Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) has pulled back about 15% in recent weeks.

Let’s take a look at the company’s situation to see if it deserves to be in your portfolio today.

Restructuring

Penn West was on the brink of going bust just a few months ago, but a last-minute deal to unload a significant part of its asset base saved the company from bankruptcy.

What happened?

Penn West got caught with too much debt when WTI oil plunged from US$100 per barrel in 2014 to below US$30 per barrel earlier this year.

As with other highly leveraged producers, the company scrambled to sell assets and reduce debt to keep the wolves away.

Despite making decent progress in a very difficult market, Penn West’s prospects weren’t looking very good at the end of May this year; investors bailed out, sending the stock back below $1 per share.

That was a painful moment for long-term investors who had held on in hopes of a recovery. Penn West traded for $20 per share just five years ago and was $40 per share if you go back a decade.

With the banks knocking at the doors, Penn West found a buyer for its Saskatchewan assets, bringing in $975 million. All of a sudden, the balance sheet concerns disappeared, and management began to focus on rebuilding the company.

The shares subsequently surged above $2.50 in October, but concerns over oil prices have pulled the stock back to $2 in recent weeks.

Financials

Penn West just reported its Q3 2016 results. The numbers were a bit messy, as restructuring charges connected to past asset sales distorted the picture, but the company appears to be on track to survive the downturn.

Production came in ahead of target at 41,233 barrels of oil equivalent per day (boe/d), generating funds from operation (FFO) of $32 million, which was significantly above the $13 million the company spent on capital expenditures in the quarter.

This means Penn West is easily living within its cash flow and has room to boost development spending.

Penn West recently bought back $437 million in outstanding debt and paid down the credit facility by $11 million. As a result, the company finished the third quarter with net debt of $484 million, putting it comfortably in compliance with all of its lending covenants.

To put things into perspective, net debt was $2.1 billion at the end of last year.

Growth

Penn West increased its capital plan by $40 million after the asset sale in June and has initiated a four-rig drilling program at its remaining core properties.

The company is finalizing its 2017 budget, but plans to spend about $150 million, which will be fully covered by FFO. The additional drilling activity should boost production by 10%.

Should you buy?

Penn West is a now much smaller company, but the balance sheet is in good shape, and the company is growing production using funds generated from operations.

If you are bullish on oil, Penn West looks more attractive today than it has in a long time and could deliver some nice gains as crude prices rise.

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