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Strong Eagle Ford Wells Make PVA Optimistic; Analyst Unsure

During the first quarter Penn Virginia Corp. (PVA) set a quarterly oil production record, thanks to a 15% increase in output from its Eagle Ford Shale operations as it continues to grow and delineate its South Texas acreage.

First quarter overall production from the Eagle Ford was 15,152 boe/d, up 15% compared to 13,145 boe/d in the fourth quarter. First quarter oil production from the play was 11,878 b/d, 10% higher than the 10,759 b/d in the fourth quarter.

CEO Baird Whitehead said during a conference call that the production climb was achieved despite wells coming online later than expected during the quarter. "Due to continued success in adding to our Eagle Ford Shale acreage position, we are increasing our leasing capital expenditures guidance for the year, but otherwise our previously reported guidance remains unchanged," he said. "We continue our aggressive Eagle Ford Shale leasing effort, at attractive acquisition costs, as we draw closer to our stated minimum goal of 100,000 net acres.

"Initial testing of our adjacent Upper/Lower Eagle Ford Shale wells commenced in the first quarter and the initial results are strong. We saw initial production in excess of 2,000 boe/d with a very high flowing pressure. Longer-term testing will be necessary in order to fully understand the upside associated with the Upper Eagle Ford Shale, but we are very optimistic about the play."

Analysts following the company have differing views.

"...[W]e think investors overestimate how good Penn Virginia's Eagle Ford position is," wrote BMO Capital Markets analyst Phillip Jungwirth, adding that depreciation, depletion and amortization expense is increasing, suggesting that estimated ultimate recoveries are lower or well costs are higher than is being assumed in others' net asset value estimates. He wrote that PVA shares "are worth low-teens in a best case scenario. In our view, years of inventory shouldn't be the primary valuation metric and reported results this far along into development should hold more weight."

But Wells Fargo Securities analyst David Tameron and colleagues wrote that the market is undervaluing PVA's future development potential in the Eagle Ford. "Because we believe that continued achievement in the Eagle Ford and potential monetizations of noncore assets will close the gap between this fundamental value and the value currently being attributed in the marketplace, we expect shares to outperform small cap peers," Tameron wrote.

PVA shares were trading around $15.00 Wednesday morning, down from an intraday high of $16.34 at the start of the week and $18.07 last Thursday. BMO has a "market perform" rating on PVA while Wells Fargo has an "outperform" rating on the stock.

In the Lower and Upper Eagle Ford PVA estimates that it has 1,510 gross remaining drilling locations, about 1,035 of which are in the Lower Eagle Ford. This estimate is up by 34% from the company's previous projection of 1,125 locations. The inventory doesn't assume any overlap from the upper and lower plays, which could represent up to an additional 400 locations, PVA said.

The company highlighted two wells in particular that it completed and turned in line during March in Lavaca County, TX, the Welhausen #A2H and Welhausen #B1H. The two laterals are effectively 660 feet apart. The Welhausen #B1H landed in the Lower Eagle Ford, "which is where the vast majority of our wells traditionally have been completed." The Welhausen #B1H has a 5,584 foot lateral and 26 fracture (frack) stages and flowed back at a pressure of 5,700 psi, with an initial potential (IP) of 1,536 boe/d. The Welhausen #A2H was completed in the Upper Eagle Ford (Marl) Shale, has a 5,976 foot lateral and 26 frack stages. It flowed back at a pressure of 4,500 psi and had an IP of 2,165 boe/d.

"These two wells have two of the highest wellhead flowing pressures we have encountered to date in our Eagle Ford Shale development program," Whitehead said. "Their GORs (gas-oil-ratios) of 5,000-6,000 standard cubic feet per barrel are also the highest we have encountered, but these higher pressures and GORs were expected since these wells are also our deepest 'down-dip' tests of the Eagle Ford Shale. These initial results imply that we are still in the volatile oil window. Longer term, additional testing and production history will help determine whether, at least in this area, the Upper Eagle Ford Shale and Lower Eagle Ford Shale are completely separate reservoirs."

More broadly, COO John Brooks said the 18 wells that the company turned in line during the quarter had average rates of 1,080 b/d of oil and 2,004 Mcf/d of gas for a combined 1,425 boe/d. "So, our well results continue to be strong," he said. "Our average well cost came in at a little over a $9 million with an average of 24.6 frack stages per well...

"As we've transitioned almost completely to pad drilling, we've developed a strong inventory of wells to complete. As of March 31, we had 19 wells completing or waiting on completion..."

The company has about 125,300 gross (85,900 net) acres in the Eagle Ford, with about 6,400 net acres, 8%, having been added since the last quarterly report at an average cost of about $3,000 per acre.

Companywide first quarter production was 21,133 boe/d, up 6% compared to 20,020 boe/d at the end of 2013. The majority of the production was from the Eagle Ford, but East Texas operations provided 2,004 boe/d; Midcontinent turned in 1,931 boe/d; Mississippi operations in the Selma Chalk contributed 1,981 boe/d; and Appalachia production was 66 boe/d.

This year's capital expenditures are expected to range between $595 and $653 million, an increase of $13-20 million from previous guidance, reflecting an increase in lease acquisition capital expenditures to $60-83 million from previous guidance of $40-70 million. Other 2014 guidance remains unchanged.

Net income was $17.5 million (22 cents/share) for the quarter compared with a net loss of $18.1 million (minus 33 cents) for the year-ago quarter. Adjusted for special items, PVA reported a net loss of $7.9 million (minus 12 cents/share) compared with an adjusted net loss of $10.4 million (minus 19 cents) for the year-ago quarter.

ISSN © 2577-9877 | ISSN © 2158-8023

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