Let’s take a look at this fallen star of the oil patch to see if it deserves to be in your portfolio today.
Penn West traded for more than $20 per share five years ago, and investors who have followed the name for some time are well aware that this was a $40 stock in early 2006.
As the oil rout unfolded over the past two years, Penn West got caught with too much debt, and the stock took another beating as a result.
Management had to unload assets to keep the wolves away from the doors, and while progress was made, the situation continued to deteriorate through the first part of last year. Investors began to throw in the towel, sending the stock below $1 per share in May.
The situation certainly looked bleak, but at the last minute, Penn West negotiated a $975 million deal to sell its Saskatchewan assets.
Suddenly, the company’s debt woes were under control, and management turned its focus on growing the remaining assets. The stock has been on the rise since early June and now trades at 12-month high above $2.50 per share.
That isn’t much consolation for long-term holders of the stock, but it presents an interesting contrarian opportunity for new investors.
Penn West just announced a large increase to its capital plan.
The company will spend $180 million in 2017, almost double the 2016 amount, as it’s only going to use 80% of its funds flow from operations to grow production.
That means the company can drive growth without having to borrow money of tap the equity market through a share sale. It also gives the company some breathing room in the event oil prices pull back.
Production is expected to increase 15% from Q4 2016 to Q4 2017 as a result of the expanded drilling program.
Penn West reduced its available credit facility in the fourth quarter from $1.2 billion to $600 million. The move will save the company $2.5 million per year in standby fees and better reflects the company’s current needs.
The new management team is also focused on living within the company’s cash flow, so there is less reason for carrying substantial access to debt.
Penn West had net debt of just $484 million at the end of September, which is down from $2.1 billion at the beginning of 2016. As of December 31, Penn West had tapped about $330 million of the available credit facilities.
Should you buy?
Penn West is a much smaller company today than it was in the past, but the company’s remaining assets have strong growth potential, and the balance sheet is in much better shape.
If you believe the oil rally is set to continue, Penn West looks like an attractive pick right now.
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 Andrew Walker has no position in any stocks mentioned.