A Slick Steal

 | Oct 16, 2013 | 12:00 PM EDT
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The ramp-up in oil production in the Eagle Ford shale area in south Texas has been the basis for a really great investment thesis over the last few years. Providing exponential growth to seemingly any producer investing here, this shale has literally "made" a number of companies.

For example, EOG Resources (EOG) was already a big Bakken producer, but it built the largest of all the Eagle Ford acreage positions. With its stock is up about 80% since the beginning of 2012, EOG is now a very big blip on the radar. Consider smaller names such as Carrizo (CRZO), which has doubled since only the beginning of 2013, and Sanchez Energy (SN), an even smaller name, up 38% since its trough in April of this year. These two names trade at 2.72x and 1.6x book, respectively.

While Eagle Ford names are up a lot, the market has still not fully priced in some of the participants. I think Penn Virginia (PVA), in particular, is still a steal. Penn Virginia has indeed been in the Eagle Ford for a while, but it hadn't truly become a significant player until its most recent acquisition of Magnum Hunter's assets. Penn Virginia now has a large, 55,800 acre position in the northeastern corner of the play, or the "tail" of the shale. The company has transformed itself from a hodgepodge of mature Cotton Valley assets and shale assets in the gassy Haynesville into an oil company on one of America's premier shale areas. Eagle Ford's assets alone now represent more than half of all of the company's production.

Penn Virginia is now growing oil production at a rate comparable to EOG or Carrizo. Its two main acreage positions in the Eagle Ford, Shiner (yes, that's the same namesake as the Texas beer) and Peach Creek, fetch rates of return at 40% and 50% respectively, and that's at $90 West Texas Intermediate (WTI). In the words of management, the well economics "work all day long." And with 455 more net wells to drill, there's plenty more where that came from. In fact, in 2013, company-wide production is expected to grow by 67%, and another 40% compounded atop that in 2014.

Clearly, both well economics and production growth are up on par with the other names on this shale. However, its valuation is anything but comparable. Although shares of Penn Virginia have jumped from $4.70 to $7.50 since just last month, the stock is now only trading at 0.56x book value.

That is a real bargain compared to other small and mid-cap Eagle Ford names. Eagle Ford peer Rosetta Resources (ROSE) trades at 2.7x book value, and much of its production here is of lower-return natural gas. Carrizo, as I mentioned, is also much more expensive than Penn Virginia. I don't believe the market has fully digested the Magnum Hunter transaction. Penn Virginia has a long way to run.

We can expect Penn Virginia to continue being an active acquirer in the Eagle Ford. With almost 80% of its $300 million revolving credit facility still available, this company has the flexibility to do it. Look for bolt-on acquisitions as more land becomes available to change hands. Management will be adding to that tail tip. The company's long-term goal is to amass 100,000 net acres in this shale. In the meantime, Penn Virginia is still pretty cheap. If you're looking to capitalize on rapid oil production growth, this name is worth your consideration.

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we still like this trade but need some more time on it. SOLD WDC JUL 87.5 CALL AT 5.40 (in at 5.85) BOUG...



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