Penn Virginia (PVAC) Update - April 20

[dan_s]

Like most of the small-caps, Penn Virginia Corp. (PVAC) has very little Wall Street coverage. One reason that companies like SilverBow Resources (SBOW) and PVAC are trading at insanely low multiples of cash flow is because they have low share counts and low trading volume. Lots of large funds won't buy stocks that have low trading volume for FEAR that their buying will jack up the price and if they need to sell there won't be enough buyers.

This creates situations like this where upstream companies are trading below net asset value. Patient investors know that eventually the valuation gap must be filled.

Why NOW is a good time to buy PVAC: It is "off the radar screen", but won't be for long. It is clear to me that very few investors / fund managers are aware of how significant Penn Virginia's "Juniper Transaction", that closed on January 15th, is to this small-cap. Juniper contributed $150 million in cash and some producing oil & gas assets that recapitalized the balance sheet and set Penn Virginia up to generate close to $7.00 of operating cash flow per share this year. More important is the fact that this year's drilling program will be fully funded by operating cash flow. Penn Virginia's 3-31-2021 balance sheet is going to look MUCH BETTER than their 12-31-2020 balance sheet.

The only negative that I see is that they have some low priced oil hedges in Q1 and Q2 that will keep their realized 1H 2021 oil prices more than $10/bbl under the market price. Most of their "Bad Hedges" expire at the end of June. With their oil production increasing, more unhedged oil should push their realized oil price up toward $60/bbl by year-end.

My forecast/valuation is based on the mid-point of their updated guidance, but with their new wells exceeding the pre-drill type curves I expect them to produce near the top of their guidance. They should exit 2021 with production near 27,000 Boepd (~80% crude oil).