Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) enjoyed a nice rally off its lows, but the stock has pulled back in the past week, and investors who missed the surge are wondering if this is a good time to step in.

Long way down

The recent rally was big in percentage terms, but not everyone is impressed.

The stock bottomed out at $0.60 per share near the end of September and more than tripled by the first week of November. That’s a great run for investors who had the guts to start a position below a buck, but many investors have held the stock for years and the recent surge is little consolation.

In fact, shareholders who bought Penn West nearly a decade ago have watched the company slide from $45 per share to the current level.

Debt issues

Like many of its peers, Penn West is struggling with a mountain of debt. Earlier this year the company negotiated some flexibility with lenders in order to buy some time to sell off assets.

Penn West managed to offload $414 million in properties in the second quarter and has found buyers for another $398 million in recent months.

The success of the sales in a tough market coupled with a brief rally in oil prices sent the stock surging in recent weeks. Takeover speculation added some extra fuel to the fire, and short sellers probably helped juice the rally a bit too as they locked in profits.

The stock has come down from more than $2 a share to about $1.50 and investors are trying to figure out where it is headed next.

Buyout potential

Penn West is certainly a good takeover candidate. The company owns an attractive portfolio of gas and light oil assets that, in the right market conditions, have substantial potential to produce some solid cash flow.

At the moment, low energy prices and the stretched balance sheet mean that Penn West doesn’t have the funds to develop its holdings, so it would make sense that one of the larger players might step in and pick off the company while it is cheap.

What is it worth?

Penn West finished Q3 2015 with $2.25 billion in long-term debt. The market capitalization is currently about $800 million, so the minimum price would be just over $3 billion. That’s a drop in the bucket for some of the healthier companies in the patch.

Should you buy?

Oil prices are hinting at a run to new lows, so there probably isn’t a rush to step in right now. Penn West is really up against the clock. If oil doesn’t recover and the company isn’t able to unload assets fast enough to get the debt down to manageable levels, the shares could easily fall back below $1 per share.

Penn West probably gets taken out at some point, but betting on a premium above the current price is a risky call to make. I would avoid the stock for the time being.

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