Penn Virginia Corporation Is A Compelling Investment, With Or Without George Soros

Aug. 3.14 | About: Penn Virginia (PVAHQ)


George Soros is pushing for a sale of Penn Virginia Corporation, but there are other reasons to own the stock.

Penn Virginia has sold off or monetized its assets to fund its Eagle Ford endeavors.

Two wells targeting the Upper Eagle Ford posted amazing production results, testifying to its potential.

Penn Virginia lowered its 2014 guidance but raised its 2015 guidance due to the addition of two new rigs in the area.

Many investors are trying to figure out what George Soros has in store for Penn Virginia Corporation (PVA), particularly on how he plans to get Penn Virginia to put itself up for sale. While a sale would generate instant returns for traders, investors with a longer term view should see how Penn Virginia plans to reward shareholders if management doesn't put the company up for sale.

By selling off its non-core assets, Penn Virginia can focus on its pride and joy, the Eagle Ford. Part of its plan includes the sale of its Selma Chalk assets for $73 million, selling off the rights to construct an oil gathering and transportation system on its Eagle Ford position for $150 million, and the future sale of its Granite Wash assets. Using this cash, Penn Virginia has been testing out other horizons in the Eagle Ford to grow its drilling inventory.

Expanding its growth horizon
To boost the value of its 102,000 net acres in the Eagle Ford, Penn Virginia has been actively testing out the potential of the Upper Eagle Ford, which management refers to as the Marl shale. Two of Penn Virginia's wells tapped into the Marl shale, with amazing results.

Penn Virginia brought the Welhausen #A2H well online, which posted an initial production rate, or IP, of 2,165 barrels of oil equivalent per day, or BOE/d. The Martinsen #2H well had an IP rate of 1,360 BOE/d, which pales in comparison to the Welhausen, but any well with an IP rate above 1,000 BOE/d is very strong, especially if it's accessing a new part of a play.

A combination of its new acreage and the success of its Marl program allowed Penn Virginia to increase its drilling inventory by 125 locations to 1,635. To ramp up the development of those locations, Penn Virginia is adding two more rigs to its fleet.

Production growth and mixed guidance
Penn Virginia is going to add a new rig to its drilling program in August and September, boosting its rig count by two to eight. More drilling activity in the future allowed management to raise its 2015 production growth guidance to 35%, with 45% growth in oil output. On the downside, management decreasing its 2014 guidance due to less than expected production growth in the first half of the year.

Year-over-year, Penn Virginia grew its Eagle Ford output by 36% to 15,618 BOE/d, 74% of which was oil. While this isn't that impressive for a small company like Penn Virginia, management pointed out that stronger production growth should start to materialize by the fourth quarter of this year as its new rigs begin drilling. Another positive is that in the month of July, Penn Virginia was pumping out ~18,100 BOE/d from the Eagle Ford, which is 16% higher than the average production rate for the second quarter.

Final thoughts
Opening up new drilling locations and expanding the Eagle Ford's potential is very bullish, especially when wells tapping into the Marl are posting IP rates north of 2,000 BOE/d. While Penn Virginia's production growth was less than expected this year, the second half of this year and in 2015 will be much stronger. By boosting its rig count, Penn Virginia will be able to bring more wells online, propelling its output upwards.

After Penn Virginia's recent sell off, shareholders could stand to make a decent amount of money betting on this company. Soros' activism offers a very strong short term catalyst for the stock, but Penn Virginia also offers a compelling long term, oil-weighted, Eagle Ford growth story if a sale doesn't materialize.

Disclosure: The author is long PVA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Callum Turcan owns September and December call options for Penn Virginia Corporation