Penn Virginia's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Penn Virginia Corporation (PVA)

Q2 2012 Results Earnings Call

August 2, 2012 10:00 AM ET

Executives

Baird Whitehead – President and CEO

Nancy Snyder – Chief Administrative Officer

Steve Hartman – Chief Financial Officer

John Brooks – Senior Vice President and Regional Manager, Gulf Coast Operations

Jim Dean – Vice President, Corporate Development

Analysts

JB Jouve – RBC Capital Markets

Jason Freuchtel – SunTrust

David Snow – Energy Equities Inc.

Adam Leight – RBC Capital Markets

Sean Sneeden – Oppenheimer

Ray Deacon – Brean Murray

Biju Perincheril – Jefferies

Eric Seeve – Golden Tree

Steven Karpel – Credit Suisse

Richard Tullis – Capital One Southcoast

Welles Fitzpatrick – Johnson Rice

Presentation

Operator

Please standby. We are about to begin. Good day. And welcome to the Penn Virginia Corporation’s Second Quarter 2012 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to the President and CEO, Mr. Baird Whitehead. Please go ahead, sir.

Baird Whitehead

Thank you very much, Roxanne. Good morning. And welcome to Penn Virginia second quarter 2012 conference call. I’m joined today by various members of our team including Nancy Snyder, our Chief Administrative Officer; Steve Hartman, our Chief Financial Officer; John Brooks, our Senior Vice President and Regional Manager of our Gulf Coast Operations; and Jim Dean, our Vice President of Corporate Development.

Prior to getting started, we would like to remind you that the language in our forward-looking statement section of the press release as it was issued last night, as well as our Form 10-Q, which will be filed today, will apply to our comments this morning. We’d like to begin our discussion by expanding on the earnings and operational update press release that was issued after the close yesterday.

The second quarter continued a trend of solid financial results, with increasing cash flows from our growing oil and liquids production and decreasing operating expenses, helping offset declines in our gas production and natural gas prices.

Before we get into the details of the quarter, I wanted to touch on a number of recent developments which in addition to a strong first half of the year, are significant for Penn Virginia and consistent with our strategy and continuing to grow the oily part of our portfolio.

We did close on $100 million sale of our Appalachian assets. This was a very good price with a very attractive cash flow multiple. At the same time, we retained or will retain our Granite Wash assets, which still have a high component of liquids production and has -- also has an inventory of economic drilling locations that we will continue to exploit.

We have discontinued our dividend of approximately $10 million a year and both of these steps have helped improve our liquidity. And therefore, will help our capital expenditure program in the future.

We have had excellent early results from our Lavaca County Eagle Ford program, which has provided us an exciting addition to our oily drilling inventory and therefore, liquid reserve base.

We also have continued to experience solid reserve -- results from our initial acreage position in Gonzales County with our development drilling programs and in spite of selling our Appalachian assets, which were all dry gas, we do continue to retain our key gas reserves, which includes East Texas, Mississippi and the Granite Wash, which we consider will be essential modest recovery in natural gas prices.

For the second quarter we reported increases in product revenues, EBITDAX and cash flows relative to previous year’s quarter, primarily due to 161% increase in oil production, which is again attributable to the ongoing solid results of our Eagle Ford drilling program.

Product revenues of $76.2 million were up 4% over the second quarter of 2011, as our realizations increased 15% from $6.24 per Mcfe to $7.16 per Mcfe.

Oil and liquids revenues by itself were $65.9 million or 86% of our total product revenues this quarter, an increase of 90% over the second quarter 2011, due to the increase -- 161% increase in oil production and to a much lesser extent, a 4% increase in oil prices.

Adjusted EBITDAX of $60 million was up 20% over the second quarter of 2011. By the way, this is our fourth consecutive quarter of adjusted EBITDAX at or above $60 million. The improvement in EBITDAX was attributable not only to the 4% increase in product revenues, but also to a 17% decrease in direct operating expenses is a result of our continued focus on controlling costs.

These direct operating expenses decreased to $2.24 per Mcfe from $2.47 per Mcfe in the second quarter of last year, despite the 30% decrease in pro forma natural gas production.

With the sale of Appalachia, we will continue to make progress on bringing these operating expenses down, since Appalachian by itself, especially Horizontal CBM had a high operating cost component.

Our gross operating margin per Mcfe remained strong, increasing 30% from $3.78 per Mcfe to $4.92 per Mcfe in the second quarter of 2012, again due to our shift toward oil and natural gas -- or natural gas liquids, as well as lower operating costs.

Cash flow from operating activities increased 31% from $34.3 million in the second quarter of 2011 to $45 million in this year’s second quarter. During the first half of 2012, our cash flows from operating activities was -- almost $116 million, compared to only $64 million in the first half of 2011, an increase of 82%.

Adjusted loss was $10.8 million and adjusted earnings per share was negative $0.23, which includes the cash impact of derivatives and exclude charges for any impairments, restructuring costs and other non-recurring items. This is an improvement of $0.03 over the second quarter of 2011 and is due primarily to the increase on our gross operating margin.

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