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.
PVA announced its third quarter 2013 results on October 30, 2013. Product revenues increased 11% to $121.6 million from $109.7 million in Q2’13. Oil and NGL revenues accounted for 89% of revenues, and operating margin was $50.86 per BOE, a 10% increase over its Q2’13 total of $46.09 per BOE. Net loss attributable to shareholders was $100.6 million, or $1.54 per diluted share, compared to a loss of $27.2 million, or $0.43 per diluted share in the previous quarter.
Eagle Ford Shale Highlights
PVA expects 2014 production growth of 65% to 85% in the Eagle Ford after adding an additional rig. The company’s non-operated partner reduced its rig count, leading to PVA falling short of its production expectations. However, increased operating activity is expected to offset its Q3’13 results.OAG 360 believes PVA has reason to be confident in its Eagle Ford operations, and covered the situation in a recent feature article.
In Q3’13, Eagle Ford Shale production rose 9% to 12,489 BOEPD from 11,476 BOEPD, and oil accounted for a record 10,373 BOE (83%).The company holds 51 MMBOE of proved reserves after acquiring approximately 12 MMBOE in Q2’13. PVA held 38 MMBOE of reserves at year-end 2012. Eagle Ford 3P reserves are approximately 170 MMBOE. Currently 158 producing wells are in the area, 10 are waiting completion, and six are being drilled. Average gross peak production rate for the 18 most recent operated wells, excluding one with operational problems, was 1,288 BOEPD, with 15 of the 18 averaged 874 BOEPD over a 30-day period.
PVA currently owns 107,000 gross (67,000 net) acres in the Eagle Ford, and expects to add 7,000 additional acres in Q4’13. Approximately 890 undeveloped drilling locations are in the area, which PVA expects to take 10 years.
Fourth Quarter 2013 Guidance
PVA expects Q4’13 production to be approximately 1,770 to 2,045 MBOE, or approximately 19,200 to 22,200 BOEPD. Revenues, excluding hedges, are expected to be $118 million to $135 million, with crude and NGL contributing to 90%. Capital expenditures are between $139 million and $169 million.
Preliminary Full-Year 2014 Guidance
PVA expects approximately $250 million of available liquidity in 2014, and does not include any proceeds from the potential sale of natural gas midstream, gas lift assets or the rights to build an oil gathering system in the Eagle Ford.
PVA believes it has more than sufficient funds for its $510 million to $540 million capital expenditures program, which is similar to the program in 2013. PVA’s drilling program will utilize six drilling rigs (one outside operated), and full year 2014 production is estimated to be 9.0 MMBOE to 10.0 MMBOE, or 24,600 to 27,400 BOEPD, with oil and NGL accounting for 75% of production. The estimates are 30% to 45% higher than the mid-point 2013 guidance of 6.9 MMBOE, or 18,900 BOEPD.
PVA Conference Call
In a conference call following the announcement, H. Baird Whitehead, President and CEO of Penn Virginia Corp., said the stabilized well pricing in the Eagle Ford will help reduce costs, and PVA expects to pay below $8 million per well. “We expect to have 74,000 net acres by the end of the year,” Whitehead said. “We expect to have 890 remaining drilling locations in our inventory, which is a 20% increase over our previous number of 750.
John Brooks, Executive Vice President of Operations, said “We currently have 158 Eagle Ford Shale producing wells. “We’re getting to see the advantages associated with pad drilling and closer well spacing which improves frac efficiencies and overall production rates.”
Brooks added the tightly drilled wells are producing up to 1,400 BOEPD, but PVA hasn’t figured out a consistent process. “Based on wells, we’ve seen, IP rates are through the roof. You cannot go to any conclusions other than it is working and working spectacularly. We don’t have a big dataset on which to draw on, but we’ve seen both positive and negative interference and production.”
For Q4’13, Brooks said: “We plan to spud 25 gross and 17 net wells, bringing our estimated Eagle Ford total to 71 gross and 45 net. Over the next few years, we expect to drill approximately 90 gross wells per year. “
In regards to cash proceeds for 2015, Whitehead said: “We’re focusing on cleaning up the balance sheet. In the acceleration of growth and EBITDAX the pricing didn’t cooperate according to our assumptions.” PVA reported a loss of $132 million in Q3’13 to price fluctuations.
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.
Stifel Note – 10.30.13
Positive Guidance Should Help Stock
Investment summary. Yesterday after the close, PVA released positive 2014 initial guidance, but 3Q results that were slightly below expectations. Overall, the increasing activity heading into 2014, the higher 2014 production growth outlook relative to Stifel and consensus estimates, the IP/30 day rates on new EF wells, which showed improving rates with lower capex, and the upcoming test of the upper Eagle Ford zone, which would increase inventory, are positive and are setting up the name for a positive 2014 for investors who are willing to assume the higher risk associated with the balance sheet leverage and FCF outspend, in our view. Over time, as the FCF narrows (we estimate the company hitting FCF in 3Q15), the EBITDA multiple should expand.
3Q results slightly below expectations. 3Q production and realized prices were lighter than expected, resulting in reported CFPS of $0.81 coming in less than our $0.86 estimate. Production for the quarter averaged 19.6 mboe/d, up a modest 2% Q/Q, but below our estimates of 21.2 mboe/d. Operating costs this quarter experienced a 6% Q/Q decline in total LOE. Realized pricing in the Eagle Ford deteriorated further with realized corporate oil diffs, which had decreased from $10.98/bbl in 1Q to $7.09/bbl in 2Q, decreasing further to a $0.45/bbl.discount to WTI.
Positive 2014 outlook. The company has increased its EF rig count from five to six, with initial 2014 production guidance of 24.6-27.4 mboe/d, reflecting 38% Y/Y growth at the midpoint. This is significantly higher than our initial estimate of 19%. While the addition of a rig is one factor, the improving IP’s and strong 30 day rates, which indicate lower decline than our initial expectations, are another positive contributing factor. Despite the meaningfully higher production, we are also assuming wider oil diffs going forward based on current diff results, resulting in a more modest increase to our 2014 CFPS from $4.30 to $4.50.
Valuation and other metrics. PVA currently trades at 3.8x 2014E EV/EBITDA and 87% P/NAV, versus the group at 6.0x and 84%, respectively. LTD/F12M EBITDA is 2.8x vs. the group at 1.7x and FCF outspend is decreasing from $275 mm in 2013 to $152 mm in 2014.
Lowering 4Q14 estimates on lower production and realized pricing. PVA revised its 4Q guidance with yesterday’s release and now expects 4Q production to range from 19.2-22.2 mboe/d, up 8% Q/Q at the midpoint, but 10% below our previous 4Q production forecast of 22.8 mboe/d. 4Q capex is expected to range from $139.3-$169.3, up 28%, at the midpoint, from our previous estimate, as PVA brings a fifth operated rig into the Eagle Ford to make up for its drilling partner dropping a rig in the play. Due to our lowered 4Q production outlook and lower forecasted realized pricing, we are lowering our 4Q13 CFPS/EPS estimates from $1.00/($0.14) to $0.81/($0.02).
Eagle Ford operations update. 3Q13 Eagle Ford production averaged 12.5 mboe/d, up 9% Q/Q. Following the decision by PVA’s Eagle Ford drilling partner to drop from two operating rigs to one, PVA is increasing its operating rig count to five, and expects to run the five, and a non-operated rig, through 2014. PVA has recently added 5,000 net acres in the play, at a $1,600/acre cost, and expects to add an additional 7,000 net acres in 4Q13. In 4Q, PVA will test the upper Eagle Ford with a two-well pad, with one well to be drilled in the lower Eagle Ford and the other well to be drilled in the upper Eagle Ford. PVA is considering the sale of its Eagle Ford midstream assets in 1H14 after receiving several recent bids.
Wells Fargo Securities Note – 10.31.13
Summary: Neutral/Positive. Adjusted Q3 EPS of -$0.02 above our -$0.16 and Street’s -$0.17, although production volumes of 19.6 MBoe/d fell shy of both our 21.8 MBoe/d and the Street’s 21.3 MBoe/d estimate. 2013 production guided lower and capex higher, but this is offset by 2014 production guidance that came in well above our forecast while 2014 capex was held in-line versus us. Liquidity looks good, as increased revolver and higher 2014 cash flow should more than cover 2014 capital program. Adjusting our 2013E and 2014E EPS for updated guidance, our 2013 and 2014 estimates shift to -$0.39 and +$0.27 from -$0.68 and -$0.35, respectively.
Guidance: 2013 Lower, 2014 Higher. 2013 production guidance decreased by 692 boe/d, or 3.5%, at the midpoint, reflecting the decision by a non-op partner to lay down 1 rig. PVA responded by adding 1 operated rig, and 2013 capex upped by $25MM to $500-$530MM. The good news however is that 2014 benefits from the additional operated rig, and PVA issued 2014 production guidance of 30-45%, including oil growth of 65-85% (compared to prior oil growth target of 40%). The 30-45% is well above our 24% estimate, but capex targeted at $510-$540MM, which compared to our $533MM. So in 2014, versus our estimate, significantly more production for same capex.
Eagle Ford. Production light on the quarter, as non-op partner reduced its rig count by 1 rig. In response, PVA adding 1 operated rig which should help drive 2014 production higher. In 2014, will now have 5 operated and 1 non-op rig. Now up for 67,000 net acres, with plans to add another 7,000 net acres in 4Q. Ultimate goal of 100K net acres remains intact. Inventory count up by 20% to 890 locations reflecting increased acreage and downspacing. In aggregate, 17 wells completed during quarter looked solid, with average 30-day rates of 874 boe/d (86% oil). In 4Q, have plans to test upper Eagle Ford using a two-well pad with one well in lower and one in upper.
Financial Snapshot. Revolver increased to $425MM, up from $350MM, with 9/30 proforma liquidity at $330MM. Looking at 2014, based on our DCF of $380MM and $250MM available liquidity expected entering 2014, PVA should be able to fund a capital budget that we now peg at $540MM. Quarter review on the following page.
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