VIA FACSIMILE & U.S. MAIL
February 27, 2002
Mr. A. James Dearlove
President & C.E.O.
Penn Virginia Corporation
One Radnor Corp Center, Suite 200
100 Matsonford Road
Radnor, PA 19087-4515
Dear Mr. Dearlove:
Third Point Management Company L.L.C. ("Third Point"), as investment manager of
Third Point Partners L.P. and its affiliates has recently acquired 500,000
shares of Penn Virginia Corporation (the "Company"), representing 5.6% of the
issued and outstanding stock.
Do not confuse our investment as a vote of confidence in management's
ill-conceived acquisition and exploration strategy. Rather, we believe that Penn
Virginia is asset rich and trades significantly below its intrinsic value. We
believe that the reason for the discount is that shareholders lack confidence
that management has set forth a clear path to value creation. We have set forth
such a path below, the essential elements of which are:
1. Refrain from further dilutive oil and gas acquisitions.
2. Drastically cut back on the company's drilling program.
3. Contemplate the sale of some or all oil and gas assets.
4. Use the cash flow freed up by steps 1, 2 and possibly 3 above to
repurchase the Company undervalued stock in the open market.
5. Increase value of the Company via its General Partnership interest in
PVR.
Although we applaud the separation of the Company's coal and timber assets into
a separate public entity, Penn Virginia Resource Partners, L.P. (the
"Partnership" or "PVR") in which the Company owns roughly half the units and
retains a General Partnership interest, we believe that this transaction
represents only an initial step to value
<PAGE>
creation for shareholders. The next step is to deploy the company's free cash
flow in a way that immediately reduces the value gap between the company's share
price and its intrinsic value. Unfortunately, this seemingly obvious exigency
has not been the Company's modus operandi.
The ill conceived and poorly timed $112.0 million acquisition of Synergy Oil &
Gas ("Synergy") appears to bode poorly for this management team's ability to
complete accretive corporate transactions. First, the transaction was
consummated at a time when natural gas prices were near all time highs which
resulted in a subsequent write down of $35.0 million within four months of
closing. Second, the subsequent low prices of natural gas have left the Company
unable to sell off marginal properties as anticipated at the time of the
acquisition. Third, to add insult to (shareholder's) injury, the first three
exploratory holes drilled came up dry and four material wells went off-line, a
circumstance that you described as a "perfect storm" scenario during your fourth
quarter conference call. More terrifying, notwithstanding the financial and
strategic blunder of the Synergy acquisition, you remain undeterred saying that
the setbacks "have not lowered [your] expectations by one molecule." Compounding
our fear is your stated objective of using Synergy as a platform for further
wildcatting adventures. We will not stand by and allow management to waste
another dollar on expensive acquisitions while our stock languishes at a
fraction of its intrinsic value.
With all due respect, the sophisticated Texas oilmen (Synergy C.E.O., Eric
Pitcher and the individuals at Natural Gas Partners) that sold their interest in
Synergy saw the Appalachian coal men coming with aspirations to wear crocodile
skin cowboy boots, silver spurs and ten-gallon hats. No doubt the folks at NGP
who sold Synergy so near the top tick of the natural gas bubble had quite a
hootenanny at Penn Virginia shareholders' expense.
Your drilling program does not seem to be motivated by a desire to find the
cheapest reserves available to you. For 2001, your finding costs were $1.56 per
Mcfe (per your fourth quarter release) and you anticipate that they will be
$1.22 per Mcfe in 2002 (as indicated in the conference call on February 14th).
By contrast, the cost of buying back your own reserves via a share repurchase is
about $0.50 per Mcfe (which calculation we set forth several paragraphs below).
Mr. Dearlove acknowledged as much on the most recent conference call, in
response to the suggestion by another large shareholder that the company invest
in share repurchases rather than in drilling for new reserves:
<PAGE>
"I surely got the conceptually same answer you got, that right
now, the cheapest reserves maybe that we can lay our hands on are
to buy our own stock back in."
We can only surmise that management's goal in making corporate acquisitions and
in spending shareholder's capital on extensive exploration rather than
reinvesting in Company stock, is to expand the size of the Company to inflate
your egos, rather than your shareholder's pocketbooks.
We believe the Company's shares are worth at least $50.00 and that the best
immediate use of the company's cash remains repurchase of its own shares. If the
company's stake in PVR is valued by using the market value of the common units
as a proxy for the value of PVA's common units, the value of the PVR stake is
worth roughly $175 million (7,649,880 subordinated units and 174,880 common
units at $22.50 per Partnership Unit; this valuation ascribes no value to the 2%
general partner interest that the Company maintains in PVR, which certain
analysts have valued at more than $30 million or $3.00 per share. This valuation
is reinforced by the ultimate conversion of subordinated units into common stock
that will occur over the period 2004-2006 and the fact that the GP ownership has
incentive distributions that should garner cash flows equal to more than 2% of
the outstanding LP units when certain benchmarks are met.) Subtracting $175
million from the company's market value of approximately $300 million, we arrive
at a $125 million valuation attributable to the roughly 250 Bcfe of its oil and
gas assets or about $0.50 per Mcfe. Given the option of seeking to find assets
of unknown quality at a cost of $1.22 per Mcfe, or acquiring known assets at a
cost of $0.50 per Mcfe, we insist that management and the Board choose the lower
cost and more certain method of increasing reserves per share and shareholder
value, by buying back its own shares.
If we place a value of only $1.05 per Mcfe on the Company's reserves, we arrive
at a minimum pre-tax valuation of $49 per share base on a sum of the parts
analysis. (Reserves of 250 Bcfe X $1.05=$262.5 million plus $175 million for the
stake in PVR divided by 8.9 million shares) Our financial advisors, seasoned
natural resources investment bankers, have completed an independent Present
Value analysis that concludes that the assets are worth a minimum of $52 per
share. Our assumptions regarding minimum valuation per Mcfe is also confirmed by
discussions with industry participants who are knowledgeable about the Company's
primary market area.
Although we believe repurchasing shares with available cash is preferable in the
near term to dissipating corporate assets via foolhardy acquisitions or
wildcatting adventures,
<PAGE>
we recommend that Penn Virginia take immediate steps to explore the sale of its
oil and gas assets to a strategic buyer who would benefit from the potential
efficiencies of such a combination. Indeed, Third Point has had informal
discussions with a public competitor in the oil and gas industry with
significant reserves complimentary to the Company's Appalachian properties.
Third Point would entertain working with this or another strategic buyer to
assist in financing the acquisition of some or all of the Company's oil and gas
reserves. We recommend that proceeds from such a sale be used to buy in shares
via a tender offer or open market purchases and that management focus its
efforts on making acquisitions using the currency of the Partnership and
increase value to the Company by maximizing its General Partner's fees due from
PVR.
Lest you dismiss our efforts as that of a corporate gadfly who will go away if
ignored, let me disabuse you of that notion right away by providing you with
some background on our firm and several of our past 13D initiatives. Third Point
manages in excess of $500 million for institutional investors, roughly 4 times
the implied stock market value of the Company's oil and gas reserves. We have
compounded our investors' money at a rate of over 30% since inception in 1995
via our value oriented investment style.
Our record in effecting change, identifying and realizing value is evident in
the following selected prior 13D filings:
o In September 1999, Third Point filed a 13D on Agribrands Inc. in which
we complained that a transaction to sell the company to an affiliate
of the Chairman for $39.00 per share was woefully inadequate and not
in the best interest of shareholders. We contacted other potential
acquirers and three months later one of the companies that we
contacted, Cargill, acquired Agribrands for $54.50 per share. This was
a 40% premium over the insider transaction and resulted in an
incremental $150 million in profits for shareholders.
o In March of 2001, Third Point and an allied firm filed a 13D on
Bindview Inc. in which we demanded the resignation of then Chief
Executive Officer for his apparently incompetent management and the
bloated cost structure that he had created. The C.E.O's employment was
terminated several months later, excellent management was hired who
met with our approval and Bindview adopted the very cost cutting
strategies that we suggested in our filing.
<PAGE>
o In November 2001, Third Point filed a 13D on Stage Stores, a Houston
based retailer, in which we articulated our belief that the company's
shares were significantly undervalued. Stage Stores shares have risen
90% since our filing and 400% from our cost.
Please note that our 5.6% position is significant relative to the combined Board
and senior management's stake of only 5% but represents only 3% of our capital
base. We have the resources to significantly increase our stake should we so
choose.
Mr. Dearlove, while I appreciate your offer to come to our offices in New York
to talk about the company, I believe that the time for discussion has long
passed and the time for action has arrived. I imagine this letter will provide
for interesting discussion for the factions that we hear are split between a
growth versus value enhancing strategy at the next Board meeting scheduled for
March 27th. In the meantime, we may increase our stake in the company, which you
will be kept apprised of via the appropriate S.E.C. filings. In addition, we
plan to continue our discussions with other large shareholders, potential
strategic buyers, and financial and legal advisors in order to determine a
course of action to maximize value for all shareholders.
Sincerely,
/s/ Mr. P$nk
Managing His Member |
