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In Penn West turnaround, it's one step forward, many steps back

If corporate turnarounds were easy, we'd all be doing it.

They're not. They're invariably tricky and often downright painful. Penn West Petroleum Ltd.'s turnaround efforts have been both of those and more.

Now, strides the Calgary-based oil producer has made to stabilize itself in the past year will be overshadowed for an indefinite period by fears of corporate malfeasance, deserved or not.

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The revelation of accounting irregularities, disclosed late Tuesday, wiped away potential gains from what turned out to be an impressive quarterly operating performance and evidence that fixes were starting to pay off.

That's one step forward, a bunch of steps back, and it could well open the door to an opportunistic bidder looking to take advantage of a stock price that has cratered and major investors growing impatient.

Its top holders include U.S. hedge fund First Eagle Investment Management LLC, China Investment Corp. and Canadian Imperial Bank of Commerce, according to Bloomberg.

Chairman Rick George did the right thing by coming clean quickly once questionable accounting was discovered, alerting securities regulators that tens of millions of dollars may have been misclassified as capital spending when they were actually operating expenses, lowering the latter.

Another $100-million in operating expenses were put into the royalty expense category, it said.

Here are the problems with all that: Penn West has had to go back and restate some of its financials, making a series of adjustments that may cut cash flow assumptions for this year. The company could be running afoul of the terms of some of its debt. It's been forced to go to lenders and seek waivers to some of the stipulations tied to the securities.

Mr. George and chief executive officer David Roberts blamed former staff for what has yet to be determined as misstatement with intent to deceive or judgment calls within grey areas of accepted accounting practice.

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With the aid of auditors and Canadian and U.S. lawyers, Penn West is still reviewing its books going back more than four years and it warned it could turn up more problems.

Mr. George, the veteran oil man who was at the helm of Suncor Energy for two decades, has overseen moves to rejuvenate the company, which had become debt-heavy, unfocused and costly to operate. Last year, he brought in Mr. Roberts, a former Marathon Oil Corp. executive, to run the show.

Mr. Roberts launched a series of tough moves to put Penn West on a more stable footing, including major staff cuts, a hefty dividend reduction and plans for $2-billion worth of asset sales by 2015.

The market response has been mixed so far. Before Wednesday's swoon in response to the accounting worries, the stock had gained 12 per cent this year, which isn't bad though it remained well below year-ago levels and lagged the 19-per-cent gain in the S&P/TSX energy group.

Investors, who watched as the one-time income trust bled value for years, had been taking a wait-and-see approach before jumping back to Penn West in a big way. Mr. Roberts has faced criticism for pushing some of the assets out the door at bargain-basement prices.

Still, his moves to make operations more efficient appear to be paying off.

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The company produced more than 108,000 barrels of oil equivalent a day in the second quarter, which beat the expectations of many analysts and kept it on track to meet its annual target of 101,000-106,000 barrels a day.

Staff numbers are down 46 per cent, reducing costs, and the company has delivered on $700-million of asset sales, with most of the proceeds going to debt reduction.

Analysts were impressed with those things. Still, a reduction in cash flow and capital assumptions stemming from the accounting problems forced some of the dealers to put their ratings on the stock under review, or cut them.

Penn West ended the day down 14 per cent, lopping $673-million from its market capitalization and putting the shares back in the range they were last February.

It will be tough to win that kind of money back in a turnaround story that had yet to gain full traction.

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