Why Penn Virginia Stock Can Fall Further

Penn Virginia Corporation stock has not been in great health this year, losing more than 41% of its value thanks to the recent weakness in oil prices. However, the company’s recent results were strong enough to beat investors’ expectations, but were they good enough to help Penn Virginia stock begin a turnaround? Let’s find out.

A Closer Look at the Quarterly Performance

During the second quarter of fiscal 2019, Penn Virginia produced 27,845 barrels of oil equivalent per day. This was 25% higher than what the company produced during the year-ago period, and was above the mid-point of Penn Virginia’s own guidance range.

The solid increase in Penn Virginia’s production allowed the company to post revenue of nearly $123 million during the quarter, up from $111.6 million in the year-ago period. So, Penn Virginia’s revenue increased just 10% year-over-year despite the impressive increase in its production.

The weak top-line growth can be attributed to the weak oil prices that were prevailing during the quarter. The aggregate energy price recorded by Penn Virginia during the second quarter came in at $48.47 per barrel of oil equivalent, down from $55.02 per barrel in the year-ago period.

This 30% fall in the average realized prices was enough to offset Penn Virginia’s strong production growth, and also send its bottom line into the abyss. Penn Virginia’s adjusted net income for the quarter came in at $1.96 per share, down from the prior-year period’s bottom line of $2.46 per share.

All of this makes it evident that there’s one big problem that’s holding Penn Virginia back – weak oil prices.

Should Investors Buy the Weakness?

Penn Virginia can start doing well as soon as oil prices start improving. This is because the company is looking to keep a handle on costs even though it is increasing production. According to CEO John Brooks:

Comparing the second quarter of 2019 to the second quarter of 2018, we saw drilling and completion costs reduced by approximately 10% to 15% after adjusting for completion design differences.

Moreover, Penn Virginia is laying great stress on boosting cash flow. The company has decided to defer its capital expenses to boost this metric so that it doesn’t need to take on more debt in a weak oil pricing scenario.

This is a strategy that Penn Virginia needs to stick by as its balance sheet is highly-levered. The company has only $4.66 million in cash and a debt of $518 million. So it needs to avoid taking on more debt, or else it will be buried under the burden of higher interest expenses. As such, it would be a good idea for investors to stay on the sidelines as the stock isn’t headed anywhere until and unless oil prices improve.

The bad news is that an oil price improvement doesn’t seem to be in the cards given the prevailing macroeconomic conditions. CNN reports:

Oil prices are swept up in stock market and commodity losses due to rising concern about trade disputes, the health of the global economy and weak oil demand,” the IEA report said.

The new tariffs imposed by Trump on Chinese goods could hurt oil demand to the extent of 500,000 barrels per day, according to Bank of America Merrill Lynch. So don’t expect oil prices to recover anytime soon, and that’s bad news for Penn Virginia stock.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects.

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