PENN WEST PETROLEUM $10.70 (Toronto symbol PWT; Shares outstanding: 476.8 million; Market cap: $5.1 billion; TSINetwork Rating: Average; Dividend yield: 10.1%) is one of North America’s largest oil and gas producers. Its production is 66% oil and 34% gas. In the quarter ended September 30, 2012, Penn West’s cash flow per share fell 2.7%, to $0.72 from $0.74 a year earlier. Lower oil and gas prices hurt cash flow, as did a fall in daily output, to 160,339 barrels of oil equivalent from 161,323 barrels.
Penn West has taken on debt, but the resulting investments have failed to increase its production. To improve its performance, it has fired four senior executives and will likely hire outside the company to bring in new expertise.
To cut its debt, which now stands at $3.5 billion, or a high 68.6% of its market cap, Penn West has agreed to sell $1.3 billion worth of non-core properties. In all, these produce about 12,000 barrels per day, or 7.5% of the company’s total output.
Paying down its debt will lower Penn West’s interest costs and let it invest more money in its highest-potential oil and gas properties.
However, the company will need time to replace its fired executives and increase production to replace the cash flow from its asset sales. In the meantime, a dividend cut is a possibility. The shares now yield a very high 10.1%.
Penn West is now a hold.
