Penn West Petroleum Ltd. was upgraded to outperform from underperform at Raymond James after announcing the sale of its Saskatchewan assets, including those in the Dodsland Viking area.
Analyst Jeremy McCrea also raised his price target on Penn West shares to $3 from 75 cents, telling clients the $975 million transaction marks a definitive step toward shifting the focus away from the company’s debt situation, and toward more constructive conversations around its performance in the Cardium oil play.
“Meaningful solutions cannot be achieved through half measures,” McCrea said in a research note. “In the case of Penn West, the full measure solution of its debt overhang was the sale of one of its jewels – its Dodsland Viking.”
The company stock was trading at $1.64, up 40.5 per cent on the Toronto Stock Exchange at 3.31 p.m. ET.
The analyst considers this the right move for Penn West, noting that it’s been a consistent performer in the Cardium, and its success in the Saskatchewan Viking bodes well for the Alberta Viking lands.
With the sale of the Saskatchewan assets, along with Slave Point and various other Alberta assets in the second quarter, Penn West will cut its debt to below $600 million.
McCrea noted that its debt-to-PDP (proved-developed-producing reserves) ratio falls to 33 per cent, which is well below the industry median of 51 per cent.
The analyst believes lenders will be very comfortable with this level, as they typically look for a figure below 60 per cent.
While some may consider Penn West’s debt-to-cash flow ratio of 3.9x for 2017 relatively high, McCrea pointed out that it fails to capture the company’s low decline profile of roughly 19 per cent. That, combined with a renewed capex program, should allow Penn West to grow much easier, and reduce that debt-to-cash flow figure further into 2018.