Brean Murray, Carret & Co. analyst Raymond Deacon initiated coverage of Penn Virginia Corp. (NYSE:PVA) with a "Buy" rating and $10 price target, equal to 75% of his risked net asset value that assumes mid-cycle NYMEX benchmark prices of $85/Bbl crude oil and $4.00/MMBtu natural gas.
Deacon said proceeds from the company's anticipated Granite Wash divestiture should shift market focus from liquidity concerns to the value of its Eagle Ford oil window acreage.
The sale announcement, expected in early 3Q, provides the most impactful near-term catalyst, followed by Eagle Ford acreage de-risking from the 4 Lavaca County and 17 Gonzales County wells that PVA plans to drill in the remainder of 2012.
The company's 55-77% year-over-year 2012 oil production growth guidance looks conservative by about 25% compared to Deacon's Eagle Ford build-up model. His thesis on PVA is that consistent Eagle Ford well results, de-risking in Lavaca County, and beats on crude oil production volumes this year provide a clear path to value accretion once the company's Granite Wash sale is consummated.
PVA's 2-rig Eagle Ford program adds 2 MBbld/d of net daily oil production by 4Q in the analyst's build-up model, versus guidance for flat to about 0.2 MBbl/d growth. He views liquids production guidance as highly conservative and expects oil production beats to be a positive driver for PVA shares over the course of the year.
Deacon assumes that PVA drills an additional 17 Gonzales County and 4 Lavaca County wells, consistent with its 32-well 2012 Eagle Ford drilling plan, and that results remain in line with the 645 Boe/d average 30-day IP rate (about 400 MBoe EUR) from 42 wells drilled to date.
The analyst's net asset value (NAV) assumptions look very conservative based on individual well results and acreage derisking. Initial results from PVA's first 2 Lavaca County results were positive; if successful, results from 4 follow-up wells this year should de-risk at least ~40 gross drilling locations and bring total undrilled inventory to ~135 gross locations (before downspacing).
The first 2 Lavaca wells came online at 922 and 709 Boe/d, respectively, with 92% liquids cut above about 85% expectations. Deacon's value PVA's about 8,000 net acres at $2.50/share ($14,600/acre) and see $2.50/share of upside from de-risking this year. In his view, visibility on repeatability should price this asset into the shares.
Premium pricing on Eagle Ford crude production and downspacing potential build conservatism into the analyst's asset valuation. PVA currently sells Eagle Ford crude at $2-12 premium to WTI net of transport costs versus $0 differential in his NAV; $8 premium adds $2/share to his NAV.
Deacon assumes 90-acre spacing in Gonzales County, versus PVA's plans to drill at 65-80 acres; going to 65 acres in his NAV adds $4/share to his NAV and adds about 50 gross drilling locations.
The analyst said increasing drilling efficiency and modified completion designs driving cost reductions and improved economics in the Eagle Ford.
PVA has reduced development well costs in Gonzales County to $7.5 million in 1Q, from about $10.5 million initially; self-sourced ceramic proppant and 50%/50% sand/ceramic completions driving bulk of savings. PVA expects to save an additional $500,000/well from pad drilling in 2013, which would add $1/share to Deacon's NAV.
The shares of the independent oil and gas company is trading 18.05% higher at $5.69 on Monday. Providing quality reviews, articles and writings on crude oil, energy and gas online.
No comments:
Post a Comment