Update: Penn Virginia - Revises Production Guidance

| About: Penn Virginia (PVAC)
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Penn Virginia provided updated production, capex and EBITDAX guidance for 2014. Preliminary 2015 guidance was also updated.

While the downward revision to 2014 guidance is material, the stocks compelling investment thesis remains intact.

This note provides comparison of the new guidance versus old and discusses implications for the stock.

Penn Virginia's stock (PVA) spiked by 6.5% on Friday, the day when many of its mid-capitalization peers in the E&P sector declined. The only news this morning related to Penn Virginia is an updated production guidance released by the company. The press release warns of a delay in the production ramp-up due to slower-than-expected completions schedule. The new guidance is reduced relative to the guidance provided a month ago on the company's Q2 conference call and is a second 2014 production guidance revision in a row.

The updated guidance shows a strong ramp-up in production that is expected during the fourth quarter, indicating that the slowdown in growth is likely temporary and strong momentum will be regained with the addition of the seventh and eighth drilling rigs going into 2015. However, in the immediate term, the revision to expected growth estimates are quite significant.

Given the stock's strong rally on Friday, today's trading session may be volatile.

H2 2014 Updated Guidance Analysis

New Q3 production guidance: 20,750-22,000 boe/d, including oil production of 13,260-14,000 bo/d. This represents a 1%-7% increase over the second quarter, pro forma for the sale of the company's Mississippi assets, which closed at the end of July.

New Q4 production guidance: 26,000-29,000 boe/d, including oil production of 15,925-17,725 bo/d. This represents a 29%-36% increase over the second quarter on a pro forma basis.

New second half of 2014 guidance: 23,375-25,500 boe/d, including oil production of 14,590-15,840 bo/d.

While the production growth guided for the fourth quarter is strong, the delay in the ramp-up results in a significant downward revision to the previous H2 2014 guidance. For comparison purposes, Penn Virginia guided a month ago that average production during the second half of this year would be 27,175-28,800 boe/d, including oil production of 16,850-18,475 bo/d.

The company attributed the revision to the delay in the timing of completions:

Although well results continue to meet or exceed expectations, we anticipate delays in the timing of completions associated with our second half of 2014 drilling program, including those wells to be drilled with the recently added seventh and eighth drilling rigs. In addition, as a result of the delays, we now expect four (2.5 net) fewer wells will be turned in line in 2014, with those four wells now expected to be turned in line during the first quarter of 2015.

The lower production guidance is mirrored in the new Adjusted EBITDAX guidance that is now expected to range between $210 and $245 million for the second half of 2014. This compares to the previous guidance of $251-$296 million, an ~$45 million reduction based on midpoints. Adjusted EBITDAX includes the cash impact of derivatives.

The reduced EBITDAX guidance will have only minor impact on the company's balance sheet as capital spending is also expected to be lower. As a result of the reduced 2014 completion activity, second half 2014 capital expenditures are now expected to range between $380 and $420 million.

Penn Virginia anticipates having no outstanding borrowings under our revolving credit facility and financial liquidity of nearly $500 million at the end of the year.

2015 Updated Guidance Analysis

Penn Virginia also provided updated 2015 guidance.

The company's preliminary estimate for 2015 total production is 35%-45% higher than 2014, an increase from the previous growth guidance of 35%.

Oil production is expected to be 45%-60% higher than 2014, an increase from the previous growth guidance of 45%.

The higher expected growth rates in 2015 are consistent with the company's explanation that the lower production volumes in 2014 are a result of the delayed completions schedule and not a reflection of poor well performance.

Adjusted EBITDAX is estimated to be 35%-40% percent higher than 2014, unchanged from the previous guidance (which assumed that the WTI oil price would average $90 per barrel and the Henry Hub natural gas price would average $4.25 per MMBTU in 2015).

2015 capital expenditures are expected to range between $750 and $800 million, unchanged from the previous guidance.

In Conclusion…

Penn Virginia's guidance revision is material, but appears to represent a "deferral of growth." The development is nonetheless.

Despite this setback - which is hopefully just a transitory rough patch - the company's longer-term investment thesis remains intact.

Well performance remains the single most important factor that will determine the direction of the stock price and needs to be monitored closely.

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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