Soros Left in Lurch as Penn Virginia Misses Window: Real M&A

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Penn Virginia Corp. should have listened to George Soros when it had the chance.

The billionaire investor started publicly encouraging a sale of the oil explorer in March 2014, after building a stake in the company. Analysts ran with the idea, estimating Penn Virginia’s reserves in the oil-rich Eagle Ford shale formation in Texas could justify a takeover offer of at least $25 a share. That represented a premium of more than 50 percent on top of a stock that was already trading near a three-year high.

Back then, crude cost about $100 a barrel. Today, it’s dropped to about half that. Meantime, Penn Virginia shares are down more than 80 percent, heading toward $2.

“Soros had the right idea when he came in -- I just think that he didn’t foresee the oil price collapse and I think management was a little too stubborn,” said Robert Du Boff of Oppenheimer & Co. Now, “they’re definitely listening. It’s just a matter of whether they get a price they like, which doesn’t seem too likely in the current environment.”

On Wednesday, Penn Virginia plunged to a more than 25-year low of $2.22 after fellow Eagle Ford operator Pioneer Natural Resources Co. said flooding hampered drilling in the region in the second quarter.

Big Holder

No sale process was ever announced publicly, even after Soros reiterated his call in June 2014 and criticized the company for not adopting an incentive plan for executives that might have encouraged a transaction. Soros, through his family office, still has an 8.4 percent stake, making him Penn Virginia’s third-biggest holder, according to data compiled by Bloomberg.

Jim Dean, a representative for Radnor, Pennsylvania-based Penn Virginia, said the company had no comment on whether it followed up on Soros’s suggestion to explore a sale. A representative for Soros declined to comment.

Of course, there’s no guarantee that Penn Virginia would have found a buyer then. And very few predicted oil would plunge as far as it did. When oil topped $107 a barrel in June 2014 at its peak for the year, all but three analysts recommended buying Penn Virginia shares. The group was predicting the stock would rise to about $21, on average, from where it was trading then at $15.

“Put yourself in their shoes at the time: we were a couple years into this steady-state, $90-plus oil environment where we were definitely never going lower than that,” said Chad Mabry, a Houston-based analyst at MLV & Co. “Obviously hindsight is 20-20, but at that time and place, they had a good reason to think that they could command a higher multiple and valuation.”

Not so now. While almost all energy-related companies are down this year, Penn Virginia has been one of the worst performers. Its market value has dropped below $200 million from a peak of more than $3 billion in 2008.

Buyer’s Market

Penn Virginia Chief Executive Officer H. Baird Whitehead said on the company’s most recent earnings call in May that if the company was approached by a buyer, it “certainly would listen and consider doing something.”

With oil prices where they are, though, bargains abound and buyers can be choosy. The deals that are getting done are primarily for companies with the highest quality assets where the drilling math can still work and the debt load isn’t too high, Mabry said. That’s not Penn Virginia.

“Yes, it’s Eagle Ford, but it’s not all created equal,” the analyst said. “This is the kind of area that works really well at $90-plus oil, but you start getting into this kind of environment, and it just isn’t as intriguing.”

Deal Hope

There’s still some hope for a transaction.

Lone Star Value Management, another Penn Virginia shareholder, started pushing for a sale in June after a blog report from Proactive Investors said the company had rejected a takeover bid from BP Plc. Penn Virginia had no comment, and the Wall Street Journal subsequently reported that the offer and rejection didn’t happen, citing people familiar with the matter. Still, some analysts, responding to the initial blog report, found the concept of a takeover at least plausible.

A management change and asset sales have added to speculation about a possible deal. The company announced Monday that Whitehead, its 65-year-old CEO, was going to retire after more than 14 years at the company.

The news came less than a week after Penn Virginia said it would sell its East Texas oil properties to an undisclosed buyer for $75 million. The deal will give the company more financial flexibility and also gives any potential acquirer one less thing to worry about.

“It just makes it more streamlined,” said Richard Tullis, an analyst at Capital One Financial Corp. “If you have a buyer that’s got a long-term horizon, that’s counting on oil prices to rebound and then has deep pockets, I think an acquisition like a Penn Virginia could make sense.”

‘Just Survive’

Whether Penn Virginia should take any offers now is another question. It may be better off riding things out for as long as it can on its own, Du Boff of Oppenheimer said. The company has other assets it can sell -- like its water gathering business in the Eagle Ford -- and enough cash to make it through at least 2016, barring an additional significant drop in oil prices, he said.

“Ultimately that’s the current strategy: just survive,” the analyst said. “It’s kind of one of those decisions that you kick the can down the road, and maybe higher oil prices would lead to a significantly higher equity value.”