Since late July, Penn West (NYSE:PWE) has been mired in a most difficult situation. The company announced that it was voluntarily conducting an internal review of its accounting practices. As a result, the stock has been hammered, down over 20% over the past few weeks. Indeed, the selloff has continued unabated, with little to no "dead cat bounce" being seen.
On August 12, Penn West provided an update on its internal review process. The company noted that it was working towards filing its Q2 2014 results and completing the restatement of its historical financial results and related disclosures, anticipating filing them no later than October 14, 2014. Also keep in mind that due to these issues, Penn West is technically no longer in compliance with certain covenants of its bank facility and of its senior unsecured notes. Penn West has obtained a waiver of the defaults under its bank facility from its lenders, which has the effect of extending the cure period under its bank facility until October 14, 2014. Penn West will have access to around $660 million under its bank facility, of which $250 million has been drawn to date. As for the senior notes, the company is in advanced discussions with it noteholders and is also seeking a waiver of defaults under a similar cure period.
As I noted in a recent article, these accounting concerns should be considered a major negative for the stock. The company was basically fudging with its numbers, lowering operating costs and increasing capital expenditures. This has the net effect of improperly boosting key metrics such as FFO, while hiding cost overruns. Simply put, Penn West's prior numbers can no longer be relied upon, with these issues possibly going back up five years. As a result, it is imperative that the company finishes its internal review so that a proper analysis of its operations can be made. I would avoid Penn West's stock until the completion of its internal review.
Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.