Penn Virginia Corp. – Year-End 2012 Reserves and Operations Update

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.

The company today announced proved oil and gas reserves and provided an update of its operations, including full-year and fourth quarter 2012 operational results.

Proved Reserves and Operational Update Highlights

Proved reserve data included the following:

• Proved oil and gas reserves were 113.5 million barrels of oil equivalent (MMBOE) at year-end 2012, compared to 130.3 MMBOE at year-end 2011, pro forma to exclude 16.9 MMBOE of Appalachian reserves sold in July 2012
  • Proved oil and natural gas liquids (NGL) reserves increased 28 percent to 45.5 MMBOE, or 40 percent of total proved reserves, from 35.6 MMBOE, or 24 percent of total proved reserves, at year-end 2011
  • Eagle Ford Shale proved reserves increased by 161 percent from 10.0 MMBOE at year-end 2011 to 26.1 MMBOE at year-end 2012
  • Pro forma natural gas proved reserves decreased by 161 billion cubic feet (Bcf) (26.9 MMBOE), or 28 percent, primarily due to low gas prices
• The pre-tax present value of estimated future net cash flows from proved reserves, discounted at 10 percent, (PV-10) was $692 million
  • The PV-10 value, excluding all proved undeveloped (PUD) wells with negative PV-10 value, was $839 million
  • The PV-10 value of proved developed reserves was $628 million
• As determined by our third party reserve engineering firm, the average gross estimated ultimate recovery (EUR) for Eagle Ford Shale PUD wells with full-length laterals in Gonzales County was approximately 400 thousand barrels of oil equivalent (MBOE) and in Lavaca County was approximately 500 MBOE

Operational results for the fourth quarter of 2012, with comparisons to the third quarter 2012 where applicable, included the following:

• Production of 1.4 MMBOE, or 15,444 barrels of oil equivalent (BOE) per day (BOEPD), compared to 1.4 MMBOE, or 15,245 BOEPD, pro forma to exclude production from Appalachian assets sold in July 2012
  • Eagle Ford Shale net production was approximately 6,900 BOEPD in the fourth quarter of 2012, compared to approximately 6,300 BOEPD
  • Fourth quarter and full-year 2012 production exceeded the upper end of previously provided guidance
  • Oil and NGL production was 56 percent of quarterly production, compared to 52 percent
• Currently, we have 66 (55.1 net) Eagle Ford Shale wells on line, with one (0.9 net) well waiting on completion, two wells being drilled in the Eagle Ford Shale in Lavaca County and one horizontal test well being drilled in the Pearsall Shale in Gonzales County
• The average peak gross production rate per well for the 59 wells we have completed to date with full-length laterals was 972 BOEPD. The initial 30-day average gross production rate for the 55 of these 59 wells with a 30-day production history was 651 BOEPD
  • The wells drilled and completed to date in Gonzales County with full-length laterals had an average initial gross production rate of 984 BOEPD and an initial 30-day average gross production rate of 649 BOEPD
  • The wells drilled and completed to date in Lavaca County with full-length laterals had an average initial gross production rate of 926 BOEPD and an initial 30-day average gross production rate of 660 BOEPD
  • The higher average 30-day initial rate in Lavaca County, along with the higher reservoir pressure, is consistent with higher expected EURs as compared to the EURs expected in Gonzales County
• Currently, we have approximately 40,000 gross (approximately 32,000 net) acres in the Eagle Ford Shale
  • We increased our net acreage by approximately 2,000 net acres since late October 2012, at a cost of approximately $4.9 million

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Fourth Quarter 2012 Operational Results

Pricing

Our preliminary fourth quarter 2012 realized oil price was $99.30 per barrel, compared to $99.45 per barrel price in the third quarter of 2012. Our preliminary fourth quarter 2012 realized NGL price was $32.40 per barrel, compared to $32.94 per barrel price in the third quarter of 2012. Our preliminary fourth quarter 2012 realized natural gas price was $3.41 per thousand cubic feet (Mcf), compared to $2.72 per Mcf price in the third quarter of 2012. Adjusting for oil and gas hedges, our preliminary fourth quarter 2012 effective oil price was $106.40 per barrel and our effective natural gas price was $3.83 per Mcf, or increases of $7.10 per barrel and $0.42 per Mcf over the realized prices.

Production

The production in the fourth quarter of 2012 and full-year 2012 exceeded the upper end of our previously provided guidance. As shown in the table above, on a pro forma basis to exclude production from assets sold in 2011 and 2012, production in the fourth quarter of 2012 was 1.4 MMBOE, or 15,444 BOEPD, compared to 1.4 MMBOE, or 15,671 BOEPD, in the prior year quarter and 1.4 MMBOE, or 15,245 BOEPD, in the third quarter of 2012. As a percentage of total equivalent production, oil and NGL volumes were 56 percent in the fourth quarter of 2012, compared to 37 percent in the prior year quarter and 52 percent in the third quarter of 2012.

As shown in the table above, on a pro forma basis to exclude production from assets sold in 2010, 2011 and 2012, production in 2012 was 5.8 MMBOE, or 15,776 BOEPD, compared to 5.9 MMBOE, or 16,157 BOEPD in 2011, and 5.5 MMBOE, or 15,176 BOEPD, in 2010. The slight decrease from 2011 to 2012 was due to natural gas production declines associated with discontinued natural gas drilling, largely offset by increased crude oil production from the Eagle Ford Shale.

Proved Reserves

As set forth in the table below, proved reserves were 113.5 MMBOE at year-end 2012, as compared to 130.3 MMBOE at year-end 2011, pro forma to exclude 16.9 MMBOE of Appalachian reserves sold in July 2012 (reported proved reserves at year-2011 were 147.2 MMBOE). The 13 percent decrease in pro forma proved reserves was due to a 161 Bcf (26.9 MMBOE), or 28 percent, decrease in natural gas proved reserves, partially offset by a 10.0 MMBOE, or 28 percent, increase in oil and natural gas liquid (NGL) proved reserves. In the Eagle Ford Shale play, proved reserves increased by 16.1 MMBOE, or 161 percent, from 10.0 MMBOE at year-end 2011 to 26.1 MMBOE at year-end 2012.

The PV-10 value of the proved reserves at year-end 2012 was approximately $692 million (see statement regarding non-GAAP measures below). This PV-10 value was based on a Henry Hub (HH) price of $2.76 per million British thermal units (MMBtu) for natural gas and a West Texas Intermediate (WTI) price of $94.71 per barrel for oil, each of which represents the unweighted arithmetic average of the first-day-of-the-month prices during the 12-month period ending on December 31, 2012.

Excluding all PUD wells with negative PV-10 value, the PV-10 value for our proved reserves was $839 million. The estimated year-end 2012 proved reserves included proved developed reserves of 46.5 MMBOE, with a PV-10 value of $628 million, and PUD reserves of 66.5 MMBOE, with a PV-10 value of $64 million (excluding all PUD wells with negative PV-10 value, the PV-10 value of PUD reserves was $211 million). During 2012, we added 18.3 MMBOE of proved reserves from extensions, discoveries, purchases and other additions in the Eagle Ford Shale play.

For the 12-month period ended December 31, 2011, the average HH price for natural gas was $4.12 per MMBtu and the average WTI price for oil was $96.19 per barrel. As a result of the declines in natural gas and NGL prices, together with the situation that we will not be able to develop a portion of our PUD reserves within a five-year time period required under the reserve rules of the Securities and Exchange Commission (SEC), we had 28.7 MMBOE of negative revisions, in the Selma Chalk, Marcellus Shale, Haynesville Shale, Cotton Valley and Granite Wash plays.

Operational Update

Eagle Ford Shale

Net production from the Eagle Ford Shale was 6,872 BOEPD in the fourth quarter of 2012, compared to 6,317 BOEPD in the third quarter of 2012. During the fourth quarter of 2012, we drilled ten (9.0 net) operated wells in the Eagle Ford Shale, all of which were successful. Since late October, we have completed ten (9.0 net) Eagle Ford Shale wells. This brings the total number of on-line wells to 66 (55.1 net), with one (0.9 net) well waiting on completion, two wells being drilled in the Eagle Ford Shale and one horizontal exploratory well being drilled in the Pearsall Shale in Gonzales County.

As previously disclosed, we have initiated the process and are actively seeking a 40 percent working interest partner for our Lavaca County acreage. We expect to have this process completed late in the first quarter. In addition, beginning in 2013, we will initiate the use of pad drilling, which we believe will decrease costs and improve fracture efficiency.

Set forth below are the initial results and statistics for certain Eagle Ford Shale wells drilled and completed to date.

Derivatives Update

To support our operating cash flows, we hedge a portion of our oil and natural gas production at pre-determined prices or price ranges. Based on hedges currently in place, as detailed in the table below, we have hedged approximately 4,500 barrels of daily crude oil production at a weighted average floor/swap price of $97.29 per barrel and 20 million cubic feet of daily natural gas production in 2013 at a weighted average floor/swap price of $3.76 per Mcf. The following table summarizes our open hedge positions through swaps and collars as of January 28, 2013.

Non-GAAP Measure

PV-10 value is the estimated future net cash flows from estimated proved reserves discounted at an annual rate of ten percent before giving effect to income taxes. The standardized measure is the after-tax estimated future cash flows from estimated proved reserves discounted at an annual rate of 10 percent, determined in accordance with generally accepted accounting principles (GAAP). We use PV-10 value as one measure of the value of our estimated proved reserves and to compare relative values of proved reserves among exploration and production companies without regard to income taxes. We believe that securities analysts and rating agencies use PV-10 value in similar ways. Our management believes PV-10 value is a useful measure for comparison of proved reserve values among companies because, unlike standardized measure, it excludes future income taxes that often depend principally on the characteristics of the owner of the reserves rather than on the nature, location and quality of the reserves themselves. We cannot reconcile PV-10 value to the standardized measure at this time because final income tax information for 2012 is not yet available. The standardized measure will be provided in our forthcoming Form 10-K for the year ended December, 31 2012 to be filed with the SEC.

Fourth Quarter and Full-Year 2012 Financial and Operational Results Conference Call

A conference call and webcast, during which management will discuss fourth quarter and full-year 2012 financial and operational results, is scheduled for Thursday, February 21, 2013 at 10:00 a.m. ET. Prepared remarks by H. Baird Whitehead, President and Chief Executive Officer, will be followed by a question and answer period. Investors and analysts may participate via phone by dialing 1-866-630-9986 five to 10 minutes before the scheduled start of the conference call (use the passcode 7342669), or via webcast by logging on to our website, www.pennvirginia.com, at least 15 minutes prior to the scheduled start of the call to download and install any necessary audio software. A telephonic replay will be available for two weeks beginning approximately 24 hours after the call. The replay can be accessed by dialing toll free 888-203-1112 (international:719-457-0820) and using the replay code 7342669. In addition, an on-demand replay of the webcast will also be available for two weeks at our website beginning approximately 24 hours after the webcast.

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 (1.29.13)

Penn Virginia (PVA, $4.19, Buy) provides positive operations update as 4Q production and realized commodity prices were better than expected driven by incremental Eagle Ford activity.

• 4Q production was 15,444 Boe/d (44% Gas), which was 4.7% higher than the STRH estimate and 2% higher than the upper end of previous guidance.
• The average peak gross production rate for 59 Eagle Ford wells was 972 Boe/d with a 30-day rate of 651 Boe/d with little variability between the Gonzales and Lavaca county wells.
• In addition to the Eagle Ford wells, Penn Virginia is drilling its first Pearsall Shale well in Gonzales County.
• The company currently has 32,000 Eagle Ford acres.
• The 4Q average realized liquids price was the same as STRH estimate with the 4Q realized natural gas price 7.6% higher than STRH estimate.
• As expected after the Appalachian sale and lower gas prices, proved reserves declined ~23% y/y to (60% gas, 41.6% developed) though reserves were relatively flat on a pro forma basis. Stock likely to outperform on the update.

Barclays (1.29.13)

PVA reported YE12 proved reserves of 113.5 MMBOE, a 23% decrease from YE11. Pro forma for the Appalachia asset sale in July 2012, reserves fell by ~13%. Oil and NGL reserves grew 28% to 34.4 MMbbls, while natural gas reserves fell 61% (or 28% pro forma) to 408 Bcf. PVA also reported 4Q12 production of 15,444 BOE/d, a 5% sequential decline (or 1% increase pro forma), which is above both our estimate and management’s guidance range. Oil and NGLs comprised ~56% of total volumes, compared to 52% last quarter.

Reserve update
PVA reported YE12 proved reserves of 113.5 MMBOE (60% gas, 41% developed), a 23% decrease from 147.2 MMBOE (76% gas, 49% developed) at YE11. Pro forma for the sale of Appalachian reserves in July 2012, reserves fell approximately 13%. Oil and NGL reserves increased by 28% to 34.4 MMbbls while natural gas reserves fell 61% (28% decrease pro forma for asset sale) to 408 Bcf. Eagle Ford proved reserves increased by 161% to 26.1 MMBOE at YE12, compared to 10.0 MMBOE at YE11. The PV-10 value of the YE12 proved reserves was $692 million, which is based on a HH natural gas price of $2.76/MMBtu and a WTI oil price of $94.71/bbl. Excluding PUD’s with negative PV-10 values, the PV-10 of the company’s reserves was $839 million. Due to declining natural gas and NGL prices and the failure to drill certain wells within the SEC’s required five year window for proved reserves, PVA had negative revisions of 28.7 MMBOE in the Selma Chalk, Marcellus Shale, Haynesville Shale, Cotton Valley, and Granite Wash plays.

Production / Realized Prices
Fourth quarter production averaged 15,444 BOE/d, down 5% sequentially from 3Q12 due to the sale of Appalachian assets in July 2012. Pro forma for the asset sale, production rose by 1.3% sequentially. This compares to our estimate of 14.6 MBOE/d. FY12 production of 17.8 MBOE/d, came in above management’s guidance range of 17.5 – 17.7 MBOE/d. Liquids comprised approximately 56% of 4Q12 volumes, compared to 52% last quarter and 37% in 4Q11.

PVA reported a 4Q12 wellhead oil price of $99.30/bbl, NGL price of $32.40/bbl, and gas price of $3.41/Mcf. Adjusting for the effect of hedges, the company realized an oil price of $106.40/bbl, above our estimate of $102.11, and a realized gas price of $3.83/MMBtu, above our estimate of $3.71. Fourth quarter NGL prices of $32.40/bbl were also slightly above our estimate of $31.50.

Operating update
Eagle Ford – Fourth quarter production rose 9% sequentially to 6,872 BOE/d from 6,317 BOE/d in 3Q12. PVA drilled and completed ten (9.0 net) wells during 4Q12, bringing the total number of wells on production to 66 (55.1 net). One well is currently waiting on completion, two wells are being drilling in the Eagle Ford, and one exploratory well is being drilled in the Pearsall Shale in Gonzalez County. The company continues to seek a 40% working interest partner in its Lavaca County acreage and expects the process to be completed in late 1Q13. Also, the company plans to begin using pad drilling in 2013 which is expected to reduce costs and increase efficiency.

PVA’s first 59 full-length lateral wells produced at an average peak initial rate of 972 BOE/d. Of these wells, 55 with sufficient history had a 30-day production average of 651 BOE/d. The company’s reserve engineers have determined that wells drilled in Gonzalez County have EURs of ~400 MBOE while wells in Lavaca County have EURs of ~500 MBOE. PVA currently owns 40,000 gross (32,000 net) acres in the Eagle Ford Shale, an increase of approximately 2,000 net acres since late October 2012 at a cost of $4.9 million.

Capital One Southcoast (1.29.13)

Overall positive for a name that has been quite weak the past several days. 4Q12 production of 15.4 Mboe/d is above the high end of guidance and above COS/consensus estimates of 15.1 Mboe/d and 14.8 Mboe/d, respectively. Reserves down 13% on gas writes downs while PV-10 also declined from $839MM to $692MM (partly due to asset sales). Eagle Ford EURs of 400 Mboe for Gonzales County and 500 Mboe for Lavaca County are in line with our model. PVA has now completed 59 net wells in Gonzales and Lavaca Counties with 30-day rates of 649 boepd in Gonzales County and 660 boepd in Lavaca County.

Barid Equity Research (1.29.13)

PVA 4Q12 pre-release, operations update. This morning PennVirginia (PVA) pre-released 4Q12 results and announced 2012 reserve data. 4Q12 production was 15,444 boe/d, which came in 2.7% ahead of the Bloomberg consensus estimate (15,035 boe/d) and exceeded the high end of management’s prior guidance range; oil/NGL was 56% of total production, which was in line with Street expectations. On the reserves front, total proved reserves declined 13% Y/Y due to a 28% decrease in natural gas due to negative revisions and asset sales partially offset by a 28% increase in oil/NGL reserves (Eagle Ford extensions). Operationally, Eagle Ford wells continue to perform well though the most recent 13 wells modestly underperformed the 59 total well average rates on both peak and 30-day rate comparisons (peak: 895 vs. 972 boe/d, 30-day: 627 vs. 651 boe/d). PennVirginia is still seeking a 40% WI partner for its Lavaca County acreage with the process expected to be completed in 1Q13. Its third party engineers put its Gonzales County, TX, EURs at 400 mboe, while its Lavaca County, TX, EURs were at 500 mboe.

Howard Weil (1.29.13)

Quick Take: Like many of its transitioning peers, PVA’s total reserve bookings decreased YoY, driven by the gas side of the ledger. However, oil reserves grew 28% from last year with the Eagle Ford contribution accelerating, and the Company’s current enterprise value approximates its PV-10 at 2012 SEC prices. More importantly, initial production and pricing for 4Q12 looks good vs. our estimates, and PVA should start to see more of a ramp now that the third Eagle Ford rig is back up and running. The Company has had very consistent results in both Gonzales and Lavaca counties in the Eagle Ford and was allowed to book 500 MBoe locations in Lavaca. Further, we think PVA could be closing in on a deal to bring in a partner for 40% WI in Lavaca which could help the Company fund the accelerated growth. All in all, we think 2013 could be a transformational year for the Company, which has come a long way in the last 18 months.

Revisions to Estimates: Our 4Q12 EPS and CFPS are increasing to ($0.12) and $0.77 from ($0.19) and $0.63 as a result of higher production and pricing vs. our model.

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