Does Penn West Have the Energy to Grow?
Sep 24th 2012 1:04PM
Updated Sep 24th 2012 1:10PM
With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.
Motley Fool CAPS helps you focus your energies by providing you with a personalized "Stock of the Day." Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and targets areas in which you already have an interest.
By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.
Buy what you know
No doubt based on my interest in the oil, gas, and consumable fuels sector where I've rated companies like HollyFrontier and Kodiak to outperform the broad indexes -- and rated the likes of Walter Industries and Enerplus to underperform -- the CAPS supercomputer thought I also might be interested in another energy play, this time Canadian oil and gas producer Penn West Petroleum (NYS: PWE) . It was one of five "Stocks of the Day" it offered up for my consideration this week.
Considering that natural gas prices remain at historically depressed levels and will likely stay there for some time to come, let's see what Penn West has going for it that might warrant an investment, even if the supercomputer hasn't yet picked it for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.
Penn West Petroleum snapshot
|Industry||Oil, Gas & Consumable Fuels|
|Market Cap||$7.4 billion|
|Revenues, TTM||$3.2 billion|
|1-Yr Stock Return||3.6%|
|Return on Investment||2.6%|
|Est. 5-Yr EPS Growth||9.3%|
|Dividend & Yield||$1.11/7.2%|
A fluid situation
Like much of the rest of the natural gas industry, Penn West has been focusing more on the liquids market than in dry gas. While production in the latter was up 2% in the last quarter, light crude and liquids were 8% higher though average sales prices were down across the board. But when Penn West is realizing natural gas prices 50% below what it got a year ago, there's little reason to wonder why the focus is on the one and not the other. The driller's second-half capex program will focus almost exclusively on the liquids market, though the total spent will be 10% lower.
Like many of its peers, Penn West is hunkering down because of the lower realized prices. It will engage in asset sales to reduce its indebtedness, and plans on shedding as much as $1.5 billion worth of assets. Both Talisman Energy (NYS: TLM) and Canadian Natural Resources (NYS: CNQ) are also engaging in spending cuts and asset sales to orient their operations toward current market conditions. Penn West will also see its production levels fall from previous estimates, now pegged at 65,000-168,500 barrels a day, down from 168,500-172,500 barrels.
How dry I am
Chesapeake Energy (NYS: CHK) is targeting $13 billion-$14 billion in asset sales this year as it continues its conversion to a liquids play. It wants to grow that segment from 10% of its assets in 2010 to 35% by 2015, and will achieve that goal by drilling almost exclusively for liquids, at least until natural gas prices improve.
That could be awhile. Some analysts believe we'll have sub-$4 natural gas prices for the next 30 years and that it will stay below $8 for the next 80 years! Yet weak economic conditions will likely depress the liquids market too, albeit not to the same extent as natural gas.
There is some industry consolidation under way with Nexen being acquired by CNOOC, Talisman jettisoning its CEO and setting itself up as a possible takeover target, and Linn Energy (NAS: LINE) taking advantage of everyone's asset sales to add to its reserves. Penn West has some interesting assets that might be attractive to someone, including the Sawn, Otter and Swan Hills carbonates, the Cardium in Alberta, and the Viking and Spearfish projects. Reducing its debt levels might make it more attractive to someone. With a dividend payout that might be endangered, perhaps a buyout would be a welcome reprieve?
With 96% of the nearly 1,400 CAPS members rating Penn West to outperform the market indexes it doesn't seem as though the investor community is concerned it won't recover. But, tell me in the comments box below if you agree the turn toward a smaller footprint is a better outcome for the driller.
No buzz kill here
Penn West does have potential, but why not invest in the one company in the energy sector that can hold fast no matter what oil or gas goes for? Find out why this company is the only energy stock you'll ever need in the Motley Fool's popular free report. Click here for the inside scoop while it lasts.
The article Does Penn West Have the Energy to Grow? originally appeared on Fool.com.Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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