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Weakened PVA Pulling Back Drilling, Holding On

Penn Virginia Corp. (PVA) interim CEO Edward Cloues on Tuesday told analysts following the company that he's a believer in its future and the Eagle Ford Shale-focused producer will make it out the other side of the commodity price collapse.

While Cloues was talking, PVA shares were tanking and later closed down almost 19% for the day at 65 cents. Third quarter results missed analyst expectations. The dividend was suspended in September (see Shale DailySept. 17), followed by a noncore asset sale (see Shale DailyOct. 7), more of which will likely be needed.

Former CEO Baird Whitehead announced his retirement last July, and on Tuesday Cloues criticized media reports that characterized his departure as "abrupt."

"I did not accept the interim CEO position to be a caretaker or to be a babysitter of a declining operation," Cloues told analysts. "Quite to the contrary, it's a job and a challenge that I welcome...I would not have come out of retirement...if I were not confident that we could succeed in restoring Penn Virginia to good health...With a little help from oil prices, we have an excellent chance to succeed..."

Cloues said the company would continue to focus drilling efforts on two-string, Lower Eagle Ford wells in Gonzales County, TX, and northwestern Lavaca County, TX, "where we believe our rates of return are optimized. The redirection of our drilling program to this lower-cost area, where we have experienced higher productivity with the slickwater fracks, has led us to reduce preliminary capital expenditures guidance for 2016 for a one-rig drilling program..."

While oil prices were lower than expected during the third quarter, the effect was offset by lower operating costs, he said. "Our third quarter production came in slightly above the midpoint of third quarter guidance, due primarily to the higher productivity of our most recent wells," he said. "In particular, we were encouraged with the early results of our most recent seven two-string, slickwater fracked wells in the Lower Eagle Ford, both in terms of their average cost and initial productivity. The last five of these wells, also utilizing zipper fracks, were on average the best wells we have drilled out of nearly 330 producing wells we and our partners have drilled over the past five years."

The company's recent borrowing base redetermination reduced liquidity, but the cut was in line with expectations, Cloues said. The recent sale of noncore Eagle Ford assets helped liquidity, but PVA expects to exceed the total debt leverage covenant in its revolving credit facility at the end of the first quarter, he said. A waiver from lenders might be needed and might not be forthcoming, he added. "Consequently, we are actively reviewing various financing and debt restructuring alternatives in an attempt to shore up our overall liquidity and relieve our dependence upon the revolver as our sole source of external funding."

Operating income was $3.6 million in the third quarter compared to an operating loss of $41.0 million in the second quarter. The $44.6 million improvement was due primarily to $50.8 million of gains related to asset sales and a $16.2 million decrease in operating expenses, partially offset by a $22.4 million decrease in product revenues.

Third quarter net income was $20 million (25 cents/share), compared with net earnings a year ago of $81.1 million (87 cents) and a net loss of $86.2 million (minus $1.19) in the prior quarter. The primary reasons for the $106.2 million improvement were the increase in operating income and a $60.2 million increase in derivatives income, which included mark-to-market adjustments.

Adjusted net loss was $43.3 million (minus 60 cents/share) for the third quarter compared to a loss of $31.6 million (minus 44 cents) in the prior quarter. The primary reasons for the $11.6 million increase in the loss were a $22.4 million decrease in product revenues and a $2.6 million decrease in cash settlements of derivatives, partially offset by the $16.2 million decrease in operating expenses.

In May when Whitehead was still at the helm, PVA management was talking up cost reductions and efficiencies (see Shale DailyMay 13). One month later, a leading investor was calling for a strategic review following rumors that a buyout offer had been rejected (see Shale DailyJune 26).

During the third quarter, capital spending was $40 million, a decrease of 58% compared to $94 million in the second quarter. At the end of September debt was nearly $1.22 billion.

Third quarter production from Eagle Ford operations was 18,528 boe/d, a 9% decrease from the 20,259 boe/d produced in the second quarter. 69% of the production was crude oil, 18% was natural gas liquids and 13% was natural gas. "The decrease was attributable primarily to our reduction in drilling activity as the year progressed, in light of lower oil and gas prices," the company said.

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