After suffering through the last few months of constant cries from naysayers about the company’s impending bankruptcy, shareholders of Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) can finally look toward the future with a little optimism.
The company got some huge news this week when it announced an agreement to sell $321 million worth of land to Freehold Royalties Ltd, which was more than the market expected for the sale. Shares rallied more than 8% the next day, closing above $3 for the first time since December.
There are a couple of reasons why this sale is so important. Penn West has $650 million in unsecured notes coming due, which aren’t as big of a concern with half the amount in cash. With this sale, the company’s chances of bankruptcy are greatly reduced.
But perhaps more importantly, it shows that Penn West has assets that can still be sold during trying times. In fact, it was reported that there was more than one interested party in the deal, which pushed the price up.
This news, combined with crude recently recovering to its highest level since December, has renewed interest in the beleaguered stock. Here are three more reasons why I think the stock is still a buy at these levels.
One of the cornerstones of value investing is to look at situations of asymmetric risk and reward. Penn West is in such a situation.
The worst case scenario of this stock is that it goes to zero, representing a 100% loss. That’s a bad outcome we want to avoid.
But the best case is an easy 200% gain, perhaps even more. Even after writing off $1.7 billion in assets at the end of 2014, the company still has a book value of $10 per share. Shares currently trade hands at just over $3. Even after a 200% gain, shares still won’t trade at book value. In an environment where oil trades at more normal levels, book value is a pretty obtainable level.
Another thing value investors tend to look at is whether management is loading up on shares. The logic goes that management has a pretty good idea of what’s going on. If they’re buying, it’s obvious there’s value in the name. It’s not a perfect relationship, but it tends to have a correlation.
Over the past six months, insiders have been snapping up shares like crazy. During November and December, insiders bought more than 400,000 shares, with one director spending nearly $1 million of his own money on the struggling stock. Both the CEO and CFO also purchased shares during the past year.
If I had one word to describe Penn West’s former management team, I’d probably go with inept. Not only did they recklessly take on debt to make all sorts of ill-advised acquisitions, but the finance team left the books in shambles, which led to a small accounting scandal when new CFO David Dyck took over.
Penn West’s new management is much better. CEO David Roberts is a veteran of the industry and most recently spent time as Marathon Oil’s COO. Penn West’s Chairman Rick George is also a familiar name in Canada’s energy sector because he spent two decades as the CEO of Suncor Energy. These are exactly the people I want in charge during difficult times.
Roberts has cut costs by laying off employees and focusing drilling on the best areas. Dyck did a nice job both dealing with the accounting scandal and paying down debt left by the previous team. There’s still work left to do, but at least this team is making the right moves.
Penn West will likely suffer more setbacks, but at this point, I’m more confident in the company than I’ve been for months. The stock is cheap, and the threat of bankruptcy is declining. If I didn’t already have a full position, I’d be buying at these levels.