Update: Penn West Petroleum - Buying When Blood Is In The Streets?

| About: Obsidian Energy (OBE)
This article is now exclusive for PRO subscribers.


Penn West recently announced that it is slashing its capital budget and its dividend in 2015.

The company prepares for a low commodity price environment.

I believe oil is way oversold and has the potential to rebound to the $70+ per barrel region next year.

Penn West Petroleum's shares were extremely punished in 2014 and lost 68% of their value in the last three months alone.

Should you buy when blood is in the streets?

Falling energy prices do not only affect U.S. oil companies. Softer commodity prices affect Canadian oil and natural gas players just as well as recent events have shown. I have been quite bullish about Penn West Petroleum Ltd. (PWE), a Calgary-based conventional energy producer, since the company made decent progress in bringing down its cash costs and intended to divest of non-strategic assets.

Collapsing energy prices, however, have put increasing pressure on Penn West Petroleum's capital projects in the second half of 2014, which led the company to announce a major dividend cut and an adjustment to its investment plan. According to Penn West Petroleum's latest press release, the company will be reducing "its capital budget by approximately $215 million and reducing its 2015 dividend by approximately $160 million commencing with the 2015 first quarter dividend payment payable on April 15, 2015." Furthermore, the energy producer clarified what this meant for shareholders by informing them that "the Board has approved a reduction to Penn West's quarterly dividend commencing in the first quarter of 2015 to $0.03 per share from $0.14 per share."

At the end of the day, Penn West Petroleum slashed its capital budget by 25% and its dividend by 79%. The adjustment of Penn West Petroleum's dividend and capital budget shows how dependent companies are on high oil and natural gas prices. Correspondingly, shares of Penn West Petroleum have done extremely poorly over the last three months as they have lost 68% of their value. As unexpected and painful the dividend cut is for shareholders, it is important to remain clear-headed. Penn West Petroleum is not the only company that got thrown under the bus. All oil companies are looking back on terrible year-to-date returns: Simply operating in the oil business in the second half of 2014 was reason enough for investors to drop their oil shares like hot potatoes.

It is important, however, to see the big picture here: The oil sector will roar back and reclaim investor favoritism once prices reverse course. Contrary to what many believe, the Saudi's are not going to sit back and let oil fall to $40 per share just because they want to gain market share or because they want to stick it to the U.S and Iran. High commodity prices are in the interest of every oil player, and there is a good chance that 2015 will be the year of rebounding oil prices. Having said that, I am gradually increasing my exposure to U.S. and Canadian energy plays.

Your Takeaway

Unfortunately for shareholders of Penn West Petroleum, the current sector downturn has led to some serious bloodshed. However, I am active in the stock market long enough to know that low commodity prices are very unlikely to persist for long stretches of time and investors could very well see a turn in fortunes in 2015. While it is impossible to know when markets bottom, investors with a desire for exposure to an interesting Canadian energy player could consider Penn West Petroleum EXACTLY at a time when few want to.

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.