Why Are Penn Virginia's Shares Sliding?

Penn Virginia's shares have been falling, but what's behind the declines?

Jun 17, 2014 at 10:52AM

Since releasing its first quarter results at the beginning of May, Penn Virginia's (NYSE:PVA) shares have been falling.

Penn Virginia reported a first quarter loss per share of $0.12, worse than analyst expectations, which called for a loss of $0.06 per share. The shares sold off on the news, but quickly rebounded.

Unfortunately, the company's shares then started to slide again when Penn announced the sale of its Mississippi assets to an undisclosed buyer for a total of $72.7 million. The assets had a net production of around 11.9 million cubic feet of natural gas equivalent per day. The asset sale is expected to close in July.

Nothing to worry about
Now, realistically, this deal is not going to have much of an effect on Penn's outlook. Only a few days before this news was announced, Penn gave a presentation reiterating its commitment to the development of oil fields; this was to be self-funded through the sale of gas assets.

Penn was planning to divest assets worth $250 to $300 million during 2014 to self-fund its development plans. The sale of Eagle Ford gas assets closed in January 2014 for a net of $94 million, and this newest deal should bring the total to $167 million. If anything, this deal was good news.

Some odd news
The market also initially acted badly to Penn's recent offering of $250 million of "depository shares" that can be converted into preferred stock. In other words, the company issued $250 million of stock to be held with institutions in order to fund growth.

In the long term, this extra cash should help Penn's growth. It is now expected that the company will be able to reach its target of owning 100,000 net acres within the Eagle Ford sooner than initially expected. What's more, the additional funding will allow Penn to ramp up oil production by 40% during 2015, as opposed to the 30% originally expected.

However, some analysts have questioned the timing of the funding, as Penn is expected to announce a batch of well results in the near future.

Still, Penn is expecting oil production to increase by 66% to 78% through 2014. The year-end goal is to increase the company's position within the Eagle Ford to a minimum of 100,000 net acres. This extra funding should allow the company to fund this growth.

Overvalued
However, these recent decline have brought Penn's valuation closer to that of its peers. Compared to peers Devon Energy (NYSE:DVN) and Newfield Exploration (NYSE:NFX), Penn currently trades at a enterprise value to earnings before interest, taxes, amortization, and depreciation (EV/EBITDA) ratio of 7.3. In comparison, Devon trades at an EV/EBITDA ratio of 5.4 and Newfield at 7.3.

What's more, Penn trades at a EV/revenue value of 4.6, compared to Devon and Newfield's 3.6 times and 4 times, respectively. This being said, both Newfield and Devon have been considered possible suitors for Penn. There is plenty of speculation that these two larger North American players could make an offer for Penn, as it would allow then to boost production and grab up 80,000 acres in an area that's proven to be very attractive to a larger player.

Foolish summary
Overall, it would appear that Penn's recent declines are nothing to worry about. The company has been raising cash and selling off assets to fund growth, in line with the company's plan to increase output. Over the next few months, Penn should release some impressive results from oil wells currently being drilled.

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Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. 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.

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