Penn Virginia Continues To Acquire More Bolt-On Eagle Ford Acreage

Aug. 06, 2021 10:28 AM ETRanger Oil Corporation (ROCC)15 Comments10 Likes

Summary

  • Penn Virginia has proposed another accretive transaction.
  • Lonestar shareholders benefit from the combination with a far stronger company.
  • The Juniper deal is beginning to make more sense to the market.
  • The "bolt-on" acreage makes that part of the deal very valuable to Penn Virginia.
  • The rest of the acreage can be developed, swapped, or used to begin another core area.
  • This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »

3d illustration of barrels with oil
Artem_Egorov/iStock via Getty Images

Penn Virginia (PVAC) has proposed to acquire Lonestar Resources (OTCQX:LONE) in an all-stock transaction. Back during the Juniper Capital Advisors transaction, so many wondered why Penn Virginia needed the cash injection and really could not justify "all that dilution". At least one possible answer is it made the current merger proposal possible. There are distressed companies like Lonestar with a lot of debt that are still good deals to acquire. Lonestar would struggle under the debt load unless current commodity prices remained for a while. The combined company will not struggle and that same combined company remains strong enough to continue shopping for good deals.

Source: Penn Virginia Merger Offer To Lonestar Slide Presentation July 2021.

Notice that Lonestar owns a fair amount of scattered acreage whereas Penn Virginia has a fairly solid block. The small amounts of acreage are not nearly as valuable as the relatively solid Penn Virginia block. That one "bolt-on" acquisition shown in the corner of the Penn Virginia acreage is extremely valuable to Penn Virginia (and unlikely to be valuable to anyone else).

The reason is that the "bolt-on" acreage allows for longer more profitable laterals on the combined acreage. Also, it is far easier to build and own midstream operations with contiguous acreage. Then, there are sales for the combined acreage instead of sales from a small position. However, you look at it, a solid block like Penn Virginia has is worth a lot of money.

The rest of the acreage can be used to swap to combine smaller blocks into larger blocks or developed as needed. Some of that acreage is in prime areas and can be considered a start to build another core area in the Eagle Ford.

A standalone Lonestar would be looking at liquidating some properties to decrease the company leverage or selling common stock so that production would rapidly increase. The combination with Penn Virginia allows for an orderly development or rearrangement of the Lonestar properties by a far stronger entity. The combined company will benefit from this process.

Source: Penn Virginia Merger Offer To Lonestar Slide Presentation July 2021.

Acreage in some of these areas has some very good results with decent paybacks. Penn Virginia will need to decide what will become a core area for the company and what needs to be sold for the right price. The combined company is financially strong enough to wait for a decent price for some of this acreage.

The total transaction is valued at $370 million. For more than 50,000 acres, this is less than $8,000 an acre. So, the "bolt-on" part of the acquisition could be worth most of the deal with the production representing "icing on the cake". Or the cost per flowing barrel can be viewed as reasonable with the rest of the acreage be valued at zero. No matter how you look at this, it is a good deal for Penn Virginia shareholders.

Lonestar recently exited reorganization. Many times companies that exit bankruptcy have to deal with a bankruptcy discount. So, this combination may well be the best way for Lonestar shareholders to realize the value of the leases. The combined company will also have a larger market for buying and selling shares. Since companies that exit bankruptcy often have a lot of shareholders that were previously debt holders, a larger market for the company stock allows them to exit without sharply depressing the share value.

Source: Penn Virginia Merger Offer To Lonestar Slide Presentation July 2021.

This makes it clear that the main objective has been to build the core lease position into a larger position. Shareholders and the market should expect management to continue with that strategy. There have now been two acquisitions that have added to the core acreage in the last fiscal year. More than likely there will be more acquisitions as long as the current market remains a buyer's market.

There are a lot of distressed sellers out there. This company is in a position to review any properties on the market while picking the best for the shareholders. The company is then strong enough to wait for that seller's market to sell. That should result in a considerable amount of the purchase price changing into cash over time.

Source: Penn Virginia Merger Offer To Lonestar Slide Presentation July 2021.

Smaller sellers often have a very hard time receiving anything approaching reasonable value for their acreage. Many times, a stock transaction like Penn Virginia offered shareholders this time is the only hope for smaller operators to achieve the value that they hope for in their small holdings.

The market for the smaller properties is not that well developed. Therefore, a graph like the one above is important because it shows that there is significant growth potential ahead for Penn Virginia by buying production rather than drilling for it. More accretive transactions are very likely in the future.

The original deal with Juniper strengthened the company to the point that the company's stock became a valuable currency in a merger transaction. That reduces the need for more debt. The strong balance sheet also enables the company to take over companies like Lonestar that would struggle with the debt load. Clearly, Penn Virginia still has conservative debt metrics after the deal closes.

If Penn Virginia can continue this method of growth, then the company can grow fast and the stock will appreciate quickly. Several other companies in the industry like Diamondback Energy (FANG) have a long history of growing by acquisition. There are several models out there for Penn Virginia to choose from as it continues to grow by acquisition.

The free cash flow can be used to repay debt or it can be used to grow production. Management can hedge to assure a minimum return on wells drilled. In the meantime, the future for this company appears far better than it did after the collapse of a merger agreement a few years back.

Penn Virginia has an improving position in a very profitable area of the Eagle Ford. Most likely, the association with Juniper will result in the construction of a company that will be sold near the cyclical top of the market. But for the time being, expect this company to be an accretive consolidator. The deals done appear to be fairly conservative deals so that the risk of failure remains low. That makes this stock attractive to a wide range of investors.

I analyze oil and gas companies like Penn Virginia and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that are not published on the free site. Interested? Sign up here for a free two-week trial.

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