Penn Virginia Corp. (NYSE: PVA) said December 20 that it completed an agreement with an undisclosed major oil and gas company to jointly explore the Eagle Ford Shale in Lavaca County, Texas.
The agreement establishes an area of mutual interest (AMI) between PVA, as operator, and the other company covering approximately 13,000 gross acres near PVA’s existing acreage in southeastern Gonzales County. The company bought into 6,800 net acres in August 2010 for $31.1 million.
Depending on the future participation of other companies, PVA’s minimum working interest in this project will be approximately 50%. Preliminarily, PVA estimates that a minimum of approximately 40 horizontal drilling locations may exist in the new AMI area, with the potential for additional locations assuming future downspaced drilling.
In a December 20 note to investors, Jefferies & Co. Inc. analysts say the new acreage, possibly in the light oil/wet gas window, increases Penn Virginia’s drilling inventory by at least a year. As for the price, Jefferies analysts noted the deal price “appears cheap and carry structure should help to preserve liquidity.”
According to Jefferies, PVA will make a “nominal cash payment” upfront. PVA will drill up to six wells by September 1, 2012 to earn the 50% interest and PVA will carry the seller on the first three wells.
“Assuming $10 million completed cost per well (we think there will be some science work of the initial few wells), PVA’s cost is estimated to be under $2,000/acre. The deal is especially attractive given there is minimal upfront cash, which helps to preserve PVA’s precious liquidity. The seller currently has a minority interest owner on this block and we expect that partner will maintain its ownership,” noted the analysts.
H. Baird Whitehead, president and CEO stated, “We are pleased to have entered into this agreement in Lavaca County and believe the AMI acreage is highly prospective for the Eagle Ford Shale as it is situated almost adjacent to our existing Eagle Ford position in Gonzales County on which we have drilled some excellent wells. We now have a very good opportunity to increase our prospective net acreage position in the Eagle Ford to approximate our near-term goal of 25,000 net acres.”
With the agreement, PVA has the opportunity to earn at least 6,500 net acres in Lavaca County, bringing the company’s total Eagle Ford position to 20,000 net acres.
