First Look at Penn West Petroleum (PWE).

What does the company do to earn profits?  Penn West Petroleum Ltd., based in Calgary, Alberta, is an independent Canadian energy company focused on the exploration and production of oil and natural gas resources in nearly 6.5 million acres across Saskatchewan, Alberta, and British Columbia. At the end of 2011, the company reported proven reserves before royalties of 499 million barrels of oil equivalent. Daily production averaged about 163,000 barrels of oil equivalent in 2011, at a ratio of 63% oil/37% gas.

Morningstar’s take: Penn West seeks to develop oil and gas reserves in the relatively mature environment of the Western Canadian sedimentary basin. Management’s strategy is two-pronged: Develop additional reserves in existing producing zones through horizontal drilling and enhanced recovery efforts, and perform exploratory drilling to add new reserves. Exploration efforts are concentrated in light and medium oil plays, as Penn West seeks to increase oil in the production mix and take advantage of more the desirable oil pricing environment.

Bonds outstanding: none

Times bond interest earned: not applicable

Preferred stock: none.

DIVIDEND RECORD  Penn West Petroleum (PWE) paid a monthly dividend through 2010.  In 2011, they switched to quarterly dividends.  But, they also cut the dividend in 2009, 2010, and 2011.  Here are the annual dividend payments over the last few years.

Dividend: $0.27 quarterly ($1.08 annual dividend)

Dividend yield: 7.6% ($1.08 annual dividend / $14.19 share price)

Dividend payout ratio: 85.7% using earning power of $1.26 per share

EARNING POWER – $1.26 @ 474.58 million shares

(Earnings adjusted for changes in capitalization)

EPS

Net income

Shares

Adjusted EPS

2007

$0.73

$176 M

242 M

$0.37

2008

$3.22

$1,221 M

383 M

$2.57

2009

($0.35)

($144 M)

413 M

($0.30)

2010

$2.48

$1,110 M

452 M

$2.34

2011

$1.36

$638 M

467 M

$1.34

2012

474.58 M

Six year average adjusted earnings per share is $1.26

Consider contrarian buying below $10.08 (8 times average adjusted EPS)

Penn West Petroleum is currently trading at 11.3 times average adjusted EPS.  This stock is priced for value.

Consider value buying below $15.12 (12 times average adjusted EPS)

Consider speculative selling above $25.20 (20 times average adjusted EPS)

BALANCE SHEET – The company’s lack of current assets and cash compared to current liabilities shows its financial weakness

Image013

Book value per share: $19.10 ($9.067 B equity / 474.58 M shares)

Price to book value ratio: 0.74 (under 1.0 is good)

Tangible book value: $14.78 (equity – $2.02 B in intangibles / 474.58 M shares)

Price to tangible book value ratio: 0.96 (under 1.0 is really good)

Current ratio: 0.50 (over 2.0 is good) ($675 M current assets / $1.333 B current liabilities)

Quick ratio:  no cash so N/A (over 1.0 is good) 0.36 according to Morningstar.com.  They probably used the receivables as a substitute of cash.

Debt to equity ratio: 0.38 (lower is better)

Percent of total assets:

            Real assets (property, plant, and equipment) – 79.27%

            Current assets – 4.3%

            Intangibles – 12.86%

            Other long term assets – 3.57%

CONCLUSION – Penn West Petroleum is currently a high dividend stock, but its dividend is not entirely safe.  The company reported disappointing 2nd quarter 2012 earnings. 

http://www.nasdaq.com/article/penn-west-quarterly-profit-declines-on-lower-prices-cuts-outlook—update-20120810-00378

Oil and natural gas prices have been down and will go down further when the worldwide recession worsens.  It is a value stock by common measures trading at only 11.3 times average adjusted earnings, but I think you’ll be able to buy it below $10.00 per share when the recession hits in 2013-2014.  I don’t like the weak current ratio and quick ratio.  That makes the balance sheet weak in my opinion.  Put this one on your watch list for under $10.00.

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DISCLOSURE – I don’t own Penn West Petroleum (PWE).

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Published in: on August 10, 2012 at 2:40 pm  Leave a Comment  

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