Penn West Petroleum

I have been asked to talk about what a reasonable stock price is. I will do that after I finish talking about my oil and gas stocks.

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. In November 2001, there was a stock exchange and stock became Ultimate Energy Fund 2006. I followed stock into NCE Petrofund and then into Petrofund Energy. Petrofund Energy merged with Penn West in July 2006 and I got .6 of a share for each share I had. My spreadsheet follows the stock from Petrofund into Penn West.

So I bought this stock as Maximum Energy Trust in 1998 and sold 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 to convert from an Income Trust. They also decreased their dividends at conversion, but dividends have been going down since 2008.

The current dividend on this stock is quite good at 7.2%. As with other oil and gas companies, the dividends will fluctuate with the price of oil and gas. As an income trust, the dividends on this company were sometimes quite high. The 10 year median high dividend is 15%. However, as a corporation they will be lower as Dividend Payout Ratios based on earnings and cash flow will now be important.

The 5 year median DPR for earnings is 127% and for cash flow is 70%. However, the DPR ratios for 2011 are expected to be 74% for earnings and 28% for cash flow. As an oil and gas company, this company’s earnings have fluctuated. The company had a loss in 2009 and did not earn much in 2010. It is expected to do better in the future.

My spreadsheet and therefore my growth figures are following Petrofund into Penn West. When companies get together, you have to follow the company from somewhere. This will, of course, affect the growth figures that I have. Also, a lot of my growth figures are per share. Since under Petrofund and Penn West lots of shares were issued (I have a 10 year median increase of 32%), this tends to suppress growth figures per share. However, from my point of view, the only growth that matters is per share.

From my spreadsheet, I see no (or negative growth) for Revenue, Earnings, Dividends, and Cash Flow. For example, Revenue per Share is down 7.6% per year and 5% per year over the past 5 and 10 years. Other negative growth is worse. The best is Book Value and Book Value over the past 5 years is down 5% per year, but over the past 10 years is up 5.5% per year. This is not a good showing.

Debt ratios are ok except for Liquidity Ratio. The current Liquidity Ratio is only 0.53. When it is under 1.00, it means that current assets cannot cover current liabilities. However, they have enough cash flow after dividends to cover current liabilities. The Asset/Liability Ratio is much better, with a current ratio of 2.56. The Leverage Ratio and Debt/Equity Ratio are fine with current ratios at 1.64 and .64 respectively.

The Return on Equity is nothing to write home about neither. The ROE for the financial year ending in 2010 is just 2.8 and the 5 year median ROE is 5.5%. It has been higher in the past. They have also had positive earnings for the first 6 months of this year.

You would not have made any money if you had invested in the company 5 years ago. However, if you had invested in this company 10 years ago, you would have made a return of approximately 11 to 12% per year, but all the return would be in distributions. You would have had a capital loss.

The company has been making revenue, earnings and cash flow. Over the past 10 years, there is only one year of negative earnings. All years have positive cash flow. The problem from a growth per share stand point is that it is not growing. However, they have been paying out very good distributions.

Tomorrow, I look at what the analysts say about this stock and also what my spreadsheet say about the stock price.

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.