1 Thing That Penn West Petroleum Ltd Got Right

Penn West Petroleum Ltd (TSX:PWT)(NYSE:PWE) has reported that its reserve estimates were not impacted by the company’s accounting issues.

The Motley Fool

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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Investing

question marks written reminders tickets
Dividend Stocks

Dividend Investors: Is BCE Stock a Buy Now?

BCE now offers a 7.9% dividend yield.

Read more »

A bull outlined against a field
Tech Stocks

Is a Bull Market Here? 4 Reasons to Buy Celestica Stock Like There’s No Tomorrow 

Celestica (TSX:CLS) stock has been a huge winner for investors this year, but there could be even more in the…

Read more »

Retirement plan

1 Retirement Savings Hack That Has Created Many Millionaires

Investors can retirement with $1 million in savings by investing in index funds such as the S&P 500.

Read more »

edit Taxes CRA
Dividend Stocks

CRA Money: 2 More Days to Boost Your Tax Refund!

Dividend stocks like Toronto-Dominion Bank (TSX:TD) can be great RRSP holdings.

Read more »

close-up photo of investor Warren Buffett
Stocks for Beginners

The Best Warren Buffett Stocks to Buy With $300 Right Now

These Warren Buffett stocks have long histories of growth, each offering their own reasons for why investors need them today.

Read more »

grow money, wealth build
Dividend Stocks

3 TSX Dividend Stocks With Yields Above 7% (But Are They Safe?)

These three dividend stocks all have ultra-high yields, making them some of the best to buy if you're looking to…

Read more »

oil and natural gas
Energy Stocks

3 Energy Stocks Already Worth Your While

TSX energy stocks could shine for much longer. Here's why Canadian Natural Resources (TSX:CNQ), Parex Resources (TSX:PXT), and another oil…

Read more »

Light bulb with jester hat perched on top
Dividend Stocks

3 Canadian Dividend Stocks With Payouts That Are No Joke 

Here are three top Canadian dividend stocks long-term investors would be remiss to ignore, particularly at these current valuations.

Read more »