Penn West Petroleum (PWE) has 50% upside

Penn West Petroleum Ltd. (PWE) explores for, develops, and produces oil and natural gas properties in western Canada. The company had been mismanaged and changed it’s CEO in 2013. Dave Roberts, the new CEO, has been trying to cut cost and sell non-core assets in order to deleverage the balance sheet.¬†

However with the crash in oil prices, investors have not been rewarded. The company has taken a huge hit the last couple of years. It is trading at $1.36 as of today. It had been trading over $20 a couple of years back when oil was trading at much higher prices.

Recently, there was talk that PWE would breach its financial convents at the end of quarter 2. It has to be maintain a total debt/EBITDA ratio of 5. It was at 4.4 at the end of quarter 1. The stock went below $1 and hit a 52 week low of $.45. 

To make sure this would not happen, the company sold some non core assets and sold one of it’s key core asset. It sold its Viking light oil assets in Saskatchewan to Teine Energy for C$975M ($763M). It was a much higher price that analysts had expected. With the sale, it removed any chance of a breach for 2016 and the stock shot up to its current price of $1.36. However, it still seems the company is undervalued based on the assets that are left. Let’s take a look:

Currently the company has a market capitalization of C$870 million. It has a net debt of C$600 million after the asset sale. Here are the assets still left:

  • It’s crown jewel – Cardium area. The Cardium area produces 50% more boe/d than the Saskatchewan assets and has a lower operating cost and higher netback. If ¬†Saskatchewan assets sold for C$975M – Caridum is worth more and close to the full enterprise value of C$1470M – if not more. Cardium still has plenty of prospective areas where PWE can do additional development.
  • Non core assets worth C$100 million – C$200 million that company plans to sell. After the sale, its asset retirement obligation will be reduced to C$100 million.
  • Alberta Viking area – which currently only produces 1,000boe/d but according to PWE has the potential to be like the assets it just sold over the next couple of years.
  • “The Peace River area is focused on our Peace River Oil Partnership (PROP) with our joint venture partner. We expect this area to remain a stable production and cash generation vehicle for the Company, as approximately 90% of our operating and capital costs are paid for by our partner. Our first quarter net production at Peace River was approximately 5,000 boe/d, 98% weighted to crude oil, with operating costs of $1/boe(3).”
  • The company has also has some oil production hedged into 2017.

I am not an oil expert and do not know these areas and their worth, but it is safe to assume that the value of all these pieces exceed the enterprise value of C$1470 million. It is more like they exceed C$2B easily at the current oil prices. The price of $PWE should approach $2/share as investors start to realize this.

Disclosure: I am long PWE