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Penn Virginia Corporation: A Strong Play Irrespective Of Energy Prices

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About: Penn Virginia Corporation (PVAC)
by: Daniel Jones
Daniel Jones
Deep Value, value, contrarian, special situations
Summary

Following up on my prior deep dive analysis of Penn Virginia Corporation, I have decided to see how things look from a different perspective.

Even in cases where energy prices tank, the firm holds up reasonably well this year and next.

Should prices move higher, the upside potential is real, plus management has the ability to tap more debt to further fuel growth in that scenario.

One of the more interesting and attractive oil and gas E&P (exploration and production) firms I have come across lately has been Penn Virginia Corporation (OTC:PVAC), a niche player with fairly low leverage, decent growth, and a low trading multiple. In my prior analysis of the firm, I made the case that while Penn Virginia was not the most appealing company on my list, it is certainly in the top 20% of companies I have performed deep dives on. Given just how appealing the firm is, it makes sense also to look at it from the perspective of how sensitive it is to energy price fluctuations. After all, understanding its prospects at a given price are important, but in the world of crude and natural gas, volatility is inevitable, and where energy prices move in the years to come will determine where the company’s share price ends up long term.

Taking a look at 2019

First and foremost, let’s begin with 2019. In my prior article on Penn Virginia, I provided significant details about how I went about creating my cash flow model for the firm. I have decided to use the same cash flow model for the creation of this article as well, with the same core assumptions built around it. Using all of that data, I then decided, for this piece, to look at both EBITDA and operating cash flow for 2019, the results of which (for EBITDA) can be seen in the table below.

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The table illustrated shows oil prices ranging between $40 per barrel and $100 per barrel, while natural gas prices range between $2 per Mcf and $6 per Mcf. As an example of the outcome, if oil this year were to average $40 per barrel and natural gas were to average $2 per Mcf, investors could expect the company to generate EBITDA of about $287 million. At a more reasonable level (given where prices have been recently), with oil at $55 per barrel and natural gas at $2.50 per Mcf, the end result would be EBIDA of $334 million instead, while if prices surge for the rest of the year and average $65 per barrel for crude and $3 per Mcf for natural gas, investors can expect EBITDA to be closer to $367 million.

*Created by Author

Using that data, I then created the table above, as well as the table below. In the table above, I decided to look at operating cash flow instead of EBITDA. The results here are similar, but one big difference is the coloring. This year, management is expected to allocate, at the mid-point, $345 million toward the firm’s capex budget. Any reading on the operating cash flow table below that level is in red to signify a shortcoming, while anything highlighted in green is either cash flow breakeven or cash flow positive. In the table below, meanwhile, you can see the leverage ratio of the firm using 2019’s figures. Really, anything under a score of 2 is really healthy here, and Penn Virginia fits the bill in this respect.

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2020 is shaping up slightly better

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Now that we have some idea as to what 2019 might look like, it’s time to use my model to churn out results for 2020. In the table above, you can see my EBITDA figures for the firm for 2020 under the more conservative 10% annual production growth scenario. This data shows greater volatility compared to 2019 for two reasons. First, the higher output, and second, differences in hedging between this year and next. In the table below, meanwhile, you can see the operating cash flow figures for next year under the same scenario as well. The same color coding applies.

*Created by Author

While the 10% growth scenario shows a more volatile range of outcomes, the 15% growth scenario is even greater than that. In both tables below, you can see the EBITDA and the operating cash flow under this latter 15% growth scenario. If natural gas stays around $3 per Mcf and if oil were to move to a more reasonable level like $65 per barrel, we could expect EBITDA for next year to rise to $432 million, just as operating cash flow hits about $394 million. This translates to $65 million more EBITDA versus 2019’s model, and the same disparity for operating cash flow too.

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Lastly, I would like to draw your attention to the following two tables below. The first of these looks at the net leverage ratio for the 2020 10% growth scenario, while the second one does the same thing but for the 15% growth scenario. In both cases, you can see that we are, in most scenarios, well below the 2 level that’s considered attractive leverage. In fact, leverage is so low that the firm should be able to borrow, next year, between $242.8 million and $278.8 million in extra debt before even hitting the 2 leverage ratio. This could give it fuel to further increase its growth if management so chooses.

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Takeaway

Based on the data provided, it appears to me as though Penn Virginia is still an excellent prospect for long-term oil and gas investors to consider. Not only is leverage low in most scenarios, the company’s cash flow picture is pretty stable even in the event that energy prices tank. As an example, if crude falls $10 per barrel for next year under the 10% growth scenario, EBITDA will drop by just $50 million compared to what it otherwise would be. However, based on how close the company will be to generating positive free cash flow, the upside could be supercharged in 2020 should energy prices rise nicely from here. In all, I haven’t changed my stance on it being a solid, but not the best, prospect out on the market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.