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Usually a dividend cut is viewed very negatively by the stock market. Investors who had been holding shares will often sell because they were invested for the specific purpose of the dividend.

Last week, Penn West (NYSE:PWE) made the following announcement concerning its dividend:

Dividend Reduction to Strengthen Financial Flexibility
Penn West also announces that its Board has approved a change to its dividend. Effective for its third quarter, Penn West's quarterly dividend will be reduced to $0.14 per common share from $0.27 per common share. This measure will provide Penn West with increased financial flexibility, and a sustainable dividend, as it continues to improve operating performance.

But for Penn West there has been very little damage to the company share price. In fact, the Penn West shares have had a pretty good week:

(click to enlarge)

Penn West's dividend payout ratio was actually fairly modest relative to the rest of its dividend paying peers.

(click to enlarge)

But after divesting 13,000 barrels of oil equivalent per day late in 2012, a dividend cut certainly is not a surprise. For the first quarter of 2013, Penn West has funds flow from operations of $267 million. Annualized that would be just over $1 billion. With $3 billion in long-term debt, Penn West is running at a debt to cash flow ratio of 3 to 1.

(click to enlarge)

That is a bit uncomfortable. And what makes that even more uncomfortable is that it is running with this elevated level of debt to cash and it still isn't growing production. Other more leveraged companies can point to the fact that they are also growing production and that they will grow into their debt load.

For Penn West, growth wasn't happening and the dividend cut makes sense.

But I don't think it is the dividend cut that has propelled the stock price in recent days. No, I think it is the big dollar amount of insider buying that has been going on.

As of 11:59pm ET June 12th, 2013

Filing
Date

Transaction
Date

Insider Name

Ownership
Type

Securities

Nature of transaction

# or value acquired or disposed of

Price

12/13

11/13

Markin, Allan

Indirect Ownership

Common Shares

10 - Acquisition in the public market

100,000

$10.75

11/13

7/13

Thornton, Jay

Indirect Ownership

Common Shares

10 - Acquisition in the public market

75,000

$10.40

11/13

7/13

George, Richard Lee

Indirect Ownership

Common Shares

10 - Acquisition in the public market

75,000

$10.40

10/13

7/13

Brookman, George Homer

Direct Ownership

Common Shares

10 - Acquisition in the public market

2,500

$10.40

7/13

7/13

Markin, Allan

Indirect Ownership

Common Shares

10 - Acquisition in the public market

100,000

$10.38

11/13

6/13

Thornton, Jay

Indirect Ownership

Common Shares

10 - Acquisition in the public market

75,000

$10.40

11/13

6/13

George, Richard Lee

Indirect Ownership

Common Shares

10 - Acquisition in the public market

75,000

$10.40

7/13

6/13

Shepherd, Robert Louis

Direct Ownership

Options

38 - Redemption, retraction, cancellation, repurchase

-75,000

7/13

6/13

Shepherd, Robert Louis

Direct Ownership

Restricted Share Rights

57 - Exercise of rights

-75,000

7/13

6/13

Markin, Allan

Indirect Ownership

Common Shares

10 - Acquisition in the public market

55,900

$10.33

Between new board members George and Markin, almost 400,000 shares worth well over $4 million have been purchased out of their own pockets. These gentlemen know the Canadian oil business given their long distinguished careers at Suncor (NYSE:SU) and Canadian Natural Resources (NYSE:CNQ) and their interest in Penn West is very encouraging.

Further exciting investors was Penn West's announced commitment to look at all avenues to realize value for shareholders:

Corporate Strategic Review
Penn West's Board of Directors will form a Special Committee to explore strategic alternatives. The Special Committee will consider all alternatives to increase shareholder value, including strategic financing alternatives, asset divestments, joint ventures and/or other business combinations. Although strategy review is always an ongoing activity for all companies, we expect this concentrated effort will be completed by year end. "Penn West has many high quality assets but the Company has yet to unlock their complete value. The Board is focused on maximizing value for all shareholders," said Mr. George.

One theory is that Penn West will split into two companies. One company holding the older conventional assets that will pay a dividend and not offer much if any growth. The second company would hold the unconventional tight oil plays that Penn West is abundantly blessed with and which could, under proper management, result in a fairly high growth entity.

(click to enlarge)

For the first time in a long time, investors seem to be getting excited about Penn West. A new management team, a new board of directors and hopefully a new era. This company has some great assets. Hopefully, new management can get them developed in way that rewards shareholders.

The implications for investors are that insiders buy shares using their own cash for one reason. That reason is that they believe that at some point in the future they will be able to sell those shares at a significantly higher price.

Time will tell if Markin and George are right.

Disclosure: I am long PWE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Penn West Cuts Its Dividend, But The Market Is Focused On Big Insider Buying