A Well Run Dry?

Penn Virginia has sought "strategic alternatives" since last year. A report said it had spurned a would-be buyer, spurring a stock sell-off and a denial by the chairman it had anything to reject.

Founded in 1882 by Philadelphia coal barons, Penn Virginia Corp. is one of the region's oldest surviving businesses.

That distinction is in serious jeopardy with each passing day of depressed energy prices.

The company, based in Radnor, traces its roots to the pioneers of Lehigh Valley anthracite coal mining. In its 21st-century incarnation, it has embraced shale, the new fossil-fuel revolution, and transformed itself into a shale-oil producer.

Yet while the collapse of crude-oil prices last year has been a boon for energy consumers, the prolonged slump has hammered small exploration and production companies such as Penn Virginia that borrowed heavily to lease reserves that are unprofitable when oil sells for less than $50 a barrel.

Penn Virginia's losses have mounted - $190 million in the last three quarters - and it has responded by slashing operating costs. Last year, it boosted the number of drill rigs operating in Texas to eight. Now it has one.

It suspended dividends on its preferred stock. Its credit line, which is covering its operating losses, is on course to be tapped out next year.

To raise cash, Penn Virginia is selling assets, one by one, though it retains its prized possession, about 100,000 acres of leases in the Eagle Ford shale formation near San Antonio.

"They're taking every measure available to them to preserve liquidity and batten down the hatches and survive this thing," said Chad Mabry, a Houston-based analyst at FBR Capital Markets & Co.

Large investors, including Soros Fund Management and more recently Lone Star Value Management, have pressed the company to find a buyer. But Penn Virginia's stock price has plummeted from $17 a share in early 2014 to about 75 cents. The New York Stock Exchange put the company on notice that it would be delisted unless its share price got back above $1 a share.

Chief executive H. Baird Whitehead, 65, announced plans in July to retire after a replacement was named, then abruptly quit Monday, though he will remain on the board. The company's chairman, Edward B. Cloues II, has stepped in as interim CEO.

Analysts interpreted the move as another bearish signal.

"The initial announcement talked about him staying on board until a new CEO comes in," said Robert Du Boff, of Oppenheimer & Co. "The fact that that process hasn't taken place leads me to believe that they can't find any takers for the role, or maybe they already know they're going to sell the company, which is why they wouldn't bring in a new CEO."

Penn Virginia had $637 million in revenue in 2014. At year's end, it had 164 employees, many of them in its Houston operational office, though it let go 18 employees this year, according to its financial reports. The company employs contractors for its drilling operations.

A Moody's Investors Service comparison of 90 oil- and gas-exploration companies in August placed Penn Virginia dead last for "full-cycle costs" to produce a barrel of oil, a proxy for a break-even cost.

The average among the producers to find, develop and sell a barrel of oil was $44.42, according to Moody's. Penn Virginia's cost was $135.52.

Internet naysayers have been harsh. "Penn Virginia: All Signs Point to Bankruptcy," read the headline on a column posted in August on the online investor forum Seeking Alpha.

Penn Virginia, through a spokesman, declined to comment for this article. Its officials have limited their public statements to news releases and conference calls with investment analysts.

Penn Virginia has been seeking "strategic alternatives" since last year. A British publication reported in July that the company had spurned a potential buyer, prompting a stock sell-off and a public denial by the chairman that it had anything to reject.

"While there was a reasonable level of interest, at the end of the day, there were no offers to consider," Cloues told analysts July 30. "The difficult environment for oil prices just caused a lot of people to be very hesitant."

Penn Virginia's history begins with the Virginia Coal & Iron Co., founded in 1882 by Philadelphia businessman John Leisenring Jr., whose grandfather had settled in the Lehigh Valley in the 1700s.

According to a 2003 history by Dan Rottenberg, In the Kingdom of Coal: An American Family and the Rock that Changed the World, the Leisenrings were pioneers in the anthracite business, based in the town of Mauch Chunk, now known as Jim Thorpe.

Virginia Coal & Iron was created as a holding company to own mineral rights that it leased to its companion company, Westmoreland Coal Co. Westmoreland was founded in 1854 to mine bituminous coal in Western Pennsylvania, and its formation was closely tied to the creation of the Pennsylvania Railroad.

When Westmoreland later ventured south for new veins of coal, Virginia Coal and Iron was its vehicle for acquiring the mineral rights.

Westmoreland and Virginia Coal & Iron remained conjoined for much of the 20th century. They shared ownership and neighboring offices in the Fidelity Trust Building on South Broad Street. Both were headed by E.B. "Ted" Leisenring Sr., the founder's grandson.

In 1967, the holding company was renamed Penn Virginia Corp., a "modern" name that Leisenring said "indicates areas of management and operation without limiting future activities."

Eventually, Westmoreland closed its Eastern mines, went through bankruptcy, and moved to Colorado in 1995 to operate its Western mines.

Penn Virginia separated its coal and natural-gas rights, along with its pipeline interests, into Penn Virginia Resources L.P. That company, which came to be known as PVR, was bought in 2014 and absorbed by an Energy Transfer Partners subsidiary.

Penn Virginia Corp., the last remaining local remnant of the Leisenring Group of companies, transformed into an oil and gas producer. It hired Whitehead, a 20-year industry veteran, to run its oil and gas unit in 2001. He became CEO in 2011.

Penn Virginia's initial focus as a producer was to explore primarily for shale gas - it was active in some of the less productive areas of Pennsylvania's Marcellus formation. After gas prices fell in 2009, it shifted its ambitions to shale oil, which continued to fetch strong prices.

Analysts say that Penn Virginia's decision to focus exclusively on one promising formation in Texas was reasonable.

"At the time, I think it was a good move," said Mabry, the FBR Capital Markets analyst. "The market was assigning a premium to operators that had that pure-play status."

Others suggest Penn Virginia overextended itself, not uncommon in an aggressive industry where optimism reigns supreme during boom times.

"I think they had the right idea, but on the execution, they bit off more than they could chew," said Du Boff, the Oppenheimer analyst.

Moody's said Penn Virginia's acquisition of leases from 2012 to 2014 contributed to its high costs, along with "its refocusing of development efforts."

Now, the company says, its goal is to "develop a viable path forward through at least 2017."

That will be a tall order.

"Their equity isn't worth very much," Du Boff said.

"Without significant improvement in the oil price, and significant improvement in operations," he said, "they're going to have to do something to restructure their debt next year. Or just outright sell the company."