If you’d drawn up a death pool for the energy sector going into 2016, the name Penn West Petroleum Ltd. (TSX: PWT) would have been near the top of the list. The company entered the year heaving with debt, burdened by underperforming properties and desperate to sell assets in the most ruthless buyers’ market the energy industry has ever seen. But in a year that claimed Leonard Cohen, Prince and even the BBC’s The Great British Bake Off, somehow Penn West managed to survive.
It did better than survive, actually. After a flurry of deals that saw it unload $1.6 billion worth of assets in the past 12 months, highlighted by the June sale of its Saskatchewan Viking assets to Teine Energy for $975 million, it has effectively reinvented itself. Gone is the listless behemoth that cranked out upwards of 150,000 barrels per day without a clear sense of direction or purpose. In its place is a company producing just 25,000 barrels per day, but with a healthy balance sheet and a new chief executive in former Bankers Petroleum boss David French.
The disconnect between what Penn West was—it was founded by Calgary billionaire Murray Edwards, though he has long since divested—and what it might become creates an interesting opportunity. “Their valuation multiple is still reflecting a challenged company—a company that has had leverage issues and going concern questions in the past,” says Thomas Matthews, an analyst with AltaCorp Capital. “If you look at the go-forward business, it’s very attractive versus where it has been.”
That go-forward business is built on the company’s last remaining crown jewel, the Cardium Formation lying beneath west-central Alberta. And Matthews, for one, thinks it has some shine to it: “The Cardium is seeing a bit of a renaissance as far as completion techniques go. And there’s a lot of oil still to be recovered there.” And Penn West just might have a good read on how to find it. In the last quarter of 2015, it posted some of the most prolific well results the region had ever seen, but because the company had to shut down its capital program to conserve cash, it wasn’t able to build on those results. “It’s been kind of hidden,” says Raymond James analyst Jeremy McCrea, who has a 12-month target of $3 on its shares (at the time of writing, they trade around $2.20). “You only have a very tiny glimmer of what they’ve been doing, versus a whole lot of old historical well results.”
Now, with an apparently improved knowledge of the formation’s geology and a new CEO in French, who made his bones bringing new life to another underperforming old field, Penn West might be ready to put those past results behind it for good. Its rigs were out in the Cardium in the third and fourth quarters of 2016, and if they now yield similar well results, the market might start to close the distance between the company’s reputation and its new reality. Investors who are willing to beat the rush might be rewarded for their bravery. And if oil prices rally in 2017, as many are expecting? Then McCrea’s 12-month target could be downright conservative.
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