After another quarterly loss, Penn Virginia Corp. (PVA) said it will abandon upper Eagle Ford drilling in 2015 after lackluster results and is exploring transactions with its South Texas assets.
On Aug. 4, Penn Virginia said it had hired Jefferies LLC as exclusive financial adviser for Eagle Ford transactions. Penn is largely built around its core Eagle Ford acreage in Gonzales and Lavaca counties, Texas. However, the company is facing an increasingly precarious financial situation as its cash and available borrowings shrink.
“As part of its general advisory services, Jefferies will also help the company evaluate strategic alternatives with respect to its Eagle Ford assets and their development and will provide the company with other financial advice and financial planning assistance,” according to Penn.
The company recently discussed a variety of assets it could sell as its production falls and losses mount.
Robert Du Boff, analyst, Oppenheimer & Co. Inc., said Penn has a desirable asset base in the Eagle Ford and has made progress in improving operations and cutting costs.
“However, given the company’s considerable debt burden [66% net debt ratio], we think the company will struggle to grow cash flows in the current environment,” Du Boff said. “PVA may ultimately have to sell assets or equity in an unfavorable market just to maintain production, which could ultimately erode shareholder value in the near term.”
In July, Penn Virginia said it was selling its East Texas assets in a move to avoid disrupting its Eagle Ford position. Penn will receive $75 million from Covey Park Energy LLC for East Texas and North Louisiana subsidiary Penn Virginia Oil & Gas LP (PVOG).
The assets produced about 1,870 barrels of oil equivalent per day (boe/d) in the second quarter of 2015, including 76% gas, 16% NGL and 8% oil.
However, with its borrowing base already reduced in May to $425 million from $500 million, the expected completion of the sale in August will decrease the company’s borrowing base by $30 million, said David Tameron, analyst, Wells Fargo Securities.
On a July 30 earnings call, Steven Hartman, Penn Virginia’s CFO and senior vice president, said the company could sell noncore assets as well as non-contiguous assets it has already marketed. The company also has a water system it could divest.
“I don't think we're going to have that done in 2015, but in 2016 that could be an asset that we could use to plug any gap for that program,” Hartman said, according to an earnings call transcript by Seeking Alpha. “And then there is always just looking at our contiguous block and maybe looking at that.”
Hartman added that the company could also sell its Granite Wash assets.
As for a rumored deal that BP Plc (BP) had offered to buy Penn Virginia for $537 million, Edward B. Cloues, Penn Virginia chairman, said that at the end of the day “there were no offers to consider.”
“The difficult environment for oil prices just caused a lot of people to be very hesitant, so we wanted to get on record with this now to clear up any confusion that might exist in the marketplace,” Cloues said, according to the Seeking Alpha transcript.
The second quarter of 2015 continued Penn’s woes. The company posted an operating loss of $41 million compared to $57.9 million in the first quarter of 2015. The company’s improvement of $16.9 came through revenue increase and expense cutting.
The company has posted a net loss every year since 2010 and at least $100 million in annual losses since 2011.
Penn will now focus on Lower Eagle Ford to target less costly drilling locations, Tameron said.
Second quarter Eagle Ford production fell to 20,259 barrels of oil equivalent per day (boe/d), compared to 21,390 boe/d in the first quarter. However, well costs averaged $6.9 million less in second quarter of 2015, 19% lower than in first quarter.
Penn cut 2015 guidance to up to 22.6 Mboe/d from 26.2 Mboe/d, largely on its disappointing Upper Eagle Ford results.
“We now forecast declining volumes in 2016, but see a modest resumption of growth by the end of next year,” Du Boff said.
Tameron said Penn has high quality acreage in the Eagle Ford but “we believe shares will be challenged by production and leverage headwinds.”
In July, Penn said H. Baird Whitehead plans to retire as president and CEO after more than 14 years with the company, including four years in his current position. He will serve until a successor is named and the CEO transition is complete.
Contact the author, Darren Barbee, at dbarbee@hartenergy.com.
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