Has Penn West Petroleum Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, and then decide if Penn West Petroleum (NYSE: PWE  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Penn West Petroleum.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

8.5%

Fail

 

One-year revenue growth > 12%

4.6%

Fail

Margins

Gross margin > 35%

62.1%

Pass

 

Net margin > 15%

12.9%

Fail

Balance sheet

Debt to equity < 50%

40.2%

Pass

 

Current ratio > 1.3

0.95

Fail

Opportunities

Return on equity > 15%

4%

Fail

Valuation

Normalized P/E < 20

28.05

Fail

Dividends

Current yield > 2%

7.7%

Pass

 

Five-year dividend growth > 10%

(23.3%)

Fail

       
 

Total Score

 

3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Penn West Petroleum last year, the company has kept the same score. Although the company is back in the black on the earnings front, the stock hasn't performed all that well, falling 10% over the past year.

Like many natural-gas-heavy producers, Penn West has had a tough time dealing with rock-bottom gas prices. Just as Chesapeake Energy (NYSE: CHK  ) and Devon Energy (NYSE: DVN  ) have tried to shift their focus away from gas-producing properties toward more lucrative energy niches, Penn West has tried to turn things around by increasing its exposure to oil and natural-gas liquids, which now account for the majority of Penn West's production.

Penn West has also joined the wave of Canadian companies that have sold off assets in an effort to become more efficient. Both Talisman Energy (NYSE: TLM  ) and Canadian National Resources (NYSE: CNQ  ) have used asset sales to try to shift production away from dry gas, and Penn West's plans include selling $1.5 billion in assets, which it will apply toward reducing debt.

The sense of urgency comes from a big problem that Penn West faces. This year, the company successfully hedged much of its natural-gas exposure at favorable prices. But next year those hedges will drop by more than $1 per million cubic feet, leaving the company facing much lower revenue if natural-gas prices don't rise.

For Penn West to improve, it needs to keep emphasizing higher-priced oil and liquids production while getting costs better under control to boost margins. If it can do so and the energy markets cooperate, then Penn West could get back on the track toward perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Penn West Petroleum has plenty of potential, but why not invest in the one company in the energy sector that can hold fast no matter what oil costs? Find out why this company is "The Only Energy Stock You'll Ever Need" in the Motley Fool's popular free report. Click here for the inside scoop while it lasts.

Click here to add Penn West Petroleum to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2033903, ~/Articles/ArticleHandler.aspx, 4/18/2014 9:45:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement