Let’s take a look at the former darling of the Canadian oil patch to see if it deserves to be a contrarian pick today.
Back from the brink
Penn West was at serious risk of going under just a few months ago, but management pulled off a last-minute deal to unload significant assets, and the company lived to see another day.
What’s the story?
Like many of its peers, Penn West was carrying too much debt when oil prices fell off the cliff.
In an effort to shore up the balance sheet, the company scrambled to sell assets throughout the plunge. Management was actually making decent progress, considering the difficult market conditions, but the damage was simply too great to fix in such a short time.
By the end of May this year, investors figured the writing was on the wall, and an exodus sent Penn West’s stock price below $1 per share.
That was a bitter moment for long-time holders of the name. Five years ago, Penn West traded for more than $20. If you go back about a decade, the shares fetched $40 each.
With the clock ticking, Penn West secured a deal to sell its Saskatchewan assets for $975 million. This made the company much smaller, but also wiped out the debt concern with one big swoop.
Back on track?
Penn West is now focused on growing production on its remaining properties.
Third-quarter output exceeded expectations at 41,233 barrels of oil equivalent per day (boe/d), which resulted in in funds from operations of $32 million. The company only spent $13 million on capital development during the quarter, so the business is comfortably living within its cash flow.
On the debt front, Penn West has repurchased $437 million in debt and paid down part of its credit line. At the end of September, net debt was well within the lending covenants at $484 million. Penn West began 2016 with net debt of $2.1 billion.
A better 2017
The company is putting the final touches on its 2017 capital plan, but it has indicated it plans to spend at least $150 million during the year. The additional drilling costs are expected to be fully funded through operating cash flow and should result in a 10% increase in production.
Should you buy?
At the time of writing, Penn West trades for $2.40 per share.
That’s little consolation for investors who have held the stock for a number of years, and there isn’t much chance the company will ever regain its former glory.
However, if you are new to the name and think oil has bottomed, Penn West now looks like a nice contrarian growth play, and might be worth a shot today.
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Fool contributor Andrew Walker has no position in any stocks mentioned.