Will Penn West Deliver in 2012?

Now is a good time to check how the stocks in your portfolio might shape up this year. A good knowledge of the opportunities and the challenges ahead for companies should help you make better investing decisions regarding their stock. Let's take a look at what 2012 might hold for Penn West Petroleum (NYSE: PWE  ) .

A good 2011, but not a great 2011
Looking back into 2011, the Calgary--based exploration and production company had a largely good year thanks to favorable (read: higher) crude--oil prices. Despite overall production remaining flat as compared to 2010, Penn West's strategy to increase weightage of liquids produced has been successful and has translated into higher revenues.  

But one thing that no one really anticipated was the depreciating Canadian dollar as a result of the European debt crisis. This ensured a drop in demand for crude oil -- Canada's largest export -- and forex traders saw red in Canadian currency. This depreciating ensured that oil stocks across the country nosedived in the last six months. For Penn West, third-quarter results had been marred by forex losses amounting to $213 million. But that's just where opportunity knocks.

A solid outlook
In the last twelve months, Penn West has seen 19% of its market cap shaved off. The company was additionally facing problems in getting its status converted to a corporation from an income trust. And after the government had started taxing income trusts, Penn West had to cut its dividends sharply.

However, production should see a hike in 2012. With access to major oil trends in the form of Vikings, Spearfish, Carbonates, and Cardium, Penn West is now among the top five light-oil producers in Canada. Management expects to fully scale up production in these key oil plays this year. With capital expenditure expected to move up to $1.7 billion, it translates into a 7%‒9% increase in annual average production. Again, a proportional increase in cash flows could prompt management to increase dividends and the yield, which is currently 5.5%.  Moreover, analysts are expecting the next twelve month P/E to be around 23 -- a substantial drop from 38, which was the average trailing P/E in 2011.

In short, the company's fundamental game plan looks solid. I believe this company will offer investors an excellent opportunity to invest in a dividend stock. The reason behind this is the rare opportunity provided by the European debt crisis.

Foolish bottom line
The current drop looks like a chance to accumulate. The stock has fallen 20% this year.  Dividend stocks do look attractive in these volatile times. With these sound fundamentals in place, Penn West looks well- prepared to take on what comes over the next year.

For another smart stock idea, check out The Motley Fool's latest special report to discover our top stock pick for 2012. It's free, but it won't be available for long, so get your copy now.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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