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Which Is the Better Opportunity: Penn West Petroleum Ltd. or Husky Energy Inc.?

Value investors have been waiting on the edge of their seats for months now, looking for the flashing neon sign telling them the bottom has arrived in the crude market.

As we all know, the world of investing doesn’t quite work that way. In fact, the bottom might even be past us. Rig counts are down, the price of crude has stabilized, and the shouts of upcoming debt defaults have been silenced—at least for now. This could very well be the beginning of the next bull market in oil.

But nobody can say that with any certainty, which is why I employ a simple strategy when it comes to the sector and my portfolio. If I can find cheap assets accompanied with a reasonable balance sheet, I’m going to buy in for the long term. I don’t know where crude will be next week or next year, but I’m pretty confident it’ll be up a whole lot at some point in the future.

Both Husky Energy Inc. (TSX:HSE) and Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) meet my qualifications. Is there one I should prefer over the other? Let’s have a closer look.

Outlook

Thanks to a recent $321 million asset sale, the short-term outlook for Penn West looks a lot better than it did a few months ago.

Although Penn West’s new management team has done a nice job turning the ship around after years of mismanagement, Penn West still isn’t in the greatest of spots. The balance sheet still has almost $2 billion worth of debt, and additional asset sales will be needed if oil continues to languish between $50 and $55 per barrel. At least the weakness in the Canadian dollar is helping.

Husky, meanwhile, is a much more stable producer. It has large oil sands projects that are less sensitive to the price of crude, since most of the costs are borne up front. It also has downstream operations that include a handful of refineries and more than 500 fuel stations located mainly in the west, which act as a hedge against crude.

Although the two companies are in the same sector, they experience different challenges. Husky is a safer investment than Penn West, but the latter will likely see much more upside when the sector recovers.

Dividends

As part of the agreement it signed with lenders back in March, Penn West will only be paying a quarterly dividend of a penny per share. That’s a yield of a little over 1%.

Husky’s dividend is much more attractive. Shares currently yield 4.3%, a dividend that looks to be pretty safe. The company is sitting on a stockpile of cash, and has the balance sheet strength to borrow more if needed. Obviously, borrowing to sustain the dividend isn’t a smart long-term choice, but for a few quarters it should be fine—providing the price of crude goes higher.

Price per flowing barrel

An important metric of value in the energy patch is the price per flowing barrel. Essentially, it’s a measurement of how much investors are paying per barrel of production.

Penn West’s number is one of the best in the sector. Investors are paying just $33,600 per flowing barrel based on 2014 production, compared with Husky, where they are paying $92,970. It’s clear Penn West is the better value, even if production is scheduled to fall off a little in 2015.

Which is best?

To determine which one of these companies to buy, you have to figure out how much risk you’re willing to take.

Husky is the safe choice. It has a great balance sheet, a billionaire backer who owns the majority of shares, and downstream operations to shield it from volatility in crude. Plus, you’ll get a pretty nice dividend to wait.

But it’s obvious Penn West has more upside. If the company can sort out its problems, sell some more assets, and get cooperation from the price of crude, there could be serious gains. Yes, it’s riskier, but at least for my portfolio, it’s a risk I’m comfortable taking.

Two more great energy names. Check these out!

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Fool contributor Nelson Smith owns shares of PENN WEST PETROLEUM LTD..

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