Should You Join This Billionaire's Bet on an Energy Buyout?

Source: Marathon Oil Corporation.  

Yesterday it was revealed that billionaire investor George Soros had acquired a 9.18% stake in Penn Virginia Corporation (NYSE: PVA  ) . His intention isn't to buy and hold the stock of this fast-growing energy producer. Instead, he believes the company should explore strategic alternatives, which could lead to the company selling itself or some of its assets to the highest bidder.

Why Penn Virginia?
This isn't the first time it has been suggested that Penn Virginia should put up a for sale sign for some or all of its assets. Analysts and investors alike see the company's very promising oil-rich assets in the Eagle Ford Shale as a tempting target for a larger competitor.

However, in addition to its acreage in the Eagle Ford Shale, Penn Virginia has other assets spread around the country, as the following map shows.

Source: Penn Virginia Corporation Investor Presentation (link opens PDF).

Selling the assets outside of the Eagle Ford could be one strategic alternative. It would provide the company with cash to reinvest in the Eagle Ford or pay down debt. Further, it would transition the company into a pure-play on the Eagle Ford, though given that more than 90% of its capital is already spent on that one play, it's basically an Eagle Ford pure-play already.

Speaking of the Eagle Ford, with 79,500 net acres and more than 1,100 future drilling locations, Penn Virginia has built a strong position in the fast-growing shale oil play. As the following slide shows, the company's acreage position is right in the middle of the oil and condensate-rich windows of the play.

Source: Penn Virginia Corporation Investor Presentation (link opens PDF).

Because of that position, the company expects its oil production to grow 66%-78% this year alone. Further, Penn Virginia continues to get better in developing the play, as its initial production rates are increasing while its well costs are falling. That has the company enjoying a 64%-74% pre-tax internal rate of return with $100 oil. These assets by far hold the most value to a strategic buyer.

What strategic buyer might be interested?
While a sale of Penn Virginia is pure speculation at this point, the company's assets are in a highly desirable part of the Eagle Ford. Devon Energy (NYSE: DVN  ) , for example, recently paid $6 billion to acquire a position in the Eagle Ford, with much of its acreage adjacent to Penn Virginia, as the map above details. Because of that, it's not out of the realm of possibilities that Devon Energy could be interested in expanding its position by acquiring Penn Virginia's Eagle Ford assets as well.

EOG Resources (NYSE: EOG  ) or Marathon Oil (NYSE: MRO  ) also would make some strategic sense here. Both have acreage that's adjacent to Penn Virginia's acreage. Because of that either could look to increase scale by adding prime oil-rich acres in the Eagle Ford. Other potential buyers could be a Bakken Shale focused producer that's looking to diversify, or an international buyer that's looking to make a big move in the Eagle Ford. Realistically, there would likely be a lot of bidders if Penn Virginia does put itself or its Eagle Ford Shale assets up for sale.

All of that being said, unless the company is overwhelmed with an offer, I doubt it would sell out at this point. It has an Eagle Ford Shale focused growth plan in place already that could fuel tremendous future value creation for investors. On the other hand, selling its non-Eagle Ford Shale assets might be on the table.

The Granite Wash/Mid-Continent, Marcellus/Appalachia, and Selma Chalk/Mississippi assets could all be a tempting target for an income focused MLP. The fact that all three assets are more than 69% developed means there isn't a lot of growth left. Meanwhile, the East Texas assets could be a solid buy for a natural gas focused producer given that these assets are only 30% developed. While none of these assets would fetch top dollar, all probably would be better off with another producer.

Investor takeaway
Penn Virginia clearly has upside from pursuing strategic alternatives. That said, I'm not entirely sure selling its Eagle Ford assets is something the company is likely to do at this point, nor is it in the best interest of investors. It's still early in developing these assets, which could fuel a lot of future value to investors. On the other hand, shedding its non-core assets does make a lot of sense, as it would free up a lot of cash that could be invested to grow its more promising assets in the Eagle Ford Shale. Because of that, I think there's still some tempting upside from here for investors interested in following George Soros.

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