Penn Virginia: Significant Second-Half Debt Reduction Expected (NASDAQ:PVAC)

Penn Virginia (NASDAQ:PVAC) appears to be on track to reduce its debt by a substantial amount over the second half of 2020. It may be able to pay down its debt by around $80 million over the second half of the year, giving it a decent amount of room under its credit facility.

For 2021, Penn Virginia’s breakeven point appears to be around $48 oil, so at current strip prices, it may be looking at mid- to upper-single-digits production declines to reach breakeven cash flow though.

Q3 Expectations

Penn Virginia expects approximately 18,000 barrels per day in oil production in Q3 2020. This is around 5% less than its average Q2 2020 oil production, reflecting its modest development activity since the crash in oil prices. Penn Virginia plans to complete its five remaining DUCs in Q3 2020.

Based on actual Q3 2020 commodity prices, Penn Virginia would be expected to generate around $69 million in oil and gas revenue in the quarter, along with $17 million in realized gains from its hedges.

Barrels/Mcf

$ Per Barrel/Mcf (Realized)

$ Million

Oil

1,656,000

$40.00

$66

NGLs

292,000

$6.00

$1

Natural Gas

1,263,000

$1.50

$2

Hedge Value

$17

Total Revenue

$86

Penn Virginia projected that it would have approximately $13 million in capex during Q3 2020, which leads to an expectation that it would deliver around $39 million in positive cash flow during the quarter.

$ Million

$ Million

Lease Operating Expense

$9

Production and Ad Valorem Taxes

$4

Gathering, Processing, and Transportation

$6

Cash G&A

$7

Cash Interest

$8

Capital Expenditures

$13

Total Expenses

$47

Penn Virginia also has strong hedges for Q4 2020, so if it spends minimal capex during the quarter, it is probably looking at around $40 million in positive cash flow in Q4 2020 as well.

At the end of Q2 2020, Penn Virginia had $337 million in credit facility debt (net of cash on hand). Thus its 2H 2020 cash flow may reduce that net credit facility debt to approximately $258 million. As well, Penn Virginia still has its $200 million second-lien term loan debt.

2021 Outlook

Penn Virginia estimated that it could maintain production levels in 2021 with a slightly over 1.5 rig drilling program. While it didn’t put a dollar value to the cost of that program, I am estimating that would cost around $205 million.

At a maintenance production level and $40 WTI oil (with no oil differential), Penn Virginia would deliver approximately $299 million in revenues after hedges for 2021.

Barrels/Mcf

$ Per Barrel/Mcf (Realized)

$ Million

Oil

6,570,000

$40.00

$263

NGLs

1,168,000

$7.00

$8

Natural Gas

5,052,000

$2.90

$15

Hedge Value

$13

Total Revenue

$299

With a $205 million capex budget, it is estimated to have $338 million in cash expenditures. Thus it would have around $39 million in cash burn if it wanted to maintain production levels at $40 WTI oil in 2021.

$ Million

$ Million

Lease Operating Expense

$38

Production and Ad Valorem Taxes

$17

Gathering, Processing, and Transportation

$21

Cash G&A

$27

Cash Interest

$30

Capital Expenditures

$205

Total Expenses

$338

Penn Virginia would reach breakeven cash flow (including hedges) at approximately $48 WTI oil in 2021, based on a maintenance capex budget.

Conclusion

Penn Virginia looks set to pay down its credit facility debt significantly over the second half of 2020, potentially reducing it to around $258 million by the end of the year. This would be well below the effective $350 million borrowing limit in place for October 2020.

Penn Virginia’s next concern will be to deal with its $200 million second-lien term loan due in September 2022. It could use mid- to high-$40s WTI oil by late 2021 to be in a decent position to refinance that term loan. Significantly lower oil prices would put it in the position of trying to refinance that term loan with a smaller PDP reserve base.

I am neutral on Penn Virginia at its current price. It does have upside to around $15 with $50 WTI oil and a refinanced second-lien term loan. However, strip prices for 2022 are around $43 right now, and it probably needs better oil prices to reduce the refinancing risk.

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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.

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