What Does Soros See in This Company That Others Don't?

Soros recently announced his fund owns 9.2% of Penn Virginia; does he see something investors have been missing?

Mar 28, 2014 at 1:40PM

What does George Soros see in Penn Virginia Corp (NYSE:PVA)? this company hasn't posted a profit in the past five years! That hasn't stopped Soros from buying up 9.2% of Penn Virginia's shares though. Should you follow suit or has Soros made the wrong call? 

All about the Eagle Ford
The only reason why Soros would take such a large stake in Penn Virginia is because of its Eagle Ford assets. To be fair, the Eagle Ford has treated Penn Virginia very well, which is why Penn Virginia is betting it all on the play this year: 98% of its budget is going toward the Eagle Ford.

Through several acquisitions, Penn Virginia collected 84,300 net acres in the Eagle Ford, but its ultimate goal is to have a 100,000 net acre foothold in the region. To do so, Penn Virginia has budgeted $40 million-$70 million toward purchasing additional acreage. By growing its presence in the Eagle Ford, Penn Virginia is guiding for oil production to increase 72% this year. 

To achieve such high levels of growth, Penn Virginia has been utilizing the best drilling techniques around. After growing initial and 30-day production rates per frac stage by ~25% and ~33% respectively last year, Penn Virginia is doing its best to make the most out of each well. 

A trend investors should love
Innovation in the Eagle Ford is widespread, which points toward a bullish trend forming in the area for E&P players. EOG Resources (NYSE:EOG), the largest crude producer in the Eagle Ford, has been able to significantly boost the ultimate recovery rate per well in the region. To do so, EOG Resources increased the average initial production rate per well by 10.5% in 2013. EOG Resources is bringing better wells online, but it is also keeping a tight lid on costs. Completed well costs fell by $800,000 last year to $6.1 million, and management is guiding for that to fall even further, down to $5.5 million this year. 

Penn Virginia plans on following suit. By using pad drilling and zipper fracs, completion costs have trended downwards by ~20% while total well costs fell ~25% last year. Regardless of size, E&P players in the Eagle Ford are benefiting from better industry standards and drilling techniques. Cheaper, more efficient wells translate to a fatter bottom line for shareholders. 

Cash flow problems
Unfortunately for Penn Virginia, it seems to have a problem living within its means. Over the past five years Penn Virginia has posted a net loss each year, even as EBITDAX grew from $179.7 million to $316.2 million over that time period. To fund a continuous loss someone has to be footing the bill. In this case, Penn Virginia issued senior notes, $300 million of which is due in 2019 and $775 million is due the year after. On top of issuing debt, Penn Virginia also took out $206 million from its $425 million revolving credit facility. 

Map of Penn Virginia's assets

Images

Source: Penn Virginia's Website

To get its interest expenses under control, Penn Virginia plans on divesting non-core assets so it can pour all its cash into the Eagle Ford while paying down debt. Penn Virginia is going to divest its Granite Wash and Selma Chalk assets sometime in the middle of 2014, after it sold off its Eagle Ford gas gathering assets for $100 million at the beginning of the year. Through these asset sales, Penn Virginia hopes to raise between $250 million-$300 million to pay down its credit revolver and fund operations. Beyond asset sales, Penn Virginia is guiding for its EBITDAX to grow to $440 million-$485 million this year to help close the gap, as Penn Virginia is going to spend a little over $600 million this year.

Worth it
While Penn Virginia will lose 24.8 MMBoe of proven reserves and 4,200 boe/d in production by divesting those two assets, but that's nothing compared to what the Eagle Ford can offer. Penn Virginia has 75.6 MMboe of proven reserves in the Eagle Ford, which pales in comparison to the possible 190 MMBoe of recoverable resources Penn Virginia could be sitting on top of in Southern Texas. To makes things even better, 75% of Penn Virginia's Eagle Ford reserves is oil and 13% is NGLs, making each barrel all the more valuable.

Foolish final thoughts
What does George Soros see in this company? Massive upside in the Eagle Ford. Several analysts have speculated that Penn Virginia could be sold to a larger oil producer, like EOG Resources, to gain a stronger foothold in one of America's best shale oil plays. I'm not saying you should bank on Penn Virginia being sold for a hefty premium, but due to its relatively small size (market cap of around $1 billion) versus its peers (EOG Resources has a market cap of $52 billion), it seems that could be a possibility, especially since George Soros has taken such a large stake in the company. 

Even if George Soros' end game isn't to get management to sell the company, Penn Virginia still has a lot to offer investors. Only 29% of its Eagle Ford acreage is developed, leaving room for massive reserve upside. Penn Virginia is also steadily moving toward a more liquids-weighted production mix. Management is calling for Penn Virginia's production mix to shift from 58.4% liquids in the first quarter of 2013 to 75% in 2014, which will propel margins upwards and help alleviate its funding problems.

The biggest downside to Penn Virginia is that it isn't a profitable company yet and carries a heavy debt burden. Even so, investors who are willing to tough it out could stand to make market-beating returns. Asset sales and the building of an oil gathering system in the Eagle Ford create plenty of catalysts this year, but the biggest catalyst of all would be Penn Virginia achieving fully self-funded operations by 2016-2017. If that happens the sky's the limit, assuming management keeps a watchful eye on debt maturing as well.

More ways to profit from the American energy boom
You already know record oil and natural production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

 

Callum Turcan has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers