Penn West Petroleum Ltd

Penn West Petroleum Ltd

On my other blog I am today writing about Tax Free Savings Accounts...continue...

I have more stocks to cover than I have time this year if I do a double report on each stock. So, for the first part of the year, I will do short reports on some of the stocks that I track. This is one stock for the short report.

I do not own this stock of Penn West Petroleum Ltd. (TSX-PWT, NYSE-PWE). The stock I bought was Maximum Trust. My spreadsheet shows some values from Maximum Trust to Petrofund to Penn West and other values of Petrofund to Penn West. I decided to sell Penn West in 2010 because the company changing to a corporation and they are also getting back into exploration, rather than just selling oil from their wells.

I made a return of 8.5% per year on this stock. I made 10.4% per year in dividend income and had a capital loss of 1.9% per year. When this company changed to a corporation, it reduced its dividends from $.15 to $.09 per month, a reduction of 40% (2010). They had also reduced their dividends in 2009 by 35%. However, this company is an oil and gas company and you would expect dividends to fluctuate.

Another way to look at this company is that it is another previous income trust that cannot cover its dividends with its earnings. The 5 year median Dividend Payout Ratio for EPS is 126%. The DPR expected for 2012 is 263% and for 2013 is 720%. This does not give me any confidence that dividends will remain at the current value. The 5 year median DPR for CF is better at 61%.

The current Liquidity Ratio is low at 0.93. The 5 year median ratio is even lower at just 0.62. The cash flow brings this ratio generally up above 1.00. However, since cash flow fluctuates this is rather cold comfort. The current Debt Ratio is strong at 2.32. The current Leverage and Debt/Equity Ratios are also good at 1.76 and 0.76. I do not like low Liquidity Ratios because companies that can survive in the long term should have good Liquidity ratios to survive the bad times.

There is generally no growth in revenue, earnings, cash flow or book value per share. Outstanding shares have increased greatly and are up by 15% per year over the past 5 years and 34% per year over the past 10 years. Outstanding shares are increasing due to acquisitions, stock options and the DRIP plan. The company has also bought back some shares for cancellations. In 2011, shares increased by 2.5% in total and by 1.5% due to stock options.

The 5 year low, median and high median Price/Earnings Ratios are 10.56, 15.65 and 20.65. The current one based on stock price of $10.85 and EPS of $0.15 for 2013 is 72.33, a very high P/E. If you use the expected EPS for 2012 of $0.41, you still get a rather high P/E at 26.46.

Using current the Price/Graham Price Ratio of 1.36, the price also looks high. However, using the current dividend yield of 9.95% against the 5 year median of 7.73%, price is relatively low. Also, using the current Price/Book Value Ratio 0.56 against the 10 year median P/B Ratio of 1.35, the stock price looks low.

Over the past year there was insider buying of $1.8M and insider selling of $0.7M. Net insider buying is at $1.1M. All insiders but directors have more options than shares. There are not only options, but Deferred Share Unit, Rights (CSRIP) and Incentive Award (Cash Based - LTRIP). For example the CEO has $1.6M in shares and $16.3M in options and the CFO has $0.6M in shares and $11.9M in options.

There are some 356 institutions that hold some 47% of the outstanding shares. Over the past 3 months they have decreased their shares marginally.

When I look at the analysts' recommendations I find Buy, Strong Buy, Hold and Underperform. Most of the recommendations are a Hold recommendation and this is the consensus recommendation. The 12 month stock price consensus is $15.50. That implies a total return of 55.12% with 10.23% from dividends and 44.89% from capital gain. (The total return seems a huge return for a Hold recommendation.)

The tests on the stock price are mixed. DPRs for cash flow not bad, but very high for earnings. Oil and gas companies are risky at the best of times. I think that this company is just another previous income trust that cannot seem to get earnings higher than dividends.

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 or StockTwits.