The following discussion and analysis of the financial condition and results of operations ofPenn Virginia Corporation and its consolidated subsidiaries ("Penn Virginia," the "Company," "we," "us" or "our") should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in Part I, Item 1, "Financial Statements." All dollar amounts presented in the tables that follow are in thousands unless otherwise indicated. Also, due to the combination of different units of volumetric measure, the number of decimal places presented and rounding, certain results may not calculate explicitly from the values presented in the tables. References to "quarters" represent the three months endedMarch 31, 2020 or 2019, as applicable. Overview and Executive Summary We are an independent oil and gas company engaged in the onshore exploration, development and production of crude oil, natural gas liquids, or NGLs, and natural gas. Our current operations consist of drilling unconventional horizontal development wells and operating our producing wells in theEagle Ford Shale , or the Eagle Ford, inGonzales ,Lavaca ,Fayette andDeWitt Counties inSouth Texas . Industry Environment and Recent Operating and Financial Highlights Commodity Price and Other Economic Conditions The global public health crisis associated with the novel coronavirus, or COVID-19, has and is anticipated to continue to have an adverse effect on global economic activity for the immediate future and has resulted in travel restrictions, business closures and the institution of quarantining and other restrictions on movement in many communities. The slowdown in global economic activity attributable to COVID-19 has resulted in a dramatic decline in the demand for energy which directly impacts our industry and the Company. In addition, global crude oil prices experienced a collapse starting in earlyMarch 2020 as a direct result of failed negotiations between theOrganization of the Petroleum Exporting Countries , orOPEC , andRussia . In response to the global economic slowdown,OPEC had recommended a decrease in production levels in order to accommodate reduced demand.Russia rejected the recommendation ofOPEC as a concession toU.S. producers. After the failure to reach an agreement,Saudi Arabia , a dominant member ofOPEC , and other Persian Gulf OPEC members announced intentions to increase production and offer price discounts to buyers in certain geographic regions. As the breadth of the COVID-19 health crisis expanded throughout the month ofMarch 2020 and governmental authorities implemented more restrictive measures to limit person-to-person contact, global economic activity continued to decline commensurately. The associated impact on the energy industry has been adverse and continued to be exacerbated by the unresolved conflict regarding production. In the second week of April,OPEC ,Russia and certain other petroleum producing nations, or OPEC+, reconvened to discuss the matter of production cuts in light of unprecedented disruption and supply and demand imbalances that expanded since the failed negotiations in earlyMarch 2020 . Tentative agreements were reached to cut production by up to 10 million barrels of oil per day, or BOPD, with allocations to be made among the OPEC+ participants. If effected, these production cuts, however, may not offset near-term demand loss attributable to the COVID-19 health crisis and related economic slowdown, and the tentative agreement has not resulted in increased commodity prices. The combined effect of COVID-19 and the energy industry disruptions led to a decline in NYMEX West Texas Intermediate, or NYMEX WTI, crude oil prices of approximately 67 percent from the beginning ofJanuary 2020 , when prices were approximately$62 per barrel, through the end ofMarch 2020 , when they were just above$20 per barrel. During late March NYMEX WTI crude oil prices declined below$20 per barrel as uncertainty regarding geopolitical factors expanded. Overall crude oil price volatility has continued despite apparent agreement among OPEC+ regarding production cuts and for the week endingMay 1, 2020 , the average NYMEX WTI crude oil price was approximately$16 per barrel. Despite a significant decline in drilling byU.S. producers starting inmid-March 2020 , domestic supply continues to exceed demand which has led to significant operational stress with respect to capacity limitations associated with storage, pipeline and refining infrastructure, particularly within theGulf Coast region. The combined effect of the aforementioned factors is anticipated to have a continuing adverse impact on the industry in general and our operations specifically. In order to mitigate the impact of COVID-19 and the economic effects of the unprecedented decline in economic activity and global energy markets, we undertook several actions in March andApril 2020 in support of our liquidity and the efficient continuity of our operations. These actions are described in greater detail in the discussions for Key Developments that follow as well as Notes 2, 5, 8 and 12 to the Condensed Consolidated Financial Statements included in Part I, Item 1, "Financial Statements." 23
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Capital Expenditures and Development Progress OnMarch 17, 2020 , in response to the substantial decrease in crude oil prices, we initially adjusted our drilling and completion program for the remainder of the year. Subsequently, we suspended our drilling and completion program altogether in the second week ofApril 2020 and released our contracted drilling rigs. During the first quarter of 2020, we incurred capital expenditures of approximately$79 million with 96 percent directed to drilling and completion projects. We drilled and completed a total of 13 gross (11.0 net) wells, all of which were turned to sales during the quarter. At the time of the suspension in April, we had a total of eight gross (7.6 net) wells that were drilled but not completed and remained uncompleted as ofMay 7, 2020 . Sequential Quarterly Analysis The following summarizes our key operating and financial highlights for the three months endedMarch 31, 2020 , with comparison to the three months endedDecember 31, 2019 as presented in the table that follows. The year-over-year highlights for the quarterly periods endedMarch 31, 2020 and 2019 are addressed in further detail in the discussions for Financial Condition and Results of Operations that follow. • Daily production decreased nine percent to 26,740 barrels of oil equivalent per day, or BOEPD, from 29,314 BOEPD due primarily to the timing of wells turned to sales during the first quarter of 2020, which included five gross (3.6 net) wells that were turned to sales in the last week ofMarch 2020 for which we realized only minimal volume for the
quarterly period. Total production decreased 10 percent to 2,433 thousand
barrels of oil equivalent, or MBOE, from 2,697 MBOE due primarily to the issue of timing referenced above during the quarter endedMarch 31, 2020 .
• Product revenues declined approximately 26 percent to
NGL revenues were 53 percent lower due to 43 percent lower prices, or
million, and 17 percent lower volume, or$0.7 million . Natural gas revenues declined 32 percent due to 22 percent lower prices, or$0.8 million , and 13 percent lower volume, or$0.5 million .
• Production and lifting costs (consisting of Lease operating expenses, or
LOE, and Gathering, processing and transportation expenses, or GPT)
decreased marginally on an absolute basis to
million and increased on a per unit basis to
BOE due primarily to the effect of lower volume. Lower GPT expenses and compression charges associated with the lower production volume were substantially offset by higher water disposal costs associated with
protective measures from offset stimulation activities and higher chemical
product and labor costs. • Production and ad valorem taxes decreased on an absolute and per unit basis to$6.2 million and$2.53 per BOE from$7.4 million and$2.74 per
BOE, respectively, due to the overall effects of lower volume and product
pricing.
• General and administrative, or G&A, expenses increased on an absolute and
per unit basis to
lower benefits costs in the fourth quarter of 2019 as compared to first
quarter of 2020 as well as higher consulting and information technology
costs partially offset by lower incentive and share-based compensation
costs in the first quarter of 2020. • Depreciation, depletion and amortization, or DD&A, decreased on an
absolute basis to
volume. DD&A increased marginally on a per unit basis to$16.73 per BOE from$16.64 per BOE.
• Operating income decreased to
combined impact of the matters noted in the bullets above. 24
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The following table sets forth certain historical summary operating and financial statistics for the periods presented:
Three Months Ended March 31, December 31, March 31, 2020 2019 2019 Total production (MBOE) 2,433 2,697 2,222 Average daily production (BOEPD) 26,740 29,314 24,692 Crude oil production (MBbl) 1,881 2,043 1,652 Crude oil production as a percent of total 77 % 76 % 74 % Product revenues$ 90,891 $ 123,196 $ 104,637 Crude oil revenues$ 86,308 $ 115,252 $ 94,812 Crude oil revenues as a percent of total 95 % 94 % 91 % Realized prices: Crude oil ($ per Bbl)$ 45.90 $ 56.40 $ 57.39 NGLs ($ per Bbl)$ 6.16 $ 10.74 $ 17.60 Natural gas ($ per Mcf)$ 1.83 $ 2.34 $ 2.79 Aggregate ($ per BOE)$ 37.35 $ 45.68 $ 47.08 Prices adjusted for derivatives: Crude oil ($ per Bbl)$ 54.15 $ 55.70 $ 56.37 Natural gas ($ per Mcf)$ 1.90 $ 2.34 $ 2.79 Aggregate ($ per BOE)$ 43.78 $ 45.15 $ 46.32 Production and lifting costs: Lease operating ($ per BOE)$ 4.33 $ 3.65 $ 4.95 Gathering, processing and transportation ($ per BOE)$ 2.24 $ 2.32 $ 1.77 Production and ad valorem taxes ($ per BOE)$ 2.53 $ 2.74 $ 2.56 General and administrative ($ per BOE) 1$ 2.97 $ 1.97 $ 3.18 Depreciation, depletion and amortization ($ per BOE)$ 16.73 $ 16.64 $ 17.49 Capital expenditure program costs 2$ 79,220 $ 64,623 $ 101,288 Cash provided by operating activities 3$ 72,473 $ 75,981 $ 69,259 Cash paid for capital expenditures 4$ 62,015 $ 71,010 $ 86,486 Cash and cash equivalents at end of period$ 55,331 $ 7,798 $ 4,655 Debt outstanding at end of period, net 5$ 592,624 $ 555,028 $ 515,919 Credit available under credit facility at end of period 6$ 100,200 $ 137,200 $ 124,600 Net development wells drilled and completed 11.0 9.9 7.8
__________________________________________________________________________________
1 Includes combined amounts of
months ended
respectively, attributable to equity-classified share-based compensation and
significant special charges, including acquisition, divestiture and strategic
transaction and other costs, as described in the discussion of "Results of
Operations - General and Administrative" that follows.
2 Includes amounts accrued and excludes capitalized interest and capitalized
labor.
3 Includes net cash received (paid) for derivative settlements of
operating assets and liabilities of
million for the three months ended
4 Represents actual cash paid for capital expenditures including capitalized
interest and capitalized labor.
5 Represents amounts net of unamortized discount and deferred issue costs of
2019 and
6 The borrowing base under the credit agreement, or Credit Facility, was reduced
to
will decrease further to
availability will be decreased to a maximum of
redetermination of the borrowing base in Fall 2021. Based on the amended
borrowing base, our credit availability would have been
amendment been in effect as ofMarch 31, 2020 . 25
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Key Developments The following general business developments had or may have a significant impact on our results of operations, financial position and cash flows: Actions to Address the Economic Impact of COVID-19 and Decline in Commodity Prices During March andApril 2020 , we initiated and began pursuit of several actions to mitigate the anticipated adverse economic conditions for the immediate future and to support our financial position, liquidity and the efficient continuity of our operations as follows: Drilling and Completion Program. We suspended our drilling and completion program altogether inApril 2020 . All of our contracted operated rigs were released from drilling activities in earlyApril 2020 . Derivatives. We substantially expanded the scope and range of our commodity derivatives portfolio and restructured certain oil hedge positions to move hedge positions from the second half of 2021 into the second and the fourth quarters of 2020. InApril 2020 , we received over$14 million in proceeds from settlements of our commodity derivatives. Federal Relief. We have initiated a number of liquidity and income tax measures made available under the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act and related regulations, including the application for an accelerated refund of our remaining alternative minimum tax, or ATM, credits of approximately$2.5 million that would have otherwise been payable to us over the next two years. Working Capital. We have negotiated more favorable payment terms with certain of our larger vendors and are continuing to increase our diligence in collecting and managing our portfolio of joint venture receivables. Cost Containment. We initiated a hiring freeze inMarch 2020 and eliminated annual cost-of-living and similar adjustments to our salaries and wages for 2020. We are also reviewing our operations to reduce or otherwise defer certain costs consistent with the anticipated level of business activity and changes to the timing of certain action plans. Operations Considerations. In anticipation of continued excess domestic supply, we: (i) have secured supplemental storage capacity for our crude oil production for up to six months beginning inMay 2020 , (ii) have shut in certain producing wells beginning inApril 2020 and continue to evaluate other opportunities to do so if the price environment remains depressed for an extended period and (iii) are enhancing the integrity of our producing wells and reserves in place in the event a larger scale curtailment condition is necessary. InApril 2020 , we rescinded the release of one rig and entered into a new agreement to maintain the rig in place for a minimal daily rate providing us with the option to either restart drilling operations on seven days notice or release the rig altogether for demobilization. Borrowing Base Redetermination OnApril 30, 2020 , we entered into the Borrowing Base Redetermination Agreement and Amendment No. 7 to Credit Agreement, or the Seventh Amendment. The Seventh Amendment provides for a$1.0 billion revolving commitment and a$400 million borrowing base, reduced from$500 million , including a$25 million sublimit for the issuance of letters of credit. Furthermore, the Seventh Amendment provides for an additional decrease in the borrowing base to$375 million effectiveJuly 1, 2020 and, effectiveOctober 1, 2020 , limits availability under the Credit Facility to a maximum of$350 million until the redetermination of the borrowing base in Fall 2021. In addition, the Seventh Amendment provides for: (i) an increase of 100 basis points to the applicable margin ranges for outstanding borrowings, (ii) a decrease to the maximum leverage ratio from 4.00 times to 3.50 times, (iii) implementation of certain anti-cash hoarding provisions, including the requirement to repay outstanding loans and cash collateralize outstanding letters of credit on a weekly basis in the amount of any cash on the balance sheet (subject to certain exceptions) in excess of$25 million and (iv) further limitations on dividends and share repurchases until Spring 2021 borrowing base determination. Production and Development Plans Total production for the first quarter of 2020 was 2,433 BOE, or 26,740 barrels of oil equivalent per day, or BOEPD, with approximately 77 percent, or 1,881 MBbls, of production from crude oil, 13 percent from NGLs and 10 percent from natural gas, respectively. We drilled and turned 13 gross (11.0 net) wells to sales during the first quarter of 2020. At the time we suspended our drilling and completion program and continuing through toMay 1, 2020 , we had a total of eight gross (7.6 net) wells in process that were substantially drilled and waiting on completion. As ofMay 1, 2020 , we had approximately 99,300 gross (86,600 net) acres in the Eagle Ford, net of expirations. Approximately 92 percent of our acreage is held by production and substantially all is operated by us. 26
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Commodity and Interest Rate Hedging Program As ofApril 30, 2020 , we have hedged a portion of our estimated future crude oil and natural gas production fromMay 1, 2020 through the first half of 2021. We are currently unhedged with respect to NGL production. The following table summarizes our hedge positions for the periods presented: WTI - Oil Volumes WTI Average Price MEH - Oil Volumes MEH Average Price Swaps (Barrels per day) ($ per barrel) (Barrels per day) ($ per barrel) 2Q - 2020 13,209 $ 52.06 2,000 $ 61.03 3Q - 2020 8,630 $ 55.20 2,000 $ 61.03 4Q - 2020 9,804 $ 55.18 2,000 $ 61.03 1Q - 2021 5,000 $ 51.60 - $ - 2Q - 2021 4,945 $ 51.60 - $ - WTI - Oil Volumes WTI Floor Price WTI Ceiling Price Collars (Barrels per day) ($ per barrel) ($ per barrel) 2Q - 2020 2,000 $ 48.00 $ 57.10 3Q - 2020 6,891 $ 52.97 $ 58.03 4Q - 2020 2,000 $ 48.00 $ 57.10 1Q - 2021 1,667 $ 55.00 $ 58.00 2Q - 2021 1,648 $ 55.00 $ 58.00 WTI - Oil Volumes WTI Average Put Price Long Puts (Barrels per day) ($ per barrel) 2Q - 2020 3,297 $ 23.00 2Q - 2020 8,242 $ 30.00 2Q - 2020 3,297 $ 55.00 3Q - 2020 2,717 $ 30.00 1Q - 2021 2,500 $ 36.00 2Q - 2021 2,473 $ 36.00 WTI - Oil Volumes WTI Put Price Short Puts (Barrels per day) ($ per barrel) 2Q - 2020 912 $ 44.00 4Q - 2020 5,087 $ 43.50 1Q - 2021 9,167 $ 37.36 2Q - 2021 9,066 $ 37.36 WTI - Oil Volumes WTI Long Puts Price WTI Short Puts Price Put Spreads (Barrels per day) ($ per barrel) ($ per barrel) 3Q - 2020 5,435 $ 30.00 $ 20.00 Basis Volumes Basis Price MEH-WTI Basis Swaps (Barrels per day) ($ per barrel) 2Q - 2020 2,747 $ (0.85 ) Henry Hub - Gas Volumes Henry Hub Floor Price Henry Hub Ceiling Price Collars (MMBtu/d) ($/MMBtu) ($/MMBtu) 2Q - 2020 12,901 $ 2.00 $ 2.21 3Q - 2020 12,804 $ 2.00 $ 2.21 4Q - 2020 12,804 $ 2.00 $ 2.21 27
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Financial Condition Liquidity Our primary sources of liquidity include our cash on hand, cash provided by operating activities and borrowings under the Credit Facility. The Credit Facility provides us with up to$1.0 billion in borrowing commitments. The current borrowing base under the Credit Facility is$400 million throughJune 30, 2020 at which time it will be further reduced to$375 million , and effectiveOctober 1, 2020 , availability under the Credit Facility will be limited to a maximum of$350 million until the redetermination of the borrowing base in Fall 2021. As ofMay 7, 2020 , we had$20.2 million available under the Credit Facility. Our cash flows from operating activities are subject to significant volatility due to changes in commodity prices for crude oil, NGL and natural gas products, as well as variations in our production. The prices for these commodities are driven by a number of factors beyond our control, including global and regional product supply and demand, weather, product distribution, refining and processing capacity and other supply chain dynamics, among other factors. All of these factors have been negatively impacted by the COVID-19 health crisis and the ongoing disruptions to the global energy markets. In order to mitigate this volatility, we entered into derivative contracts with a number of financial institutions, all of which are participants in the Credit Facility, hedging a portion of our estimated future crude oil and natural gas production through the the first half of 2021. The level of our hedging activity and duration of the financial instruments employed depends on our desired cash flow protection, available hedge prices, the magnitude of our capital program and our operating strategy. Capital Resources We plan to fund our operations for the next twelve months primarily with cash on hand, cash from operating activities, including net receipts from derivative settlements and borrowings under the Credit Facility. Based upon current price and production expectations for the remainder of the year, we believe that our cash on hand, cash from operating activities and borrowings under our Credit Facility will be sufficient to fund our operations for the next twelve months; however, future cash flows are subject to a number of variables including the length and magnitude of the current global economic slowdown associated with the COVID-19 health crisis and related disruptions to global energy markets. Cash on Hand and Cash From Operating Activities. As ofMay 7, 2020 , we had approximately$39 million of cash on hand. For additional information and an analysis of our historical cash from operating activities, see the "Cash Flows" discussion that follows. Credit Facility Borrowings. During the three months endedMarch 31, 2020 , we borrowed$37 million , net of repayments, under the Credit Facility. We paid down$20 million onMay 4, 2020 subsequent to the effective date of the Seventh Amendment. For additional information regarding the terms and covenants under the Credit Facility, see the "Capitalization" discussion that follows. The following table summarizes our borrowing activity under the Credit Facility for the periods presented: Borrowings Outstanding Weighted- Weighted- End of Period Average Maximum Average Rate Three months ended March 31, 2020$ 399,400 $ 376,059 $ 399,400 3.68 % Proceeds from Sales of Assets. For additional information and an analysis of our historical proceeds from sales of assets, see the "Cash Flows" discussion that follows. Capital Markets Transactions. From time-to-time and under market conditions that we believe are favorable to us, we may consider capital market transactions, including the offering of debt and equity securities. We intend to maintain an effective shelf registration statement to allow for optionality, including by filing in the near term a new Shelf Registration Statement on Form S-3 in advance of the expiration of our current Shelf Registration Statement. At the present time, however; we do not believe that the market conditions for such transactions are viable for entities of our size within our industry. Accordingly, we do not consider such transactions as a potential source of capital at this time. 28
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