When it comes to comparing bad years in 2014, I think Penn West Petroleum Ltd. (TSX: PWT)(NYSE: PWE) might have had the worst.
First of all, the company was plagued with an accounting scandal, discovered when the new CFO was examining the books after taking over. Although management did the right thing by immediately disclosing the error and restating the affected years’ financials, investors still sold the stock en masse, choosing to bail now and ask questions later. It was a strong reaction to what was, at least in my opinion, a pretty minor scandal.
Once the company recovered from that, crude immediately started to fall. As the price of oil has declined more than 50% compared to heights set back in the summer, Penn West shares have plummeted, losing more than three-quarters of their value over the last six months.
Although it might not seem like it, this could be the perfect buying opportunity. Here are a few reasons why.
Cheap assets
A big part of Penn West’s turnaround plan in 2014 was selling non-core assets. The company was pretty successful at its plan too, getting rid of more than $1 billion worth of land that wasn’t currently producing.
Even after those sales, Penn West is still sitting on some hugely valuable land. It’s concentrating its 2015 development in three main areas — the Cardium, Viking, and Slave Point fields, all of which have pretty attractive netbacks once the price of crude goes back to normal levels. Production is scheduled touch 100,000 boe/d in 2015, and is still projected to grow some 13% annually until 2019.
One glance at the balance sheet is all it takes to realize how poorly Penn West’s assets are really being valued by the market. The company has a tangible book value of $11.11 per share, which is more than 4.5 times the current share price. The company still has problems and there’s a possibility that asset write-offs are coming, but that margin of safety is just too big to ignore.
Insider buying
Over the last couple months, Penn West insiders have been on a buying binge.
During November and early December, insiders bought a total of 263,500 shares, including purchases of some 53,000 shares by the company’s CFO, David Dyck, and 5,000 shares by the the company’s CEO, David Roberts. Dyck also exercised 250,000 shares worth of options, choosing to hold the shares instead of selling them.
In December, one insider made an extremely bullish call on the company. Director John Byrdson started out the month buying 150,000 shares on December 1, and then bought an additional 150,000 shares on December 11. In total, Byrdson spent nearly $1 million on his 300,000 shares.
Although the relationship is hardly perfect, insider buying during tough times tends to work out pretty well. Over time, being bullish while insiders are also bullish is a pretty smart investment thesis.
Price of oil
As much as we’d all like to be able to predict the price of oil, the reality is just about every market observer is pretty terrible at it. There aren’t many people who saw the decline in crude, and many of the folks who didn’t get that prediction right are now calling on the price of oil to stay low for possibly years.
While this recovery could be different, I take comfort in knowing that the last two oil bear markets turned on a dime, back in 2011 and 2009. Even if it isn’t a V-shaped recovery this time around, I’m confident oil rebounds at some point in 2015. There are too many companies and governments around the world that depend on crude above $80.
Once oil recovers, Penn West’s shares will likely surge. Most of the company’s problems are pretty easily fixed by higher oil prices. If oil recovers to $70 per barrel and the risk of bankruptcy dissipates, shares could end the year much higher than where they trade today.
