Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) was pretty much left for dead a month ago, but the stock has tripled off those lows, and investors are wondering if more gains are on the way.

Painful times

Long-term investors are not getting much comfort out of the recent rally in the shares.

Less than 10 years ago, Penn West was one of the darlings of the oil patch and traded for more than $45 per share. Since then, the stock has essentially moved in one direction and finally bottomed out at $0.60 per share at the end of September.

Fighting to survive

Management has been scrambling to renegotiate covenants and sell assets as the clock ticks on an unsustainable level of debt.

Earlier this year the company convinced its lenders to loosen up terms on the debt, and that has provided some breathing room as the company tries to get reasonable prices for its assets in a buyers’ market. Penn West unloaded $414 million in properties during the second quarter and found buyers for another $398 million in the past couple of months.

The successful sales and some relief in the oil market brought contrarian investors back into the name throughout October, and the rally appears to have legs with the stock up nearly 20% on November 2.

Takeover potential

Consolidation in the energy sector is going to pick up speed as big companies with healthy balance sheets look to acquire quality assets at fire-sale prices.

Penn West has an attractive portfolio of gas and light oil assets that have the potential to deliver solid cash flow for years. The company no longer has the means to develop the resources, so it makes sense that Penn West will get taken out.

Whether or not that will happen in the coming months is anyone’s guess, and the higher the stock rises on speculation of a bid, the lower the odds are that one will come.

Should you buy the stock?

At this point, the name looks pretty risky. The easy money has already been made, and oil prices remain extremely volatile. The fact that the majors continue to shed staff at an alarming rate suggests the expectation in the patch is for a long and drawn-out period of weak prices.

That’s not the situation investors want to buy into unless the company has the means to ride out the slump.

At the time of writing, Penn West is trading at $1.78 per share. With about $2.2 billion in debt and a market cap of about $900 million, the roughly $3 billion minimum price tag is a drop in the bucket for many of the company’s peers, but investors have to ask themselves why a suitor hasn’t already taken a run at the company.

Penn West might very well get bought out a much higher level, but the downside risk is significant if that bet doesn’t work out.

At this point, I would still avoid the stock.

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