Thursday, October 6, 2011

Penn West Petroleum 2

I do not own this stock (TSX-PWT), but I used to own it. I bought this stock as Maximum Energy Trust (MXT.UN) in 1998. I sold it as Penn West Petroleum in 2010 and I made a return of 8.47% per year. I made 11.2% per year on distributions, and lost 2.7% per year on capital gain per year. This is another oil and gas company that converted from an Income Trust.

When I look at insider trading, I find $50M of insider selling and little insider buying with a net insider selling of $49.5M. The vast majority of the selling was at the market high earlier this year. This is a lot of insider selling, but it is also a $10B company, so insider selling is less than 1% of the company.

All insiders but board members have far more stock options than shares. Insiders do have millions of dollars in stock options. It would appear that the insider selling was of stock options. Also, some 369Institutions own about 49% of the shares of the company. Over the past 3 months they have added marginally (less than 1% increase) to their holdings. (See my site for information on Insider Trading.)

I get a 5 year median Price/Earnings Ratio of 9.74 and a 5 year median high P/E Ratio of 14.38. The current P/E of 12.39 on stock price of $15.12 is close to the median P/E Ratio of 12.06. I get a Graham Price of $23.19 and the current stock price of $15.12 is some 35% lower. The median difference between the Graham Price and the low stock price is 30%. By both these measures, the stock price is reasonable.

I get a 10 year median Price/Book Value of 1.37. The current P/B Ratio of 0.77 is some 60% lower. This points to a very good current stock price because the difference between the median P/B Ratio and current P/B Ratio and also because this stock is selling below its book value.

On the only test that shows the stock price is not a relatively good price is the Dividend Yield. The current yield is 7.14% and the 5 year median Dividend Yield is higher at 10.27%. For the stock to pass this test, you would want a current yield higher than the 5 year median yield. There are a couple of points to make. The first is that corporations will not provide the high yields that income trusts provided. The second point is that 7.14% is a high yield.

When I look at analysts’ recommendations, I find Strong Buy, Buy and Hold recommendations. The consensus recommendation is a Buy. (See my site for information on analyst ratings.) One Buy recommendation comes with a 12 month stock price of $23. One analyst with Hold says that the company hasn’t done that well. Another says it is a good buy because price of oil is down, but it will recover. Another feels that it has a great land position in Western Canada.

Another blogger also talks about this stock at Wealthy Canadian.

It is the largest conventional oil and natural gas producing trust in North America. They operate only in Alberta. Its web site is here Penn West. See my spreadsheet at pwt.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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