“One man’s trash is another man’s treasure.” That’s an appropriate saying for an investor looking for bargains in the stock market.

I spend a lot of time looking through beaten-down stocks trying to find an overlooked jewel. I believe I found one recently in Penn West Petroleum (NYSE: PWE), which many investors have been throwing into the trash bin.

#-ad_banner-#Shares of Penn West would need to triple to get back to where they were just two years ago — but I think that triple is possible.  

I’m not suggesting it will happen overnight, but with the plan that Penn West has in place, it can happen.

The nice part about Penn West is that as an investor buying today, you can lock in a 7% dividend yield. That means you get paid nicely while you wait for the plan to be executed and the shares to go up.

What Caused PWE To Collapse?
I’m bullish on Penn West going forward, but I don’t dispute for a minute that the share price drop over the past two years was warranted.

This is a company that has struggled mightily. Shareholders are right to feel disappointed.

Penn West has had two primary problems.

Problem #1 has been depressed natural gas prices, which have dealt a severe blow to Penn West’s cash flow.  

In 2012 because of low natural gas prices, Penn West generated all of $13 million from producing the commodity. That is more than $350 million less than in 2009.

If you combine 2012 with the low natural gas prices that also prevailed in 2011 and 2013, it adds up to a big loss of cash flow and a big hole in Penn West’s balance sheet.

Problem #2 is that Penn West has done a terrible job controlling costs. This is a self-inflicted wound that has been eating at the company for several years.

Penn West’s operating cost per barrel of production has been at least $4 per barrel above the norm for the industry.

Four dollars a barrel might not sound like much — but believe me, it adds up. 

Over the past few years Penn West has produced on average about 150,000 barrels of oil and gas per day. Over the course of a year, that is 55 million barrels.

By having costs per barrel that are $4 too high, Penn West is making $220 million less per year on its 55 million barrels of production than it should.  

Over the course of several years, that adds up to some really big numbers.

Times Are Changing
Pretty much everyone who owned Penn West has given up on the company. The horrible stock price performance tells us that.

But change has come to Penn West. I’m not talking about small changes — I’m talking about a complete transformation.

That change starts at the top of the company. There is new leadership at the helm of Penn West, and that leadership has big-time credentials.

Penn West’s new chairman is Rick George, who led Suncor (NYSE: SU) from a share price of $2 in the ’90s to nearly $40 today.

The man knows the oil business, and his coming on board is a great sign that he believes in the quality of Penn West’s assets.   

An even better sign of his belief is that he spent a couple million dollars of his own money buying shares of Penn West in the open market.

George’s biggest impact on Penn West so far has been hiring a new CEO, Dave Roberts, a former chief operations officer at Marathon Oil (NYSE: MRO). In his first half-year at Penn West, Roberts has been ruthless at trimming the fat and selling assets to improve the balance sheet.

By the end of 2014, Roberts expects to have sold almost $2 billion worth of assets and reduced Penn West’s debt-to-cash flow ratio from over three times to about half that.

Reducing costs and fixing the balance sheet are only the first step.

Once the balance sheet is in order and with a leaner, meaner company, Roberts is going to have Penn West focused on only its three best oil plays (Cardium, Slave Point and Viking).  

By drilling nothing but oil wells in these three plays, Roberts expects he can take Penn West’s cash flow per share from $1.50 this year to $2.80 in 2018.

A doubling in cash flow per share combined with the significant debt reduction could result in a tripling of Penn West’s share price by 2018. That triple assumes that Penn West shares trade at 7.5 times cash flow in 2018, which is roughly the market average.

This isn’t going to be an overnight success story, but it’s certainly one that can happen over time.  The bonus is that as a buyer of shares today you can lock in a 7% dividend that you can enjoy while this plan comes to fruition.

Risks to Consider: As mentioned, this company is in the midst of an asset-selling program. If prices for those assets don’t measure up to what the company expects, this transition might not go as smoothly as desired.

Action to Take –> Buy shares of Penn West and enjoy the dividend while new management executes its turnaround plan. This is one to tuck away and check back on in 2018 — enjoying that dividend yield all the while.

P.S. As mentioned, Penn West has had a rough few years… but it’s often a shrewd move to pick up beaten-down stocks. In fact, Dave Forest, Chief Investment Strategist of StreetAuthority’s Scarcity & Real Wealth advisory, loves finding “hated” resource and energy stocks — because he’s found they often lead to double- or triple-digit gains a few months down the road. To learn more about Dave’s strategy, click here.