Steven Ward

Penn West Energy Needs to Show Investors Its Worth

PWE shook up their management a few months ago. The reasoning is a new emphasis on developing the assets faster. PWE was in danger of acting like Compton Petroleum; alot of assets but not enough production to sustain the carrying costs of the purchased assets.

All of PWE's big oil in place resevoirs are secondary and tertiary recovery operations. That's expensive and usually lowers the ROI. That is what PWE's got to beat, thus the management change.

PWe's new CEO said as recently as March/April, that all cash flow will be used to cover the development and exploration budgets, then the dividend. If any money is left over then and only then will the debt be paid down. Of course the management could do an about face.

On the dividend, PWE is using it as an enticement, currency if you will to make acquisitions. Additionally, PWE is also touting her tax pools that should give her the ability to pay the big dividend for 2 to 3 years after the law change in 2011.

Ultimately, did you want to own PWE since the Halloween Massacre of 2006 or would rather own Crescent Point Energy Trust. CPE has a different strategy altogether and has doubled its unit price since 2006 low. The only Can Roy other than Canadian Oil Sands to do so. CPE also has large OOIP reserves and uses secondary recovery methods. CPE also raised debt and diluted shares with a bought deal. The difference, higher netbacks, lower costs and a dividend payout that makes economic sense.

Reserves are good, but if current management fails to deliver on ROI then PWE shareholders will suffer like they did last year with a total negative 7 percent return, even with the whopping dividend.