Which is the Better Short: Penn Virginia vs. Swift Energy?

The Eagle Ford Shale is fueling massive growth in American proved oil reserves.

Because of that it has been a hotbed of

investment and the shale play is fueling big gains for

investors. Photo credit: Flickr/fsecart

That being said, not every company operating out of the Eagle Ford Shale has won the

praise of investors. Two stocks in particular are

among the most heavily shorted in the whole sector

as investors worry that these stocks will incinerate their

investment. Photo credit: Flickr/TaxRebate.org.uk

Big Short No. 1: Swift EnergyInvestors sold short 34.2% of Swift Energy’s shares.

Source: Swift Energy Investor Presentation

Swift Energy

What has investors so worried:

Shares plunged earlier this year after the company reduced its 2014 production guidance.

It found that wells drilled in its Artesia area didn’t deliver consistent results.

The company’s balance sheet isn’t as strong as some of its peers. Finally, a new joint venture will fuel growth in the company’s natural

gas focused acreage in the Eagle Ford. Goal is to grow from the 31st ranked gas producer in Texas to a top 20

producer by next year.

Swift Energy

Is shorting a good idea?

Maybe – Swift Energy is starting to improve the areas that concern investors. The joint venture brought in cash to improve the balance sheet and fund drilling. The company is also focused on better wellbore placement, which is resulting in more consistent production. However, the focus on natural gas could burn investors if prices don’t improve.

Big Short No. 2: Penn VirginiaInvestors sold short 34.1% of Penn Virginia’s shares.

Source: Penn Virginia Investor Presentation

Penn Virginia

What has investors so worried:

Penn Virginia’s stock price surged 200% over the past year. Part of the surge is due to the company’s Eagle Ford fueled oil

production growth. However, activist investor George Soros is

pushing for the company to sell itself. Investors are worried a sale won’t happen and the stock price will

plunge. Company also has substantial debt as it continues to outspend

its cash flow.

Penn Virginia

Is shorting a good idea?

Absolutely not – Penn Virginia is building one of the fastest growing oil platforms in the Eagle Ford Shale. Its oil production is expected to grow 65% this year. It’s also planning non-core asset sales to increase its liquidity to fund its accelerated growth plan. While its valuation might be stretched, that alone isn’t reason to go short.

Bonus Short: Sanchez EnergyInvestors sold short 13.9% of Sanchez Energy’s shares.

Source: Sanchez Energy Investor Presentation

Sanchez Energy

What has investors so worried:

Sanchez Energy recently spent $554 million on a natural gas rich asset in the Eagle Ford Shale.

Deal pushes Sanchez Energy’s reserves from 77% oil to 49% oil.

Deal also doubled the company’s Debt/Enterprise Value from 20% to 41%.

Sanchez Energy

Is shorting a good idea?

Not really – Sanchez Energy seized the opportunity to buy cheap natural gas assets. This gives the company a lot of upside to natural gas, especially in the export marketplace. However, the big boost in debt should be monitored.

Investor takeaway

Swift Energy has under performed this year and might make shorts some money. However, Penn

Virginia is a short to avoid. While its stock has soared

this year that’s no reason to short. The market can stay

irrational a lot longer than an investor can stay short.

Photo credit: TaxCredits.net

This energy company is becoming OPEC’s worst

nightmare.