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1 Thing That Penn West Petroleum Ltd Got Right

It’s been a rough month for investors in Penn West Petroleum Ltd (TSX: PWT)(NYSE: PWE). On July 29th the company announced that management had initiated an internal review of the company’s accounting practices and decided to restate some of its historical financial statements. These announcements didn’t sit well with investors, which is why the stock is off more than 18% since then. However, while the company is still reviewing those numbers, it does have some reserve numbers it can confirm.

Good news

On Aug. 26th, the company put out a press release announcing that it determined that its review of its accounting practices has had no effect on the independent estimates of the volumes of its proved and probable reserves. This is good news; it helps to put a firm value on the company, as the value of the oil and gas still in the ground is critical to the company going forward.

As of the end of last year, the company’s proved plus probable reserves stood at 625 million barrels of oil equivalent. As the following diagram from the U.S. Energy Information Agency shows, proved reserves are those that a company is most certain exists and can be produced.

 

EIA Resource Categories

Source: EIA

Energy companies like Penn West Petroleum can then value these assets and use that value to obtain credit, among other things. Thus, the fact that these won’t change is a good thing.

What’s also not changing is the discounted net present value of these reserves, or the PV-10 value of the company. That value stood at $8.9 billion at the end of last year. That puts a firm floor on the company’s value, as at current commodity prices there is a reasonable certainty that the company can indeed extract this value.

Work left to be done

Still, Penn West Petroleum has a lot of work to do in order to regain the confidence of investors in light of its accounting issues. The company has announced that it plans to complete its internal review by Oct. 14th at the very latest. Until that is complete, there will continue to be a cloud of uncertainty around the stock. However, in the interim, the company will continue to make bi-weekly updates until it has fully completed the review and its quarterly filings are current under Canadian securities laws.

Investor takeaway

Investors hate uncertainty, especially when it relates to a company’s finances. Until that uncertainty is removed there will continue to be a cloud over Penn West Petroleum’s stock. However, the fact that the company is now certain that its oil and gas reserves won’t be impacted by the review is a solid step forward, as it solidifies the company’s main value proposition that its oil and gas reserves will deliver value in the future as these are produced and sold.

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Fool contributor Matt DiLallo has no position in any stocks mentioned.

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