Short-sellers have been actively targeting the stock of independent oil and gas producer Penn Virginia (NYSE: PVA) this year. As the following chart shows, 28.2% of the company's outstanding shares are currently held short.
The company's short interest has steadily risen over the past year. That being said, I don't think it's a good idea to join in and short Penn Virginia's stock. Here's why.
Loaded with oil
Penn Virginia has refocused its operations to basically become a pure play on the growth of the Eagle Ford shale. Almost 100% of the company's capital investments these days are directed toward the shale, where it built a 101,800 net acre position in two top oil-producing counties. That position is expected to fuel 42%-49% oil production growth this year, with output expected to surge another 45%-60% next year. Very few companies are growing oil production as fast as Penn Virginia.
This focus on oil production growth has more than doubled the company's cash margins per barrel of oil equivalent from just 2011, as the following slide shows.
Source: Penn Virginia Investor Presentation.
Those higher margins are providing the company with more cash flow, enabling it to continue growing production at a healthy clip. That's not exactly the recipe for disaster that a short-seller would want to see, nor is it the only potential positive catalyst for the stock.
Soros wants a sale
in fact, short-sellers might be the ones heading for a disaster as billionaire investor George Soros is pushing for the company to sell itself to the highest bidder. In June, Soros Fund Management wrote a strongly worded letter to Penn Virginia demanding it be put up for sale; this would be the "optimal means to maximize value," as new owners could do a better job of maximizing the value of the company's position in the Eagle Ford shale, according to Soros. He believes other operators with larger scale would have lower capital costs, suggesting that Penn Virginia's assets would be more valuable to another company than if developed by Penn Virginia.
There likely would be no shortage of buyers if the company pursued a sale. As shown on the map in the following slide, Penn Virginia is concentrated in the eastern portion of the play.
Source: Penn Virginia Investor Presentation.
It's a prime position in the oil-rich window of the shale that would benefit any number of buyers. However, two potential buyers really stand out: Devon Energy (DVN -0.46%) and Encana (OVV -0.43%). Devon Energy is a recent entrant to the Eagle Ford shale, having just spent $6 billion to acquire 82,000 net acres in DeWitt County and Lavaca County, Texas. That position is in close proximity to Penn Virginia's acreage, so Devon could notably scale its position by acquiring its peers.
Encana likewise just added the Eagle Ford shale to its portfolio in a $3.1 billion deal. Its position is just to the west of Penn Virginia's, so Encana too could achieve significant scale with an acquisition. Another reason why Encana is a likely candidate is because it is now, per Bloomberg, loaded with cash that it plans to use to bulk up on oil.
Investor takeaway
The combination of a strong oil growth position in the Eagle Ford shale and an activist investor pushing for a sale is a recipe for disaster for Penn Virginia short-sellers. Furthermore, even if a sale never materializes, this is still a strong oil growth company. That should be reason enough for potential short-sellers to avoid this stock.
