Even before oil tanked, things weren’t going well for Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE).

In 2014 the company dealt with an accounting scandal. A new CFO came in and discovered the company was classifying certain operating expenses as capital expenses, which then allowed it to artificially inflate its funds flow–a key measure of profitability for energy producers.

This led to a class action lawsuit from shareholders that was only recently settled.

The company also struggled with its debt load. The previous management team spent aggressively to acquire assets without much of a plan. Led by new CEO Dave Roberts, the company announced it would sell many of those non-core assets.

The plan was going swimmingly–at least until the price of crude fell through the floor.

Penn West faced a bigger problem than many other oil producers. The company was already struggling before the big energy bear market hit. Unless oil recovered very quickly, Penn West was going to have to fight for its life.

We’re now a year into this oil-sector funk, and Penn West is not in good shape. Can the company survive?

Cost cuts

Penn West’s management team has done a nice job cutting as much fat from the operation as possible.

The company first reduced its dividend and then eliminated it completely. It cut operating costs by approximately 20% by making operations more efficient, laying off staff, and focusing on a couple of areas with attractive economics. And it stopped borrowing to fund capital expenditures, adopting a cash-in, cash-out model.

Unfortunately, these cuts have led to a marked decrease in production. The company produced approximately 77,000 barrels of oil equivalent per day in 2015, and 2016’s guidance is sharply lower, coming in between 60,000 and 64,000 barrels per day. Capital expenditures have been cut to the bone and are expected to come in at $70 million for 2016. As recently as 2014, the company spent $730 million annually in capital expenditures.

Penn West is also taking steps to hedge some of its oil production. In its most recent quarter, approximately a quarter of all oil production was hedged at $73 per barrel (in Canadian currency), a move that looks pretty smart in hindsight. Look for these hedges to continue as Penn West tries to get a little more cost certainty.

The debt

The big issue with Penn West is the company’s debt.

At least it’s moving in the right direction. In the fourth quarter it closed the disposition of two assets for proceeds of approximately $400 million. This latest asset sale brought net debt down to approximately $2 billion, a far cry from the $3.4 billion peak back in 2013.

But that might not be enough. The company is still looking to sell assets into a market where there are many sellers and not so many buyers. It’s also selling at the bottom of the cycle, something no seller wants to do. Buyers are also well aware of Penn West’s issues; some might prefer to wait and see if the company goes bankrupt.

Penn West has near-term debt maturities, too. It has $252 million in debt due in 2016 and an additional $271 million that needs to be paid in 2017. The company does have some $600 million in untapped capacity on its bank facility, which it can use as a last resort, something I’m sure management has at least considered.

The other issue with the debt is the covenants. Penn West was one of the first energy companies to get concessions from its debtholders back in 2015. But that might not be enough; at least one energy analyst has said the company could start breaching the new, more generous covenants as early as the end of this quarter.

The bottom line? Penn West needs crude to recover in a big way. At $36 per barrel, the company’s survival is in doubt. At the same time, if crude recovers to $50, Penn West has a lot of potential upside.

At this point, it’s a levered bet on crude. I think there might be safer bets out there than Penn West, but there’s no denying the potential upside if the price of oil keeps recovering.

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Fool contributor Nelson Smith has no position in any stocks mentioned.