Penn Virginia Corporation (ticker: PVA) is an independent oil and gas company engaged primarily in the development, exploration and production of oil and natural gas in various domestic onshore regions, including Texas, Oklahoma, Mississippi and Pennsylvania – however, the company expects its Eagle Ford (EF) operations to fuel its growth and transition to oil thru 2015.
Analyst Day Highlights Value Propositions
Penn Virginia held an Analyst Day on November 19, 2013. The company provided insight on its assets in the Eagle Ford, planned sales and acquisitions, near-term developments, and guidance on 2014 and 2015 operations.
Eagle Ford Operations – From Nothing to Something
PVA holds 107,100 gross (67,000 net) acres in the EF and operates 93,800 gross (60,500 net) acres – up from virtually nothing in 2010. To define this strategic shift, OAG360 reviewed PVA’s press releases since 2010. Based on our findings in the news releases, the company has successfully sold $168.5 million of natural gas-prone assets and added $456.6 million of new Eagle Ford assets. And the company continues to find attractive bolt-on acquisitions. Since August, the company added approximately 5,000 net acres at roughly $1,600 per acre.
Proved reserves for the Eagle Ford are 51 MMBOE (75% oil) with a proved PV-10 at Q2’13 of $1.03 billion. The company is currently operating 132 producing horizontal wells. An estimated 890 gross drilling locations remain, and the company plans to drill with seven rigs (six operated) in Q4’13. The location inventory increase is a result of 60-acre downspacing and tests for 40-acre downspacing are currently underway. The results were achieved with operations from 14 different pads and do not include potential from the upper Eagle Ford, Austin Chalk and Pearsall locations.
Reducing Costs and Generating Efficiencies
Well costs have dropped due to increased stimulation efficiency, as the company has discovered higher frac intensity results in higher productivity. Pad drilling also reduces costs. Costs for frac stages in 2012 and Q1’13 averaged $195,000 per stage, while the 2Q’13 average cost decreased by nearly 50% to $98,000 per stage. With all these reductions taking place, PVA reported well costs have dropped below their initial $8 million estimate.
The Switch to Oil is Paying Off
Penn Virginia’s switch to oil-weighted assets is starting to show in its metrics. According to EnerCom’s E&P database of 88 public companies, as of November 15, 2013, PVA is generating a TTM Cash Margin per barrel of $32.04, better than the 88 company average of $27.72 per barrel. Additionally, PVA’s TTM EBITDA per unit of production is $40.38,also superior to the 88 company average of $32.46 per barrel.
Exploring and Developing their Asset
De-risking the EF by means of exploration is a priority for PVA. Its total 2013 capital program is expected to come in between $500 million and $530, with 86% invested in development drilling and 93% of that total directed at the Eagle Ford.
For 2014, PVA plans to spend between $510 million to $540 million with the vast majority allocated to drill 90 gross wells (52 net) for the fiscal year. A similar plan is in place for 2015, with 90 gross wells (57 net) at a cost between $520 million and $550 million. Total company production by 2015 is expected to reach 7.3 MMBO, or 10.7 MMBOE.
PVA expects down spacing and testing plans to taper off and will run six rigs (operate five) in 2014. The EF will account for 76% of total production in 2014 and is expected to reach 82% by 2015. Oil production will grow 65% to 85% in 2014 and is expected to account for a total of 68% of company revenue by 2015. Due to the increases in oil production, PVA believes 2014 revenues should increase 40% compared to 2013, with a 28% compound annual growth rate going forward in the company’s two year plan.
From an exploration standpoint, the company expects spend $18 million on research in 2014 and has up to $25 million allotted for 2015. An up-hole completion in the Rodessa is planned for 2H’14. Management said the costs for seismic research and test drilling may be expensive but are worthwhile. Joint venture exploration partnerships are always open for consideration.
PVA believes the entire play has now been de-risked, as the extreme northeast and southwest portions of its acreage have been tested. A down dip approach will be employed to further test the upper and lower portions of the EF formation. Tests from the upper EF will be completed in 1H’14 and will determine if the area is worthy of development.
A company goal in 2014 is to acquire a leasehold position in two to three available exploration prospects with a 25% to 40% working interest and operatorship in each section. Current opportunities include basins in the Uinta, San Juan, Tucumcari, West Texas Chihuahua and TX-LA-MS Salts. The company intends to conduct petroleum systems analysis in each basin.
PVA’s Goal to become Self-Funding by 2016
PVA plans to maintain at least $200 million of financial liquidity and lower its debt-to-adjusted EBITDAX to less than 2.5x by 2016. Pro forma for the borrowing base increase and the acquisition of EF assets, the company holds $330 million in liquidity and a debt-to-adjusted EBITDAX at 3.6x. Since more than 50% of oil production is hedged for 2014, and more than 90% of its capital investment is directed at the EF, we believe PVA is on track to achieve its self fund drilling plan by year-end 2016.
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Penn Virginia following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
SunTrust Robinson Humphrey Note – (11.21.13)
What’s Incremental Raising price target to $16 from $15 as this week’s analyst day and tour highlighted a solid Eagle Ford position with current and upcoming drilling efficiencies that should lead to improved production and lower costs boosting our cash flow estimates. Penn Virginia’s story is unique for a small-cap E&P as the company continues to add to its contiguous Eagle Ford block for a fraction of the going rate especially when considering yesterday’s expensive near-by Eagle Ford acquisition.
Increased cash flow drives higher price target, which still has much more upside potential. Penn Virginia is not only likely to see materially higher growth from its six rigs running, but the company should see at least 10% growth from drilling/completion efficiencies next year. The company should be able to fund the growth not only from cash flow but through upcoming upstream and midstream sales. As a result, our price target increases from $15.00 to $16.00 derived from a 2015 CFPS estimate of $7.95 ($7.49 previously and $5.79 consensus) applied to a deeply discounted price target multiple of 2.0x (2.0x previously and 3.9x group mean). Our price target multiple is likely to expand as leverage continues to decline.
An Eagle Ford position likely few others. Penn Virginia not only has some of the best Eagle Ford acreage given its oily / highly economic wells in Gonzalez and Lavaca Counties, but the company has a relatively contiguous block that has been largely delineated. We forecast that ~75% of Penn Virginia’s activity in the play next year is likely to be on pads, which should enable even more highly economic wells though production is likely more lumpy. Future inventory is also likely to be no problem given the company continues to purchase acreage in this highly valuable region for ~$1,600/acre such as the 3,500 acres recently announced.
Recent acquisition suggest Penn Virginia’s Eagle Ford is severely undervalued. Devon Energy (DVN,$62.75,NR) announced a $6B cash acquisition yesterday of Eagle Ford Shale assets in DeWitt and Lavaca Counties from private GeoSouthern Energy. The assets consist of 53,000 boe/d and 82,000 net acres with over 1,200 drilling location all in DeWitt and Lavaca Counties. We calculate the deal at $3.975B for the 53,000 boe/d of existing production assuming recent Eagle Ford deal rates of $75,000 per flowing Boe and $2.025B for acreage or ~$25,000/acre after netting out the production. We calculate that if all acreage was the same, Penn Virginia trades at roughly 25% of the value of the latest acquisition, and nearly as large a discount even after taking into account some acreage differences.
- A sale likely soon announced for the midstream for ~$100mm.
- 1H14 possible sale announcements of the Selma Chalk and Mid-Continent properties for ~$125mm.
- Further acquisitions in surrounding Eagle Ford area.
- Eagle Ford well costs lower than Penn Virginia’s $8mm estimated average.
- A well with the first 30-day average gross daily rate over 2,000 Boe/d.
Stifel Note – (11.20.13)
Investor Day Highlights Eagle Ford
Investment summary. Yesterday’s investor day highlighted PVA’s Eagle Ford asset, quantified upcoming planned asset sales, confirmed 2014 guidance, provided initial color on the 2015 outlook, and highlighted the near-term direction for additional developments (testing downspacing below 60 acres, potential Eagle Ford acceleration late 2014/early 2015, testing of upper Eagle Ford and other zones, potentially acquiring acreage in 2-3 new plays over the coming 1-2 years, and strong reserve adds expected in EF by YE13 through more PUD bookings). Four incremental points stick out. Incrementally, the numbers around the planned asset sales help provide comfort on funding future FCF outspend given the balance sheet, the potential for adding EF rigs in 2H14 (with asset sales) or 2015 (even without asset sales) provides upside to our 2015 estimates, and the testing of the upper Eagle Ford and downspacing possibly provides upside to inventory. The only incremental negative is the delaying of FCF neutral from 2015 to 2016 and the risk of capex eventually picking up due to new ventures, pushing FCF out further. Given that the balance sheet risk is coming down slightly with the defining of the asset sales and the upside to 2015 outlooks/estimates, yesterday’s investor day should help the name today. Over the coming 12 months, as PVA executes on its EF development, it provides upside for investors who want EF exposure and are comfortable with the leverage and outspend.
Valuation, leverage, FCF outspend, and upcoming asset sales. 2014 guidance was reiterated with midpoint production growth of 37%, resulting in CF of $385 mm, capex of $530 mm, and a FCF outspend of $152 mm, down from a 2013 FCF outspend of $275 mm, based on our estimates. Based on initial rough 2015 guidance, we estimate a conservative Y/Y production growth of 13%, CF of $443 mm, capex of $535 mm, causing FCF outspend to fall to $99 mm. We view the initial 2015 guidance as conservative and believe that growth could be higher even without an acceleration. Therefore, with or without rigs being added, we think there is upside to 2015 CFPS. Our current profile results in an EV/F12M EBITDA multiple of 4.1x at YE13 improving to 3.9x by YE14. The total debt/F12M EBITDA falls slightly from 2.8x at YE13 to 2.7x at YE14. With $225 mm of asset sales, this improves the EV/EBITDA multiple by 0.2x and lowers the leverage ratio by 0.3x. Given the improving valuation and reduced stress on the balance sheet, the stock should improve as PVA executes on its plans.
Testing different Eagle Ford zones. PVA plans to spud its first 2-well pad testing the Upper Eagle Ford Marl zone in December, with flow back results possible by 1Q14 or 2Q14, at the latest. Successful test results may cause an expansion of development drilling in the play during 2H14. PVA estimates that about 50% of its Eagle Ford acreage may be prospective to the upper Eagle Ford, with its estimated assumptions for the zone shown below in Exhibit 1. PVA also plans to test the Buda/Edwards and the Rodessa zones in the Eagle Ford, with a completion expected in the latter zone during 2H14.
Looking to add other plays over time. Despite plans to continue adding to its Eagle Ford leasehold, PVA also plans to explore other potential plays for longer-term growth. Identified as potential exploration opportunities were the Uinta Basin, San Juan Basin, Tucumcari Basin, TX-LA-MS Salt Basins and West Texas Chihuahua Basin. The company is allocating up to $25 mm annually for the initial establishment of positions in new plays, with a plan to be in 2-3 new plays in the coming 1-2 years.
Additional color on 2014 and 2015 provided. PVA reiterated its 2014 guidance, laid out last month with 3Q results, which calls for production to range from 24.6-27.4 mboe/d, up 38% Y/Y at the midpoint of the range, on a capex forecast ranging from $510-$540 mm, up $10 mm at the midpoint from the 2013 capex range of $500-$530 mm. Initial rough 2015 guidance was provided, which we feel is conservative. With capex holding flat, we feel that the production growth should be better than the 13% midpoint and oil growth could be more than the 20% estimate. We believe that the company will accelerate development by mid-2014, once the asset sales have closed, or will accelerate in 2015 given the expected improvement in the balance sheet and being closer to FCF at that point even without asset sales. For now, our 2015 estimates reflect the rough guidance provided by the company, which is that production is expected to be 10.7 mmboe, up about 13% Y/Y, with oil production set to grow 20% Y/Y. Capex is forecast to range from $520-$550 mmm, up 2% Y/Y versus anticipated 2014 levels. Oil production will constitute an estimated 68% of 2015 production, up from our estimate of 64% in 2014, and 51% in 2013.
Upcoming asset sales to help fund outspend. PVA hopes to raise $200-$250 mm through upcoming divestitures. A sales process of Eagle Ford gas midstream assets is ongoing and is expected to close by 1Q14. Divestitures of the Selma Chalk and Granite Wash assets are also planned for 1H14. Combined, these two assets accounted for 4.4 mboe/d of production in 3Q13, 22% of total production, with a 72% gas cut.
Wells Fargo Securities Note – (11.20.13)
PVA: Positive Analyst Day–Focus Remains Squarely On EF
Summary. On Tuesday, we attended PVA’s analyst day. As expected, focus remained was on development and resource optimization of its 67,000 net acre position in the Eagle Ford (Gonzales, Lavaca counties). We think management was effective in delivering its message, highlighting the upside in its inventory and instilling confidence that it can hit its 2014 65-85% liquids growth target. Full details are provided within. We are taking this opportunity to update our estimates to reflect the 10-Q, and our 2013E and 2014E EPS to -$0.42 and $0.20 from -$0.39 and $0.27, respectively. Our NAV estimates moves to $14.44 and our valuation range to $11-14 per share from $8-10 per share.
Committed to Liquids Growth. As with all pad drilling focused operations, it may be a little choppy, but management is very confident it can hit its 2014 65-85% liquids growth target.
Asset Sales – Selma Chalk and Granite Wash… Commentary largely mirrored prior statements as next year’s divestments will be focused on the Selma Chalk and Granite Wash — estimated proceeds between $125MM and $150MM.
…Including Potential For EF Acceleration. If divestment program is successful, it provides optionality to add a sixth EF rig in 2014.
Upper EF. Outside of bolt-on acreage deals (targeting addition of 10-15K acres / year), company will be testing the Upper Eagle Ford, where it has 249 prospective locations. First test set to spud in December. Nothing in our NAV and provides upside potential to our and Street targets.
Leverage Outlook. Management remains committed to reducing leverage in coming years. YE13 target of 3.5x versus the current 3.6x.
Johnson Rice & Company, Morning Energy Call – (11.20.13)
PVA hosted its analyst day this morning. The biggest news item was the introduction of ’15 guidance; production is 8-17% ahead of cons, capex is 5-19% ahead of cons & running the numbers through our model, CFPS should be up 11-26% with improved liquidity. Acreage is now 70.5k (up from 65k) and Upper Eagle Ford EURs have been officially established at 350-450 mboe. PVA has a dramatic multiple/growth disconnect (’14 EV/EBITDA of 4.1x w/ 64% y/y CFPS growth vs E&P group’s 5.9x & 23%); our NAV is ~$13/share ($95/b, $3.50/m).
The company issued two initial 2015 production and capex guidance scenarios of ~32.6 mboe/d & $625mm (acceleration case, assumes 6th rig in Eagle Ford starting mid-’14) and ~30.1 mboe/d & $550mm (conservative case), both of which are above consensus’ 27.9 mboe/d and $525mm. While we haven’t issued ’15 estimates, adjusting our model from the street’s ’15 consensus to each of the scenarios increases FY:15 CFPS from $6.94 (with an outspend of $65mm and YE:15 liquidity of $70mm) to an acceleration case CFPS of $8.77 (with an outspend of $44mm and YE:15 liquidity of $91mm) or a conservative case CFPS of $7.70 (with an outspend of $39mm and YE:15 liquidity of $96mm). We view this as a strong positive and expect the street’s numbers to increase accordingly, although due to the long dated nature of the guidance, the reaction might be slightly less dramatic than the numbers themselves.
PVA’s next Upper/Lower Eagle Ford
well pair will be spud in December, with results in 1Q:14. Management feels that 3-6 months after these results they will have a good idea whether the concept should work. For the Upper Eagle Ford, the company released an EUR of 350-450 mboe (vs the initial well’s last 350 mboe EUR update). This would be ~70-80 mboe less than corresponding Lower Eagle Ford wells, but would still represent a solid F&D of $19-21/boe (vs $17/boe for lower EF).
PVA also talked about an expanded exploration program
It will focus on the Gulf Coast, and potential targets mentioned included the Austin Chalk, TMS, Woodbine, Buda, and Georgetown. The company will focus on prospects that are not in development mode, but have been proven to some extent, meaning that buying in will likely not be a negligible cost. The company has a relatively modest budget for exploration, spending $8-18mm and $25mm in ’14 and ’15 respectively. Management indicated that it would likely use joint ventures to fund any significant acquisitions, although it did not rule out equity for an acceleration. Management also noted that the Haynesville breaks even at $3.60/mcf and the Cotton Valley at $5.60/mcf, but we would not expect either project to compete for capital.
In the Eagle Ford the company has its sights firmly set at the 100k net acre goal which was previously outlined; it is currently at 70.5k with acreage additions “in process” already announced that would bring the total to around 74k. The company noted it was willing to expand most directions, but that up to the Northeast into Fayette County the Lower Eagle Ford thins, and the company wanted to avoid the dead oil window too far to the Northwest.
Management spoke about its divestiture program; it still expects to have a midstream deal signed by YE:13 (management has guided to ~$75-100mm, and noted its “minimum bid” has been met). The Granite Wash and the Selma Chalk, will likely be sold in the 1H:14. As a reminder, our previous estimates on those assets are ~$80-135mm & ~$75mm respectively
Capital One Southcoast Morning Energy Summary – (11.20.13)
Our PVA target price is increasing by $1 to $13 following yesterday’s analyst meeting that highlighted the potential for horizontal drilling across the company’s 70.5K net Eagle Ford acres (PVA announced that it has added 3.5K net acres mainly in Lavaca County at a cost of ~$1.5K/acre since reporting 3Q earnings in late October). Although PVA believes most of its Eagle Ford acreage is prospective for horizontal drilling, our valuation is based on a more conservative 60% of the acreage (650 horizontal drilling locations vs 521 locations previously) using 430 Mboe average wells & $8MM well costs. We expect the stock could continue to outperform near term despite the strong run YTD (+125%) on continued Eagle Ford acreage acquisitions (PVA expects to add ~5K net additional acres by year end) & potential downspacing success (currently testing 40-acre spacing). Each 100 additional Eagle Ford horizontal drilling locations could be worth ~$1.50/sh. By 1Q14, look for results from PVA’s well testing the upper Eagle Ford (Marl formation) in Lavaca County and potential monetization announcement for its Eagle Ford gas gathering & gas lift systems (we value at $90MM). PVA also plans to place its Selma Chalk & Granite Wash assets up for sale next year with estimated potential proceeds of ~$155MM (we lowered our valuation from ~$200MM total). These properties accounted for 4.2 Mboe/d net in 3Q13, or about 20% of total PVA production.
Balance sheet/liquidity: Current liquidity is solid at $330MM as of 3Q, which should be adequate to fund the ~$343MM cash deficit that we estimate for 2014 – 2015 after factoring in the planned midstream monetization. By 2016, we expect PVA will be generating enough cash to fund its drilling operations with an estimated budget of ~$500MM. With the expected improvement in cash flow, we look for debt/Ebitdax to decline to 2.5x in 4Q15 compared to 4.0x at 3Q13.
Production outlook: Our 2014 production estimate is unchanged at 9.7 MMboe (63% oil) while our 2015 estimate decreases to 10.8 MMboe from 11.6 MMboe (67% oil) mainly on longer spud-to-sales as more drilling shifts to pads. The company mentioned at its analyst meeting that it could accelerate drilling in 2H14 (by adding a 6th operated rig) if able to sell the Selma Chalk & Granite Wash assets and oil prices remain near current levels. Adding a rig could increase our 2015 production estimate ~8% to 11.7 MMboe from 10.8 MMboe.
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