Penn Virginia Corporation (ticker: PVA) announced it entered into a Purchase and Sale Agreement to sell substantially all of its Appalachian assets, with the exception of the Marcellus Shale, to an undisclosed buyer for gross cash proceeds of $100MM. The sale is expected to close before mid-August 2012 with an effective date of January 1, 2012. PVA intends to use the net proceeds from this sale to help fund the 2012 capital expenditure plan focused primarily on the Eagle Ford Shale.
The divested assets sold include vertical and horizontal coalbed methane and conventional properties, as well as royalty interests. The properties have net production of approximately 20 MMcfe/d (100% natural gas) and proved reserves as of year-end 2011 of 105.7 Bcfe (96% proved developed and 100% natural gas).
Based on the $100MM purchase price and the 20 MMcfe/d of production and 105.7 Bcfe of proved reserves, the deal will be completed for $0.95 per Mcfe of proved reserves or $5,000 per Mcfe/d. As of July 13, 2012, PVA was trading at an enterprise value to 2011 proved reserves and enterprise value to trailing twelve months production of $1.17 per Mcfe and $8,360 per flowing Mcfe/d, respectively. We note that the average enterprise value to proved reserves and enterprise value to trailing twelve months production for the three CBM companies in EnerCom’s database (Tickers: CEP, DBLE, GMET) was $0.76 per Mcfe and $4,611 per flowing Mcfe/d, respectively, as of July 13, 2012. Pinnacle Gas Resources on January 25, 2011 was acquired by SW Energy Capital LP, for approximately $1.01 per prove Mcfe. Based on these data points, the PVA transaction looks to be in line with market comparables.
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This divestiture of lower margin coalbed methane gas assets helps the company add focus to PVA’s higher margin Eagle Ford oil shale. The asset sale was a step in the right direction to address its balance sheet; however, debt is still of concern with growth investors. As of market close on July 13, 2012, PVA had a debt to market capitalization of 226%. If we reduce PVA’s total debt by $100MM for the asset sale, all else held equal, PVA would still have a debt to market capitalization of 194%, above the micro-cap group median of 63% in EnerCom’s E&P database.
Even with this asset sale and the cash flow from continued operations, the company will most likely have to rely on its borrowing base or resort to additional asset sales to fully fund its 2012 and 2013 capital budgets. The company estimates that 89% of its $300 million to $325 million 2012 capital budget will be deployed in the company’s Eagle Ford asset base where the production on PVA’s acreage mix is 88% oil, 6% NGLs and 6% gas, post processing.
As of Q1’12, PVA’s borrowing base was $300 million with approximately $180 million of liquidity. In its recent June 2012 investment presentation, PVA estimated its 2012 cash flow outspend to be $107 million to $147 million. Cash flow should be helped from exposure to oil and hedges. PVA has nearly 70% of its 2012 oil production hedged at a weighted average price of $100 per barrel. For the trailing twelve months period ending March 31, 2012 the company generated nearly $178 million in EBITDA.
In the Eagle Ford play, PVA has 47 wells on‐line, 44 in Gonzales County and three in Lavaca County, driving growth in EBITDA and cash operating margins through exposure to oil and NGL production. The company has been guiding for 2012 production of 41.5 Bcfe with 43% oil and liquids. PVA estimates that as a result of the divestiture, 2012 production will decrease by an estimated 2.9 Bcfe but we estimate that the oil mix will increase to 46% in 2012. PVA currently has 36,100 gross (24,900 net) acres in the volatile oil window of the play that provides a multi‐year inventory of approximately 200 additional locations. From EnerCom’s database, companies that are seen as owning meaningful Eagle Ford acreage positions trade at a median 2012 estimated P/CFPS multiple of approximately 4.3 times.