Penn West Could Be Turning Around

Income-trust-to-corporation convert Penn West Petroleum (NYS: PWE) seems to be on the road to recovery. While problems did occur, things looked pretty smooth for this dividend payer in the third quarter, thanks to some efficient operations coupled with favorable market conditions.

The third-quarter results looked promising if not outright impressive. Net income stood at $138 million, or $0.29 per share. While last year's third quarter showed net profits of $304 million, it included a one-time gain of $368 million from disposition of assets as part of a joint venture in the Cordova Embayment. Effectively, Penn West managed to turn around a $64 million loss.

Operations have picked up with oil and liquids accounting for 63% of total production, compared to 60% last year. The focus on light crude oil production has been rewarding. Now combine this with a 25% increase in average sales price, and you can bet on some solid growth in the ensuing quarters. Unless a global crisis is around the corner, I don't expect a drastic fall in crude prices.

Ace up the sleeve?
Penn West's strong asset base should be attracting investors. With acreages in nearly every prolific light-oil play in Canada, it's only a matter of time and resources before they are developed. But I wouldn't say everything looks hunky-dory for the moment. Next year holds the key to the development of some of the company's major projects. Management expects to move into full-scale development of the key light-oil plays in the Cardium, Carbonates, Spearfish, and Viking formations of the Western Canadian sedimentary basin. While initial production rates looked promising, a current ratio of just 0.5 time doesn't. I'm not too sure of the company's cash balances and liquidity.

Still, investors must realize that Penn West is no longer an income trust. Hence, without the additional headache of distributable earnings other than dividends paid, the company might just be able to beef up its balance sheet, and should help advance capital expenditure programs.

There's hope
The Western Canadian Sedimentary Basin has typically been an excellent hunting ground for upstream players. Dividend payers that operate here -- some of them income trusts -- like Baytex Energy (NYS: BTE) , Enerplus (NYSR: ERF), and Pengrowth Energy (NYS: PGH) have proved to be attractive investments. There's no reason why Penn West should lag given that it has been a consistent dividend payer. Its trailing yield of 5.4% has been among the highest among Canadian upstream companies.

Foolish bottom line
While historically a relatively high dividend has been paid, one must realize that the stock has been down 23% since the start of the year. With lots of promising activity, production could see a substantial growth. If management could smooth out some of the issues, including that of working capital and liquidity, things could definitely look up by the end of next quarter. Given that, this might be a good time to accumulate some shares. In the meantime, The Motley Fool can help you keep a track of this company for all of the latest news and analysis. All you need to do is add it to your watchlist. It's free.

At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article.Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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