Penn Virginia Corp. (PVA) gave up East Texas rock to avoid disrupting its strong Eagle Ford position, but it’s uncertain whether the proceeds will calm the company’s balance sheet.

On July 15, Penn said it struck a deal to sell in East Texas for gross cash proceeds of $75 million. Covey Park Energy LLC purchased oil and gas acreage in East Texas and North Louisiana from Penn subsidiary Penn Virginia Oil & Gas LP (PVOG). Covey is backed by private equity firm Denham Capital.

Robert Du Boff, analyst, Oppenheimer & Co., said the money will help bolster the balance sheet but fears it won’t be enough to help its leverage, the ratio of total debt to EBITDAX.

Penn’s borrowing base was reduced in May to $425 million from $500 million due to declines in commodity prices. The company had first-quarter 2015 liquidity of $265 million.

“We plan to assess our financing and liquidity requirements as we progress into 2015,” the company said in a July 15 SEC document.

Penn Virginia said its options included seeking an amendment to the leverage covenant, adjusting the pace or magnitude of its capital program or assessing the potential for a capital markets transaction.

The option to make a deal wasn’t a surprise. Company executives had suggested a potential sale of the asset in the past few months, Du Boff said.

“The alternative was another drop in Eagle Ford activity, which would further hamper PVA's long-term prospects,” Du Boff said. “Despite the East Texas proceeds, we believe the company still has too much leverage to efficiently capitalize on a good Eagle Ford acreage position.”

Eagle Ford acreage seems an unlikely target for a deal. In June, the company said the Eagle Ford produced 21,400 barrels of oil equivalent per day (boe/d), or 87% of Penn’s total of 24,701 boe/d.

Penn Virginia, East Texas, Eagle Ford, shale, inventory, table Penn Virginia’s East Texas divestiture was slightly above Du Boff’s expectations of a $50- to $60 million transaction. At $75 million, the company got $40,000 per flowing barrel—about $5.50 per boe of proved reserves (13.7 MMboe, 85% developed and 77% gas).

Penn Virginia’s sale sacrifices net production of 1,870 boe/d during the second quarter of 2015, consisting of 76% natural gas, 16% NGL and 8% oil.

Production has faltered by about 20% since 2014 due to a lack of drilling. Nevertheless, the divestiture is expected to decrease by an estimated 200,000 boe,” Penn said.

The company said it halted drilling in East Texas while gas prices strengthened. Its East Texas assets are largely HBP with relatively high natural gas content.

“Production was 76% gas, an unfavorable mix today, but a nice long-term option,” Du Boff said. “Although we would have preferred a Granite Wash sale, the long-term potential in East Texas was ultimately more attractive to buyers.”

Penn Virginia said on its website that at year-end 2013, its East Texas assets consisted of 33,400 acres in Texas and the Haynesville Shale.

Estimated proved reserves associated with the divested properties at year-end 2014 were 13.7 MMboe, 85% of which were proved developed. The reserves consisted of 77% natural gas, 16% NGLs and 6% oil.

The sale is unlikely to have a significant impact on cash flow per share, likely about $0.01 in 2016.

The $75 million is a nice windfall but isn’t likely to keep the company’s leverage ratio flat in 2015, Du Boff said.

The company’s current business plans for 2015 are projected to have the company approaching the limits of its allowable leverage beginning in the second half of 2015, based on the existing covenants under its revolver.

“We still see net debt/EBITDAX climbing above 5x later in 2016 on significantly lower hedging gains drop, within its revised covenants (5.5x) but too high to fully capitalize on its sizable Eagle Ford position,” Du Boff said.

The deal is expected to close in August and is subject to customary closing conditions, including the completion of title and environmental reviews.

Contact the author, Darren Barbee, at dbarbee@hartenergy.com.