Penn Virginia (NYSE: PVA) recently reported weaker than expected fourth-quarter performance, missing on both net income and production. However, the key takeaway for investors is that the company's well performance from its core asset -- Texas' Eagle Ford shale -- continues to improve markedly on a both year-over-year and sequential basis. Let's take a closer look.
Strong Eagle Ford operating performance
Penn Virginia reported a fourth-quarter net loss of $4.07 million, or $0.06 per share, missing analyst expectations, though still representing an improvement over the previous year's quarterly loss of $56.13 million, or $1.05 per share.
The main reason behind the company's fourth-quarter earnings and production miss was that some of its Eagle Ford wells were brought online later than expected because of abnormally harsh weather, and also because the company's non-operated partner suspended its drilling program in the play. Despite the worse-than-expected results, Penn Virginia's Eagle Ford operations continue to improve.
The company's average peak initial production (IP) rate for its 23 most recently completed Eagle Ford wells was an impressive 1,582 Boe/d, with an extremely high oil cut of 86%. By comparison, the average 30-day IP rate for wells in the fourth quarter of 2012 was less than 800 Boe/d. So, in other words, the company has essentially doubled its new well productivity in just one year.
Also important to note is that Penn Virginia's fourth-quarter wells were drilled at an average lateral length of 5,722 feet and completed with an average of 24.3 frac stages. This equates to an average 30-day gross production rate per frac stage of 45.2 Boe/d, up by a whopping 19% compared to the third quarter, largely because of greater use of proppant and continued success with multi-well pad drilling and "zipper fracs."
And despite the increase in proppant amount per stage, the company's average drilling and completion cost per frac stage fell to $380,000 in the fourth quarter, down almost 3% sequentially. In other words, Penn Virginia's well productivity per stage is increasing sharply, while its well costs per stage are falling.
Increased Eagle Ford inventory
In addition to its strong operational in the Eagle Ford, the company also continues to expand its drilling inventory in the play. Thanks to successful downspacing results, Penn Virginia has boosted its Eagle Ford drilling inventory from 895 just a few months ago to approximately 1,125 drilling locations currently, representing an inventory of more than 10 years.
As a result, the company boosted its 3P Eagle Ford reserves from 140 MMBOE pro forma to 170 MMBOE, up by more than 20% in less than a year. Going forward, it plans to continue growing its Eagle Ford position and hopes to amass a total of 100,000 net acres with well over 1,000 undrilled locations through transformational acquisitions such as the one in April of last year, when it boosted its Eagle Ford acreage position by about 38% by purchasing Magnum Hunter Resources' (NYSE: MHR) Eagle Ford properties for roughly $360 million in cash and 10 million shares of common stock.
What's next for Penn Virginia?
In 2014, the company plans to increase its rig count to an average of six drilling rigs throughout the year. To fund this increase in capital expenditures, it plans to sell properties in the Mid-Continent and Mississippi regions. An announcement regarding the sale of these properties will be made by the second quarter.
The increase in drilling activity should result in production growth of 34%-43% over 2013 levels to 25,000-26,800 Boe/d, with the Eagle Ford accounting for 77% of its production. As a result, oil production is expected to grow even more briskly, rising 66%-78% over 2013 levels to 15,600-16,700 Boe/d. This is crucial because it means the company's production will become even more oil-weighted and therefore generate stronger returns.
The bottom line
Having derisked most of its Eagle Ford acreage and expanded its drilling inventory to 1,125 locations, Penn Virginia has an even bigger opportunity in the Eagle Ford than it did before. Given its relatively small size and high degree of leverage to the play, I think Penn Virginia has considerably more upside than larger, Eagle Ford-focused peers and may be an attractive opportunity for investors willing to take on more risk.
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