Soros Has Big Plans For This Energy Stock
George Soros is a macro investor: He looks at the big picture, identifies a theme... and then homes in on the best way to profit from that theme.
His strategy involves looking at government and central bank policies, industry trends, and the economy -- but one tactic that he has typically avoided is activist investing. Soros usually leaves that for the likes of Carl Icahn , Bill Ackman and Dan Loeb.
However, when Soros -- with a net worth of $25 billion -- decides to become a company's largest shareholder and assume an activist role, he should not be taken lightly.
Soros has taken on just such a role with Penn Virginia (NYSE: PVA ) .
Over the years, Penn Virginia has shifted from being a pure natural gas company to one focused on oil and higher-value natural gas liquids. The company remains one of the best-positioned companies in the Eagle Ford shale formation in South Texas.
Soros became Penn Virginia's largest shareholder in the first quarter of this year after disclosing a position of just over 9% in the company. The interesting part is what Soros said in his SEC filing .
Where most activists go after management, Soros praised Penn Virginia's management team for the job that they have done. (In fact, he said "the financial incentives for its management team should be enhanced" -- meaning he thinks raises are in order.) However, Soros went on to say that he sees the stock as undervalued and that "strategic alternatives" should be explored to enhance shareholder value.
Soros is correct to praise the job Penn Virginia's management team has done. One of the first companies to realize the potential of the Eagle Ford, Penn Virginia also has interests in the Haynesville Shale and Cotton Valley in East Texas, the Selma Chalk in Mississippi, and the Marcellus Shale in Pennsylvania.
At the end of last year, Penn Virginia had 1,213 productive wells, with proven reserves of 136 million barrels of oil equivalent (BOEs). It also owns 280,400 acres of leasehold and royalty interests. These assets could make Penn Virginia an attractive takeover target for a larger player.
The most attractive asset in Penn Virginia's portfolio is its Eagle Ford assets. One player in particular has been making purchases in the Eagle Ford is Devon Energy (NYSE: DVN ) , which purchased GeoSouthern Energy's Eagle Ford assets last year for $6 billion in cash.
Devon's purchase covered 82,000 net acres of drilling leases in the Eagle Ford that are producing 53,000 barrels of oil equivalent per day. In comparison, Penn Virginia currently owns 85,900 net acres in the Eagle Ford. (My colleague Jody Chudley recently investigated a lesser-known aspect of the Eagle Ford's output .)
Shares of Penn Virginia are trading at 29 times next year's earnings and just 1.1 times book value. Its enterprise value-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio is only 7.5.
Besides Soros and his 9.1% stake, another big name in the stock is billionaire Ken Griffin and his Citadel Advisors hedge fund, which owns a 6.7% stake in the company.
Risks to Consider: Shares of Penn Virginia have already gone on quite a run due to the potential of its Eagle Ford assets. Shares are up almost 200% in the past year. If a deal is not announced within the next year, the stock could see some selling pressure as some shareholders lock in profits.
Action to Take --> Buy shares of Penn Virginia with a price target of $22 for upside of 50%. This is based on the premium that many analysts expect the company would command in a sale if Soros is successful in getting Penn Virginia acquired by a larger player.
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