Legendary investor George Soros, known as the man who broke the Bank of England, recently revealed that his investment vehicle had acquired a near 10% stake in Penn Virginia Corporation (NASDAQOTH:PVAHQ).
Soros has built his reputation as a value investor, and this time it's no different. Indeed, Soros has stated that he believes Penn is undervalued and should explore strategic alternatives in order to unlock value from the company's oil-bearing Eagle Ford assets.
But since the beginning of this year Penn Virginia's shares have already risen approximately 81%, so is it too late for investors to follow Soros' lead?
What does Soros see in the company?
George Soros has stated that he wants to discuss options for increasing value with Penn's board of directors. These "options" include the possibility of finding a possible suitor for the company; essentially, Soros is trying to get Penn Virginia to sell itself.
Penn Virginia's assets include 80,000 acres in the Eagle Ford area, and based on the company's current market capitalization and estimated value of oil contained within the acreage, Penn Virginia's assets are undervalued in comparison to the majority of the company's peers.
But it's not as if Penn Virginia's assets are junk either. There are currently 1,100 remaining drill locations on its acreage, and the company continues to acquire land, targeting a minimum of 100,000 net acres by year-end. In addition, Penn Virginia is working hard to get this land to yield results. Penn Virginia's management plans to drill 53 net wells during 2014, which will be for the most part self-funded with asset divestments.
Nevertheless, the fact remains that Penn Virginia is essentially still an exploration company and most of the value lies within the company's acreage. Analysts currently forecast a small profit of $0.07 per share for 2014, although this jumps to $0.44 per share during 2015.
The value then really lies in Penn Virginia's acreage, which is currently trading at a value of $13,100 per acre. Now, this is where the value is to be found. Indeed, at the end of last year, Devon Energy (NYSE:DVN) acquired similar Eagle Ford assets belonging to GeoSouthern Energy for $6 billion in cash.
Devon acquired 82,000 net acres of Geo, which at the time were producing 53,000 barrels of oil equivalent per day with at least 1,200 undrilled locations. Total risked recoverable resource on the acreage was estimated at 400 million barrels of oil equivalent, the majority of which is proved reserves.
In comparison, Penn is guiding for 25,000 to 27,000 barrels of oil production per day from its fields during 2014, while the company's acreage has 190 million barrels of proved and probable reserves, around half of which are proved.
Taking the data relating to the Devon/Geo deal into account, it's easy to assume that based on its reserves and assets, Penn Virginia is worth more than its current market cap.
Who would be the suitor?
Even though Penn Virginia looks attractive on an asset-value basis, it remains to be seen if any of the company's peers would want to acquire the company.
But EOG Resources (NYSE:EOG), one of the largest independent oil and gas companies within the U.S., could prove to be a good suitor for the company. EOG already has a huge presence within the Eagle Ford region -- actually it could be said that the Eagle Ford prospect is where EOG's largest presence is.
EOG has six offices in the region and owns several oil rail terminals facilitating shipment to the Gulf Coast. Further, EOG plans to drill 520 net wells in the Eagle Ford during 2014 with 26 rigs, and management is aiming to reduce drilling time below 12 days per well. EOG is by far the largest oil producer and acreage holder in the Eagle Ford.
So, it would seem as if on an infrastructure basis, EOG and Penn Virginia are well placed to merge. Additionally, due to EOG's heavy presence in the Eagle Ford region there would be significant synergies to be gained from the deal as well. But can EOG afford it?
Well, quite simply yes. Specifically, at the end of 2013, EOG had $1.3 billion in cash on its balance sheet and total debt of $5.9 billion. Net debt to equity was only 30% but raising enough cash to buy out Penn Virginia for, let's say, $2 billion would only increase net debt to equity to approximately 50% -- not bad considering the acreage EOG would be acquiring. I should also mention that during 2013, EOG generated $7.3 billion in cash from operations, which makes Penn Virginia's estimated $2 billion price tag look tiny.
So all in all, based on previous deals it would appear that Penn Virginia's assets are still worth more than the company's current market capitalization, despite recent share price gains. Specifically, based on the Devon-Geo deal it would be reasonable to assume that Penn Virginia could be worth in the region of $1.5 billion to $2 billion if a peer decided to buy out the company.