(By Balaseshan) Deutsche Bank analyst Stephen Richardson initiated coverage of Penn West Petroleum Ltd. (TSE:PWT) with a "Hold" rating and C$20 price target.
Richardson said PWT is 3 years into a transition from an acquisition and yield (royalty trust) model to that of a growth-oriented E&P focused on tight oil opportunities in the western Canadian sedimentary basin.
While market fears over discounts for Canadian crudes (heavy and light) and sustainability of the yield (current 7.6%) have likely peaked, the analyst sees the portfolio as challenged to grow at rates comparable to peers.
While more asset moves are likely before-2013, the analyst suspects a more aggressive portfolio pruning will be necessary to right size the model. A work in progress, definitely worth tracking, but still early.
With C$1 billion to C$1.5 billion in assets on the market, PWT has a track record in the deal market and has indicated more significant (sales/JVs) are likely to be contemplated, the analyst noted. Proceeds at the high end could bolster the balance sheet and de-risk the 2013 plan.
Richardson said the opportunity in his mind is to high grade the portfolio while enhancing the go forward growth plan, which could entail a more expansive shrink to grow strategy. The transition story at PWT has disappointed.
Despite delivering results from emerging tight oil plays, headline production growth and improvements in capital efficiency have proven elusive, the analyst noted. Further, funding has been challenged by lower natural gas prices and widening Canadian crude differentials, leaving the business model increasingly dependent on infrastructure adds and asset sales proceeds in 2013-beyond.
PWT's focus on shareholder returns in addition to production growth is unique within the peer group, but until the model can deliver both sustainably, Richardson does not expect the market to take notice.
PWT is trading down 3.37% at C$13.78 on Thursday.