Better days ahead
Penn West pulled off an impressive last-minute asset sale in mid-2016 that saved the company from bankruptcy and set the business up for renewed growth in 2017.
With the clock ticking and investors running for the doors, Penn West sealed a $975 million deal to sell its Saskatchewan assets. The move immediately solved the company’s debt crisis and provided the liquidity needed to begin the process of growing the remaining assets.
The stock bottomed out below $1 per share in May. Today it trades close to $2.25, so investors who had the courage to buy at the lows are already looking at some nice gains.
Long-term holders of the stock, however, are finding little consolation in the bounce. Penn West traded for $22 per share five years ago.
Penn West is spending $180 million this year on drilling activities in its core development areas. That’s close to double the amount the company spent in 2016.
Funds from operations will cover the capital outlays, and management expects production to increase by 15% in the key development areas by the end of the year as compared to the 2016 exit rate.
Full-year 2017 production guidance is now 27,000-29,000 barrels of oil equivalent per day.
Hedging is part of the company’s cash flow management plan. As of December 31, 2016, Penn West has 50% of forecasted 2017 net oil volumes hedged above $67 per barrel.
Net debt at the end of September was down to $484 million, as compared to $2.1 billion at the beginning of 2016.
The company has reduced its credit line to $600 million from $1.2 billion, saving the business $2.5 million per year in standby fees. As of December 31, Penn West had drawn about $330 million on its bank facility.
Should you buy Penn West?
The balance sheet is in good shape, the company is increasing production by 15% without borrowing funds to develop the assets, and management has a strong hedge position in place that should ensure the business can meet its objectives for the year.
You have to believe oil is headed higher to own any producer right now, but if you are in that camp, Penn West might be worth a contrarian bet today.