Penn West (PWE) has announced a reduction in its capital budget and the dividends for the next year. The company has reduced the capital budget by $215 million [185.6 million U.S. Dollars] in the wake of declining crude oil prices - capital budget for the next year now stands at $625 million [540 million U.S. dollars], compared to the previously announced figure of $840 million [725 million U.S. dollars]. At the same time, the company has reduced the quarterly dividend from 14 cents [12.6 cents] to 3 cents [2.6 cents]. Furthermore, the company has also suspended its Dividend Reinvestment Plan [DRIP].
The decision to decrease the capital budget for the next year does not come as a surprise as almost every energy company is trying to save cash. However, a decrease in dividends and the suspension of DRIP is an extremely positive sign for the company. Penn West is already going through a rough patch and the decision to preserve cash will enhance the balance sheet of the company and allow it to use these cash reserves for a better growth opportunity in the future. Usually, when a company cuts its dividend we see an adverse reaction from the market - the example of Seadrill (NYSE:SDRL) is there for everyone to see - but Penn West stock gained almost 8% as the company came out with the decision to cut its dividends and the capital budget.
This speaks volumes. It shows that the market wanted the management to take some bold steps in order to strengthen the balance sheet as well as the cash position of the company. In the current circumstances, this is a wise decision, in my opinion. It allows the company to keep its powder dry for the opportunities in the future and reduces the pressure on the business. Penn West will save around $220 million [190 million U.S. dollars] in dividends due to the dividend cut - total savings from the dividend cut and reduction in capital budget will reach over $435 million [376 million U.S. dollars].
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.