Shareholders of Penn West Petroleum Ltd (TSX: PWT)(NYSE: PWE) must be getting pretty fed up by now. Over the last three years, the oil producer first expanded too aggressively, putting pressure on its balance sheet. Then, when the market turned the wrong way, Penn West had to unload assets — right into a buyer’s market. Now the company is mired in an accounting scandal. Since the beginning of 2012, its shares have fallen by 60%.
As it stands, no one seems to want anything to do with Penn West, and the stock price reflects that. Has that created an opportunity? Well, not necessarily. Below are three reasons why you should still avoid these shares.
1. Not a safe dividend
As the stock price falls, that of course makes the dividend yield increase — thanks to Penn West’s issues, the shares yield over 7% as of this writing. This is despite a steep dividend cut of almost 50% last year.
Don’t be tempted by the high yield, though; Penn West cannot afford to pay such a steep dividend. To illustrate, last year the company made only $0.46 per share in free cash flow. To help pay the dividend, Penn West sold off assets and increased its share count.
Because of these asset sales, production is declining — production decreased by 16% in 2013, and the company is guiding for a decrease of more than 20% this year. Unless prices turn out very favourably, this dividend will not be sustainable in the long term.
2. Not a good track record
There’s no nice way to put it. Penn West and its management team (no matter who’s in charge) have not been good stewards of capital. First came the acquisition spree, which left the company with $3.2 billion in long-term debt by the end of 2011. Then came a scramble to sell assets in an environment where getting a fair price was going to be difficult.
Thus, while Penn West’s shares may appear cheap, they are cheap for a reason. You’ve worked hard for your money, so why hand it over to a management team that has consistently fallen short?
3. Too many issues
There is no denying that corporate turnarounds can make investors very wealthy. Penn West could be another example: If the company is able to dig itself out of its current mess and defy expectations, then the shares could be an absolute home run. So why not go for it?
Well, there are too many issues, such as the aforementioned accounting irregularities, which total $381 million over two years. These kinds of problems always seem to happen at struggling companies — after all, they are the ones under the most pressure to appease shareholders and debt collectors. Thus, there’s more incentive to stretch the numbers.
Now there is also a proxy fight between Chairman Rick George and retired investment banker Tom Budd. The Globe and Mail describes this as “a drama in the making” — and I don’t want my savings to be part of that drama.
