The news of Soros Fund Management becoming Penn Virginia's (PVA) activist shareholder with a 9.18% stake sent the shares 15.6% higher during yesterday's trading session. The shares closed at $15.73, their highest level in almost three years.
The vote of confidence from a highly reputed hedge fund is without doubt a strong positive for the stock. Perhaps even more important is Soros' declaration of a "strategic alternatives" agenda that may indeed put the company "in play" and accelerate value recognition.
A scenario under which the fund's strategy comes to fruition is in fact probable. As I wrote on multiple occasions, Penn Virginia had staged a spectacular come-back by capturing a large, concentrated position in what has proven to be a top quality section of the Eagle Ford's fairway. The company's initial bet on the geology in the play's eastern extension proved visionary and the daring Magnum Hunter acquisition a year ago highly value creating.
The quality of the company's assets has been visible for quite some time. In fact, I argued in my note back in June of last year (the shares traded at $4.64) that the stock had potential to triple within two years. Since then, Penn Virginia's operating story has been steadily and rapidly improving and risks have subsided.
As I wrote in my detailed review in early December, despite the stock's tremendous run-up over the preceding nine months, its valuation still remained compelling. I argued that even in the absence of a multiple expansion, the company's operating projections supported a $15.30-$18.40 per share valuation. In that price range, the stock would still continue to trade at an EBITDA multiple at the lower end of its peer group.
Several positive developments have occurred since December:
- Penn Virginia reported yet another quarter of improving well results (that I discussed in my most recent note).
- The company has continued to consolidate acreage around its block at a remarkably low acquisition cost, adding ~8,000 net acres since the previous update at approximately $2,800 per acre. Penn Virginia sees its target of 100,000 net acres in the play achievable already this year.
- The divestiture of the gas gathering assets came in above the high end of the expectation.
- Natural gas prices have firmed up noticeably, which should facilitate the anticipated divestitures of non-core assets.
- Positive results have been achieved in downspacing.
- The Upper Eagle Ford potential looks increasingly probable.
All these developments have clearly added to the stock's value potential.
On the M&A side, Devon's acquisition of GeoSouthern's assets (82,000 net acres) for $6 billion and Baytex's (NYSE:BTE) acquisition of Aurora Oil & Gas (22,100 largely non-operated net acres) for $2.35 billion vividly demonstrated that the private market, on occasion, can pay stratospheric prices for top quality properties in the Eagle Ford. In that regard, Soros' suggestion that value maximization opportunities via the private market should be explored is in fact not without merit.
In the context of the M&A market, can one rule out a $20-$25 valuation range per share as outlandish? In my opinion, given the quality, size and concentration of the company's Eagle Ford position, absolutely not.
The following is a excerpt from Soros' 13-D filing that the fund filed yesterday. It speaks to itself.
The Reporting Persons acquired beneficial ownership of the Common Stock of the Issuer for investment purposes because they believed the Issuer's Common Stock represented an attractive investment opportunity. The Reporting Persons believe that the Common Stock at current market prices is undervalued.
Representatives of the Reporting Persons have, from time to time, engaged in discussions with management of the Issuer regarding, among other things, the Issuer's business, assets, prospects and strategic alternatives and direction. The Reporting Persons believe that the Issuer has been very well managed, and in fact that the financial incentives for its management team should be enhanced. However, the Reporting Persons also believe that the Issuer should explore strategic alternatives as a means to enhance or maximize shareholder value, and intend to continue to discuss the matters described above with the Issuer's management and may also seek to have conversations with the Issuer's board of directors, as well as other shareholders of the Issuer, other industry participants, potential acquirers and other interested parties, and may take other steps seeking to bring about changes to increase shareholder value as well as pursue other plans or proposals that relate to or could result in any of the matters set forth in clauses (NYSE:A)-(j) of Item 4 of Schedule 13D.
Depending on various factors including, without limitation, the outcome of any discussions referenced above, the Issuer's financial position and strategic direction, actions taken by the Board, price levels of the Common Stock, other investment opportunities available to the Reporting Persons, conditions in the securities market and general economic and industry conditions, the Reporting Persons may in the future take such actions with respect to their investment in the Issuer as they deem appropriate including, without limitation, purchasing additional shares of Common Stock and/or other equity, debt, notes, instruments or other securities of the Issuer (collectively, "Securities"), disposing of any or all of their Securities, in the open market or otherwise, at any time and from time to time, and engaging in any hedging or similar transactions with respect to the Securities. The Reporting Persons reserve the right to change their intention with respect to any and all matters referred to in subparagraphs -(j) of Schedule 13D.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.
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