Why Penn West's Numbers Could Be Misleading

For oil and gas companies, there's nothing more important than reserves, rigs, submersibles, and refineries. However, to be truly valuable, these assets must be capable of generating profitable returns.

Value for money
It makes little sense for an exploration and production company to have a lot of reserves but not the ability to pull them out in a profitable manner. In short, you have to understand how valuable these assets are to the company. Today, we'll take a look at Penn West Petroleum (NYSE: PWE  ) and see how efficiently the company is using its resources.

To help evaluate this, we can look at some important metrics:

  • Return on assets, or net income divided by total assets indicates how efficiently the company generates profits for every dollar of assets it owns. A higher value indicates that the assets are more valuable. The metric is pretty useful when used as a comparative measure – against peers and the industry in general. Typically, ROA for Penn West's peer group in the oil exploration and production industry is about 6.3%.
  • Fixed-asset turnover ratio, or revenues divided by total fixed assets indicates how efficiently the company's refineries are generating revenues. The higher the turnover rate, the better. For these companies, a value above 0.5 times looks pretty good.
  • Total Enterprise Value/TTM EBITDA shows how expensive the company looks when compared against its trailing-twelve month earnings before interest, tax, depreciation and amortization.

This is how Penn West stacks up against its peers:

Company

Return on Assets

(TTM)

Fixed-Asset Turnover Ratio

P/B

TEV/ TTM EBITDA

Penn West Petroleum 2.2% 0.3 0.70 5.5
Pioneer Natural Resources (NYSE: PXD  ) 7.0% 0.3 1.91 5.9
Plains Exploration & Production (NYSE: PXP  ) 4.2% 0.3 1.47 5.6

Source: S&P Capital IQ. TTM = trailing 12 months.

Penn West's returns aren't the best compared to its peers. Additionally, the company's ROA and fixed-asset turnover are below the industry average. This doesn't look great from a financial standpoint. The company had been struggling with derivative losses lately that affected its bottom line. However, delving deeper, things don't look so bad. Revenue is showing an upward trend, thanks to production increases. With access to the best oil plays in the industry in the form of the Canadian oil sands, production is expected to increase further.

Canada's Talisman Energy (NYSE: TLM  ) is proof to that. The exploration and production company had its ratings upgraded to "outperform" on Thursday by Bernstein.

The Foolish bottom line
Penn West's future looks promising. The underlying fundamentals look much more solid than what the company's financials suggest. This could be an opportunity to seriously consider this stock. However, if you'd rather be on the sidelines and watch the company for a while before jumping in, add it to your personalized watchlist. It's free.

At the same time, you should also safeguard your investments by checking out the following report: "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost by clicking here.

Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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