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PVA > SEC Filings for PVA > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for PENN VIRGINIA CORP

Form 10-Q for PENN VIRGINIA CORP


30-Jul-2014

Quarterly Report


Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations

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 Condensed Consolidated Financial Statements and Notes thereto included in Item
1. All dollar amounts presented in the tables that follow are in thousands unless otherwise indicated. Certain year-over-year changes are presented as not meaningful, or "NM," where disclosure of the actual value does not otherwise enhance the analysis. Also, due to the combination of different units of volumetric measure and the number of decimal places presented, certain results may not calculate explicitly from the values presented in the tables.

Overview of Business
We are an independent oil and gas company engaged in the exploration, development and production of oil, NGLs and natural gas in various onshore regions of the United States. Our current operations consist primarily of the drilling of unconventional horizontal development wells and are currently concentrated in the Eagle Ford Shale in South Texas. We also have operations in the Granite Wash in Oklahoma, the Haynesville Shale and Cotton Valley in East Texas and the Selma Chalk in Mississippi, the latter of which we have agreed to sell. As of December 31, 2013, we had proved oil and gas reserves of approximately 136 million barrels of oil equivalent, or MMBOE (approximately 122 MMBOE excluding our Selma Chalk assets in Mississippi).
The following table sets forth certain summary operating and financial statistics for the periods presented:

                                         Three Months Ended              Six Months Ended
                                              June 30,                       June 30,
                                         2014           2013           2014            2013
Total production (MBOE)                   1,983          1,748           3,885           3,175
Daily production (BOEPD)                 21,786         19,209          21,461          17,542
Crude oil and NGL production (MBbl)     1,379.6        1,118.4         2,682.6         1,951.5
Crude oil and NGL production as a
percent of total                             70 %           64 %            69 %            61 %
Product revenues, as reported        $  136,429     $  109,734     $   269,581     $   191,958
Product revenues, as adjusted for
derivatives                          $  129,207     $  111,967     $   259,302     $   197,748
Crude oil and NGL revenues as a
percent of total, as reported                88 %           86 %            87 %            86 %
Realized prices:
Crude oil ($/Bbl)                    $   100.16     $   101.23     $     99.16     $    102.89
NGL ($/Bbl)                          $    30.85     $    28.10     $     35.71     $     29.21
Natural gas ($/Mcf)                  $     4.51     $     4.12     $      4.78     $      3.76
Aggregate ($/BOE)                    $    68.81     $    62.78     $     69.40     $     60.46
Production and lifting costs
($/BOE):
Lease operating                      $     6.25     $     4.94     $      5.87     $      5.18
Gathering, processing and
transportation                             1.78           1.70            1.67            2.07
Production and ad valorem taxes
($/BOE)                                    3.79           3.99            3.81            4.07
General and administrative ($/BOE) 1       6.54           7.17            5.89            7.05
Total operating costs ($/BOE)        $    18.36     $    17.80     $     17.24     $     18.37
Depreciation, depletion and
amortization ($/BOE)                 $    36.03     $    36.80     $     36.97     $     36.51
Cash provided by operating
activities                           $   32,633     $   84,136     $    99,193     $   129,751
Cash paid for capital expenditures   $  190,776     $  143,346     $   350,580     $   229,319
Cash and cash equivalents at end of
period                                                             $    25,095     $    19,090
Debt outstanding, net of discounts,
at end of period                                                   $ 1,130,000     $ 1,142,000
Credit available under revolving
credit facility at end of period 2                                 $   393,346     $   279,968
Net development wells drilled              15.0           10.8            28.8            19.3
Net exploratory wells drilled                 -              -               -               -


_______________________

1 Excludes equity-classified share-based compensation, which is a non-cash expense, of $0.42 and $0.42 for the three and six months ended June 30, 2014 and $1.54 and $1.19 for the three and six months ended June 30, 2013 and liability-classified share-based compensation of $0.53 and $1.80 for the three and six months ended June 30, 2014 and $0.25 and $0.14 for the three and six months ended June 30, 2013.
2 As reduced by outstanding borrowings and letters of credit and limited by financial covenants, if applicable.


In the three months ended June 30, 2014, our crude oil and NGL production increased to 70 percent of our total production continuing a trend consistent with our liquids-focused strategy. Our cash margin, or aggregate realized prices less total operating costs excluding equity-classified and liability-classified share-based compensation, increased $5.47 per barrel of oil equivalent, or BOE, or 12 percent, to $50.45 per BOE for the three months ended June 30, 2014 from $44.98 per BOE for the corresponding period in 2013. The cash margin increased $10.07 per BOE, or 24 percent, to $52.16 per BOE when compared to $42.09 per BOE for the six months ended June 30, 2013. The higher cash margins are attributable primarily to higher liquids production and higher NGL and natural gas prices compared to the corresponding periods of the prior year. Consistent with our growth in cash margins, our cash from operating activities, excluding working capital changes, increased approximately $37 million, or 36 percent, for the six months ended June 30, 2014 compared the corresponding period of the prior year. Our growth in crude oil and NGL production has been focused exclusively in the Eagle Ford in South Texas. Since our initial acquisition in this region in 2010, we have drilled and turned in line 219 gross (141.5 net) wells through July 25, 2014. We are currently operating a total of six drilling rigs in the Eagle Ford and have plans in place to increase the total to eight rigs by the end of September 2014. Our capital program, of which approximately 98 percent is dedicated to the Eagle Ford, is being financed with a combination of cash from operating activities, the sale of non-core assets, borrowings under our revolving credit facility, or the Revolver, and our recent preferred equity offering.

Key Developments
The following general business developments and corporate actions had or will have a significant impact on the financial reporting and disclosure of our results of operations, financial position and cash flows: (i) drilling results and future development plans in the Eagle Ford, (ii) the acquisition of additional Eagle Ford acreage, (iii) recent preferred stock transactions, (iv) the sale of Mississippi assets, South Texas oil gathering rights and natural gas gathering and gas lift assets and (v) the resolution of arbitration related to our Eagle Ford acquisition in 2013.
Drilling Results and Future Development Plans for the Eagle Ford During the three months ended June 30, 2014, we operated six drilling rigs and completed 27 gross (15.0 net) wells in the Eagle Ford. Our Eagle Ford production was 15,618 net barrels of oil equivalent per day, or BOEPD, during the three months ended June 30, 2014 with oil comprising 11,744 BOPD, or 75 percent and NGLs and natural gas comprising approximately 13 percent and 12 percent. Our Eagle Ford oil production was two percent higher than 11,511 BOPD in the first quarter of 2014. In the Eagle Ford, we have a total of 219 gross (141.5 net) producing wells, 11 gross (6.3 net) wells completing, 11 gross (5.0 net) wells waiting on completion and six gross (4.6 net) wells being drilled as of July 25, 2014.
We intend to add a seventh rig to our Eagle Ford drilling program in August 2014 and an eighth rig in September 2014. We have increased the drilling and completion component of our capital expenditures program accordingly. As a result of the additional rigs, we expect to turn in line 68 gross (39.0 net) wells during the remainder of 2014, for a total of 111 (67.0 net) operated wells, excluding shallow wells, being turned in line during 2014, along with a production contribution associated with the seventh and eighth rigs of 700 to 800 MBOE in the fourth quarter of 2014.
Through July 25, 2014 we have tested three Upper Eagle Ford (Marl) and for the remainder of 2014, we have 19 additional Upper Eagle Ford wells planned to spud, with eight of those scheduled as development wells in the same area as our three initial test wells.
Acquisition of Additional Eagle Ford Acreage In July 2014, we entered into a definitive agreement to acquire approximately 13,125 gross (11,660 net) acres in Lavaca County, Texas, the vast majority of which are in the "volatile oil window" of the Eagle Ford, for approximately $45 million, of which approximately $34 million will be paid at closing and the balance of approximately $11 million will be paid over time as a drilling carry. The transaction is expected to close in August 2014 and is subject to customary closing conditions. The transaction, combined with recent leasing, will bring our total Eagle Ford acreage position to approximately 143,200 gross (102,000 net) acres which to a large extent are contiguous. The acquired acreage is adjacent to our Shiner area, most of which we expect will be prospective in the Upper Eagle Ford.
Preferred Stock Offering and Induced Conversion of Outstanding Preferred Stock In June 2014, we completed a private offering of 3,250,000 depositary shares each representing 1/100th interest in a share of our 6% Series B Convertible Perpetual Preferred Stock, or the Series B Preferred Stock, that provided approximately $314 million of proceeds, net of underwriting fees and issuance costs. Concurrently, we paid $3.4 million to induce the conversion of 2,593 shares, or 259,262 depositary shares, of our 6% Series A Convertible Perpetual Preferred Stock, or the Series A Preferred Stock. A total of 4.3 million shares of our common stock were issued in connection with the induced


conversion of the Series A Preferred Stock. Subsequent to June 30, 2014, an additional 93 shares of the Series A Preferred Stock have been converted resulting in issuance of an additional 1.6 million shares of our common stock. Sale of Mississippi Assets
In June 2014, we entered into a definitive agreement to sell our Selma Chalk assets (primarily natural gas) in Mississippi for gross cash proceeds of $72.7 million. The sale is expected to close in the third quarter of 2014 and we anticipate receiving approximately $71 million of proceeds, net of transaction costs and customary closing adjustments. An impairment charge of $117.9 million was recognized in the three months ended June 30, 2014 to write down these assets to their estimated fair value..
Sale of Rights to Construct an Oil Gathering System in South Texas In July 2014, we sold the rights to construct a crude oil gathering and intermediate transportation system in South Texas and received proceeds of approximately $147 million, net of transaction costs. Concurrent with the sale, we entered into long-term agreements with the buyer to provide us gathering and intermediate pipeline transportation services for a substantial portion of our South Texas crude oil and condensate production.
Sale of South Texas Natural Gas Gathering and Gas Lift Assets In January 2014, we sold our natural gas gathering and gas lift assets in South Texas and received proceeds of approximately $96 million, net of transaction costs. Concurrent with the sale, we entered into a long-term agreement with the buyer to provide us natural gas gathering and compression services for a substantial portion of our South Texas natural gas production. We realized a gain of $67.3 million of which $56.7 million was recognized upon the closing of the transaction and the remaining $10.6 million was deferred and is being recognized over a twenty-five year period. Arbitration Developments
Commencing December 2013, we were involved in an arbitration with Magnum Hunter Resources Corporation, or MHR, the seller in our 2013 Eagle Ford property acquisition, or EF Acquisition. The arbitration related to disputes we had with MHR regarding contractual adjustments to the purchase price for the EF Acquisition and suspense funds that we believed MHR was obligated to transfer to us. Effective with the one-year anniversary of the acquisition date, we recorded a receivable for final purchase price adjustments representing management's estimate of the outcome of the arbitration. On July 29, 2014, we received the arbitrator's determination, which indicates that MHR is required to pay us approximately $31.0 million of purchase price adjustments and to transfer to us approximately $2.7 million of revenue suspense funds due to partners and royalty owners. The award is consistent with the estimate made by management. We are also entitled to interest on the funds since the acquisition date.


Results of Operations

Three Months Ended June 30, 2014 Compared to the Three Months Ended June 30,
2013
Production
The following tables set forth a summary of our total and daily production
volumes by product and geographic region for the periods presented:
Crude oil          Three Months Ended                             Three Months Ended
                        June 30,                Favorable              June 30,              Favorable
                    2014            2013      (Unfavorable)        2014          2013      (Unfavorable)      % Change
                         (MBbl)                                      (Bbl per day)
Texas
South Texas      1,068.7            798.3            270.5      11,744.2       8,772.1          2,972.1           34  %
East Texas          13.6             15.0             (1.4 )       149.5         164.4            (14.9 )         (9 )%
Mid-Continent       35.1             42.2             (7.0 )       386.1         463.3            (77.2 )        (17 )%
Mississippi          1.6              2.8             (1.1 )        18.0          30.5            (12.5 )        (41 )%
Appalachia             -                -                -             -             -                -            -  %
                 1,119.1            858.2            260.9      12,297.8       9,430.3          2,867.5           30  %


NGLs             Three Months Ended                           Three Months Ended
                      June 30,             Favorable               June 30,              Favorable
                 2014          2013      (Unfavorable)        2014           2013      (Unfavorable)      % Change
                       (MBbl)                                   (Bbl per day)
Texas
South Texas       189.7        133.6             56.1       2,084.2        1,468.0            616.3           42  %
East Texas         33.5         46.9            (13.5 )       367.8          515.7           (147.9 )        (29 )%
Mid-Continent      37.4         79.8            (42.4 )       410.6          876.7           (466.1 )        (53 )%
Mississippi           -            -                -             -              -                -            -  %
Appalachia            -            -                -             -              -                -            -  %
                  260.5        260.3              0.2       2,862.6        2,860.4              2.3            -  %



Natural gas      Three Months Ended                         Three Months Ended
                      June 30,             Favorable             June 30,             Favorable
                 2014          2013      (Unfavorable)       2014         2013      (Unfavorable)      % Change
                       (MMcf)                                 (MMcf per day)
Texas
South Texas         977          702              275         10.7          7.7              3.0           39  %
East Texas        1,037        1,160             (123 )       11.4         12.8             (1.4 )        (11 )%
Mid-Continent       531          727             (196 )        5.8          8.0             (2.1 )        (27 )%
Mississippi       1,036        1,151             (116 )       11.4         12.7             (1.3 )        (10 )%
Appalachia           36           37               (1 )        0.4          0.4                -           (3 )%
                  3,618        3,778             (160 )       39.8         41.5             (1.8 )         (4 )%


Combined total    Three Months Ended                          Three Months Ended
                       June 30,             Favorable              June 30,             Favorable
                  2014          2013      (Unfavorable)       2014          2013      (Unfavorable)      % Change
                        (MBOE)                                  (BOE per day)
Texas
South Texas        1,421        1,049            372        15,618.2     11,525.5          4,092.7           36  %
East Texas           220          255            (35 )       2,417.1      2,805.2           (388.1 )        (14 )%
Mid-Continent        161          243            (82 )       1,769.8      2,671.3           (901.5 )        (34 )%
Mississippi          174          195            (20 )       1,914.8      2,138.9           (224.0 )        (10 )%
Appalachia             6            6              -            66.5         68.3             (1.8 )         (3 )%
                   1,983        1,748            235        21,786.4     19,209.2          2,577.3           13  %

Total production increased during the three months ended June 30, 2014 compared to the corresponding period of 2013 due primarily to production from the properties acquired and developed from the EF Acquisition and the continued expansion of our legacy development program in South Texas. The increase was partially offset by natural production declines in our East Texas, Mid-Continent and Mississippi regions. Approximately 70% of total production during the three months ended June 30, 2014 was attributable to oil and NGLs, which represents an increase of approximately 30% over the prior year period. During


the three months ended June 30, 2014, our Eagle Ford production represented approximately 72% of our total production compared to approximately 60% from this play during the corresponding period of 2013. Product Revenues and Prices
The following tables set forth a summary of our revenues and prices per unit of volume by product and geographic region for the periods presented:

Crude oil        Three Months Ended                           Three Months Ended
                      June 30,              Favorable              June 30,              Favorable
                 2014          2013       (Unfavorable)        2014         2013       (Unfavorable)
                                                                 ($ per Bbl)
Texas
South Texas   $  107,208    $ 81,312     $      25,896     $    100.31    $ 101.86    $        (1.55 )
East Texas         1,373       1,471               (98 )        100.89       98.31              2.58
Mid-Continent      3,351       3,795              (444 )         95.38       90.01              5.37
Mississippi          158         291              (133 )         96.64      105.02             (8.38 )
Appalachia             -          (2 )               2               -           -                NM
              $  112,090    $ 86,867     $      25,223     $    100.16    $ 101.23    $        (1.07 )


NGLs                     Three Months Ended                                    Three Months Ended
                              June 30,                  Favorable                   June 30,                   Favorable
                        2014              2013        (Unfavorable)           2014              2013         (Unfavorable)
                                                                                  ($ per Bbl)
Texas
South Texas       $     4,827         $    3,220     $        1,607     $     25.45         $    24.10     $          1.35
East Texas              1,403              1,436                (33 )         41.92              30.60               11.32
Mid-Continent           1,807              2,657               (850 )         48.36              33.30               15.06
Mississippi                 -                  -                  -               -                  -                   -
Appalachia                  -                  -                  -               -                  -                   -
                  $     8,037         $    7,313     $          724     $     30.85         $    28.10     $          2.75


Natural gas            Three Months Ended                                Three Months Ended
                            June 30,                Favorable                 June 30,                Favorable
                      2014            2013        (Unfavorable)         2014            2013        (Unfavorable)
                                                                            ($ per Mcfe)
Texas
South Texas       $     4,490     $    2,733     $        1,757     $      4.59     $     3.89     $        0.70
East Texas              4,514          4,001                513            4.35           3.45              0.90
Mid-Continent           2,371          3,873             (1,502 )          4.46           5.33             (0.87 )
Mississippi             4,797          4,213                584            4.63           3.66              0.97
Appalachia                130            734               (604 )          3.58             NM                NM
                  $    16,302     $   15,554     $          748     $      4.51     $     4.12     $        0.39


Combined total         Three Months Ended                                 Three Months Ended
                            June 30,                Favorable                  June 30,                  Favorable
                      2014            2013        (Unfavorable)          2014              2013        (Unfavorable)
                                                                             ($ per BOE)
Texas
South Texas       $   116,525     $   87,265     $      29,260     $     81.99         $    83.20     $        (1.22 )
East Texas              7,290          6,908               382           33.14              27.06               6.08
Mid-Continent           7,529         10,325            (2,796 )         46.75              42.47               4.28
Mississippi             4,955          4,504               451           28.44              23.14               5.30
Appalachia                130            732              (602 )         21.47                 NM                 NM
                  $   136,429     $  109,734     $      26,695     $     68.81         $    62.78     $         6.04


The following table provides an analysis of the change in our revenues for the three months ended June 30, 2014 compared to the three months ended June 30, 2013:

Revenue Variance Due to
              Volume       Price        Total
Crude oil   $ 26,420     $ (1,197 )   $ 25,223
NGL                6          718          724
Natural gas     (658 )      1,406          748
            $ 25,768     $    927     $ 26,695

Effects of Derivatives
Our oil and gas revenues may change significantly from period to period as a
result of changes in commodity prices. As part of our risk management strategy,
we use derivative instruments to hedge oil and gas prices. In the three months
ended June 30, 2014 and 2013, we paid $7.2 million and received $2.2 million,
respectively, in cash settlements of oil and gas derivatives. The following
table reconciles crude oil and natural gas revenues to realized prices, as
adjusted for derivative activities, for the periods presented:
                                            Three Months Ended
                                                 June 30,                Favorable
                                            2014           2013        (Unfavorable)      % Change
Crude oil revenues as reported          $  112,090     $   86,867     $      25,223           29  %
Cash settlements of crude oil
derivatives, net                            (6,087 )        2,468            (8,555 )         NM
                                        $  106,003     $   89,335     $      16,668           19  %

Crude oil prices per Bbl, as reported   $   100.16     $   101.23     $       (1.06 )         (1 )%
Cash settlements of crude oil
derivatives per Bbl                          (5.44 )         2.88             (8.31 )         NM
                                        $    94.72     $   104.11     $       (9.37 )         (9 )%

Natural gas revenues as reported        $   16,302     $   15,554     $         748            5  %
Cash settlements of natural gas
derivatives, net                            (1,135 )         (235 )            (900 )        383  %
                                        $   15,167     $   15,319     $        (152 )         (1 )%

Natural gas prices per Mcf, as reported $     4.51     $     4.12     $        0.39            9  %
Cash settlements of natural gas
derivatives per Mcf                          (0.31 )        (0.06 )           (0.25 )        417  %
                                        $     4.20     $     4.06     $        0.14            3  %

Other Revenues
Other income includes gathering, transportation, compression and water supply
and disposal fees, net of marketing and related expenses. The increase during
the three months ended June 30, 2014 was attributable income related to water
supply and disposal.
Production and Lifting Costs
                                   Three Months Ended
                                        June 30,                Favorable
                                     2014           2013      (Unfavorable)     % Change
Lease operating                $    12,403        $ 8,629    $      (3,774 )     (44 )%
Per unit of production ($/BOE) $      6.25        $  4.94    $       (1.31 )     (27 )%

Lease operating expense increased during the three months ended June 30, 2014 due primarily to higher chemical, water disposal and labor costs associated primarily with the expansion of operations in the South Texas region. In addition we incurred higher compression costs attributable to higher natural gas production in the South Texas region.


                                                Three Months Ended
                                                     June 30,                  Favorable
                                               2014              2013        (Unfavorable)       % Change
Gathering, processing and transportation $     3,526         $    2,980     $         (546 )        (18 )%
Per unit of production ($/BOE)           $      1.78         $     1.70     $        (0.08 )         (5 )%

Gathering, processing and transportation charges decreased during the three . . .

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