May 02, 2019 - 11:20pm EST by
2019 2020
Price: 41.00 EPS 9.14 11.68
Shares Out. (in M): 15 P/E 4.4 3.5
Market Cap (in $M): 613 P/FCF 0 0
Net Debt (in $M): 521 EBIT 366 454
TEV ($): 1,150 TEV/EBIT 3.1 2.5

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Penn Virginia is an Eagle Ford (Gonzales, Lavaca, Fayette, DeWitt counties) shale oil operator
that has taken a tour through Chapter 11 and generates scant interest from generalist investors
in what is the worst energy tape since 2016 (arguably sentiment is worse now vs. then, when
crude fell below $30). The energy landscape is littered with broken E&Ps trading at less than 4x
EV/EBITDA and many deserve their fate as they have leveraged up to drive production growth
perpetuating the boom/bust nature of the oil market. Many have now committed to spending
within cash flow but 1st qtr results mostly have featured front loaded cap ex spending plans
leading to a broad sell off in the entire E&P segment. Is PVAC just another pie in the sky shale
growth story? I believe it is not. PVAC has already reduced drilling activity and is on track for
FCF later this year. I was first attracted to the name given the severe dislocation following a
PVAC shareholder revolt against its merger with DNR. Since the DNR deal was scuttled by a
number of holders, shares have only become graveyard for these activists who broke up the
deal. The most vocal player, Mangrove Partners (a firm I hold in very high regard), holds a 10%
stake and a board seat now and is likely going to be able to dictate strategic plans alongside
other holders with board seats.
PVAC is somewhat unique in the small cap shale space as they are on track to generate
modest FCF this year while growing 20-30%. In addition, the other main differentiating factor revolves around
planned spending on potential EOR projects that could materially alter the reserve profile of the
The following comments are from combined DNR-PVAC merger presentation:
The trends in projects in the same thermal maturity zones leads right to Penn Virginia's
acreage, with a dozen EOR projects underway next door in Gonzales County.
Incremental CapEx to implement EOR is relatively low, in the $1 million to $1.5 million
range per well, delivering strong economics.
The performance of these EOR projects has been remarkable, with a projected
increase in EUR ranging from 30% to 70% above primary recovery. Applying that
factor across the prospective portions of Penn Virginia's acreage, we believe that
incremental recovery of 60 million to 140 million barrels is possible.
PVAC 2018 review and 2019 Outlook
The company spent $425M in cap ex last year vs. EBITDA of $300M to drill 53 wells. The drilling
activity led to 120% production growth with 2018 exit rate production of 25.8K BOE (77% oil,
12% NGL). 2018 Average production was 21.6K BOE/D. On a joint call with DNR, PVAC CEO
Brooks said he expects a 2019 decline rate of exiting production of 35-40%. This equates to
8.7K BOE/D off the avg production rate in 2018.
The company plans to utilize a two-rig drilling program in 2019 vs. a 3-rig program in 2018.
However, for most of the 1st qtr they had 3 rigs running as they plan to drill about 10 of their
estimated 30 wells in 2019 in the 1st qtr. Recent conversations with the company indicate they
plan to drill about 30 wells in 2019 with the majority being XRL’s (xtra long laterals) and
complete about 35 wells. I have modeled a generic PVAC well with IP30 of 1,300 BOE/D with 
75% decline in the first year, 40% in 2nd year, 30% in 3rd, 20% thereafter for 3 years and 12%
terminal to year 10.  This is far more conservative than typical assumed type curves.
Recent well results have outperformed this type curve assumption. The well cadence in 2019
will feature 10 wells drilled and completed in 1st qtr and another 8 9 in the second qtr
according to PVAC IR. This perhaps will allow the company to meet its 30% growth targets. The
company assumed much better initial rates of production from XRL wells that deliver IP30 rates
north of 2K BOE/D last year.
Whether the company hits 30% growth numbers or comes in at 20% is not material to the longer term
thesis. The EUR on the generic Eagle Ford well is about 550K BOE. This is materially lower than PVAC
assumptions and frankly lower than all EURs cited by other Eagle Ford operators (EOG, MUR, MGY etc ).
I have struggled reconciling any of the EUR’s cited by shale players in the Eagle Ford, Permian, or any
basin for that matter given the dramatic decline rates. As a result, I have generally favored conventional
oil plays vs. shale. What differentiates PVAC from other shale plays is the EOR opportunity which is not
getting any value at this point. EOG has been successful using natural gas for EOR in Eagle Ford vs. CO2.
DNR planned to use CO2 given their existing supply and experience.
Here is a link describing recent EOR success, particularly in Eagle Ford by various operators:
PVAC Challenges and Opportunities
The bear thesis on PVAC continues to revolve around its limited drilling inventory compared to other
operators. So, while the name looks ultra-cheap on EV/EBITDA basis at less than 3x 2019 estimates,
limited reserve life is certainly a valid argument. In my opinion, the EOR opportunity would put this
argument to rest. Proved reserves at year end were 123 MMBOE. Reserves would have been materially
higher if the company’s shift in drilling to the more lucrative Southeastern portion of its acreage had not
reduced previously proved reserves by 13.9M MMBOE (given limited capital these previously proven
reserves will no longer be developed in next 5 years and were removed from year end PUD). Drilling
locations at year end were 450 with 110 locations being XRL’s. Utilizing a 3-rig program, drilling 50 wells
a year, the bear case shows up quickly because in 9 years the company’s reserves would be
extinguished. EOR materially alters this picture. However, in the next year material EOR spending is not
likely to be competitive capital wise with further horizontal drilling (Mangrove Cap will force discipline
on management and they will not be able to fund EOR with additional borrowing as they are going to be
forced to operate within cash flows).
DNR agreed to buy the company to access its EOR potential which according to their analysis can add an
incremental 60-140MMBOE in reserves. I believe at current levels we are getting this option for free as
current EV is well below $1.6B in standardized value at year end strip pricing. Current strip of $62 WTI
and $2.50 gas is about 8% lower on a BOE value basis (factoring the much lower economic value of Nat
Gas and its decline from $3.15 at year end). Current standardized value by my calculations is likely closer
to $1.4B which yields a per share NAV of about $60. While there are numerous E&Ps trading below
their NAV’s and while I view these numbers suspiciously, I do firmly believe the company’s NAV is real
given they can develop their assets from internal cash flows. In addition, we should see upside to these
numbers as over the past 3 years it has increased its proved reserves at a prolific rate from 49.5MM in
2016, to 72.6MM in 2017, and 123MM in 2018.
LLS Pricing, Oil Mix, and Takeaway Constraints
PVAC production also has the benefit of being about 85% liquids with oil at 75%. In addition, the
company receives LLS pricing on its oil which provides a modest uplift to WTI pricing after all discounts
from the well head. 80% Of its oil is on pipe with Republic Midstream and 20% on truck to nearby
terminals in South Texas. The company doesn’t face any takeaway constraints and has ample
incremental takeaway capacity for additional oil produced in the Southeastern portion of its acreage.
Closer Look at EOR Opportunity
The company had 450 producing wells at year end with more than 300 being candidates for EOR
according to joint presentations with DNR. PVAC IR confirmed the company is moving forward with EOR
projects despite the DNR deal falling apart. It has hired a team from MRO and has allocated $15MM in
cap ex spend this year to facilitate its first pilot EOR wells. EUR economics are very compelling although
they don’t provide the instant returns of horizontal drilling. Estimated cost per well is $1M - $1.5MM
which yields strong economics at current pricing. Utilizing Co2 or natural gas to flood the wells is costly
on a LOE basis ($25 LOE) but still highly economic given limited cap ex and low decline production that
follows. The company will hopefully provide much more detailed projections as the year progresses.
EOG has released some economics on some of its EOR well results. Data on over 100 wells using Rich
hydrocarbon gas floods have boosted output on existing wells anywhere from 40 to 130 barrels per day
with an average of about 80 barrels per day in the 1st year. Observed decline rates after the first year of
EOR production thus far have been in the 5% range per year. The data goes back to the first pilot EOR
wells in 2014. At 80 incremental barrels per day we get an additional ~30K barrels per year. Using $60
LLS pricing and $25 LOE which includes GP&T, the cash flow from these EOR wells is about $1.05M in the
first year. Given observed shallow decline rates going forward of about 5%, the economics look
compelling. These wells can build a large base of shallow decline production from which the company
can shift towards returning cash to holders as well as extend its reserve life dramatically. This is the
long-term opportunity for patient holders. Another partner like DNR can be brought in to accelerate
this development.
Current valuation
PVAC had $520M in debt at year end and the equity at $41 is worth about $625M for a total EV of about
$1.15B. The PV-1 of its PDP was $1.03B at $65 WTI and $825M at $55 WTI. At these levels we are
paying very little for its PUDs despite a strong management track record in developing the asset in the
past two years. Based on current strip and despite the company hedging out half its oil production at
about $57, I estimate 2019 EBITDA hitting about $380MM. Total cap ex will likely hit about $330MM
this year (the few sell side estimates have lower cap ex estimates but may not be figuring spend on EOR
pilot projects). Interest costs will be about $35MM this year. This leads to modest $15MM in FCF this
year despite 25 - 30% production growth.
Utilizing a 2-rig program in 2020 and beyond, the company should be able to generate modest
production growth without any benefit from EOR for at least the next two years. Drilling 30-35 wells per
year extends its reserves life considerably vs. the 50 well pace. However, the drilling slowdown has the
effect of lowering PV10 value given cash flows would be spread out over a longer period of time. Small
cap E&P’s need a balanced approach between returning “profits” to shareholders or putting it back into
the ground and potentially realizing much lower prices in the future thereby destroying capital.
Depressed multiples are understandable given this dynamic. This is a point where I believe PVAC will
differentiate itself.
I belive that shares should trade at their current NAV of $60 as 25% growth upside funded from internal cash 
flows merits this valuation.  Further upside could double price from here as company expands 
its proven reserves
1)Mangrove’s position on the board along with KLS, SVP among others should create a rational balance
between return of capital and production growth.
2)Adding a partner to help fund a much faster EOR development schedule
3) Potential strategic merger with another Eagle Ford operator


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


1)Mangrove's position on a 6 person board with only one insider and fellow holder KLS should create a logical balance between capital return and production growth

2)Bringing a partner to help accelerate its EOR development with increased capitl/technical expertise

3) Potential strategic merger with another Eagle Ford operator


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