Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) is getting a lot of attention these days, and investors want to know if this is a good time to start a contrarian position in the stock.

Let’s take a look to see how things are going.

Devastating slide

The oil rout has been hard on all of Canada’s energy stocks, but Penn West has really taken it on the chin.

Back in August of 2006, Penn West traded for more than $45 per share, and the stock was one of the energy patch’s top picks. If you bought the shares back then and still hold them, you are not a happy camper because the stock has pretty much been on a nine-year slide. Last month Penn West hit a low of $0.60 per share.

October has brought some relief, and anyone who had the nerve to get in near the low has already enjoyed a gain of more than 100%.

Now, with the stock back around the $1.50 mark, investors are wondering if the rally is set to continue.

Debt issues

Penn West is in trouble because it is carrying too much debt. Management renegotiated covenants with lenders earlier this year, and the company is working hard to sell off assets and get the obligations down to a reasonable level. In fact, Penn West sold $414 million in assets during Q2 and unloaded another $398 million in just the past month.

This news, combined with a rebound in oil prices, really lit a fire under the stock over the past two weeks. As the stock took off, short sellers likely compounded the gains and the stock actually topped $1.80 on October 9.

Time is running out

Unfortunately, the clock is working against the company, especially as oil prices remain under pressure.

At this point, Penn West really needs oil to recover in a big way if it is going to survive. Long-term debt at the end of Q2 still stood at $2.2 billion. The company only generated $79 million in funds from operations in Q2 and energy prices are much lower now than they were during the second quarter.

Takeover target

The energy patch is going to consolidate, that’s for sure, and unsolicited bids are already starting to heat up for some of the walking wounded.

Penn West is a large conventional oil and gas producer with a dominant position in light oil. The company has a land base of more than four million acres and more than 560 million barrels of oil equivalent proved plus probable reserves. That’s an attractive portfolio for a competitor with deep pockets and a long-term outlook.

Whether or not a white knight emerges is yet to be seen. Penn West has a market cap of about $730 million. If you throw in the debt, you get a minimum price of about $3 billion for the whole works. That’s a drop in the bucket for a number of players who still have cash and reasonably strong stock prices to put to work.

Should you buy Penn West?

At this point, betting on a takeout premium is risky and the easy money has probably already been made. I would look elsewhere for opportunities that benefit from an oil rebound and still offer growing dividends.

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Fool contributor Andrew Walker has no position in any stocks mentioned.