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Eagle Ford Stars in Penn Virginia Liquids Shift

Penn Virginia Corp. CEO H. Baird Whitehead admitted to financial analysts Thursday that the company is "essentially a one-trick pony at this moment" due to its heavy focus on the Eagle Ford Shale of South Texas. However, he said, "we think it's a pretty good-looking pony."

The Eagle Ford is a central component of the company's transition to an oil- and natural gas liquids (NGL) -weighted player.

"In the second quarter of 2011, oil and NGL revenues increased by 156% over the prior-year quarter and were 31% higher than the first quarter of 2011," Whitehead said. "In addition, oil and NGL revenues comprised 48% of total product revenues in the second quarter of 2011, compared to 26% in the prior year quarter and 39% in the first quarter of 2011.

"We remain believers in natural gas over the long-term, however, and retain our exposure to an eventual recovery in the price of natural gas."

However, on Thursday investors apparently were not believers in Penn Virginia as its shares took a beating, albeit along with the rest of the market. The company's stock closed down more than 10% at $10.42 after setting a new 52-week intraday low of $10.02. The Dow Jones Industrial Average closed down more than 4% in its worst showing since 2008, and the Amex Natural Gas Index closed down 7%.

For the quarter Penn Virginia posted $80.7 million operating loss, which was $59.8 million higher than the $20.9 million operating loss in the prior-year quarter and due primarily to a $69.9 million increase in impairment expense and a $9.8 million increase in exploration expense.

Oil and NGL revenues were $34.7 million in the second quarter, 156% higher than the $13.5 million in the prior-year quarter and 31% higher than the $26.5 million in the first quarter of 2011. Oil and NGL revenues were 48% of total product revenues in the second quarter as compared to 26% in the prior year quarter and 39% in the first quarter of 2011.

"The second quarter of 2011 is the first full quarter of contributions from our oily Eagle Ford Shale properties, which had a significant impact on our recurring financial results," Whitehead said.

The company is running three rigs in the Eagle Ford and drilling its 15th through 17th wells. It recently completed its 12th well and has two wells waiting on completion. Production from the Eagle Ford is about 8,000 (5,000 net) boe/d, and Penn Virginia said it expects to increase production to about 11,000-13,000 (7,000 to 8,000 net) boe/d by the end of 2011. The company recently expanded its position to 13,900 net acres and increased total location well inventory to up to 142 locations. Midstream facilities are connected and there have been no delays in obtaining completion or fracturing services.

"We expect oil and NGLs to contribute between 30 and 32% of total 2011 equivalent production, as compared to approximately 18% of 2010 total equivalent production, and we expect to exit 2011 with approximately 40 to 45% of fourth quarter total equivalent production from oil and NGLs," Whitehead said.

Production guidance for 2011 was trimmed to 48.5-50.5 Bcfe, a decrease of 1.5 to 3.5 Bcfe from previous guidance of 50-54 Bcfe, due primarily to an approximate 3.6 Bcfe reduction in estimated Midcontinent production following forecasting adjustments associated with the the company's ongoing Granite Wash well communication issue related to stimulations (2.7 Bcfe), along with the previously announced sale of noncore producing assets, primarily in the Arkoma Basin (0.9 Bcfe). "These decreases are expected to be partially offset by increased production from the Eagle Ford Shale due to very successful early results and shortened drilling times," the company said.

Oil and NGL production guidance was reset at between 30% and 32% of total equivalent production, compared to between 28% and 30% of total equivalent production in previous guidance (about 40% to 45% in the fourth quarter of 2011), due primarily to expected increases in oil and NGL volumes from the Eagle Ford.

And capital spending was tweaked upward for the year to $360-380 million, an increase of between $10 and $40 million from previous guidance of $320 to $370 million, due primarily to additional Eagle Ford drilling, partially offset by decreased drilling in the Marcellus Shale.

These guidance changes were among "many negatives in the quarter," according to BMO Capital Markets analyst Phillip Jungwirth. He also cited the well communication problems in the Granite Wash.

"We wrote in 1Q [that] acquiring oil on a larger scale is needed to lessen pressure on the stock, and we still think this is true," Jungwirth said in a note Wednesday. He has a "market perform" rating on Penn Virginia shares, while its industry rating is "outperform."

Production in the second quarter was about 11.7 Bcfe, or 128.6 MMcfe/d, a 12% increase as compared to 10.5 Bcfe, or 115.1 MMcfe/d, in the prior year quarter and a 5% decrease from 12.2 Bcfe, or 135.2 MMcfe/d, in the first quarter of 2011. As a percentage of total equivalent production, oil and NGL volumes were 24% in the second quarter of 2011, as compared to 13% in the prior year quarter and 20% in the first quarter of 2011.

The year-over-year production increase was due to new Eagle Ford Shale wells and contributions from 2010 drilling in the horizontal Cotton Valley and Haynesville Shale plays, the company said. The 111% increase in oil and NGL production as compared to the prior-year quarter was due to drilling in the Eagle Ford and increased NGL volumes from the Granite Wash. The sequential quarterly decrease in production was attributable primarily to natural gas production declines, partially offset by higher oil and NGL volumes in the Eagle Ford.

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