Is the Newly Transformed Penn West Petroleum Ltd. a Buy?

After eradicating its balance sheet concerns, Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) can return to growth mode.

The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

About a month ago Penn West Petroleum Ltd. (TSX:PWT)(NYSE:PWE) appeared to be just weeks away from defaulting on one of its debt covenants. However, after obtaining a much higher sale price for an asset, the company has eliminated its financial worries for the foreseeable future. With those worries gone, the company is a much more appealing buy than it has been in years.

Foundation repaired

Before the downturn in oil prices, Penn West Petroleum prided itself in providing investors both growth and income. That income stream, however, evaporated as oil prices slumped and it had to cut its dividend all the way to zero. Meanwhile, the company’s deteriorating financial position forced it to cut investment spending to the point where it was no longer even able even to maintain its production rate, let alone grow it.

However, after selling a boatload of assets, Penn West Petroleum’s financial concerns are in the past after it cut its debt from $2.1 billion to start the year to $600 million. This debt reduction has pushed its debt-to-EBITDA ratio from a covenant breaching five times to less than three times. That ratio implies that the company’s financials are now on solid ground.

Ready to restart its growth engine

Now that its balance sheet worries are in the rear-view mirror and oil is back around $50 a barrel, the company is in the position to start generating excess cash flow. In fact, the company projects that it will generate enough cash flow at current commodity prices that it will have the capital to grow its production by 10% per year with plenty of money left over.

In other words, the company could once again be a growth and income investment. Further, if oil rebounds to $60 a barrel the company estimates that it can grow its production by 15% per year while still generating excess cash flow.

That said, Penn West has spent the better part of the past couple of years shrinking its portfolio. After producing more than 100,000 barrels of oil equivalent per day (BOE/d) in 2014, the company will have shrunk down to a base that produces 25,500 BOE/d by the time it completes its final slate of asset sales. That smaller asset base certainly makes it easier to drive double-digit production growth going forward.

A great recipe for the long-term success

The newly transformed Penn West Petroleum is in its best financial shape in years. Further, it is in a position to restart its growth engine at current prices, which is something few of its rivals can match these days.

These traits make Penn West Petroleum a compelling oil stock to own for the long term. While it still has its share of risks, investors who buy today are potentially getting their hands on a turnaround stock right before it begins to turn.

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 Matt DiLallo has no position in any stocks mentioned.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

5 Dividend Stocks to Buy With Yields Upwards of 5%

These five companies all earn tonnes of cash flow, making them some of the best long-term dividend stocks you can…

Read more »

funds, money, nest egg
Dividend Stocks

TFSA Investors: 3 Stocks to Start Building an Influx of Passive Income

A TFSA is the ideal registered account for passive income, as it doesn't weigh down your tax bill, and any…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

Royal Bank of Canada stock is one of the safest TSX dividend stocks to buy. So is CT REIT and…

Read more »

Growing plant shoots on coins
Dividend Stocks

1 of the Top Canadian Growth Stocks to Buy in February 2023

Many top Canadian growth stocks represent strong underlying businesses, healthy financials, and organic growth opportunities.

Read more »

stock research, analyze data
Dividend Stocks

Wherever the Market Goes, I’m Buying These 3 TSX Stocks

Here are three TSX stocks that could outperform irrespective of the market direction.

Read more »

woman data analyze
Dividend Stocks

1 Oversold Dividend Stock (Yielding 6.5%) to Buy This Month

Here's why SmartCentres REIT (TSX:SRU.UN) is one top dividend stock that long-term investors should consider in this current market.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Better TFSA Buy: Enbridge Stock or Bank of Nova Scotia

Enbridge and Bank of Nova Scotia offer high yields for TFSA investors seeking passive income. Is one stock now undervalued?

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Top Stocks Just Became Canadian Dividend Aristocrats

These two top Canadian Dividend Aristocrats stocks are reliable companies with impressive long-term growth potential.

Read more »