Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) is battling its way through the oil rout.
Let’s take a look at the beleaguered producer to see if it is an attractive contrarian pick.
Tough times
Penn West currently trades for $1.85 per share–about triple the low the ticker hit in January.
Investors who had the courage to buy when the market thought Penn West was headed for bankruptcy have done quite well. For longer-term shareholders, the recent rally is little consolation.
Five years ago Penn West traded for $20 per share. If you trace the chart back a decade, the stock was $45.
Ill-timed investments are primarily responsible for the pain as expensive deals loaded up the balance sheet to the point where Penn West was really up against the ropes in the past two years.
Despite the tough market conditions, management has been able to unload enough properties to keep the company alive.
Successful asset sales
The company found buyers for about $800 million in assets in 2015, higher than the $650 million target for the year.
Sales have continued in 2016, including the blockbuster deal to unload all of the company’s Saskatchewan assets for $975 million.
Net debt is now just $490 million, down from $2.1 billion at the beginning of the year. As a result, Penn West is no longer at risk of being pushed into bankruptcy, and the company plans to unload another $100-200 million in non-core assets by the end of the year.
Management is actually increasing capital expenditures by $40 million to restart development in its prized Cardium and Alberta Viking plays. The increase will be fully funded through funds from operations.
Looking ahead, Penn West plans to spend $150 million in 2017. The program is expected to deliver core production growth of at least 10% over the Q4 2016 forecast. As with the current capital plan, all development spending will be funded from cash flow.
The new focus on high-quality, long-life assets should deliver annual production growth of 10% with operating costs of $10-12 per barrel of oil equivalent.
Should you buy?
Penn West is on its way to becoming a much smaller but more efficient company. Worries over its ability to continue as a going concern are pretty much taken care of, and the commitment to live within cash flow should provide investors with renewed confidence in the management team.
Oil looks like it could be heading for a repeat of last year’s swoon, so I wouldn’t buy any producer today, but if you are a long-term oil bull, Penn West is starting to look attractive again and deserves to be on your radar.
