Penn Virginia: 10% Today, 100% Tomorrow?

How do you make an oil production & exploration company pop? Propose it can double in the next year and highlight it as a possible takeover target to boot.

REUTERS

That’s what happened today to Penn Virginia (PVA), which has popped 9.7% to $10 after SunTrust Robinson Humphrey said it was a “top takeover target this year.” Oh, they also named it as a top pick, praised its “operational excellence,” and cited numerous catalysts.

Analyst Neal Dingmann and Ryan Oatman explain:

Penn Virginia is not only likely to see materially higher production growth from its six rigs drilling continuously improving wells, but the company should see over 25% cash flow growth from drilling production combined with drilling/completion efficiencies. The company should be able to fund the growth not only from cash flow but through asset sales such as the recently announced $100 million sale of its Eagle Ford gas gathering system. Channel checks not only signal continued improving well results, but also numerous drilling efficiencies that should considerably boost production and lower well costs / capital expenditures.

Now about that takeover potential. Dingmann and Oatman write:

Nearby acquisition highlights Penn Virginia's value. Devon Energy (DVN) recently agreed to acquired Eagle Ford Shale assets in DeWitt and Lavaca Counties from private GeoSouthern Energy for $6 billion. The assets consist of 53,000 boe/d and 82,000 net acres with over 1,200 drilling locations all in DeWitt and Lavaca Counties. We calculate the deal at $3.975B for the 53,000 boe/d of existing production assuming recent Eagle Ford deal rates of $75,000 per flowing Boe and $2.025B for acreage or ~$25,000/acre after netting out the production. We calculate that if all acreage was the same, Penn Virginia trades at roughly 25% of the value of the latest acquisition, and nearly as large a discount even after taking into account some acreage differences.

All in all, Dingmann and Oatman see Penn Virginia trading $18, nearly twice Friday’s close of $9.12.