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| PVA > SEC Filings for PVA > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following discussion and analysis of the financial condition and results of operations of Penn Virginia Corporation and its subsidiaries ("Penn Virginia," the "Company," "we," "us" or "our") should be read in conjunction with our consolidated financial statements and the accompanying notes in Item 1, "Financial Statements."
Overview of Business
We are an independent oil and gas company primarily engaged in the development, exploration and production of natural gas and oil in various domestic onshore regions including East Texas, the Mid-Continent, Appalachia, Mississippi and the Gulf Coast. We also indirectly own partner interests in Penn Virginia Resource Partners, L.P., or PVR, which is engaged in the coal and natural resource management and natural gas midstream businesses. Our ownership interests in PVR are held principally through our general partner interest and our 51.4% limited partner interest in Penn Virginia GP Holdings, L.P., or PVG. As of September 30, 2009, PVG owned an approximately 37% limited partner interest in PVR and 100% of the general partner of PVR, which holds a 2% general partner interest in PVR and all of the incentive distribution rights.
Although results are consolidated for financial reporting, Penn Virginia, PVG and PVR operate with independent capital structures. As such, cash flow available to us from PVG and PVR is only in the form of cash distributions declared and paid to us on account of our partner interests in those entities. We received cash distributions from PVG and PVR of $34.4 million in the nine months ended September 30, 2009 and $21.5 million for same period of 2008. These distributions were primarily used for oil and gas segment capital expenditures.
The following diagram depicts our ownership of PVG and PVR as of September 30, 2009:
[[Image Removed]]
Selected Financial Data-Consolidated
The following table presents summary operating results for the three and nine
months ended September 30, 2009 and 2008:
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Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(in thousands)
Revenues $ 195,163 $ 385,612 $ 578,240 $ 995,161
Expenses 289,994 (263,285 ) 697,027 (706,477 )
Operating income (loss) (94,831 ) 122,327 (118,787 ) 288,684
Other income (expense)
Interest expense (22,784 ) (13,221 ) (50,332 ) (35,313 )
Derivatives (2,529 ) 125,132 8,478 (4,387 )
Other 348 (4,088 ) 2,274 (782 )
Income tax benefit (expense) 50,405 (78,921 ) 69,587 (74,352 )
Net income (loss) (69,391 ) 151,229 (88,780 ) 173,850
Less net income attributable to
noncontrolling interests (10,509 ) (28,276 ) (20,512 ) (52,252 )
Income (loss) attributable to
PennVirginia Corporation $ (79,900 ) $ 122,953 $ (109,292 ) $ 121,598
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We are engaged in three primary business segments as follows:
• Oil and Gas-crude oil and natural gas exploration, development and production.
• PVR Coal and Natural Resource Management- leasing of coal properties in exchange for royalty payments and other land management activities.
• PVR Natural Gas Midstream-natural gas processing, gathering and other related services.
We operate our oil and gas segment and PVR operates the coal and natural resource management and natural gas midstream segments. Other primarily represents corporate functions such as interest expense, income tax expense, oil and gas segment derivatives and elimination of intercompany sales.
The following table presents a summary of certain financial information relating to our segments:
PVR Coal
and Natural PVR Natural
Resource Gas Eliminations
Oil and Gas Management Midstream and Other Consolidated
(in thousands)
For the Nine Months Ended
September 30, 2009:
Revenues $ 176,092 $ 108,575 $ 353,228 $ (59,655 ) $ 578,240
Cost of midstream gas purchased - - 285,129 (56,550 ) 228,579
176,092 108,575 68,099 (3,105 ) 349,661
Operating costs and expenses 128,014 18,486 35,081 16,879 198,460
Impairments 96,828 - - - 96,828
Depreciation, depletion and
amortization 119,242 23,557 28,414 1,947 173,160
Operating income (loss) $ (167,992 ) $ 66,532 $ 4,604 $ (21,931 ) $ (118,787 )
For the Nine Months Ended
September 30, 2008:
Revenues $ 383,391 $ 111,010 $ 607,585 $ (106,825 ) $ 995,161
Cost of midstream gas purchased - - 513,778 (105,531 ) 408,247
383,391 111,010 93,807 (1,294 ) 586,914
Operating costs and expenses 97,484 20,417 27,492 19,356 164,749
Depreciation, depletion and
amortization 90,849 22,733 18,589 1,310 133,481
Operating income (loss) $ 195,058 $ 67,860 $ 47,726 $ (21,960 ) $ 288,684
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Results of Operations
Oil and Gas Segment
We have a geographically diverse asset base with core regions of operation in the East Texas, Mid-Continent, Appalachian and Mississippi regions of the United States. The growth profile of our oil and gas segment was accomplished primarily by drilling oil and natural gas wells in our operating regions and, to a lesser extent, by making acquisitions of both producing properties and undeveloped leases. In response to significantly lower internal cash flows due to reduced energy commodity prices and the continued weakness in global financial markets, which have adversely impacted our ability to fund a growth oriented capital spending program, we have limited our capital spending in 2009 to more closely mirror internally generated cash flow.
Three and Nine Months Ended September 30, 2009 Compared with the
Three and Nine Months Ended September 30, 2008
The following table sets forth a summary of certain financial and other data for
our oil and gas segment for the three and nine months ended September 30, 2009
and 2008:
Three Months Ended Nine Months Ended
September 30, September 30,
Financial Highlights 2009 2008 2009 2008
Revenues (in thousands, except as noted)
Natural gas $ 36,654 $ 101,911 $ 129,305 $ 295,636
Crude oil 13,259 13,764 31,412 37,442
NGL 2,847 10,481 10,553 18,887
Other income 2,988 30,569 4,822 31,426
Total revenues 55,748 156,725 176,092 383,391
Expenses
Operating 13,277 15,067 42,788 43,370
Taxes other than income 4,186 6,537 12,756 19,480
General and administrative 5,133 5,122 15,970 14,869
Production costs 22,596 26,726 71,514 77,719
Exploration 16,117 8,346 54,901 19,765
Depreciation, depletion and amortization 39,326 32,665 119,242 90,849
Impairments on assets held for sale 87,900 - 87,900 -
Impairments 4,453 - 8,928 -
Loss on sale of assets - - 1,599 -
Total expenses 170,392 67,737 344,084 188,333
Operating income (loss) $ (114,644 ) $ 88,988 $ (167,992 ) $ 195,058
Operating Statistics
Natural gas (MMcf) 10,634 10,046 33,858 29,869
Crude oil (MBbl) 202 117 588 331
NGL (MBbl) 94 157 381 300
Total production (MMcfe) 12,410 11,690 39,672 33,655
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Production. The following table summarizes total natural gas, crude oil and NGL production by region for the three and nine months ended September 30, 2009 and 2008:
Natural Gas, Crude Oil and NGL Production
Three Months Ended Nine Months Ended
September 30, September 30,
Region 2009 2008 2009 2008
(MMcfe)
East Texas 3,034 3,764 10,429 9,986
Appalachia 2,882 2,830 8,715 8,575
Mid-Continent 3,372 1,609 9,684 4,724
Mississippi 1,875 1,837 6,118 5,462
Gulf Coast 1,247 1,650 4,726 4,908
Total 12,410 11,690 39,672 33,655
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Total production increased by 0.7 billion cubic feet equivalent (Bcfe), or 6%, from 11.7 Bcfe in the three months ended September 30, 2008 to 12.4 Bcfe in the same period of 2009 primarily due to continued development of the Granite Wash play in the Mid-Continent region, partially offset by production declines in the East Texas and Gulf Coast regions. We had an active drilling program in the East Texas region in the last half of 2008 through the first quarter of 2009, then we deferred drilling in this area until early 2010.
Total production increased by 6.0 Bcfe, or 18%, from 33.7 Bcfe in the nine months ended September 30, 2008 to 39.7 Bcfe in the same period of 2009 primarily due to higher production in the Mid-Continent, East Texas and Mississippi regions. The increase in production was due to continued development of the Granite Wash play in the Mid-Continent region, the horizontal Lower Bossier (Haynesville) Shale play in the East Texas region and the horizontal Selma Chalk play in Mississippi.
Revenues. Our revenues, consisting of natural gas, crude oil, natural gas liquid, or NGL, and other income, decreased by $100.9 million, or 64%, from $156.7 million in the three months ended September 30, 2008 to $55.8 million in the same period of 2009 primarily due to decreases in commodity prices and other income. Our revenues decreased by $207.3 million, or 54%, from $383.4 million in the nine months ended September 30, 2008 to $176.1 million in the same period of 2009 due largely to lower commodity prices, offset by an increase in production. Realized prices are before the impacts of our commodity derivatives, which are further discussed under "Effects of Derivatives" below.
Natural Gas. Natural gas revenues decreased by $65.2 million, or 64%, from $101.9 million in the three months ended September 30, 2008 to $36.7 million in the same period of 2009. Of the $65.2 million decrease, $71.2 million was the result of lower realized prices for natural gas, partially offset by $6.0 million resulting from higher natural gas production from development drilling. Our average realized price received for natural gas decreased by $6.69 per thousand cubic feet (Mcf), or 66%, from $10.14 per Mcf in the three months ended September 30, 2008 to $3.45 per Mcf in the same period of 2009.
Natural gas revenues decreased by $166.3 million, or 56%, from $295.6 million in the nine months ended September 30, 2008 to $129.3 million in the same period of 2009. Of the $166.3 million decrease, $205.8 million was the result of lower realized prices for natural gas, partially offset by $39.5 million resulting from higher natural gas production from development drilling. Our average realized price received for natural gas decreased by $6.08 per Mcf, or 61%, from $9.90 per Mcf in the nine months ended September 30, 2008 to $3.82 per Mcf in the same period of 2009.
Crude Oil. Crude oil revenues decreased by $0.5 million, or 4%, from $13.8 million in the three months ended September 30, 2008 to $13.3 million in the same period of 2009. Of the $0.5 million decrease, $10.0 million was the result of lower realized prices for crude oil, partially offset by an increase of $10.0 million resulting from higher crude oil production related to development drilling. Our average realized price received for crude oil decreased by $52.00 per barrel (Bbl), or 44%, from $117.64 per Bbl in the three months ended September 30, 2008 to $65.64 per Bbl in the same period of 2009.
Crude oil revenues decreased by $6.0 million, or 16%, from $37.4 million in the nine months ended September 30, 2008 to $31.4 million in the same period of 2009. Of the $6.0 million decrease, $35.1 million was the result of lower realized prices for crude oil, partially offset by an increase of $29.1 million resulting from higher crude oil production related to developmental drilling. Our average realized price received for crude oil decreased by $59.70 per Bbl, or 53%, from $113.12 per Bbl in the nine months ended September 30, 2008 to $53.42 per Bbl in the same period of 2009.
NGL. NGL revenues decreased by $7.7 million, or 73%, from $10.5 million in the three months ended September 30, 2008 to $2.8 million in the same period of 2009. Of the $7.7 million decrease, $4.2 million was due to a decline in volume and $3.4 million was the result of lower realized prices for NGLs. Our average realized price received for NGLs decreased by $36.47 per Bbl, or 55%, from $66.76 per Bbl in the three months ended September 30, 2008 to $30.29 per Bbl in the same period of 2009.
NGL revenues decreased by $8.3 million, or 44%, from $18.9 million in the nine months ended September 30, 2008 to $10.6 million in the same period of 2009. Of the $8.3 million decrease, $13.4 million was due to lower realized prices for NGLs, partially offset by an increase of $5.1 million resulting from additional volume, which was attributable to a new processing plant in the East Texas region. Our average realized price received for NGLs decreased by $35.26 per Bbl, or 56%, from $62.96 per Bbl in the nine months ended September 30, 2008 to $27.70 per Bbl in the same period of 2009.
Effects of Derivatives. Our revenues may vary significantly from period to period as a result of variances in commodity prices or production volumes. As part of our risk management strategy, we use derivative financial instruments to hedge natural gas and oil prices. Our commodity derivative contracts do not follow hedge accounting and are not reported as revenues in our consolidated statements of income. For derivatives related to our oil and gas segment, we received $16.4 million and $48.9 million in cash settlements in the three months and nine months ended September 30, 2009, and we paid $5.7 million and $13.5 million in cash settlements in the same periods of 2008.
The following table reconciles natural gas and crude oil revenues to realized prices, as adjusted for derivative activities, for the three and nine months ended September 30, 2009 and 2008:
Three Months Ended Nine Months Ended
September 30, September 30,
Natural gas 2009 2008 2009 2008
(in thousands)
Natural gas revenues before impact of
derivatives $ 36,654 $ 101,911 $ 129,305 $ 295,636
Cash settlements on natural gas
derivatives (1) 15,466 (4,818 ) 45,232 (12,265 )
Natural gas revenues, adjusted for
derivatives $ 52,120 $ 97,093 $ 174,537 $ 283,371
(per Mcf)
Natural gas revenues before impact of
derivatives $ 3.45 $ 10.14 $ 3.82 $ 9.90
Cash settlements on natural gas
derivatives (1) 1.45 (0.48 ) 1.33 (0.41 )
Natural gas revenues, adjusted for
derivatives $ 4.90 $ 9.66 $ 5.15 $ 9.49
Three Months Ended Nine Months Ended
September 30, September 30,
Crude oil 2009 2008 2009 2008
(in thousands)
Crude oil revenues before impact of
derivatives $ 13,259 $ 13,764 $ 31,412 $ 37,442
Cash settlements on crude oil
derivatives (1) 960 (883 ) 3,690 (1,196 )
Crude oil revenues, adjusted for
derivatives $ 14,219 $ 12,881 $ 35,102 $ 36,246
(per barrel)
Crude oil revenues before impact of
derivatives $ 65.64 $ 117.64 $ 53.42 $ 113.12
Cash settlements on crude oil
derivatives (1) 4.75 (7.55 ) 6.28 (3.62 )
Crude oil revenues, adjusted for
derivatives $ 70.39 $ 110.09 $ 59.70 $ 109.50
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Other Income. Other income for both the three and nine months ended September 30, 2009 decreased from the comparative periods of 2008 due to a $30.5 million gain on the sale of oil and gas properties in the third quarter of 2008.
Operating Expenses. Operating expenses decreased by $1.8 million, or 12%, from $15.1 million in the three months ended September 30, 2008 to $13.3 million in the same period of 2009 primarily due to lower repair and maintenance costs and lower water disposal fees, which decreased primarily because of the addition of water disposal facilities. On a per thousand cubic feet equivalent (Mcfe) basis, operating expenses decreased from $1.29 per Mcfe for the three months ended September 30, 2008 to $1.07 per Mcfe in the same period of 2009 due lower costs and higher production.
Operating expenses decreased by $0.6 million, or 1%, from $43.4 million in the nine months ended September 30, 2008 to $42.8 million in the same period of 2009 primarily due to higher gathering and processing fees resulting from higher production in several regions, partially offset by lower repair and maintenance costs and lower water disposal fees. On a per Mcfe basis, operating expenses decreased from $1.29 per Mcfe for the nine months ended September 30, 2008 to $1.08 per Mcfe in the same period of 2009 primarily due to higher production.
Taxes Other Than Income. Taxes other than income decreased by $2.3 million, or 35%, from $6.5 million in the three months ended September 30, 2008 to $4.2 million in the same period of 2009. Taxes other than income decreased by $6.7 million, or 34%, from $19.5 million in the nine months ended September 30, 2008 to $12.8 million in the same period of 2009. The decreases for both periods were primarily due to timing of refunds and lower severance taxes resulting from lower commodity prices, partially offset by higher production.
General and Administrative Expenses. General and administrative expenses remained constant at $5.1 million for the three months ended September 30, 2009 and 2008. General and administrative expenses increased by $1.1 million, or 7%, from $14.9 million in the nine months ended September 30, 2008 to $16.0 million in the same period of 2009 primarily due to higher payroll and employee benefit costs.
Exploration Expenses. Exploration expenses increased by $7.8 million, or 94%, from $8.3 million in the three months ended September 30, 2008 to $16.1 million in the same period in 2009 and increased by $35.1 million, or 177%, from $19.8 million in the nine months ended September 30, 2008 to $54.9 million in the same period in 2009. The following table summarizes the components of exploration expenses for the three and nine months ended September 30, 2009 and 2008:
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
(in thousands)
Dry hole costs $ 52 $ 959 $ 1,389 $ 3,790
Geological and geophysical 116 1,668 1,195 2,697
Unproved leasehold 10,257 4,562 28,803 11,202
Standby rig charges 3,713 - 20,316 -
Other 1,979 1,157 3,198 2,076
Total $ 16,117 $ 8,346 $ 54,901 $ 19,765
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Unproved leasehold expenses increased by $5.7 million, or 124%, from $4.6 million in the three months ended September 30, 2008 to $10.3 million in the same period of 2009 and increased by $17.6 million, or 157%, from $11.2 million in the nine months ended September 30, 2008 to $28.8 million in the same period of 2009. These increases were primarily due to a change we made to our accounting process effective January 1, 2009 to amortize additional insignificant unproved properties over the average estimated life of the leases rather than amortizing some leases and assessing other leases on an occurrence basis.
Standby rig charges totaled $3.7 million and $20.3 million in the three and nine months ended September 30, 2009 compared to zero in the comparative 2008 periods. In the first quarter of 2009, we reduced our drilling program in our oil and gas segment due to unfavorable economic conditions. In conjunction with the drilling program reduction, we amended certain drilling rig contracts to delay commencement of drilling until January 2010. As a result, we recognized standby rig charges for cancellation fees, minimum daily standby fees and demobilization fees as exploration expense in our consolidated statements of income. Based on the timing of remobilizing the drilling rigs, we could incur additional exploration expenses of up to $0.6 million for the remainder of 2009.
Impairment on Assets Held for Sale. For the three and nine months ended September 30, 2009, we recorded $87.9 million of impairments. As of September 30, 2009, certain oil and gas properties located in Texas, Louisiana and North Dakota were classified as current assets held for sale on our consolidated balance sheet. We completed the sale of the North Dakota properties in October 2009 and expect to complete the sale of the Louisiana and Texas properties in the fourth quarter of 2009. As a result of classifying these assets as held for sale, we incurred an impairment charge of $87.9 million to record the assets at fair value less costs to sell.
Other Impairments. For the three and nine months ended September 30, 2009, we recorded $4.5 million and $8.9 million of impairments. The impairment charge of $4.5 million included $0.8 million of inventory re-evaluation and $3.7 million of other impairments. The impairment charges of $8.9 million included $4.1 million of re-evaluation related to our tubular inventory due to decline in market value and $4.8 million of other impairments.
Depreciation, Depletion and Amortization Expenses. Depreciation, depletion and amortization expenses increased by $6.6 million, or 20%, from $32.7 million in the three months ended September 30, 2008 to $39.3 million in the same period of 2009. Depreciation, depletion and amortization expenses increased by $28.4 million, or 31%, from $90.8 million in the nine months ended September 30, 2008 to $119.2 million in the same period of 2009. The increases for both periods were due to an increase in equivalent production and higher depletion rates, which were caused by higher cost wells being drilled.
PVR Coal and Natural Resource Management Segment
As of December 31, 2008, PVR owned or controlled approximately 827 million tons of proven and probable coal reserves in Central and Northern Appalachia, the San Juan Basin and the Illinois Basin. PVR enters into long-term leases with experienced, third-party mine operators, providing them the right to mine PVR's coal reserves in exchange for royalty payments. PVR actively works with its lessees to develop efficient methods to exploit its reserves and to maximize production from its properties. PVR does not operate any mines. In the nine months ended September 30, 2009, PVR's lessees produced 25.9 million tons of coal from PVR's properties and paid to PVR coal royalties revenues of $90.4 million, for an average royalty per ton of $3.50 ($3.33 per ton net of coal royalties expenses). Approximately 82% of PVR's coal royalties revenues in the nine months ended September 30, 2009 was derived from coal mined on PVR's properties under leases containing royalty rates based on the higher of a fixed base price or a percentage of the gross sales price. The balance of PVR's coal royalties revenues for the respective periods was derived from coal mined on PVR's properties under leases containing fixed royalty rates that escalate annually.
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