Here’s Why Penn Virginia Could Prove to Be a Solid Bet

Penn Virginia stock has witnessed a massive slump this year, losing more than 42% of its value in 2019 as the oil pricing scenario has turned adverse after a solid start. In fact, investors have ignored the company’s positive operational performance delivered last quarter and continued to dump the stock.

Does this make Penn Virginia a turnaround play? Let’s find out.

Not as Bad as It Seems

Penn Virginia delivered a 36% annual jump in revenue in the first quarter of 2019. What’s more, the company’s non-GAAP earnings of $2.25 per share blew past Wall Street’s expectations by a massive margin of $0.44 per share.

This impressive financial performance during the quarter was a result of a massive spike in Penn Virginia’s production. The company delivered production of 24,692 barrels of oil equivalent per day during the first quarter, 74% of which was crude oil. Penn Virginia reports that its first-quarter production level was 53% higher than the year-ago period.

More importantly, Penn Virginia’s production was strong enough to offset the weak oil and gas prices it witnessed during the quarter. The company’s average realized price of crude oil came in at $57.39 per barrel, down from $63.23 per barrel a year ago.

Penn Virginia’s consolidated average realized price for the quarter stood at $47.08 per barrel of oil equivalent as compared to $52.99 in the year-ago period. As a result of the weak pricing, Penn Virginia’s operating income increased just 13.8% year over year despite the tremendous production jump.

So investors are clearly worried that Penn Virginia will fall prey to weak oil prices during the quarter.

What Does the Future Look Like?

Analysts estimate that the company will be able to deliver a 13% increase in revenue for 2019.

Penn Virginia believes that it can deliver 25% to 30% production growth in 2019 by deploying a two-rig drilling program. The annual production increase will be achieved at a capital expenditure between $345 million and $365 million.

By comparison, Penn Virginia’s capital expense last year stood at $419 million. So it is quite clear that the company will be able to increase its production efficiently this year, which should allow it to offset the impact of weak oil prices to some extent.

Analysts, for instance, estimate that the company will be able to deliver a 13% increase in revenue for 2019. However, its earnings per share are expected to shrink to $9.02 from $9.19 in the year-ago period.

So the only way Penn Virginia can deliver an improved performance this year is if oil prices pick up the pace. The good part is that WTI crude oil is breaking out once again as the U.S. and China are trying to resolve the trade standoff.

A resolution to the trade war will be beneficial for the oil industry as it will boost demand. Oil Price.com reports that:

In recent days, despite the escalating U.S.-Iran standoff after last week’s attacks on two oil tankers in the Gulf of Oman, oil market participants had turned their attention to signs of weakening oil demand growth and slowing economic activity in the face of a possible protracted trade war between the world’s two biggest economies.

So Penn Virginia could prove to be a solid bet for investors in case oil prices start recovering once again, as the company is making the right moves from an operational point of view.

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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