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Battened-Down PVA Focused on Costs, Efficiencies

Eagle Ford Shale-focused Penn Virginia Corp. (PVA) felt the pain of lower revenues and higher operating expenses during the first quarter compared with the fourth, but the company has been making headway on its top priorities: cutting costs and improving efficiencies, CEO Baird Whitehead said Tuesday.

"While continuing to grow production, our primary focus during the past two quarters has been on cutting well costs and improving operational execution," Whitehead said. "We have made significant progress on both fronts as drilling and completion costs have dropped by approximately 25%, unit production costs have declined approximately 7% and the execution of our drilling and completion program has been much better.

"For example, during the fourth and first quarters, we stimulated over 1,400 frack stages at almost a 100% operational success rate. Our first quarter production, which was up 16% from the fourth quarter, was in line with guidance and reflected our improved execution. As a result, our 2015 production guidance remains unchanged."

Operating loss was $57.9 million in the first quarter, compared to $14.1 million in the fourth quarter, which is excluding $667.8 million of impairments of East Texas and Oklahoma properties. PVA experienced a $27.6 million decrease in product and other revenues and increased operating expenses of $16.1 million.

Net loss for the first quarter was $63.2 million (minus 88 cents/share) compared to a net loss of $423.8 million (minus $5.90/share) in the prior quarter and net income of $17.5 million (22 cents/share) in the year-ago quarter. The adjusted net loss was $44.9 million (minus 62 cents/share) in the first quarter compared to a loss of $25.3 million (minus 35 cents/share) in the prior quarter.

Product revenues decreased 28% to $73.1 million ($32.87/boe) in the first quarter, from $101.4 million ($51.73/boe) in the fourth quarter, due primarily due to a 36% decrease in the realized oil equivalent price, partially offset by a 16% increase in daily production.Including derivatives, total product revenues were $110.6 million ($49.72/boe) in the first quarter compared to $111.8 million ($57.04/boe) in the fourth quarter.For the first quarter, the realized oil price decreased by 37%, the realized natural gas price decreased by 24% and the realized natural gas liquids (NGL) price decreased by 42%compared to the fourth quarter of 2014.

Total operating expenses increased by $4.7 million to $34.4 million ($15.45/boe produced) compared to $29.7 million ($15.14/boe produced) in the fourth quarter. Capital spending during the first quarter was $147 million, a decrease of $90 million, or 38%, compared to $237 million in the fourth quarter.

At the end of March, PVA had debt totaling nearly $1.24 billion. In May the company's borrowing base was reduced from $500 million to $425million, which was higher than the $400 million in previous guidance.

"Most important is to preserve our financial liquidity, which was $265 million at the end of the first quarter, and remain within our leverage covenants, which have been substantially relaxed for 2017," Whitehead said during a conference call. "It is important for us to manage our asset for the year and the focus on cost control, and drilling activity and related spending will be the single most important action we can take...We have further reduced our lease acquisition budget considerably from last year when we spent almost $100 million. At this time, lease spending will be held to a minimum and approximately $10 million, and will be primarily allocated to some key leases we want to acquire based on recent well results."

Total production in the first quarter was 24,721 boe/d compared to 21,314 boe/d in the fourth quarter, with an approximate 3,900 boe/d increase in the Eagle Ford.

First quarter production from Eagle Ford operations was 21,390 boe/d, a 23% increase over the 17,459 boe/d produced in the fourth quarter. About 68% of first quarter Eagle Ford production was crude oil, 17% was NGLs and 15%was natural gas.

Well costs declined by about $2.5 million, or 25%, from about $10.3 million for wells spud in October and November of 2014 to about $7.7 million for wells spud in February and March of 2015, PVA said. Completion costs for wells declined by 33%, or $1.8 million, over the period, while drilling costs declined by 17%, or $700,000. The decrease was due to optimization of completion design and improved stimulation pricing. "We expect to see additional decreases in drilling costs for the balance of the year as our cost reduction initiatives continue," the company said.

PVA said results in the Upper Eagle Ford have been "excellent" overall. "As we complete additional Upper Eagle Ford wells and test our acreage, the production results of those wells continues to support our belief that the Upper and Lower Eagle Ford are acting as separate reservoirs," PVA said. "Since March 2014, we have completed and turned in line 24 Upper Eagle Ford wells, including one well that had a mechanical issue.The average IP rate for the 23 wells that did not encounter a mechanical issue was 1,223 boe/d (64% oil), and the average 30-day rate for 21 of these 23 wells with sufficient production history was 942 boe/d (65% oil).

"The early results of the Upper Eagle Ford wells are encouraging and, due to these excellent results, we continue to plan to devote a significant portion of our remaining 2015 capital expenditures to drilling additional Upper Eagle Ford wells.

"While commodity futures prices have shown improvement recently, our drilling program remains focused on higher-return opportunities in both the Lower and Upper Eagle Ford," Whitehead said.

Production is expected to be 23,800-26,200 boe/d for 2015, unchanged from previous guidance. Production in the second quarter is expected to range between 24,000 and 26,000 boe/d. Product revenues, excluding the impact of hedges, are expected to be $320 to $350 million, compared to previous guidance of $312 to $343 million.

Capital expenditures are expected to be $325 to $370 million, compared to previous guidance of $295 to $345 million.

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