Q4 2019 Earnings Call
Dead dead dead good day and welcome to the pen Virginia Corporation fourth quarter 2019 earnings conference call.
Risk factors in our most recent annual report on form 10-K cautionary language is also included on page two of the presentation which will be used to go through today's discussion. I am also doing this call will also be referencing third party data and consensus estimates. Please note that we are not endorsing or confirming any of these consensus estimates are public data of our. This presentation. Finally after our prepared remarks. We will answer any questions you may have with that. I will turn the call over to John.
As well as acreage swaps with adjacent operators.
$0.57 WTI for oil and $2.58 for natural gas the company had total SEC pv-10 proved developed reserves value that just took over 1 billion dollars in value and total proved reserves valued at one point six billion dollars.
I also want to point out that this inventory count currently only reflects the lower Ingrid utilizing our recently constructed Earth model. We are also evaluating opportunities to further increase our inventory be identifying additional drilling locations in the upper eagleford in Austin chalk.
Am good day and welcome to the club. Jinya Corporation fourth quarter 2019 earnings conference call.
Given this environment. I'd also like to point out that we are approximately 76% hedged for 2020 expected all volumes based on the midpoint of Guidance with some additional Hedges extending into 25 or 1.
Our products mixed in the fourth quarter of 2019 was 90% liquids and of this 76% was oil and we proceeded we received premium Louisiana light sweet also known no LS or Magellan East Houston also referred to as m e h or WTI Houston pricing which further enhances our adjusted ebitda margins. We're attracting mid-single digit year-over-year oil production growth for 2020.
All participants will be in listen-only mode. Did you need assistance, please signal a conference specialist by pressing the star key followed by zero.
So let's move on to page five and take a closer. Look at our solid operational and financial performance during this past year.
Thanks for calling first of all, I want to congratulate the entire pin Virginia team and express my gratitude for their Relentless efforts to deliver a great fourth quarter highlighted. First of all by generating free cash flow record low operating expenses pure leading margins and continued improvement in our leverage ratio. Importantly. We also added in some timely Hedges that off with our robust operational results We Believe uniquely positioned up in Virginia in our industry. The strength of our balance sheet are strong hedge positions and the short-term nature of our drilling contracts enable us to respond to a sustained lower commodity price environment as we maintain our focus on exercising Capital discipline.
After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star then one on your touch-tone phone you withdraw your question, please press * then two, please note this event is being recorded at this time. I'd like to turn off relations, please. Go ahead.
I want to thank again everyone on the pin Virginia team for all of their hard work and dedication and 2019. The result was significant accomplishments across the business, you know, I would like to spend some time this morning High Life some of those achievements for the fourth quarter of 2019. We grew total production from the third quarter to 29314 barrels of oil equivalent per day, which included oil production of 22211 barrels of oil per day.
finally
All participants will be in listen-only met should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press star then one on your touch-tone phone you withdraw your question, please press star then Thursday, please note this event is being recorded at this time. I'd like to turn the conference over to Clay Johnson director of investor relations, please go ahead.
During 2019. We continued to create value through the drill bit. We replaced over 200% of our production in grand total proved reserves to 133 million barrels of oil equivalent a year-over-year increase of 8% in
Dead dead dead dead dead.
Thanks.
You and good morning everyone. We appreciate your participation in today's call. I'm joined this morning by John Brooks and Virginia's president and CEO Rusty Kelly our second president and CFO and Ben Mathis our senior Vice President of Operations and Engineering prior to getting started. I'd like to remind you we will be discussing non-gaap measures on this key definitions and reconciliations of these measures to the most comparable gaap measure are provided in our fourth quarter and full-year 2019 earnings, press release issued yesterday afternoon and related presentation posted on our website this morning. I would also point you to the language in the forward-looking statements section of the press release our comments today will contain forward-looking statements within the meaning of the federal Securities Law these statements which include but are not limited to comments on our operational guidance or subject to a number of risks and uncertainties that could cause
important
Both of these measures. We exceeded the midpoint of our guidance or full year 2019 total production averaged 27730 barrels of oil equivalent Thursday, which was a 27% increase from 2018 oil was 74% of total production in 2019 growing 23% to an average of 20418 barrels of oil per day on the operations front. We continue to make significant operational and efficiency improvements from 2018 to 2019. We reduced our average cycle Time by 21 days going from 87 days to 66 days a 24% improvement over 2018.
Let's start on page 3 with why we believe in Virginia.
Solidly positioned for continued success and provides a compelling investment opportunity.
We are heavily weighted to oil as evidenced by our fourth quarter 2019 production mix which was 76% oil and we expect that Trend to continue throughout 2028.
Thank you.
And good morning everyone. We appreciate your participation in today's call. I'm joined this morning by John Brooks and Virginia's president and CEO Rusty. Kelly are seen a president and CFO and Ben Mathis our senior Vice President of Operations and Engineering prior to getting started. I'd like to remind you we will be discussing non-gaap measures on this cause definitions and reconciliations of these measures to the most comparable gaap measure are provided in our fourth quarter and full-year 2019 earnings, press release issued yesterday afternoon and related presentation posted on our website this morning. I would also point you to the language in the forward-looking statements section of the press release our comments today will contain forward-looking statements within the meaning of the federal Securities Law these statements which include but are not limited to comments on our operational guidance or subject to a number of risks and uncertainties that could cause birth
Are successful efforts to continue lowering operating costs coupled with premium product pricing given our strategic location near the Gulf Coast or driving industry-leading margins.
And through our targeted development efforts. We are planning for moderate oil production growth while maintaining low leverage levels all of this results in a business that can generate free cash flow, which we did in the fourth quarter off and expect the same for four year 2020. Assuming $50 per barrel WTI pricing.
Adjusted even tax for full-year 2019 increased 18% to 352.2 million dollars or $34.80 per barrel of oil equivalent.
actual results to be materially
different from those forward-looking statement including those identified in the risk factors in our most recent annual report on form 10-K cautionary language is also included on page two of the presentation which will use to go through today's discussion also doing this call will also be referencing
During the page for in Virginia is a pure-play Eagle Ford Shale operator and Gonzalez Fayette Lavaca counties in South Texas at the end of 2019. We had approximately 1,200 gross acres and 87400 net Acres of which ninety nine percent was operated by the company and ninety 1% was held by production month. We entered 2020 with an estimated drilling inventory of five hundred gross or 441 net locations a continued Ki focused of our land and Technical teams is the ongoing replenishment of our drilling inventory through organic acreage Leasing and small Acquisitions as well as acreage swaps with adjacent operators.
Looking more specifically at the fourth quarter of 2019 adjusted ebitda increased 11% from the third quarter to ninety six point four million dollars or $35.74 per barrel of oil equivalent our growth and adjusted ebitda tax in 2019 allowed us to improve our leverage ratio to less than 1.6 times at the end of 2019 and we look forward to further Improvement in 2020.
actual results to be materially
From from those forward-looking statements including those identified in the risk factors in our most recent annual report on form 10-K cautionary language is also included on page two of the presentation wage, which will use to go through today's discussion also doing this call will also be referencing third party data in consensus estimates, please note that we are not endorsing or confirm any of these consensus estimates are public data of our peers in this presentation. Finally after our prepared remarks. We will answer any questions you may have with that. I'll turn the call to John.
Moving on to page six. It's not discussed earlier. There are several key attributes that we believe make pin Virginia and extremely attractive investment and in here on page six, we reiterate those attributes am now spend some time to sketching each of these in more detail.
I also want to point out that this.
Looking at page seven we believe in Virginia is one of the highest waited all companies in the sector with an acreage position located in the heart of the oil window of the eagle.
Inventory count currently only reflects the lower eagleford utilizing our recently constructed Earth model. We are also evaluating opportunities to further increase our inventory by identifying additional drilling locations in the upper eagleford and Austin chalk.
Dead dead dead dead.
Since 2017 we have grown all volumes by approximately 170% for 2020. We expect that growth to moderate and we are projecting all growth of between two and 9% year-over-year.
Thanks for calling first of all, I want to congratulate the entire pin Virginia team and express my gratitude for their Relentless efforts to deliver a great fourth quarter highlighted. First of all by generating free cash flow record low operating expenses pure leading margins and continued improvement in our leverage ratio. Importantly. We also added in some timely Hedges that off with our robust operational results We Believe uniquely positioned up in Virginia in our industry. The strength of our balance sheet are strong hedge positions and the short-term nature of our Drilling and completion contracts enable us to respond to a sustained lower commodity price environment as we maintain our focus on exercising Capital discipline.
Our products mixed in the fourth quarter of 2019 was 90% liquids and of this 76% was oil and we proceeded we received premium Louisiana light sweet also known no LS or Magellan East Houston also referred to as m e h or WTI Houston pricing which further enhances our adjusted ebitda margins. We are getting mid-single digit year-over-year oil production growth for 2020.
Turning to page eight unlike other basins in the US the eagle food has many crude oil delivery points in ample takeaway capacity in Virginia has access to Enterprise Products log into Morgan pipelines, which delivered directly into the Houston markets. We also have the ability to deliver crude to the Phillips 66 Refinery and Sweeney and to access other water-borne markets wage in Corpus Christi be a truck or truck to pipe.
Finally during 2019. We continued to create value through the drill bit. We replaced over 200% of our production in total proved reserves to 133 million barrels of oil equivalent, a year-over-year increase of 8% and almost 170% higher than the end of 2016.
In Virginia remains in an enviable position of geographically and geologically is our production receives premium pricing. That is either l l s or M E H as of yesterday bulb LS and any age traded at more than $3 per barrel premium to West Texas intermediate.
Let's start on page 3 with why we believe in Virginia.
Totally position for continued success and provides a compelling investment opportunity.
We are heavily weighted to oil as evidenced by our fourth quarter 2019 production mix which was 76% oil and we expect that Trend to continue throughout 2028.
The composition of our Reserve Base at the end of 2019 was 74% crude oil 15% in gl's and 11% natural gas with 42% classified as project developing producing using SEC pricing of $55.67 WTI for oil and $2.58 for natural gas. The company had a total SEC pv-10 proved developed reserves valued at just over $1 billion dollars in value and total proved reserves valued at one point six billion dollars.
Billing page nine in addition to receiving premium product pricing driving. Our high margins has been an unwavering focus on the lowering expenses across the business office maintaining a link cost structure. This can be seen on page nine where we show a 21% decrease in annual adjusted direct operating expenses from $14.40 per barrel of oil equivalent in 2017 to $11.36 per barrel of oil equivalent in 2019. As a reminder adjusted direct operating expense is off some of the lease operating expenses GPT production and ad valorem taxes and cash DNA adjusted for some one-time items. And this is reconciled in the appendix of the present time.
Are successful efforts to continue lowering operating costs coupled with premium product pricing given our strategic location near the Gulf Coast are driving industry-leading margins.
And through our targeted development efforts. We are planning for moderate oil production growth while maintaining low leverage levels all of this results in a business that can generate free cash flow, which we did in the fourth quarter off and expect the same for for year 2020. Assuming $50 per barrel pricing.
Thursday
Given this environment. I'd also like to point out that we are approximately 76% hedged for 2020 expected all volumes based on the midpoint of Guidance with some additional Hedges about finding into twenty Twenty-One. So let's move on to page five and take a closer. Look at our solid operational and financial performance during this past year.
During the page for him, Virginia is a pure-play Eagle Ford Shale operator and Gonzalez Fayette Lavaca counties in South Texas at the end of 2019. We had approximately 1,200 gross acres and 87400 net Acres of which 99% was operated by
looking specific
Hello e for the full year of 2019 r l o e was $4.26 per barrel of oil equivalent down 6% from the prior year and 26% off 2017. I am pleased to report that for the fourth quarter of 2019. We achieved a record low level 4 l o e of $3.65 per barrel of oil equivalent.
I want to thank again everyone on the pin Virginia team for all of their hard work and dedication and 2019. The result was significant accomplishments across the business and I would like to spend some time this morning of lighting some of those achievements for the fourth quarter of 2019. We grew total production from the third quarter to 29314 barrels of oil equivalent Thursday, which included oil production of 22211 barrels of oil per day.
Now we focused on three initiatives to continue drive down slowly First We are continuing to implement our field wide smart gas lift in term in our system which optimizes volumes of lift gas utilized maximize oil production four volumes of injected lift gas currently approximately 85% of our wells are on gas left which reduces costs associated with down hold repairs and maximize as well as long time.
Importantly on both of these measures. We exceeded the midpoint of our guidance or full year 2019 total production averaged 27730 barrels of oil equivalent per day, which was a 27% increase from 2018 oil was 74% of total production in 2019, growing 23% to an average of 20418 barrels of oil per day.
Secondly, we continue to expand our saltwater disposal or swd system currently between 10 to 40% of our produced water is transported via are approximately Thirty miles system where every barrel It produced water we transport on pipe we save approximately $1.25 per barrel versus having to transport via truck off.
We continue to make significant operational and efficiency improvements from 2018 to 2019. We reduced our average cycle Time by 21 days going from a 7 days to 66 days a 24% improvement over 2018.
and we continue to
Focused on maximizing the competitive advantages of our contiguous acreage footprint. This allows us to build out our swd system more cost-effectively expand centralized gal lift. Deliberately maximize third-party pipeline takeaways for oil and gas and reduced labor costs by optimizing our Workforce Effectiveness. Also, it should be noted that substantially birthday oil and gas pipeline build-out costs are borne by our Midstream Partners.
Adjusted even decks for for year 2019 increased 18% to 352.2 million dollars or $34.80 per barrel of oil equivalent.
Looking more specifically at the fourth quarter of 2019 adjusted ebitda increased 11% from the third quarter to ninety six point four million dollars or $35.74 per barrel of oil equivalent our growth and adjusted ebitda in 2019 allowed us to improve our leverage ratio to less than 1.6 times at the end of 2019 and we look forward to further Improvement in 2020.
Are just in Cash General and administrative expenses were reduced to $2.04 per barrel of oil equivalent in 2019, which is 41% lower than in 2017 bought a similar to l o e we saw strong fourth-quarter in 2019 with adjusted cash G&A expenses coming in at $1.61 per barrel of oil equivalent.
Moving on to page six. It's not discussed earlier. There are several key attributes that we believe make pin Virginia and extremely attractive investment and in here on page six, we reiterate those attributes am now spend some time discussing each of these in more detail.
Living to page 10 as part of pin Virginia's commitment to continuous Improvement. We are dedicated to lowering Capital spending by driving efficiencies throughout the organization as well as working closely with our service providers while also maintaining a safe work environment the two charts and the top of page ten clearly illustrate the improved operational execution of our technical team over the past few years. The charts are showing our average drilling feet per day from spied during release for the last three years with our to string well design our average effective joint feet per day improved 58% from 2017 to 2019.
looking at page
We believe in Virginia is one of the highest waited all companies in the sector with an acreage position located in the heart of the oil window of the eagle.
Since 2017 we have grown oil volumes by approximately 170% for 2020. We expect that growth to moderate and we are projecting oil growth of between two and 9% year-over-year.
Turning to page eight. I'd like other basins in the US. The eagle food has many crude oil delivery points in ample takeaway capacity in Virginia has access to Enterprise products and Kinder Morgan pipeline, which delivered directly into the Houston markets. We also have the ability to deliver crude to the Phillips 66 Refinery and Sweeney and to access other water-borne markets including Corpus Christi be a truck or truck to pipe.
black one
As with our three steering wheel design our average effective drilling feet per day also improved down 18% of 2017 the chart on the bottom of page ten shows the significant impact over the past few years in cycle time, which is the number of days from Spud of the first well on the pad to flow back of the wells with the efficiency improvements made in our Drilling and completion operations between 2018 and 2019. We have been able to shorten our operational Cycles times and accelerate the start of production by an average of three weeks per pad finally in 2019. We continued to work safely our overall safety performance measured by total recordable incident rate or PRI are came in at 0.27 which is one of the birth years we've had in our history to be clear working safely as a top priority and ingrained in our core values and as such I congratulate everyone on the pin Virginia team on this important achievement dead.
In Virginia remains in an enviable position of geographically in geologically is our production receives premium pricing. That is either l l s or M E H as of yesterday bulb LS and any age traded at more than $3 per barrel premium to West Texas intermediate.
Page nine in addition to receiving premium product pricing driving. Our high margins has been an unwavering focus on the lowering expenses across the business and maintaining a lean age structure. This can be seen on page nine where we show a 21% decrease in annual adjusted direct operating expenses from $14.40 per barrel of oil equivalent in 2017 to $11.36 per barrel of oil equivalent in 2019. As a reminder adjusted direct operating expense is the some of the lease operating expenses GPT production and ad valorem taxes and cash DNA adjusted for some one-time items. And this is reconciled in the appendix of the presentation.
Okay.
We show our peer-leading adjusted ebitda tax per barrel of oil equivalent, which increased by 29% from 2017 to $34.80 per barrel of oil change for the full year 2019. It is crucial to keep in mind that at the end of the day we are in the business of producing and selling our oil and gas for a margin and on this chart. We also offer a year the average West Texas intermediate price in pain Virginia's adjusted ebitda as a percent of West Texas intermediate driving the steady Improvement in this metric from 53% in 2017 to 58% for 2018 and 61% in 2019 has been are closed focus on ensuring we operate with a lien cost structure. We have been successful in continuing to increase our margin even as commodity prices declined.
Looking specifically at Lee for the full year of 2019 r l o e was $4.26 per barrel of oil equivalent down 6% from the prior year and 26% from 2017. I am pleased to report that for the fourth quarter of 2019. We achieved a record low level 4 l o e of $3.65 per bulb of oil equivalent.
now we
Looking specifically at the fourth quarter of 2019. We posted adjusted ebitda of $35.74 per barrel of oil equivalent this equates to a 63% margin to the average West Texas intermediate price for the. We expect adjusted ebitda tax per barrel of oil equivalent to remain at a high level for twenty twenty.
Stop three initiatives to continue drive down l o e First We are continuing to implement our field wide smart gas lift in term in our system, which optimizes volumes of lift gas utilized to maximize oil production for volumes of injected lift gas. Currently approximately 85% of our wells are on gas left which reduces costs associated with down home repairs and maximizes. Well uptime wage.
On page twelve we provide some highlights concerning our 2020 Capital spending plan. The plan is designed to provide moderate production growth and more importantly additional free cash flow generation for the full-year drilling and completion capital for 2020 is estimated at between $265 and $295 million, which reflects a 15 to 20% reduction compared to 2019 for a comparable development pace.
Secondly, we continue to expand our saltwater disposal or swd system currently between 10 to 40% of our produced water is transported via are approximately Thirty miles system where every barrel of produced water we transport on pipe. We save approximately $1.25 per barrel versus having to transport via truck.
And third we continue to focus on maximizing the competitive advantages of our contiguous acreage footprint. This allows us to build out our swd system more cost-effectively expect and decentralized gas lift delivery maximize third-party pipeline takeaways for oil and gas in reduced labor costs by optimizing our Workforce Effectiveness. Also, it should be noted that substantially all oil and gas pipeline build out costs are borne by our Midstream Partners.
Contributing to our lower expected spending level will be further Drilling and completion efficiency gains and it continued low service cost environment.
All of our 2020 Capital will be focused on the eagleford with 95% directed toward Drilling and completion and the balance focused on facilities pipelines and Grassroots acreage leasing office expect that approximately 55% of our Capital could be spent in the first half of the year.
or just in cat
This year we are targeting 247 gross or approximately 40 net wealth this compares to 41 net. Well spudded in 2019.
General and administrative expenses were reduced to $2.04 per barrel of oil equivalent in 2019, which was 41% lower than in 2017.
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Similar to l o e we saw strong fourth-quarter in 2019 with adjusted cash G&A expenses coming in at $1.61 per barrel of oil equivalent.
I'm twenty we expect to turn in line 50 gross or approximately 43 net Wells last year. We turned in line a similar number of net Wells looking specifically at the the first quarter we expect to spend twelve gross or approximately 10 net wells in turn in line ten gross or approximately 8 net wealth. I will now hand it off to Rusty Bucket discuss our capital structure and. Comparisons as well as provide additional specifics on our 2020 Financial Outlook in current hedge positions.
Living to page 10 as part of pin Virginia's commitment to continuous Improvement. We are dedicated to lowering Capital spending by driving efficiencies throughout the organization as well as long with our service providers while also maintaining a safe work environment.
The two charts and the top of page ten clearly illustrate the improved operational execution of our technical team over the past few years. The charts are showing our average drilling feet per day from Spud to rigorous for the last three years with our to string well design our average effective drilling feet per day improved 58% from 2017 to 2019.
Thanks, John. Good morning. Everyone on page thirteen. We show the Cadence of improvement in Virginia's financial position. The company has successfully driven its net debt to adjusted ebitda tax ratio down two point two times a year in 2017 the less than 1.6 times at the end of 2019 on page fourteen over the next several slides. We're going to compare with Virginia to a large group of companies that range from large-cap small-cap turning to page fourteen. We show oil as a percent of total production reported for the third quarter of two thousand nine thousand in Virginia is one of the highest waited companies in the sector with oil comprising 76% of our production stream for the fourth quarter. This was a 3% increase from what what shown on this slide in the third quarter.
likewise
With our three steering wheel design our average effective drilling feet per day also improved down 18% since the 2017.
The chart on the bottom of page ten shows the significant improvement over the past few years in cycle time, which is the number of days from Spud of the first well on the pad to flow back of the wells off with the efficiency improvements made in our Drilling and completion operations between 2018 and 2019. We have been able to shorten our operational Cycles times and accelerate the start of production by age of three weeks per pet finally in 2019. We continued to work safely our overall safety performance measured by total recordable incident rate or t r i c k Manet 0.27, which is one of the best years we've had in our history to be clear working safely as a top priority and ingrained in our core values and as such I can get everyone on the pin Virginia team on this important achievement.
moving on to page fifteen
We look at how consensus estimates ranked in Virginia as compared to the same group of companies when it comes to profit after operating cash costs based on this data. We have the second-highest adjusted. Or Boe ratio in this group. Bottom line are Relentless focus on cost optimization is continuing to drive expenses down in generates strong cash margins lastly on page sixteen. We looked at the relative trading multiples recent consensus estimates have pain Virginia trading at one of the lowest multiples for 2020 compared to the same EMP peer group as such wage growth. We laid out for you lean cost structure strong cash margins low leverage, and if you for continued free cash flow generation, we believe that pin Virginia provides a very compelling investment options.
On page eleven we show our peer-leading adjusted ebitda per barrel of oil equivalent which increased by 29% from 2017 to $34.80 per barrel of oil equivalent for the full year 2019. It is crucial to keep in mind that at the end of the day we are in the business of producing and selling our oil and gas for a margin and on this chart also show by year the average West Texas intermediate price and pin Virginia's adjusted ebitda as a percent of West Texas intermediate driving the steady Improvement in this metric from 53% in 2017 to 58% for 2018 and 61% in 2019 has been are close to focus on ensuring we operate with a lien on a structure. We have been successful in continuing to increase our margins even as commodity prices declined.
Now turning our attention to page 17 for the full year. We expect oil volumes of 20800 to 22200 barrels of oil per day and co-production in the range of 27327 or $2,900 per day this translates into moderate mid-single digit year-over-year oil growth, which is expected to be funded from cash flow from operations. We've also laid out our cost structure guidance below. I would reiterate as John said before that our capex implies a 15 to 20 per month reduction over 2019 levels for a similar pace of development activities turning to page eighteen. We summarize our hedge positions we have in place for our oil production, which we entered in Thursday to help mitigate commodity price risk since our last quarterly update. We took advantage of certain periods of strength and oil prices to add to both are 2020 and 2021 hedge positions through a combination.
Looking specifically at the fourth quarter of 2019. We posted adjusted ebitda tax at $35.74 per barrel of oil equivalent this equates to a 63% margin to the average West Texas intermediate price for the. We expect adjusted ebitda tax per barrel of oil equivalent to remain at a high level for twenty twenty.
On page twelve we provide some highlights concerning our 2020 Capital spending plan. The plan is designed to provide moderate production growth and more importantly additional free cash flow generation for the full-year drilling and completion capital for 2020 is estimated at between $265 and $295 million, which reflects a 15 to 20,000 traduction compared to 2019 for a comparable development pace.
and swaps and collars
Details of all of our positions can be found in the appendix of this presentation as you can see we are very well hedged for 2020 with approx 76% of our oil production at the midpoint of guidance. Also, we've hedged approximately two-thirds of our anticipated natural gas volumes. We will continue to watch the markets closely and look for opportunities to add further hedge positions that will support and protect our capital budget and balance sheet now like to turn it back to John for some concluding comments before Q&A John. Thanks Rusty on page. Nineteen. We summarize our list of major compliments accomplishments for 2019 of which there were many and I'm not going to discuss these in detail as as we've covered in previously. However, I believe this list clearly represents our contingent track record of success and further supports why we believe in Virginia is an attractive investment as we have discussed in the past, we believe there are four keys in Virginia has continued success.
Contributing to our lower expected spending level will be further Drilling and completion efficiency gains and it continued low service cost environment.
All of our 2020 Capital will be focused on the eagleford with 95% directed toward Drilling and completion and the balance focused on facilities pipelines and Grassroots acreage leasing office expect that approximately 55% of our Capital could be spent in the first half of the year.
This year we are targeting 247 gross or approximately 40 net wealth this compares to 41 net Wells better than 2019.
First is our clothes focus on cost.
Remain profitable in this volatile commodity price environment. You must maintain a lean cost structure. We have taken significant cost out of the business over the past few years will continue to look for additional opportunities moving forward. The result has been in Virginia achieving what we believe is one of the lowest cost structures of all small-cap all waited emps.
10:20, we expect to turn in line 50 gross or approximately 43 net Wells last year. We turned in line a similar number of net Wells looking specifically at home first quarter. We expect to spend twelve gross or approximately 10 net Wells and turn in line ten gross or approximately 8 net wealth. I will now hand it off to rest home discuss our capital structure and pure comparisons as well as provide additional specifics on our 2020 Financial Outlook and current hedge position.
Next you must maintain or improve margins complementing our cost structure enhancements is our strategic location that is in close proximity to the Gulf Coast. This should continue to provide a Virginia to access premium priced markets which further supports our industry-leading margin profile and the most important measure is ability to generate free cash flow Altima. You must live within your means and we achieve that goal in the fourth quarter while continuing to execute on our strategic well development program. We believe this makes pin Virginia unique approving small-cap that is focused on growing production while also generating free cash flow.
Thanks, John. Good morning. Everyone on page thirteen. We show the Cadence of improvement in Virginia's financial position. The company has successfully driven its net debt to adjusted ebitda tax ratio down two point two times a year in 2017 the less than 1.6 times at the end of 2019 on page fourteen over the next several slides. We're going to compare with Virginia to a large group of companies that range from large cap to small-cap turning to page fourteen. We show oil as a percent of total production reported for the third quarter of two thousand nine thousand in Virginia is one of the highest waited companies in the sector with oil comprising 76% of our production stream for the fourth quarter. This was a 3% increase from what what shown on this slide in the third quarter.
And ensuring Financial discipline given the current and expected continued volatility in the energy commodity markets. We will remain hyper focused on maintaining Financial discipline supported by strong balance sheet in low levels of Leverage. We look forward to another successful year in 2020. And with that Allison, we can go to the Q&A portion of the call.
moving on to page fifteen
We look at how consensus estimates rank in Virginia as compared to the same group of companies when it comes to profit after operating cash cost based on this data. We have the second-highest adjusted. Or Boe ratio in this group. Bottom line are Relentless focus on cost optimization is continuing to drive expenses down in generate strong cash margins lastly on page sixteen. We look at the relative trading multiples recent consensus estimates have pain Virginia trading at one of the lowest multiples for 2020 compared to the same EMP peer group as such wage growth. We laid out for you lean cost structure strong cash margins low leverage, and if you for continued free cash flow generation, we believe that in Virginia provides a very compelling investment home.
Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause for a moment to assemble our roster.
And our first question today will come from Don McIntosh of Johnson rice. Please go ahead and congrats on strong quarter question about 20 20 plan. You'll have two rigs out there and you know, which Commodities obviously coming under pretty severe pressure in the past couple of weeks, you know bowls full of $44 this morning. Just wondering what kind of flexibility all had under that program to kind of adjust your activity and and kind of solve for free cash. Cuz I mean, I would assume that that's kind of the goal here as well. So just thoughts around birth control an activity if Commodities are going to stay, you know down below fifty dollars here.
Now turning our attention to page 17 for the full year. We expect oil volumes of $20,800 to $22,200 barrels of oil per day and age production in the range of 27327 or $2,900 per day this translates into moderate mid-single digit year-over-year oil growth, which is expected to be funded from cash flow from operations. We've also laid out our cost structure guidance below. I would reiterate as John said before that our capex implies a 15 to 20 per month reduction over 2019 levels for a similar pace of development activities turning to page eighteen. We summarize our hedge positions we have in place for our oil production, which we entered into Iraq to help mitigate commodity price risk since our last quarterly update. We took advantage of certain periods of strength and oil prices to add to both are 2020 and 2021 hedge positions through a combination.
Yeah.
Operational contracts with short-term in nature basically a we can react within the 30 to 90 day window and the outside so with the drilling contracts or pad to pad in the completion contracts or in the 60 to 90 day window. So we've got very short term contracts that give us a lot of flexibility to respond to market conditions.
Great, and then just just one more. Maybe you kind of macro Basin level and you all do have one of the stronger balance sheets in the small-cap space and and with your oil waiting, but wondering how you can think about, you know, m&a opportunities r a n d. It's out there right now. I'd have to imagine that you know, they'd ask or the, you know asking prices or got to start coming down at some point with prices here. So just kind of suck your view on on the eagleford and potential for consolidation. Maybe not at the large-scale but you know to pick up bits and pieces here and there.
and swaps and collars
Details of all of our positions can be found in the appendix of this presentation as you can see we are very well hedged for 2020 with approx 76% of our oil production at this point of guidance. Also, we've hedged approximately two-thirds of our anticipated natural gas volumes. We will continue to watch the markets closely and look for opportunities to add further hedge positions that will support and protect our capital budget and balance sheet now like to turn it back to John for some concluding comments before Q&A John. Thanks Rusty on page. Nineteen. We summarize our life major compliments accomplishments for 2019 of which there were many and I'm not going to discuss these in detail as as we've covered in previously. However, I believe this list clearly represents our continued track record of success and further supports why we believe in Virginia is an attractive investment as we have discussed in the past. We believe there are four keys in Virginia has continued success.
Well, you know, we're focused number one.
On our current business plan in maintaining the financial discipline and and and making sure that we have continued liquidity in these in these volatile markets that being said, you know, we're always open to opportunities as they arise but they have to be a creative in nature in fit within the overall business plan.
All right, perfect. Sounds good. Thank you and congrats on a good quarter and a good-looking twenty-twenty plan.
Thank you. Thanks.
Our next question will come from Jeff of Northland Capital markets, please. Go ahead.
Was curious on the capital side for you guys John. I think I think maybe it was last call you mentioned the cost of an Eagle Ford regular coming down, you know 15% or something from the prior hundred fifty million a year that you guys were kind of assuming yet. It seems like the guidance that that that you put out maybe only gives you a portion of that credit relative to that number for just kind of doing a simple math. So just kind of wondering if maybe there's some conservatism in the capital guide or maybe just the program is maybe generally different such that that math doesn't quite work out like we think it would
First is our clothes Focus.
On cost remain profitable in this volatile commodity price environment, you must maintain a lean cost structure. We have taken significant costs out of the business over the past few years and will continue to look for additional opportunities moving forward. The result has been pin Virginia achieving what we believe is one of the lowest cost structures of all small-cap all waited emps off.
Next you must maintain or improve margins complementing our cost structure enhancements is our strategic location that is in close proximity to the Gulf Coast. This should continue to provide wage Virginia to access premium priced markets, which further supports our industry-leading margin profile and the most important measure is ability to generate free cash flow Altima. You must live within your means and we achieved that goal in the fourth quarter while continuing to execute on our strategic well development program. We believe this makes pin Virginia unique approving small-cap that is focused on growing production while also generating free cash flow.
hey, this is
Take a shot at that. So the the current, you know, rather given the efficiencies that we're seeing on kind of a per rig basis. I want to really direct uh, the the patience of development is really very similar to 2019. I think Jon's comments that he's made previously was kind of on a on a per rig basis as should be taken. As you know wage is how four similar development plan you'd see kind of I think he said 15 to 20% think what you'll see is four similar development plan were right in there and that's based on kind of environment. We were seeing in the fourth quarter. We'll see where you know, this actually pins out but I think they're they're fairly consistent for a similar development plan as last year.
and ensuring Financial discipline
Given the current and expected continued volatility and the energy commodity markets. We will remain hyper focused on maintaining Financial discipline supported by strong balance sheet in low level of Leverage. We look forward to another successful year in 2020. And with that Allison, we can go to the Q&A portion of the call.
Got it. Okay, that's helpful. I know kind of doing some of the land work incorporating some more XRS was that was a big kind of project for you guys internally was just kind of wondered how that's trending or maybe year-over-year, you know, 19 verses twenty how how big of a component of the program are those extended reach laterals for you guys?
Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause for a moment to assemble our roster.
Well, we have a lot more XR L's in the deeper part of the the acreage and we're focusing more in the oil erupted portion off. We still have some XR L's up. There. It is not in the eight to ten thousand foot range as much as it's going to probably be in the six to eight range for x r l. So Monday, we're going to continue to focus on the heavier oil waiting and by nature of the the plan of development, but probably have a few fewer Xbox this year than last year.
And our first question today will come from McIntosh of Johnson rice. Please go ahead and congrats on strong quarter question question about 20 20 plan. You'll have two rigs out there and you know, which Commodities obviously coming under pretty severe pressure in the past couple of weeks, you know bowls full of $44 this morning. Just wondering what kind of flexibility all had under that program to kind of adjust your activity and and kind of solve for free cash. Cuz I mean, I would assume that that's kind of to go leader as well. So just thoughts around birth control an activity if Commodities are going to stay, you know down below fifty dollars here.
Got it. And if I can sneak one more in John, you mentioned kind of chalk and up Regal for upside for you guys in terms of inventory count or any of those make it on the drill schedule and and off or does this environment make you I guess a little bit less interested in kind of the delineation aspect of of spending capital. I mean you raise a good point in it and we certainly don't want to do anything that takes away from the higher return lower Eagle food development program that we have planned. That being said. We do have a upper eagleford test slated for somewhere in the middle of this year. I can get exactly where the drill schedule it comes in on the but we're pretty excited about the potential for that. Well so we could do plan on getting at least one up Regal protest in this year. And that's basically the the direct outcome of our Earth model.
yeah, all of our
Operational contracts are short-term in nature. Basically a weakened react within the 30 to 90 day window and the outside so the the the drilling contracts or pad to pad in the completion contracts or in the 60 to 90 day window. So we've got very short term contracts that give us a lot of flexibility to respond to market conditions.
Great, and then just just one more. Maybe you kind of macro Basin level and you all do have one of the stronger balance sheets and small cap space and and with your oil waiting, but wondering how you think about you know, opportunities are A&D. It's out there right now. I'd have to imagine that you know, it asked or the, you know asking prices or got to start coming down at some point with prices here. So just kind of your view on on the eagleford and potential for consolidation. Maybe not at the large-scale, but you need to pick up bits and pieces here and there.
Got it. Look forward to it. I appreciate the time.
Again to ask a question, please. Press * then 1
ladies and gentlemen, this will conclude our question-and-answer session at this time. I'd like to turn the conference back over to mr. Brooks for any closing remarks.
Well, you know, we're focused number one on.
Our current business plan in maintaining the financial discipline and and and making sure that we have continued liquidity in these in these volatile markets that being said, you know, we're always open to opportunities as they arise but they have to be a creative in nature and fit within the overall business plan.
Exhausting. Thank you for your time this morning and your interest in Penn, Virginia. We look forward to talking to you again next quarter.
The conference has now concluded and we thank you for attending today's presentation. You may now disconnect your lines.
All right, perfect. Sounds good. Thank you and congrats on a good quarter and a good-looking twenty-twenty plan.
Thank you. Thanks.
Our next question will come from Jeff of Northland Capital markets, please. Go ahead.
Was curious on the capital side for you guys John. I think I think maybe it was last call you mentioned the cost of an Eagle Ford regular coming down, you know 15% or something from the prior hundred fifty million a year that you guys were kind of assuming yet. It seems like the guidance that that that you put out maybe only gives you a portion of that credit relative to that number for just kind of doing a simple math. So just kind of wondering if maybe there's some conservatism in the capital guide or maybe just the program is maybe generally different such that that math doesn't quite work out like we think it would
hey, this is
Take a shot at that. So the the current, you know, rather given the efficiencies that we're seeing on kind of a per rig basis. I want to really direct uh, the the patience of development is really very similar to 2019. I think Jon's comments that he's made previously was kind of on a on a per rig basis is should be taken as you know, uh, this is how four similar development plan you'd see kind of I think you said 15 to 20% think what you'll see is four similar development plan were right in there and that's based on Thursday environment. We were seeing in the fourth quarter. We'll see where you know, this actually pins out but I think they're they're fairly consistent for a similar development plan as last year.
Thanks, Jeff.
Got it. Okay, that's helpful. I know kind of doing some of the land work incorporating some more XRS was that was a big kind of project for you guys internally. It was just kind of wondering how that's trending or maybe year-over-year, you know, 19 verses twenty how how big of a component of the program are those extended reach laterals for you guys?
Well, we have a lot more XR L's in the deeper part of the the acreage and we're focusing more in the oil erupted portion where I still have some XR elves up there. It is not in the eight to ten thousand foot range as much as it's going to probably be in the six to eight range for x r l. So, we're going to continue to focus on the heavier oil waiting and by nature of the the plan of development, but probably have a few fewer xrm this year than last year.
Got it. And if I can sneak one more in John, you mentioned kind of chalk and up Regal for upside for you guys in terms of inventory count or any of those make it on the drill schedule and and Tuesday or does this environment make you I guess a little bit less interested and kind of the delineation aspect of of spending capital. I mean you raise a good point. We certainly don't want to do anything that takes away from the higher return lower eagleford development program that we have planned. That being said. We do have a upper eagleford test slated for somewhere in the middle of this year. I can get exactly where the drill schedule it comes in on. But but we're pretty excited about the potential for that. Well so we could do plan on getting at least one up Regal protest in this year. And that's basically the the direct outcome of our Earth model.
Got it. Look forward to it. I appreciate the time.
Again to ask a question, please. Press * then 1
ladies and gentlemen, this will conclude our question-and-answer session at this time. I'd like to turn the conference back over to mr. Brooks for any closing remarks.
Thanks Allison. Thank you for your time this morning and your interest in Penn, Virginia. We look forward to talking to you again next quarter.
The conference is now concluded and we thank you for attending today's presentation. You may now disconnect your lines.