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Penn Virginia Corporation
7 May 2012
PVA : NYSE : US$5.44 |Buy , Target US$11.00
Thesis
Raising our target $2 to $11 due to higher oil production/price realizations. Investors are valuing Penn Virginia’s Eagle Ford asset on 120-acre spacing and pricing production at ~4x in our view.
How does PVA double from current levels? First, sell Mid-Con assets at a higher valuation. Second, increase locations on current leasehold by downspacing Gonzales and derisking Lavaca.
Third, add acreage. We assume $25 million in annual leasehold acquisition at ~$10,000/acre, though Penn Virginia added Lavaca acreage for ~$2,000/acre.
Highlights
Lavaca: Two initial Lavaca County Eagle Ford tests commenced at 900+ Boepd (~90% oil) and ~700 Boepd (~90% oil), respectively, suggesting an average recovery of 300+ Mboe for ~$8.5 million.
We estimate an average Lavaca well has an NPV at 10% of ~$3.5 million, implying a value of ~$50 million for the Lavaca County acreage assuming 120-acre spacing and 50% prospectivity.
Gonzales: Gonzales County wells should recover ~400 Mboe for ~$7.5 million, implying a PV10 of ~$6.5 million. The Gonzales position is worth ~$550 million on 120-acre spacing in our view.
Mid-con: Penn Virginia plans to sell Mid-Continent assets with proved reserves of 123 Bcfe (46% NGLs/oil) and Q1 production of 24 Mmcfepd (~50% NGLs/oil). The sale at 5-10x production would generate $125-250 million.
Penn Virginia indicates the sale package PV10 is ~$210 million (proved, probable and possible reserves).
Five-year discounted cash flow analysis
Our target price is based on the net present value of free cash flow over the life of a company using a reasonable discount rate. Penn Virginia’s valuation applies a 15% discount rate to determine the net present value of its free cash flow. Our reasoning for using a 15% equity return includes the long-term nominal performance of the broader equity market (10-12%), the greater inherent volatility of cyclical energy investments, and the company’s market capitalization below $2 billion (i.e. small-cap).
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