Microcap Running Away From Gas to Oil in Next Great Texas Boom

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PVA_LogoIt’s simple economics really. Natural gas prices are trading near decade lows. Oil prices are trading at multi-year highs. Yes, it would be better for the U.S. consumer and the economy at large if the U.S., now the world’s largest natural gas producer, increased its uses of this very abundant fuel.

After all, natural gas is cheaper, burns cleaner and we’ve got plenty of it right here in the good old U.S.A. That might yet happen, but for now it’s wishful thinking.

And as a result of oil prices being high and natural gas prices remaining depressed, investors are clamoring for the energy companies they invest in to produce more oil and less gas. It doesn’t matter if it’s Exxon Mobil (NYSE: XOM) or a micro-cap with a $100 million market cap. Investors want less gas and more oil.

That has prompted scores of independent oil and gas producers to focus more on the former and less on the latter. Two prime examples in the large-cap universe are Chesapeake Energy (NYSE: CHK) and EOG Resources (NYSE: EOG). For those looking for a less gas/more oil micro-cap play, one name to consider is Penn Virginia (NYSE: PVA), headquartered in Radnor, PA and a member of the S&P SmallCap 600 Index.

 

Eagle Ford Shale Next Great Texas Oil Boom

Pennsylvania-based Penn Virginia is looking to focus solely on its acreage in the oil area of the Eagle Ford Shale in South Texas. In case you haven’t heard, Eagle Ford is the next great Texas oil field.

Some estimates say there are billions, with an “S,” barrels of reserves there. That’s good for Penn Virginia because the company owns about 23,100 net acres in Gonzales and Lavaca counties and that number is expected to jump over the next year.

Insiders Buying Shares

Penn Virginia also has properties in Appalachia, the Mid-Continent and Mississippi, but this company is becoming an Eagle Ford story and that helps to explain why company executives have been spotted buying shares of the stock in recent months.

Not surprisingly, shares of Penn Virginia have been hammered in unison with natural gas prices over the past year. The stock is down more than 60% in that time, so it’s going to take a certain level of patience and temerity to stick with this stock as the company works its way toward “more oil, less gas.”

40% Upside

The good news is that Penn Virginia currently trades slightly above $5, (bouncing nicely off a 52-week low of $3.92 on $4/10) and the average analyst price target is almost $7, implying upside of almost 40% from current levels.

Stifel Nicolaus upgraded Penn Virginia to “buy” from “hold” with a $7 price target recently.

In Gonzales county, the company “puts its 30 day rate from 26 wells (those wells with enough history to date) as averaging 675 BOEPD (89% oil, 5% natural gas liquids); nice wells that on current pricing yield revenues of roughly $1.8 mm in their first month and should pay out in less than 12 months,” according to analyst Steve Zachritz.

Bottom line: Penn Virginia is cheap relative to comparable companies; analyst and institutional investment communities do not yet fully appreciate the Penn Virginia oil story; the company has suspended gas production activities in the Marcellus Shale and those properties could be sold to enhance the balance sheet (which…frankly, needs to be enhanced) AND the stock currently yields 4.5%.

All that considered, it’s fair to say there’s more to look forward to with Penn Virginia than there are reasons to ignore this microcap play.

Mike Casson
Executive Editor

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