Did Penn West Petroleum Ltd. Just Avoid Bankruptcy?

Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) just announced a potentially company-saving deal. Is this news enough to turn bearish investors bullish?

The Motley Fool

Many investors–including myself–were convinced Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) was on a one-way trip to bankruptcy.

The company’s debt was simply too much. As of March 31 it owed more than $1.8 billion in total debt–a huge number compared to its market cap. Management even went as far as warning investors the company was in danger of violating its debt covenants during the second quarter–a move that would trigger a technical default. At that point, it’s up to the bankers to decide whether the company should get further relief or not.

Everything changed on Friday when the company announced two important asset sales. The big one was the sale of its properties in the Dodsland Viking area of Saskatchewan, assets that were producing approximately 13,000 barrels of oil equivalent per day. The purchaser was Teine Energy Ltd., a company that’s backed by the Canada Pension Plan Investment Board.

The total price for those assets were $975 million.

Penn West also announced on Friday a $140 million sale of certain Albertan properties with current production of some 3,100 barrels per day.

In total, Penn West is scheduled to get more than $1.1 billion for these two assets, an amount that will get rid of much of its debt. It’ll also ensure the company doesn’t have to worry about covenants on its remaining debt for at least the rest of the year–possibly longer.

Naturally, markets cheered this move. In the afterhours of trading on Friday, Penn West shares soared almost 100% on the New York Stock Exchange.

But what does this mean for the long-term future of Penn West?

Like chopping off a leg?

Penn West’s management has spoken very fondly about its two main production sites: the Cardium and Viking areas. These two low-cost areas were supposed to be the company’s crown jewels.

Tough times call for hard measures. Although Friday’s asset sale was only for the Saskatchewan portion of Penn West’s Viking assets, it still must be bittersweet for management to get rid of such an important area.

The good news is the valuation this assumes. The total assets sold represent approximately 20% of Penn West’s production. These assets went for $1.1 billion. Thus, simple math dictates the rest of Penn West is worth $4.4 billion.

Right before the deal was announced, Penn West had a market cap of $563 million. Add on the company’s $1.8 billion in debt and you have an enterprise value of approximately $2.4 billion. That’s still a long way from a total company value of $5.5 billion.

And remember, these asset values are at the bottom of a devastating two-year bear cycle in energy. When crude returns to normal, these assets could be worth even more. If not, why would Penn West be having success selling them today?

What should investors do?

Once this deal closes, Penn West will be in fine financial shape for the first time in years. Add on the company’s production hedges and a much better overall outlook for crude, and I can see investors actually becoming bullish about the company.

But at the same time, I’d recommend caution. Increasing production isn’t going to happen anytime soon. Even if crude continues to recover, a company that barely avoided bankruptcy isn’t going to be in a hurry to borrow for capital expenditures.

Keep in mind that the company barely has positive fund flows today. It still needs crude to recover in order to generate enough cash flow to pay the interest on its remaining debt and to have capital available to put into increasing production.

In short, this latest transaction is very good news for Penn West. But the company still needs some cooperation from crude to work out as a good long-term investment. Friday’s news was a great start, but it’s hardly the end.

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 Nelson Smith has no position in any stocks mentioned.

More on Energy Stocks

sources of renewable energy
Energy Stocks

Canadian Renewable Energy Stocks to Buy Now

Renewable companies in Canada are currently struggling through a challenging phase, but quite a few of them are still worth…

Read more »

oil pump jack under night sky
Energy Stocks

Is CNQ Stock a Buy, Sell, or Hold for 2025?

CNQ stock is down in recent months. Is a rebound on the way next year?

Read more »

a person looks out a window into a cityscape
Energy Stocks

2 No-Brainer Energy Stocks to Buy With $500 Right Now

Two low-priced energy stocks can reward investors who have limited capital with far superior returns than expensive peers.

Read more »

canadian energy oil
Energy Stocks

Where Will Suncor Stock Be in 1 Year?

Suncor Energy Inc (TSX:SU) stock is doing well this year. Will it still be doing well next year?

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Best Stock to Buy Right Now: Cenovus vs Baytex?

It may not seem like a good time to buy most energy stocks, but there are always exceptions.

Read more »

A bull and bear face off.
Energy Stocks

Dividend Investors: Top Canadian Energy Stocks for November

These three dividend-payers are on a bullish uptrend.

Read more »

analyze data
Energy Stocks

Buy 8,850 Shares of This Top Dividend Stock for $2,000/Month in Passive Income

Let's do the math on what it would take to generate $2,000 a month in passive income from Enbridge (TSX:ENB)…

Read more »

oil and gas pipeline
Energy Stocks

Is TC Energy Stock a Good Buy?

TC Energy stock has a lot going for it, but there are also a few red flags to consider before…

Read more »