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Shareholder Chides Penn Virginia, Calls For Strategic Review of Buyout Offers

Lone Star Value Management LLC, which owns around 2.8% of Penn Virginia Corp. (PVA), on Friday called for a strategic review to explore "all credible proposals" in light of rumors that an offer by BP plc was rejected.

The New York City-based investment firm owns about two millions shares in the U.S. onshore producer. A UK-based blog, Proactive Investors, on Thursday reported that BP had offered $8.00/share to acquire the independent exploration and production (E&P) operator but was rejected. Neither PVA nor BP would comment on Thursday.

"We note that $8/share would represent an 80% premium to where PVA stock closed" on Wednesday, Lone Star Managing Director Jeffrey E. Eberwein said in a letter to the company. PVA was trading at around $4.93/share Friday afternoon.

"Although we believe that PVA shares have significant upside potential in an industry recovery scenario, given the company's history of poor performance, its stale board, and its high cost of capital, the most viable path to maximizing shareholder value, in our view, is to immediately undertake a robust strategic alternatives process to fully explore all credible proposals for the acquisition of the company."

The producer's focus today is the Upper Eagle Ford Shale north of Houston, where its leasehold numbers around 100,000 acres. In 1Q2015, PVA recorded a net loss of $63.2 million (minus 88 cents/share), versus a net loss in the year-ago period of $423.9 million (minus $5.90) (see Shale Daily, May 13). The loss in 1Q2015 included $667.9 million for impairments related to the sharp decline in commodity prices.

"We believe Penn Virginia's acreage...is very valuable and makes the company an attractive acquisition target," Eberwein said. "However, we also note that Penn Virginia has a poor long-term track record of creating value for shareholders." He noted that PVA shares have declined 70% over the past year and 77% over the past five years.

"Penn Virginia has a long history of incurring excessive leverage, often at the peak of the cycle, and this recent industry downturn serves as another example. The company has recently had to retrench by reducing its rig count from eight drilling rigs down to two.

"Although this decision may be justified on a short-term basis given the oil price decline over the past year, our concern is that when an upcycle ensues, Penn Virginia will be ill-prepared to fully capitalize on it. We believe the company will be forced to focus on paying down its debt and can only increase its drilling activity slowly, failing to fully capitalize on its valuable Eagle Ford Shale acreage."

Eberwein also criticized the board, claiming the average tenure was 10 years, and he said no new independent directors had been elected in the last five years.

"If it is true that Penn Virginia could be sold for an 80% premium or more to a credible buyer, the board has a fiduciary duty to fully explore such an offer," he wrote. "Shareholders wishing to continue to participate in the E&P sector and the Eagle Ford Shale can easily do so by reinvesting in another company with similar exposure and upside as Penn Virginia."

If the board rejects offers at a "substantial premium" to PVA's stock price without considering its duties to shareholders, "we reserve all of our rights to take any actions we believe to be necessary to protect the interests of all shareholders, which may include seeking shareholder representation on the board and/or removing some or all or the current incumbent directors."

There was a lot of market chatter in Houston on Thursday about the rumored offer. Tudor, Pickering, Holt & Co. analysts said Friday they wouldn't speculate but they also wouldn't be surprised at a deal "at least this size," which at the suggested price implies a $1.8 billion enterprise value. BP, which has been in the selling mode since the Macondo well blowout in 2010, "needs to beef up its liquids position in the U.S., though we would have guessed an asset with more scale/running room would strategically be preferred."

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