Let’s take a look at the current situation to see if Penn West deserves to be in your portfolio.
Penn West traded for more than $20 per share five years ago and bottomed out below $1 last year.
Contrarian types who jumped in at the nadir are sitting on some nice gains, but the current price of $2.30 per share isn’t exactly a reason for long-term investors to break out the bubbly.
Nonetheless, better days appear to be on the horizon.
Penn West sold its Saskatchewan assets for $975 million last year in a deal that saved the company.
Management used the funds to pay down debt to the point where the wolves are no longer howling at the door, and Penn West can refocus on growth.
The 2017 capital plan calls for a spending increase to $180 million with a focus on drilling in the company’s core development zones. This should result in average production of 27,000-29,000 barrels per day, representing growth of about 15% by the end of the year.
Penn West has hedging positions in place for 50% of its oil and 30% of its natural gas production this year. At the current WTI oil price of US$53.50, the company should be on target to hit its goal of funding the capital plan through cash flow from operations.
Penn West finished Q3 2016 with net debt of just $484 million. That’s a large improvement from the $2.1 billion burden the company carried at the beginning of 2016.
Management decided to reduce the size of the credit lines by 50% to $600 million to reflect the needs of the business as a smaller entity. The move is expected to save the company $2.5 million per year in standby fees.
As of December 31, 2016, Penn West had drawn $330 million of the funds.
Should you buy?
Penn West is in much better shape than it was last year, and the company is on track to deliver decent growth in its new form.
Will the oil market continue to improve?
OPEC’s decision to cut oil output by 1.8 million barrels per day through June has helped push WTI prices above US$50 per barrel.
For the moment, OPEC and its partners in the pact say they are on track to meet the objectives, but rising production in the United States is keeping oil from breaking through the US$55 mark.
If OPEC can deliver and hold its production cuts through the second half of the year, oil might drift higher. If investors start to see reports come out that some OPEC members are not hitting their reduction goals, oil might come under renewed pressure.
Additional U.S. production gains might also force the oil market to give up some of the recent gains.
So, investors should be prepared for more volatility.
You really have to be an oil bull to own any of the producers at this point. If you fall in that camp, Penn West might be worth a contrarian bet at the current price. I would keep the position small, just in case oil decides to reverse course in the coming months.