Note: all dollar amounts are in Canadian dollars unless otherwise indicated.
Penn West Exploration (NYSE:PWE) is a Canadian company, engaged in the exploration and production of petroleum and natural gas. Penn West currently offers a dividend of $0.27 per quarter. At the current price of $11.53, Penn West offers a 9.3% dividend yield. Please note that this dividend is subject to a 15% Canadian dividend tax, so the after tax yield may be lower. Penn West offers exposure to over 6 million acres of Western Canadian land, with large concentrations of light oil.
The 9.3% yield for Penn West is not atypical for this sector. Competitors to Penn West also offer large yields such as Baytex Energy (NYSE:BTE) which offers a 6.2% yield, Enerplus Corp (NYSE:ERF) which offers a 8.4% yield, and Pengrowth Energy (NYSE:PGH) which offers a 9.5% yield. All four of these companies have suffered severe price declines this year as shown below:
Penn West strategy is centered on balanced financial management and continued resource growth across their dominant positions in four of Western Canada's five largest light oil resource plays. As part of its financial management, on June of 2012, Penn West announced its intention to divest of $1.0 to $1.5 billion of non-core assets. Effective today, the last of a number of asset dispositions related to this plan closed for total gross proceeds of approximately $1.3 billion. In addition to these dispositions, the company also recently closed a series of minor dispositions. Total proceeds from all sales were approximately $1.35 billion and were used to repay outstanding indebtedness on the company's credit facility (source). This disposition is part of a plan to reduce debt to cash flow to a range of 1.5 to 2.5.
Penn West has increased its liquids production over the past few years to 66 percent of total production. Over the past several years, Penn West has appraised vast oil resources for the application of horizontal multi-stage fracture technology. Penn West is poised for growth as the outlook for commodity prices improves.
North America will be the only non-OPEC region to show production growth in 2012 and 2013. North American oil transportation issues led to high Canadian oil differentials to WTI in the first two quarters of 2012 which narrowed in the third quarter of 2012 due to increased usage of rail transportation of crude oil to new markets. In September, Edmonton light oil prices traded approximately $2 per barrel below WTI, however, since that time differentials have widened again due to pipeline issues and refinery maintenance. Penn West has 65% of 2013 oil sales hedged with a collared ranged of WTI US$92 x US$104.
Natural gas prices have improved from the lows of the year. The price level relative to coal prices has led to new power plant construction being natural gas fired. In the near term, the use of natural gas for power generation will be dependent on the price of natural gas relative to coal.
It is my opinion that Penn West could greatly benefit if WTI crude prices improve. Penn West stock is not without risks, as it is currently spending more cash in capital expenditures and dividends than generating from operating activities. This has been the primary reason for the sharp decline in share price this year. However, for those who think WTI prices will rebound and its differential with Canadian oil prices will stay modest, Penn West maybe a stock worth looking at. The dividend yield of 9.3% is also a reason to hold this stock while you wait for this rebound. Penn West is a very risky stock to own. I would classify it as "High-risk, High-reward".