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.
In a conference call with investors and analysts on March 13, 2014, Baird Whitehead, President and Chief Executive Officer of PetroQuest Energy, said: “We continue to execute on our Eagle Ford strategy posting record oil production, along with strong cash flow and cash margins. We also importantly continue to high grade our drilling program going forward based on our overall results to-date, so the sweet spots we continue to find can be further exploited as time goes on.”
Penn Virginia reported net income of $19.2 million, or $0.27 per share, in its Q1’14 earnings release on May 12, 2014. Product revenues totaled $133.2 million (14% higher than Q4’13) with oil and NGL accounting for 86% of the return. Production rose 6% quarter over quarter to reach 21,133 BOEPD (57% oil), including a 15% jump in Eagle Ford production. An additional $57.4 million was gained from the sale of natural gas gathering assets in the EF. The company is seeking to divest three other processes including the right to a gathering system in the EF along with assets in Oklahoma and Mississippi. All three have received bids and PVA is evaluating its options.
PVA’s Production Base
The Eagle Ford contributed to 72%, or 15,152 BOEPD, of PVA’s revenue stream. Operations in East Texas, Mississippi and the Mid-Continent each contribute roughly 9% of the stream and in addition to a small operation in the Appalachia. By comparison, the EF comprised of 66% and 64% of operations in Q4’13 and Q3’13, respectively. The company has switched almost exclusively to pad drilling and is running six rigs in the EF.
Penn Virginia turned 18 wells to sales in the quarter and each produced an average of 1,415 BOEPD (76% oil). PVA completed 16 operated wells (12.9 net) and was in the process of completing an additional 19 wells (11.1 net) at the time of its release. Six more are currently being drilled. Two Welhausen lateral wells in Lavaca County were recently turned in line and provided IP rates of 2,165 and 1,536 BOEPD, respectively. The rates are the highest returns in the region to date in PVA’s drilling program. The pair is also the deepest of its “down-dip” testing, measuring in at lengths of approximately 6,000 feet. Further testing will determine if the Upper and Lower EF shales are separate reservoirs, and its downspacing program will remain consistent at 40 to 50 acre spacing.
“As we go to a lot of these pad wells we’re often offsetting existing production. So, I think the lesson learned is the earlier you down space, the better off you are,” said John Brooks, Chief Operating Officer of Penn Virginia.
Additions Strengthen Footprint
Penn Virginia added 6,400 net acres to its leasehold in the quarter for an average of $3,000 per acre (roughly $19.2 million) with most of the property in the Welhausen area. The operator now holds a total of 125,300 gross acres (85.9 net) and is expanding its drilling inventory to account for the new leaseholds.
“We continue our aggressive Eagle Ford leasing effort, at these attractive acquisition costs, as we march toward our minimum 100,000 net acre position that we communicated in the past,” said Whitehead. “If you buy an Eagle Ford acre for about $3,500, drill it with a $9.6 million well, that acre, net of investment, is now worth anywhere from $80,000 per acre to $100,000 per acre depending on spacing. I think you would consider that a very attractive arbitrage.”
PVA has identified 1,510 drilling locations but anticipates the number will rise as it continues its downspacing and pad drilling operations. The number increased by 35% in Q1’14 from downspacing and the additional acreage. An estimated 1,035 (69%) of the locations are in the Lower Eagle Ford and the remaining 475 in the Upper EF. PVA management believes as many as 400 additional locations can be considered if the inventory from the Upper and Lower benches overlap. “I would expect that 1,500 number to go to north of 2,000 toward the end of the year,” said Whitehead.
The company increased guidance by roughly 3% and expects full-year 2014 expenditures to reach $595 to $653 million. The rise comes from leasing costs from acquired acreage in the EF which led to Q1’14 expenditures of $182 million. Management expects to sell at least one piece of available assets in Q2’14. The Oklahoma and Selma Chalk assets produce approximately 1,900 BOEPD each.
Balance Sheet and Guidance
KLR Group’s note on May 14, 2014, titled “Attractive Valuation/Solid Growth Ahead,” reads that Penn Virginia generates a 2015 capital yield (cash-on-cash return) of 130%+, in-line with the industry median. Despite in-line capital yield, PVA trades at a ~20% discount to the group (’15 EBITDA), yet has ~1.3x the CFPS growth (’14E-’16E).
PVA’s borrowing base was increased to $475 million from $425 million in May. The company has $190 million outstanding and $10 million cash on hand. A total of $315 million to $375 million is expected to be withdrawn on the credit facility by year end as PVA ramps up its drilling program. The credit guidance does not include the proceeds from potential asset sales.
In the conference call, Steve Hartman, Chief Financial Officer of Penn Virginia, said: “Under our current borrowing base of $475 million, we would expect to end the year with $100 million to $160 million of liquidity, absent any of these asset sales. However, we do have our fall re-determination in October, where we expect to increase our borrowing base as we have over the last few times. If we receive a $50 million increase, which is the amount we received in the last two re-determinations, we would have year-end liquidity of $150 million to $210 million, even without any asset sales.”
Production is forecasted at 9.1 to 9.8 MMBOE (roughly 24,900 to 26,850 BOEPD average) for fiscal 2014, which represents an increase of 18% to 27% compared to Q1’14 totals. Pad drilling tests
Hartman said: “Although our first quarter production was slightly below our forecast, we think we’ll catch up the production by the third and fourth quarter as we bring online the wells that have been waiting on completion. These wells are in our most productive areas, so we expect a sharp production increase toward the end of the second quarter and into the third quarter.”
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