Via SeekingAlpha.com

I mentioned a couple times before that Penn Virginia (PVAC) had the potential for outstanding returns, as it could be worth $15 based on WTI oil reaching $50 by 2H 2021.

I took my profits in Penn Virginia though, and believe that the risk/reward equation isn’t noticeably favorable anymore with its stock essentially pricing in a very high probability of $50 WTI oil for 2H 2021 now. Penn Virginia probably needs $50 oil to be able to adequately deal with its second-lien term loan, which matures in September 2022, but needs to be dealt with by June 2022 to prevent its credit facility maturity from springing forward until then.

2020 Outlook At Current Strip

Penn Virginia averaged 26,740 BOEPD (77% oil) in Q1 2020, and then announced that it had halted all drilling and completion activity in early April. The company is deferring the completion of eight wells until late in 2020 and anticipated that it would curtail 12,600 BOEPD in production for May 2020.

I am modeling Penn Virginia’s average production at 23,000 BOEPD (75% oil) in 2020, which would lead to it generating $344 million in revenue after hedges at current strip prices. The company’s near-term financial results have actually been negatively impacted a bit by improved oil prices (compared to a couple months ago), since it is over 100% hedged on oil in Q2 and Q3 2020.

Barrels/Mcf

$ Per Barrel/Mcf (Realized)

$ Million

Oil

6,296,250

$37.00

$233

NGLs

1,154,313

$5.00

$6

Natural Gas

5,666,625

$2.00

$11

Hedge Value

$94

Total Revenue

$344

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If Penn Virginia’s full-year capital expenditure budget is reduced to $110 million (after incurring $79 million capex in Q1 2020), it will end up with $244 million in capital expenditures. Thus, it may be able to deliver $100 million in positive cash flow during 2020.

$ Million

$ Million

Lease Operating Expense

$39

Production and Ad Valorem Taxes

$15

Gathering, Processing, and Transportation

$21

Cash G&A

$27

Cash Interest

$32

Capital Expenditures

$110

Total Expenses

$244

Debt And Borrowing Base

If the company can deliver $100 million in positive cash flow in 2020, this would reduce its credit facility debt to $262 million, not including the effect of any working capital changes. Excluding derivatives, Penn Virginia had a $22 million working capital deficit at the end of 2019.

Penn Virginia’s borrowing base was reduced to $400 million, with another borrowing base reduction to $375 million on July 1. The company must also maintain at least $25 million of credit facility availability between October 1 and its Fall 2021 redetermination.

The company is able to generate a large amount of positive cash flow from its hedges now that it has stopped drilling and completion activity, so I don’t anticipate that its credit facility will be an issue in 2020.

Penn Virginia does likely still need $45+ WTI oil for the first half of 2021, as it will have more limited hedges then, and could use $50+ WTI oil in the second half of 2021, as it will be unhedged at that time.

Those oil prices would set the company up decently to deal with its second-lien term loan. The second-lien term loan currently matures in September 2022 and will trigger a springing maturity of its first-lien credit facility unless extended or repaid by June 2022.

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Conclusion

My estimate of Penn Virginia’s value remains $15 if WTI oil reaches $50 for the second half of 2021. It also likely needs $45 WTI oil for the first half of 2021 to avoid either noticeable production declines or cash burn.

Penn Virginia’s liquidity situation looks fine for now with its ability to pay down its credit facility significantly during 2020. The company offered a great risk/reward proposition when it was trading in the low single digits. At $12 per share though, it has more modest upside based on its estimated value if oil reaches $50 WTI oil for 2H 2021. There is also refinancing risk with its second-lien term loan (maturing in September 2022) if oil remains sub-$50.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.