Penn Virginia Provides Q1 2009 Operations Update

Published: 01-May-2009

By: Staff Writer Staff Writer Staff Writer

Penn Virginia Corporation (Penn Virginia), a company engaged in exploration and production of oil and gas, has provided an update on oil and gas operational activities and quarterly production. Production in the first quarter of 2009 was 13.7 billion cubic feet of natural gas equivalent (Bcfe), or 152.3 million cubic feet of natural gas equivalent (MMcfe) per day, up 32%, compared with the production of 10.5 (Bcfe), or 115.6 MMcfe per day, in the year-ago quarter.

Production for the first quarter of 2009 was 6% higher than the earlier quarterly record of 143.8 MMcfe per day, or 13.2 Bcfe, produced in the fourth quarter of 2008.

The realized natural gas price of $4.48 per thousand cubic feet (Mcf), for the first quarter of 2009, down 46%, compared with the realized natural gas price of $8.26 per Mcf, in the year-ago quarter. It also reported realized natural gas price of $6.29 per Mcf, for the fourth quarter of 2008, down 29%, compared with the realized natural gas price in the first quarter of 2009. The realized oil price during the first quarter of 2009 was $37.01 per barrel, 29% lower than the $51.93 per barrel oil price in the fourth quarter of 2008 and 62% lower than the $97 per barrel oil price in the first quarter of 2008.

The realized natural gas liquids (NGLs) price during the first quarter of 2009 was $22.93 per barrel, 12% lower than the $26.14 per barrel NGLs price in the fourth quarter of 2008 and 58% down, compared with the $54.94 per barrel NGLs price in the year-ago quarter. Adjusting for oil and gas hedges, the effective natural gas price during the first quarter of 2009 was $5.74 per Mcf and the effective oil price was $44.90 per barrel, or increases of $1.26 per Mcf and $7.89 per barrel, respectively.

During the first quarter of 2009, unit cash operating expenses reduced to $1.80 per thousand cubic feet of natural gas equivalent (Mcfe) from $1.99 per Mcfe in the fourth quarter of 2008 and $2.34 per Mcfe in the year-ago quarter. Penn Virginia anticipates full-year 2009 unit cash operating expenses to range between $1.85 and $1.95 per Mcfe, a decrease from earlier guidance of $2 to $2.10 per Mcfe. Exploration expense during the first quarter was $11.4 million, and included $8.4 million of amortization of unproved properties, an increase from prior quarters to amortize higher leasehold acquisition costs in our East Texas, mid-continent and Gulf coast regions. During the first quarter the company has incurred $9.9 million of drilling rig standby charges related to its decision to defer drilling due to unfavorable economic conditions. Impairments of proved properties of $1.2 million were also incurred during the first quarter.

Management Comment

A. James Dearlove, president and chief executive officer, said, “We are pleased with our record production and reduced cash operating expenses during the first quarter and believe that the results demonstrate the ability to manage our oil and gas operations in periods of price dislocation.

“Natural gas prices were weak in the first quarter. Our cash margins in the quarter were supported by our hedging positions, however, we expect gas prices to remain weak in the near term, which makes it difficult to achieve acceptable returns for new drilling. As such, we have decided to defer most of our drilling efforts until market conditions improve. We expect to use free cash flow from our production to reduce outstanding bank debt. Our full-year 2009 production guidance has not changed due to our expectations regarding production during the first half of the year, although the reduced level of drilling will eventually cause our production to decline.”

“We do not expect the deferred drilling to have a material effect on the lease position in our core plays and we continue to maintain a significant multi-year inventory of high-quality drilling locations. Our horizontal drilling success, increased efficiency and strong leasehold positions in the Lower Bossier Shale, Granite Wash and Selma Chalk plays have positioned us for future reserve and production growth in those plays once gas prices recover.”

Capital Expenditures

During the first quarter of 2009, oil and gas capital expenditures were about $86 million, consisting of:

-- $79 million to drill 19 (14.4 net) wells, 17 (12.5 net) of which were successful, one of which was unsuccessful and one net of which is under evaluation

-- $5 million for the expansion of gathering systems and other production facilities; and

-- $2 million for leasehold acquisition, seismic data and other expenditures

The full-year 2009 capital expenditures guidance has been decreased to a range of $130 to $140 million, excluding drilling rig standby charges, from a range of $210 to $220 million provided in earlier guidance. Based on the about $86 million spent during the first quarter of 2009, Penn Virginia approximates that it will spend about $44 to $54 million for capital expenditures during the remaining three quarters of 2009, including about $39 to $46 million for drilling and $5 to $8 million for infrastructure, seismic and leasehold costs.

The company anticipates that the drilling costs for the remainder of 2009 to be focused mainly on its continued participation in non-operated Granite Wash wells in the mid-continent region. Penn Virginia also expect to drill one to two more gross wells in our Lower Bossier shale and Selma Chalk development plays, and possibly to test the Marcellus Shale in Pennsylvania.

Drilling Rig Standby Charges

In the first quarter of 2009, Penn Virginia opted to defer the drilling of wells in several of its plays due to unfavorable economic conditions. As a result, the company amended certain drilling rig contracts to delay commencement of drilling until January 2010. In the first quarter of 2009, Penn Virginia expensed about $9.9 million for lump sum delay fees, minimum daily standby fees and demobilization fees anticipated to be paid during the standby period. The company will carry on assessing economic conditions through the remainder of 2009 to determine whether to continue to defer drilling. This decision could result in additional standby expense of up to about $14.8 million during 2009.

Operational Updates by Geographical Region

East Texas – During the first quarter of 2009, Penn Virginia drilled six net operated and one (0.5 net) non-operated lower Bossier (Haynesville) shale horizontal wells. Of the wells drilled, six wells were successful and one well (Agnor #6-H) was unsuccessful, as announced in March 2009. Production in the first quarter averaged 40.9 MMcfe per day, 35% higher than the 30.3 MMcfe per day produced in the first quarter of 2008 and 10% higher than the 37.2 MMcfe per day produced in the fourth quarter of 2008. The production raises were entirely attributable to initial contributions from the Lower Bossier shale play for which there was no production in the prior year quarter.

Over the past twelve months, we have tested the lower Bossier potential across most of our acreage position in East Texas. Penn Virginia has been encouraged by the results of the horizontal drilling program and have concluded that the majority of the company’s acreage warrants an active development program going forward.

So far Penn Virginia has concluded and is producing from 13 operated horizontal Lower Bossier wells. The average initial production rate for the 13 producing wells is 5 MMcfe per day and the total gross production rate is now 20 MMcfe per day for these wells. Initial production rates for the six operated wells completed during the first quarter ranged from 2.8 to 8.3 MMcfe per day with an average of 5.4 MMcfe per day. The completions averaged eight fracture stages with an average lateral length of about 3,500 feet.

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