Thursday, July 30, 2015

Penn West Petroleum Ltd.

Sound bite for Twitter and StockTwits is: Cheap, but risky. The problem is that revenues, earnings, cash flow and book value are all in deep decline. See my spreadsheet at pwt.htm.

I do not own this stock of Penn West Petroleum Ltd. (TSX-PWT, NYSE-PWE) but I used to. I bought this stock as Maximum Energy Trust (MXT.UN) in 1998. I sold this stock of Penn West in 2010 as it was changing to a corporation, but they are also getting back into exploration, rather than just selling oil from their wells. They also just reduced their dividends from $.15 per share per month to $.09 per share per month.

The dividends have continued to decline since 2010 and they are at $0.01 per quarter or at $0.04 per year. They have declined by 92.9% in 2015. The current dividend yield is 2.26% as the stock price has continued to decline also. Since they have not made a profit since 2013 and are not expected to make a profit before 2017, they really cannot afford to pay any dividends.

From Funds from Operations (FFO) stand point, the payout ratio is still good. In 2014 the Dividend Payout Ratio was 77.8%. In 2015 the DPR for FFO is expected to be around 22.7%. The big decline in dividends occurs next year when yearly dividend goes from $0.17 in 2015 or just $0.04 in 2016. The company obviously expects another big decline in FFO. The expected one in 2015 is some 60.5% lower than the FFO for 2014.

What I made on this stock was a total return of 8.47% with 10.43% from distributions and a capital loss of 1.96% between 1998 and 2010. Shareholders have not done well lately on this stock. The 5 and 10 year total return is a loss of 11.90% and 2.47% per year. The portion of this total return attributable to dividends is 4.10% and 9.11% per year over the past 5 and 10 years. The portion of this total return attributable to capital loss is at 16.00% and 11.58% per year over the past 5 and 10 years.

If you compare values for the year ending at the end of the second quarter to values at the end of 2014 revenue, earnings and cash flow has all declined. For Revenues the decline is28.9%, for FFO the decline is 45%, for earnings the decline is 18.8% and for cash flow the decline is 69.7%. None of this is good news.

One problem this company has is debt. Their Liquidity Ratio for 2014 is just 0.43. Current assets cannot cover current liabilities. If you add back in the current portion of long term debt ratio is 0.62. If you also add in cash flow after dividends the ratio is 1.48. However, cash flow is declining fast. Low Liquidity Ratios make a company vulnerable in the bad times. It is the bad times for oil companies.

The other debt ratios are fine. The Debt Ratio is 2.56 in 2014 and the Leverage and Debt/Equity Ratios for 2014 are 1.64 and 0.64.

In doing tests for stock price, I can use the Price/Book Value per Share Ratios. I have a 10 year P/B Ratio of 1.11 and the current ratio of 0.17 is some 85% lower. The current ratio is based on BVPS of $10.57 at the end of the second quarter and a stock price $1.77. However, the BVPS dropped some 30% between the end of 2014 and the end of the second quarter. On an absolute basis a P/B Ratio of 0.17 shows a very cheap price as company is theoretically selling below its breakup value. But with the BVPS dropping so fast this may not matter.

I get a 5 year median Price/FFO Ratio of 6.19 and the current P/FFO Ratio at 2.37 that is some 62% lower based on FFO estimate of $0.75 for 2015. This estimate is some 60.5% lower than 2014 FFO. Also, the FFO has dropped some 45% if you compare the FFO at the end of the second quarter to the FFO at the end of 2014.

When I look at analysts' recommendations, I find Hold, Underperform and Sell recommendations. Most recommendations are Underperform (or weak sell) and the consensus would be Underperform. The 12 month stock price is $2.78. This implies a total return of 59.32% with 2.26% from dividends and 57.06% from capital gains. This does not seem to correspond well with the analysts' recommendation of Underperform.

The Penn West Board faces allegations of stock options manipulation according to a recent article in the G&M. An article by Nelson Smith in the Motley Fool asks if sub $50 oil is going to send this company into bankruptcy.

I will have only one entry for this stock as I must do on some stock because I cover too many stocks to do double entries on all that I follow.

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.

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. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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