Penn West Petroleum, Great Value, High Risk

Penn West Petroleum is an interesting company from the valuation point of view in that they have a Stock price that is much lower than their net asset value, when looking at the 2014 yearend reserve report, and latest net debt.  In fact Penn West trades for less than their PDP NAV of $1.50.  What this means is that if you liquidated the company and sold off the producing wells you would have enough to pay off all the debt and still have $ in your pocket, very unusual position for a company to be in.

Declining Production per Share

The problem is the debt, which shows up as a debt to cash flow of 7.2.  What this means is that if they spent all their cash flow on paying off their debt, it would take 7.2 years to pay it off, assuming the production was flat.  Unfortunately the production is far from flat as shown in the following graph.

Penn West BOE/Share Production and Cash Flow

Production per share is dropping as they sell off properties, and the oil and natural gas price is falling at the same time, causing their cash flow per share to drop by over 80%.  This would not be a concern if they were paying down the debt at a sufficient pace but…….

Debt/share flat, Debt/cash flow Increasing….A lot

Penn West Debt/Cash Flow

The Debt/Share is not dropping since there is a significant amount of debt denominated in $US so as the Canadian dollar drops their debt goes up.  The result is that their debt/cash flow is rising sharply and could rise further yet.

Good Value, High Debt, High Risk

This is not an easy company to decide to invest in even though the value is compelling, the debt is very concerning.  The other possibility is that a sharp corporate acquisition group will run the numbers and see the valuation mismatch and that company will make a takeover offer for the entire company.  For the rest of us I will wait for the next quarterly results(more divestments have been announced) and the upcoming reserve reports.  The new reserve reports may have a significant drop in the reserve value, which may make the value proposition go away.  In any case this is not a company to focus in on at this point in time with oil inventories still high and oil production not falling sufficiently.

Look to the Past to Predict the Future and Oil Production Forecast have some addition information on the inventory problem and production.