Penn Virginia: Eagle Ford Drilling Program May Accelerate

Jun.11.14 | About: Penn Virginia (PVAHQ)

Summary

Today’s convertible offering closes Penn Virginia’s funding gap.

The company now has ample liquidity to accelerate its drilling program and commit capital to the Upper Eagle Ford testing.

Leasing program in the Eagle Ford is continuing.

Convertible Preferred Financing

This morning, Penn Virginia Corporation (PVA) successfully priced an over-night offering of convertible preferred stock. Judging by the fact that the offering was upsized by 10% from the initially announced amount and there was no detectable negative price impact on the stock price (which often occurs due to the hedging activity by convertible arbitrage funds), the transaction was well received by the market.

Assuming that the "green shoe" is exercised in full, the net proceeds will be $312.5 million.

Given Penn Virginia's elevated debt level (1Q 2014 net leverage ratio stood at 3.6x), the pricing can be viewed as favorable. The preferred will pay 6% annual dividend (on a quarterly basis) and has initial conversion price equivalent to approximately $18.34 per share of common stock. This equates to a 30% premium to yesterday's closing price of $14.11 per share.

The convertible offering provides substantial liquidity and should result in a further acceleration of the Eagle Ford development.

Selma Chalk Divestiture Successful

The proceeds from the convertible offering combine with the recently announced $73 million divestiture of the Selma Chalk assets which is expected to close in July. The divestiture is the first of the two asset packages that were designated for sale at the end of last year. The Selma Chalk properties being sold had net production of approximately 11.9 MMcfe/d of natural gas during the first quarter of 2014, almost 100% of which was natural gas. As a result of the divestiture, Penn Virginia's 2014 production will decrease by an estimated 1.9 Bcfe. Estimated proved reserves associated with the divested properties were 85 Bcfe, 69% of which were proved developed.

The proceeds from the divestiture are largely in line with my earlier estimate. The divestiture process for the second asset package, the Granite Wash, is still on-going.

Accelerated Development

These two transactions provide Penn Virginia with ample liquidity to accelerate the development of the company's large acreage position on the eastern flank of the South Texas Eagle Ford play.

The funds come particularly handy as Penn Virginia continues to report encouraging results in the Upper Eagle Ford. Proving up the Upper Eagle Ford potential and delineating the acreage may come high on the company's agenda and would require significant capital.

Also notable is the comment in Penn Virginia's press release that relates to the company's intent to use part of the proceeds from the convertible offering to "increase its lease acquisition effort in the Eagle Ford Shale." Penn Virginia has been very active and highly successful in increasing its leasehold position via grass root leasing, tactical acquisitions and JV deals. While a significant portion of the company's current ~86,000-acre position was acquired in the Magnum Hunter transaction a year ago, the ongoing leasing activity has been equally important.

The statement in the press release indicates that Penn Virginia continues to see additional opportunities to add acreage that may be material in the context of its existing position.

In Conclusion…

The successful financing is a positive development for the stock as it addresses the funding gap in the company's operating plan and provides flexibility to accelerate the drilling program.

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