Investors in Penn West Petroleum (TSX: PWT)(NYSE: PWT) awoke to some pretty crummy news this morning, as the company announced that it would immediately launch a probe into its accounting practices.
Essentially, over the last two years, the company recorded nearly $200 million of operating expenses as capital and royalty expenses. As a result, capital expenses were overstated, and more importantly, this made operating results look more impressive than they actually were — and they weren’t great even to begin with.
Management was quick to point out that everyone responsible for these accounting irregularities has since left the company, but the damage has already been done. The company will restate its last two years of numbers, and will delay filing its second-quarter results until it has solved the issue.
Of course, shares slid on the news. As I write this, investors are taking a 10% haircut on their shares. I’m surprised it isn’t more. The market hates accounting issues.
This is just another chapter in the tale of Penn West’s demise. The company reached an all-time high back in 2005, before shares were sliced by 60% when the Harper government announced it was eliminating income trusts. Thanks to a series of management blunders, poorly timed acquisitions, and weak results, the company continued its downward spiral, culminating when it was forced to cut its dividend in late 2013. Shares now trade for under $9 a piece, close to all-time lows.
Lately though, things are looking better. Most of the old management team was replaced in 2013, when current CEO David Roberts was hired. Roberts has been tirelessly working toward cleaning up the prior team’s mess by doing things like selling off non-core assets and using the proceeds to pay down the company’s debt. It seems to be working, since total debt has fallen more than $700 million over the past year.
However, problems still remain. The company is one of the least profitable in the oil patch, with a netback consistently lower than its competitors. The debt load is still high, coming in at more than $2 billion. Especially with this latest news, investors will once again worry that the company’s generous 6% dividend yield will be cut.
Could this be an entry point for long-term investors?
Roberts has a terrific track record. He is a veteran of the industry, and has had success turning around poor operators before. Roberts has pledged to turn Penn West into a high-netback light oil producer. He’s only been at the job for a little over a year, but investors have already seen an improvement.
Besides, last quarter’s results were great. The company saw increased prices for both oil and natural gas, as well as decreased costs. Netbacks increased by nearly a third, to nearly $37 per barrel. Revenue barely decreased at all, even though the amount of energy produced was lower, thanks to asset sales. Most importantly, the company’s funds from operations were solidly positive, coming in at $0.57 per share.
The company could even make an attractive acquisition target. A company like Husky Energy (TSX: HSE) comes to mind as a potential suitor. Husky has operations in the same area as Penn West, has a solid balance sheet, and could use a catalyst to help raise its stock price. Any number of suitors could be looking at Penn West. The time to make an acquisition is when the share price is depressed.
Long-term investors should see this accounting irregularity as a positive. Management knows that it will be a huge short-term drag on the share price, but the company needs to take its medicine and make things right. It’s better to do that now, rather than wait.
