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Related Issuers
Rating Action:

Moody's changes Penn Virginia's outlook to negative from stable

05 Apr 2011

Approximately $550 million of debt securities affected

New York, April 05, 2011 -- Moody's Investors Service rated Penn Virginia Corporation's (PVA) new notes B2 (LGD 4, 66%). Simultaneously, Moody's affirmed PVA's B1 Corporate Family Rating (CFR), its B1 Probability of Default Rating (PDR), and the B2 rating on the existing senior unsecured notes (although the LGD point estimate is changing to 66% from 58%). It also upgraded the Speculative Grade Liquidity Rating to SGL-2 from SGL-3. The outlook is changed to negative from stable.

Proceeds from the offering will be used to fund the company's tender of the existing $230 million senior secured convertible notes due November 2012 plus general corporate purposes.

"The move to a negative outlook reflects PVA's weakened capital productivity both on a standalone basis and relative to its peers," said Ken Austin, Moody's Vice President. "Although the company is transitioning to more of a liquids focus to offset the weaker margins for its natural gas production, this transition will take time and we expect lower profit margin trends to continue through 2011 with the company outspending cashflow in the near-term in order to fund this transition."

RATINGS RATIONALE

In terms of capital productivity, average daily production has remained essentially flat in the last three years, increasing from an average of 21.4 MBoe/Day in 2008 to 21.6 MBOE/Day in 2010, and reserves have slightly increased from 153 MMBoe in 2008 to 157 MMBoe in 2010 all while PVA has invested close to $1.3 billion in capital expenditure, of which $448 million was spent in 2010 alone.

The company's expansion in recent years to strengthen its core asset base while diversifying into new basins in East Texas, Midcontinent, Haynesville Shale, and Eagle Ford Shale has come at a cost. The company's 1-year F&D cost has increased from $13.53/Boe in 2008 to current high level of $36.05/Boe all while margins have been under pressure due to weakened natural gas pricing in North America. As a result, PVA's full cycle leverage ratio currently stands at 0.77x, indicating that current realized margins are below reserve replacement cost. The company is now concentrating on developing its liquid rich assets in order to strengthen its margins. We expect PVA to be outspending cashflow for the next 12-18 months while completing its transition to higher liquids production. PVA's divestiture in 2010 of its ownership interest in Penn Virginia Resource Partners, L.P. (PVR), a publicly traded MLP, has resulted in loss of significant dividend cashflow which could have financially aided PVA's portfolio transition.

In looking at scale, PVA's reserves and production remain on the lower end of the B1 peer group, and currently approximately 79% of the company's production is natural gas based, which faces near-term margin pressures. While its scale has not suffered, its lack of progress compared to the peer group ranks PVA less favorably than it had been previously.

Despite lower margins PVA has maintained a conservative financial profile and PVA's leverage remains in line with its peers. The rating is also supported by experienced management and conservative financial policies.

A move back to stable outlook would be considered if PVA manages to successfully navigate its portfolio transition towards higher liquid production. This would be evidenced by improving production and reserves trends coupled with a much lower finding and development (F&D) cost that translates into a leveraged full-cycle ratio of 1.00x (based on leading edge F&D) or higher, while maintaining leverage profile in the $8.00 boe of PD reserve range and debt/average daily production around the $25,000/boe level.

Conversely, the ratings could be pressured if PVA's production and reserve profile do not improve and PVA continues to lag behind its peers, or if its leverage profile deteriorates.

The upgrade of the SGL rating to SGL-2 reflects PVA's improved liquidity position underpinned by an undrawn $300 million revolving credit facility, significant cash balances to help fund the expected outspending of cash flow in 2011, and the covenant cushion that will ensure accessibility to the revolver over the next four quarters. The SGL-2 is also supported by the excess borrowing base value of the assets versus the current $300 million revolver commitments.

The last rating action for Penn Virginia was on June 4, 2009 when a first time B1 CFR, B1 PDR, B2 senior unsecured notes rating and SGL-3 Speculative Grade Liquidity Rating was assigned. The outlook was stable.

The principal methodologies used in this rating were Independent Exploration and Production (E&P) Industry published in December 2008, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Penn Virginia Corporation, headquartered in Radnor, Pennsylvania, is an independent oil and gas company primarily engaged in the development, exploration, and production of natural gas and oil in the East Texas, the Mid-Continent, Appalachian and Mississippi regions.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Kenneth Austin
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes Penn Virginia's outlook to negative from stable
No Related Data.
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