The company had 450 producing wells at year end with more than 300 being candidates for EOR
according to joint presentations with DNR. PVAC IR confirmed the company is moving forward with EOR
projects despite the DNR deal falling apart. It has hired a team from MRO and has allocated $15MM in
cap ex spend this year to facilitate its first pilot EOR wells. EUR economics are very compelling although
they don’t provide the instant returns of horizontal drilling. Estimated cost per well is $1M - $1.5MM
which yields strong economics at current pricing. Utilizing Co2 or natural gas to flood the wells is costly
on a LOE basis ($25 LOE) but still highly economic given limited cap ex and low decline production that
follows. The company will hopefully provide much more detailed projections as the year progresses.
EOG has released some economics on some of its EOR well results. Data on over 100 wells using Rich
hydrocarbon gas floods have boosted output on existing wells anywhere from 40 to 130 barrels per day
with an average of about 80 barrels per day in the 1st year. Observed decline rates after the first year of
EOR production thus far have been in the 5% range per year. The data goes back to the first pilot EOR
wells in 2014. At 80 incremental barrels per day we get an additional ~30K barrels per year. Using $60
LLS pricing and $25 LOE which includes GP&T, the cash flow from these EOR wells is about $1.05M in the
first year. Given observed shallow decline rates going forward of about 5%, the economics look
compelling. These wells can build a large base of shallow decline production from which the company
can shift towards returning cash to holders as well as extend its reserve life dramatically. This is the
long-term opportunity for patient holders. Another partner like DNR can be brought in to accelerate
this development.
Current valuation
PVAC had $520M in debt at year end and the equity at $41 is worth about $625M for a total EV of about
$1.15B. The PV-1 of its PDP was $1.03B at $65 WTI and $825M at $55 WTI. At these levels we are
paying very little for its PUDs despite a strong management track record in developing the asset in the
past two years. Based on current strip and despite the company hedging out half its oil production at
about $57, I estimate 2019 EBITDA hitting about $380MM. Total cap ex will likely hit about $330MM
this year (the few sell side estimates have lower cap ex estimates but may not be figuring spend on EOR
pilot projects). Interest costs will be about $35MM this year. This leads to modest $15MM in FCF this
year despite 25 - 30% production growth.
Utilizing a 2-rig program in 2020 and beyond, the company should be able to generate modest
production growth without any benefit from EOR for at least the next two years. Drilling 30-35 wells per
year extends its reserves life considerably vs. the 50 well pace. However, the drilling slowdown has the
effect of lowering PV10 value given cash flows would be spread out over a longer period of time. Small
cap E&P’s need a balanced approach between returning “profits” to shareholders or putting it back into
the ground and potentially realizing much lower prices in the future thereby destroying capital.
Depressed multiples are understandable given this dynamic. This is a point where I believe PVAC will
differentiate itself.
I belive that shares should trade at their current NAV of $60 as 25% growth upside funded from internal cash
flows merits this valuation. Further upside could double price from here as company expands
its proven reserves
Catalyst