Soros-Backed Oil Driller Offers Chance for Gain: Real M&A

Penn Virginia Corp., which surged this week after billionaire George Soros disclosed he was the company’s largest shareholder, stands to reap even more for investors by putting itself up for sale.

The oil and gas explorer has rallied 22 percent since Soros Fund Management LLC said it may discuss options for increasing value with the board and could even talk to possible acquirers. Should the company sell itself, it might entice suitors such as Devon Energy Corp. or Newfield Exploration Co. and command a price tag of at least $25 a share, a premium of about 50 percent, said SunTrust Banks Inc.

Penn Virginia has oil reserves in the lucrative Eagle Ford shale formation in south Texas, and buyers could be drawn by the chance to accelerate drilling there, according to Imperial Capital LLC, which sees EOG Resources Inc. as another possible buyer. The $1.1 billion company, with 80,000 net acres in the Eagle Ford area, is cheaper relative to projected profit than 82 percent of peers, according to data compiled by Bloomberg.

“Someone that’s larger and better capitalized would look at the assets that Penn Virginia has and say we could drill up all this acreage” faster, Adam Michael, a Houston-based analyst at Miller Tabak & Co., said in a phone interview. “That’s probably the biggest reason it could be a target and why Soros is pushing for the company to explore strategic alternatives.”

Representatives for Radnor, Pennsylvania-based Penn Virginia and Soros didn’t immediately respond to requests for comment.

Exploring Alternatives

Soros’s family office said in March 18 filing that it increased its stake in Penn Virginia to 9.2 percent. While the investment firm complimented management, it encouraged the company to explore options, sending the shares up 16 percent that day. Penn Virginia climbed an additional 5.3 percent since and closed yesterday at $16.57, the highest since April 2011.

Today, Penn Virginia shares fell 1.5 percent to $16.32.

Even after the gains, the company is valued at 5.06 times its projected earnings before interest, taxes, depreciation and amortization for this year, trailing the median for North American exploration and production companies bigger than $500 million, according to data compiled by Bloomberg.

Soros may push for a sale as a way to boost value, according to Neal Dingmann, a Houston-based analyst at SunTrust.

“What Soros is after is to say, ‘Look, if the market is not going to give us a comparable value to where the peers are trading, maybe a company should come out there and do that’’ via a takeover, Dingmann said in a phone interview. Recent deals for similar assets imply a lofty premium, he said.

Rising Production

Baytex Energy Corp. agreed last month to acquire Aurora Oil & Gas Ltd., while Devon closed a $6 billion purchase of closely held GeoSouthern Energy Corp.’s resources in the region on Feb.


Based on the GeoSouthern transaction, Penn Virginia could be valued at about $25 a share in a sale, about 75 percent higher than the stock’s 20-day average before Soros’s boosted stake was disclosed, said Chad Mabry of MLV & Co.

‘‘You have a very attractive asset set here,” Mabry, director of exploration and production research, said in a phone interview from Houston. “It would make a lot of sense for a larger independent” producer.

The Eagle Ford formation is one of the fastest-growing oil patches in the world, with production rising to 1.2 million barrels a day last year from about 50,000 in 2007, according to data compiled by Bloomberg.

Less Risk

Penn Virginia bolstered its presence in the formation last year by acquiring Eagle Ford properties from Magnum Hunter Resources Corp. The company had 42 acres for each $1 million in enterprise value at the end of the third quarter, trailing only Sanchez Energy Corp. out of more than two dozen producers operating in the area, data compiled by Bloomberg show.

After removing most of the geological risks tied to its real estate, Penn Virginia is now in “full manufacturing mode” and that could help it lure takeover interest from a larger oil company, such as EOG or ConocoPhillips, said Kim Pacanovsky of Imperial Capital.

“It’s a lot of inventory,” the New York-based analyst said in a phone interview. “Somebody with deeper pockets could exploit those properties in a faster manner.”

EOG had the largest position in the Eagle Ford region with 639,000 net acres, while ConocoPhillips had 227,000 acres, according to data as of the third quarter compiled by Bloomberg.

Newfield, Devon

Other possible suitors for the company include Devon and the Woodlands, Texas-based Newfield, which have market values of $26 billion and $3.9 billion respectively, said Dingmann of SunTrust.

Representatives for EOG and ConocoPhillips, both based in Houston, and Oklahoma City-based Devon declined to comment. A representative for Newfield didn’t immediately respond to a request for comment.

Penn Virginia’s management has been increasing the stock price on its own by selling off non-core assets and improving execution at its Eagle Ford properties, said Steve Berman, a New York-based analyst at Canaccord Genuity Group Inc. The shares almost tripled from just $4.70 a year ago before Soros encouraged it to explore options.

“I don’t think they want to sell,” said Michael of Miller Tabak. “I think the company is having a lot of fun right now because they’re getting better and better results and operationally they’re hitting on all cylinders.”

Even so, Michael estimated Penn Virginia could get more than his stock target of $22 a share in a sale, at least a 33 percent premium, and that kind of price could be hard to turn down, he said.

“I think they would do what’s right for shareholders,” he said. To “come in and grab up 80,000 acres in an area that’s proven up would be very attractive to a larger player. As the wells continue to get bigger for Penn Virginia, then you have to say, ‘Well, maybe they do deserve a much richer valuation.’”

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