Should Penn Virginia Investors Hope for a Turnaround?

Shares of Penn Virginia [stock_market_widget type="inline" template="generic" color="default" assets="PVAC" markup="(NASDAQ: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] have been in free fall this year despite the recent rise in oil prices. The stock is down around 21% so far in 2019 as investors have pressed the panic button in the aftermath of the failed acquisition by Denbury Resources [stock_market_widget type="inline" template="generic" color="default" assets="DNR" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"].

What’s Wrong?

Denbury Resources had announced in October last year that it will acquire Penn Virginia in a $1.7 billion cash-and-stock transaction. But toward the end of March, Denbury abandoned its proposed acquisition of Penn Virginia after opposition from shareholders who were not in favour of the deal in light of the volatile oil pricing scenario and doubts regarding the strategic benefits the transaction would have brought.

Denbury and Penn Virginia reportedly have very different oil extraction techniques and operate in different areas. Denbury’s oil comes from the Rockies and the Gulf Coast, while Penn Virginia’s production is from South Texas’ Eagle Ford shale. Given the operational mismatch between the two companies, investors objected to the merger and the deal eventually fell through.

Not surprisingly, Penn Virginia shares have taken a hit of late as the stock’s entire decline this year has come after the announcement to scrap the acquisition was made. But is Penn Virginia’s crash an opportunity in disguise? To find out, we’ll have to take a closer look at the company’s operating performance.

Will There Be a Turnaround?

The company’s full-year production in 2018 was up 110% over the prior year period, while oil production specifically was up 120%.

Penn Virginia’s full-year 2018 production came in at 21,765 barrels of oil equivalent per day, 76% of which was crude oil. The company’s full-year production in 2018 was up 110% over the prior year period, while oil production specifically was up 120%.

For 2019, Penn Virginia was originally anticipating 30% production growth with a two-rig development program, excluding the impact of the proposed Denbury acquisition. The production growth might not sound really great after last year’s performance, but that’s because Penn Virginia will spend within its means this year.

Given the oil price volatility it witnessed toward the end of 2018, Penn Virginia will fund its capital plan for the year from within the cash flow. For comparison, Penn Virginia had spent $419 million as capital expenditure in 2018.

More importantly, Penn Virginia can deliver stronger quarterly performances going forward thanks to the recent uptick in oil prices. The company witnessed a crude oil price of $66.23 per barrel in 2018, and WTI crude is once again trading close to that level after last year’s crash.

As a result, it won’t be surprising to see Penn Virginia deliver stronger revenue and cash flow this year on the back of higher production, the recent improvement in oil prices, and lower capital expenses. This is probably why analysts expect Penn Virginia’s revenue to increase to the tune of almost 29% in 2019, while earnings are expected to increase from $9.19 per share last year to $9.35 this time.

So, investors shouldn’t rule out a turnaround at Penn Virginia as the year progresses. It is capable of delivering more upside so it makes sense to buy the recent dip in the company’s shares.

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. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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