Q1 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to began shortly please continue to stand by and thank you for your patients.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the P.D.C. Energy first quarter 2020 conference call.
This time, all participants on and listen only mode.
The speakers presentations that would be a question and answer session to ask the question. During the session you can eat depressed audience. He wrote when your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press thawed N. zero.
Now like to hand, the conference over to you speak of for today, Mike at which senior director Investor Relations. So you may begin.
Thank you.
Good morning, everyone in walking on the call today, we have worked Brooklyn, President and C.E.O. Lance lock Executive Vice President.
Reason or Chief operating officer, and Scott Myers, Chief Financial Officer.
Yesterday afternoon, leisure I press release, and most of the slide presentation that accompanies or remarks today.
We also filed R.P.M. 10 q.
Press release, an presentation are available on the Investor Relations page of our website P.D.C.E. Dot com.
I'd I'd call your attention to slide to have that presentation.
Our forward looking statements.
We will present, some non U.S. gap financial numbers today. So I'd also like to call your attention to the appendix slides of that presentation.
Find the reconciliation of those non U.S. get 22 measures, but that we get started altering the call over two arceo abort Brooklyn works. Thank you Mike Hello, everyone.
Wouldn't begin this call by expressing my deepest appreciation to the medical workers.
First responders truckers farmers oil field workers.
And all those frontline heroes, who have stepped up during this crisis.
Into the P.D.C. employees.
Thank you.
Through the small choose time some of it incredibly painful.
Do you have hunker down at home.
Held modify our business plan.
Efficiently implementing are resilient strategy you.
You have truly delivered.
Thanks. Your efforts, we are confident P.D.C. will survive this downturn it'd be firmly position for a strong rebound in 2021.
Today, I will leave the quarterly highlights to Scott reserves got Myers, well I outlined a decisive actions we have taken to ensure the long term viability of P.D.C.
First thanks for a long history of conservative balance sheet management in strong risk mitigation programs.
As highlighted on slide for.
P.D.C. was well positioned to enter the turmoil difficult Marcus <unk>.
I am proud of this track record in our disappointed approach towards running the company.
You can expect us to continue.
Then.
Recognizing the depth of this market correction, we have made several tactical moves around or drilling and completion programs.
Cutting Catholics, approximately 50 per cent, we expect our capital spend to be $5 million to $600 million, while we slower corporate operating pace to one.
<unk>.
No fried fleets planned until the fourth quarter.
This is a slows capital pays for the company in many many years.
Next the P.D.C. organization has been through dramatic and sometimes painful changes.
Besides a work from home transition in mid March we have implemented a reduction enforce.
Modifications to the organization.
Significant adjustments to compensation.
In a deep scrutiny of every dollar spent we have worked with every vendor as we pursue cost reductions.
Actions have resulted in lower capital structure on a per well basis.
Lower corporate operating costs.
Additionally, as commodity prices plummeted.
Filled with expanding differentials.
We began a detail devaluation of shutting in the company's production.
This is a first for P.D.C.
Well by well pad bite pad, we focused on cash flow optimization in each face and.
This resulted in anticipated production shut ins ranging from 20% to 30% over the next several months and we maintain the flexibility to keep production shut in as we go through the balance of the year, depending on market conditions.
I'd like to think the marketing engineering production and striding strategy groups for their insightful and thorough approach to this ever changing evaluation.
Today, you also get an update on another key component of the company's liability or bank one.
We've recently reaffirmed our commitment level at $1.7 billion, giving us over a billion dollars of liquidity in considerable financial flexibility I'd like to think all of our banks for their ongoing support a P.D.C., particularly this year given the unique market conditions.
So in the end what are these critical decisions in tactical moves at up to for P.D.C.
As my team will explain on the call today.
Realty to generate free cash flow estimated to be over $200 million for years 2020, and 2021 combined.
Ample liquidity to run our business.
In industry respected let leverage ratio as we go through the next two years competitive free cash flow yields in an organization with the assets and capability to prosper as we enter next year.
What's that I'm going to turn this call over the last walk cool provide some clarity on our shut in decisions in the current marketing administering commitments.
Thanks spark given the level of extreme uncertainty in volatility in today's commodity price environment cause a large part by the global covered 19 pandemic I want to take a few monessen discuss pdcs approach to production curtailments.
While also providing an overview of our from marketing midstream commitments.
Beginning on Slideseven, you can see that P.D.C. implements a multi faceted analysis to arrive at our anticipated curtailment. During this demand destruction period of time.
There are several factors in that analysis, including from transport fixed and variable Ella we gather processor fees lease obligations in commodity mix.
However, the analysis begins with our projected netback pricing.
We arrive at a realize netbacks by first making it projection for Nymex.
Then we take out all of our expected <unk>, including crew quality, the role and transportation D. Ducks as well as TGP then to arrive at a real I snapped back price.
I saw the oil demand has substantially deteriorated in the recent months Nymex crude oil prices have followed suit.
Second quarter has declined nearly 70% from first quarter levels.
That's what we're projecting just $15 per barrel of oil.
Added to the low Nymex has been the extreme lightning, both the quality and roll D. Ducks.
Crude old storage continues to build toward capacities over the coming weeks and months.
The combination of low nine Max and high differentials have put substantial pressure on realize netback pricing, especially in the second quarter.
We project both of these price movements as well as the corresponding projected realize netback for the coming quarters and the table on the ride a slide.
The second quarter is projected to be most negatively impacted quarter delivering low single digit netbacks.
As a result, we've projected 20 to 30 per cent production for talman on a B.O. he basis over the next few months.
For the second half of the year, P.D.C. anticipates, a slight improvement and realizing that bags from both in improving Nymex oil price and tightening d. ducks. So we the same less <unk> during the third quarter and little to no curtailments and the fourth quarter.
Keep in mind, however that the market is still very dynamic given the demand destruction that are industry is currently experiencing and are projected production <unk> could change.
But no that were well prepared to manage through it whether price of stabilize or further deteriorate.
One of the key take ways from this slide is that are updated 2020 free cash flow guidance of more than $125 million is based on the assumptions shown on the slide.
On slide eight we've outlined our gross oil and financial commitments.
By quarter in 2020, and on an annual basis for about 2020 and 21.
P.D.C. strategy relating to marketing and midstream agreements as to enter to a variety of contracts with different volume and time commitments to ensure that a meaningful portion of are all a natural gas production has from transportation to various end markets.
These contracts are written on a gross basis, meaning are working interest partners are responsible for their portion of the costs. Once we produce and deliver the product. However, P.D.C. is responsible for any deficiency payments should we fail to me the gross committed by other given contract.
The purpose of this slide is to not only summarize our firm commitments, but to also provide the magnitude of potential minimum margin and deficiency payments based upon two example production contaminant levels.
First of all for each quarter, we have a contractual minimum margin c. with our primary wattenberg mid stream provider related to their two most recent gas plant expansions.
Based on projected oil and then gel pricing within our midstream P.L.P. contracts. We project this minimum margin payment to be approximately $10 million per quarter.
Famous based on pricing and only begins to have an additional volume deficiency component shall we shut in significant volumes on their system.
The second components related to our corporate production <unk>.
What we're showing two examples 25% and a very high side 50 per cent of are projected volumes and then given quarter.
He needs to scenarios are deficiency payments are projected be a very modest $5 million to $8 million per quarter.
Then when you combine both our mid stream and marketing payments based upon the 25 per cent and very high side 50 per cent level. They are relatively modest and range from a total of 15 million per quarter up to 18 million per quarter.
Are projected to 2030, 20% to 30% curtailments over the next few months, we'd be towards the lower end of the total payment range on a quarterly basis.
In in the second half the year would expect the total payments the trend down a bit further.
With that I'll turn the call over to Scott reason huh.
Thanks Lansing good morning, everyone.
Before I give an overview of our results and updated guidance.
I also think our entire team for the tremendous work they've all done this year, but particularly in the last few weeks.
The price World Lance just described has not only led to an incredible amount of chain store operating plan, but a tremendous amount of work and analysis from the team.
We appreciate your flexibility through these times.
Obviously most of the focus is on our strategy and plan moving forward.
In terms of the first quarter results were largely in line with our expectation and the integration with S.R.C. has continued to progress in a very smooth manner.
Our capital investments for the quarter of $260 million, we're both were below our expectations due to better than anticipated well costs in each basin.
Meanwhile, Elouise <unk>, we have $2.94 was in line with our expectations and included a wattenberg rate of approximately $2.75.
And the Delaware a rate of under $4.
For the rest of the year.
<unk>, we spend as a little bit of variability associated with our ultimate levels are shut ins.
So as you'll see in a moment, we're providing guidance on an absolute spend basis instead.
Finally, overall production and particularly oil production, we're in line with our expectations.
Moving to slide 11, we provide a bit more detail on our revised guidance, which was provided in early April.
Or anticipated capital investments for the year or between 500 and $600 million.
Bigger Rep decrease of approximately 50% from our originally published range of $1 billion to $1.5 billion back in February.
Additionally, our first quarter investments equate to nearly half of our new total your projections.
Given the various moving parts throughout the second quarter, we wanted to help triangulate the captains of our expected spend the rest of the year, which is you can see is expected to be less than $150 million in the second quarter less than $50 million in the third quarter and more than $100 million in the fourth quarter.
With this new plan and the pricing outlined by Lance we're proud to be able to reject more than $125 million a free cash flow for the year.
Given a modest outspending Q1, this implies a strong level of free cash flow through the rest of 2020.
Finally in terms of production our overall ranges are unchanged since our supplemental update in April. However, the current estimate does point toward the possibility of June curtailments exceeding those of May which are at 20% to 30%.
Both production and oil production estimates for the remainder the remainder of the year are extremely fluid and subject to change.
Given the overview Lance gave on our from transportation, we are prepared to make revisions as market conditions dictate.
Which could include changes to our corporate G.O. or.
As the price outlook fluctuates.
Now slide 12.
The Wattenberg, we're expecting to invest approximately $450 million on a you're leaving just over 200 million remaining when factoring in what we spent in the first quarter.
You updated plane includes running one rig through the second half of the year and taking a break from completions through the third quarter and should product prices cooperate resuming the fourth quarter.
With the change in activity, we expect to exit 2020, with approximately 200 Bucks, which is an increase of approximately 35 compared to our original guidance. These ducks continued to provide tremendous flexibility to accelerate completions indoor reduce drilling depending on the macro conditions.
<unk>.
On slide 13, we cover or Delaware capital program, which as you can see is effectively done for the year.
We release or completion crew back in March and just finished drilling released the rig for the year.
Our team was making some tremendous strides in terms of drilling days N.D.N.C. costs early in the year.
So we're all excited to get back to work when we can.
The current plan includes turning in line seven wells in the third quarter. However, the dollars for that project have already been invested with that altering the call over to Scott Myers.
[noise] Thanks Scott.
And I'm incredibly proud of the tremendous teamwork and flexibility displayed in the first quarter as we've all adapted to the new work environment.
Complete our first quarterly close using our new S.A.P. system, while predominantly working from home is a great accomplishment for the accounting an I.T. teams. There's also been a tremendous effort from a variety of departments running the countless scenarios in an effort to produce are updated guidance I truly think.
These incredible teams for all they do for P.D.C.
In terms of the first quarter results, we provide it but.
Numbers on slide 15.
As a reminder, all of our non non reconciliation is can be found in the appendix.
[noise] sales between periods, where effectively unchanged at 320 million.
Really highlights the price deterioration, we've seen in our realize price of $19 per <unk> is down 34% between periods.
Lately off setting the 50 per cent production increase which was obviously driven by the S.R.C. merger.
In terms of G.N.A. or all and expense for the quarter was approximately 62 million or $3 and spend 69 cents per <unk>.
These numbers include 20 million.
Associated S.R.C.D. all costs incurred in the corner.
As well as approximately 5 million related to the S.R.C. integration.
Excluding only the 20 million of deal cost whatever's on it and our Runrate G.N.A. of $2.50 per B.L., we which v. improvement of nearly 25% compared to the first quarter of 2019.
We project another 5 million of integration expense and the second quarter before getting into a runrate G.N.A. of approximately 30 million per quarter in the back half of the year.
Finally in terms of free cash flow, we ran a deficit of 50 million then the first quarter. Once again. This includes 20 million of deal cost. However, it's important to note that our original guidance excluded that expense, which would result in and out spend of only 30 million this quarter.
Scott alluded to we project free cash flow neutrality, and the second quarter before generating strong levels are free cash flow in the back half of the year.
Turn into slide 16, you could argue this is the most important slide in the deck and then environment such as the one we are in.
At the end as a quarter, we had just over 550 million of net debt rezoning illiquidity position of 1.1 billion.
Earlier this week, we complete or semi annual free determination of our borrowing base, which result in our top mine adjustment from 2.1 billion to 1.7 billion. However, we were able to maintain or commitment level of 1.7 billion.
We really appreciate the sport of her bankers.
With our only near term mature maturity being 200 million convertible note in September at 21, we feel very comfortable with that come with our combine liquidity position and free cash flow projections over the next couple of years.
In terms of hedging you can see our oil positions alone currently have an approximate value of $500 million.
For 2020, you can see we're pretty well insulated from nine Max oil volatility for the remainder of the year as 75 per cent of her updated guidance is covered at a weighted average for price $58 per barrel.
Meanwhile, and 2021, approximately 30 per cent upper projected volumes, our heads data for price $50 per barrel with a weighting toward the first half of the year.
As a reminder, all of our hedges are swaps or hospitals callers and we also provide more quarterly detail in the appendix.
Ascot mentioned you can see on slide 17 that we've updated our costs guidance and for both Hello, We N.G.N.A. and we provided the estimates an absolute dollars as opposed to <unk>.
For G.N.A., we expect to spend between 135 and 140 million on the year.
This is a decrease of more than 10 per cent <unk>, 10% compared to the original guidance.
And a decrease of more than $50 million compared to the S.R.C.P.D.C. combine 2019.
As a reminder, this range includes our stock based compensation and S.R.C. integration expenses, but exclude the deal costs.
Finally, I want it quickly cover our multi year outlook before turning the call over two q. and <unk>.
As you will see we will project.
Strong free cash flow over the next two years of more than 225 million, what's equates to approximately 20% of our current market cap.
Combined with the 82 million up proceeds from the Eagle payment expected later this quarter, we expect to have the ability to retire debt, while maintaining favorable leverage metrics in a depressed commodity price world.
There's obviously a lot of uncertainty in today's market at P.D.C., we take pride in consistently showing our Malta your outlook and demonstrating both the flexibility and the commitment to achieving are publicly stated goals look for this stricken look for us to continue to adapt well emphasizing or <unk>.
The of our balance sheet with an eye on generating consistent insubstantial free cash flow for the foreseeable future with that I'll turn that all over to the operator for Q.N.X.
Thank you.
Ladies and gentlemen, as a reminder to ask the question you wouldn't eat depressed sorry, I didn't want to your telephone.
To withdraw your question press the pound cake.
I want to ask the question.
<unk>.
<unk>.
I first question comes from the line of will Thompson with Barclays.
Yeah, you come on everyone.
Good morning morning.
<unk>, Yeah, I believe had some recent experience reactivating some shot in production with a bunch of the S.R.C. well shut in related to the D.C.P. gas line pressures I'm. Just curious if you can talk to your experience with that if you.
Oh, how that while it's calm.
In response to to react you mean as well just how that plane into your your your plan with the shot him.
Yeah. This is Scott and I'll I'll take a shot at that I think the the plan that we had in place was to return those wells to production. The S.R.C. wells on speaking to particularly as blind pressure came down last fall into the winter and that went very effectively we are we're I guess the point that I want to make their.
As the S.R.C. did a really good job of shutting then well they shut in the wells produce the highest highest.
Highest amount of gas relative to the oil with the idea that gas was they didn't have a lot a extra capacity. There. So they were focused on oil. So when we turn those well along they were the gasior wells that they had in their operations.
We we got those wells online and obviously at this point, we're looking at shutting those are some of those wells or or reducing flow, maybe a better way to say in some respects, but reducing flow on some of those batteries as well as a a bunch of the old P.D.C. historical well, so that's really where what we're looking at we've had we've you know we've had good good.
Experience doing it the wells seemed to perform after being shot in at the level you would expect and I think that's something that we really appreciate as we go into this process that we have that kind of information to to rely on.
To to go give us more comfort in this decision as we go forward, but really overall our team did a really effective job of of returning those wells to production and and with the with the shut in process for May have done a great job of reducing.
Reducing the flow necessary to meet the requirements that basically our marketing team's working hard to get those volumes projected out into the future, but our teams in the field have done a good job of managing that and and there are well prepared to bring the well back on line when that time comes.
What's up a card. Thank you and then are you highlighted you maintain your 1.1 billion of liquidity posted Springer termination you added some hedges for the first half of 2022.
When your peers mentioned moving to a more systematic hedging program to preserve its barring base just curious.
How practical you plan to be with you know had you further out and just how much that what what the thoughts are there.
In terms of going into 2022 already.
Yeah, I mean, when we look at her hedging again, we look to make sure. We can preserve our liquidity and protect ourselves we do not look at hedging as a money making opportunity. So when we look at various scenarios that we run to make sure we stay well within all of the compliance of our.
Det covenants and to give us the flexibility to continue to operate a wee deemed it prudent to go ahead and protect ourselves and did it in some hedges and during the first quarter I'll, just say that will continue to look at the situation from time to time, we feel pretty good about obviously, what we have had.
Right now for 2020 will continue to look for an opportunity if we I deem it to make sense for us, but really look more for the 21 and some 22 over time, we don't we're not in a rush because of the way the balance sheets been set up in our projections are we feel pretty confident but at the same type.
We like having the extra protection out there so look to continue to add when we deem warranted.
Thank you.
Thank you.
Next question.
Well, it's Patrick with soundtrack.
Open.
Hey, good morning.
<unk>.
The ducks in the D.J.
Essentially if if they'd be there have been top whole are completely drilled Canada's essentially stay in that state indefinitely or is there. Some other type of ticking clock like the two years on permits that we should be aware of and and looking for.
Yeah, well just discard it I I. They there there's not an indefinite amount of time on those the the next phase through the phases require some mechanical integrity testing and I believe that timeframe isn't that to yours in the future I I I understand believe because I'm not absolutely sure, but we do.
If we leave as well said for some period of time, we do have to do something that came it wouldn't have any testing, but it's not like an imminent type thing. So really we've got a substantial amount of time really to deal with those <unk> nothing that's pressing this at all it's much more of a decision around the economics and wins the right time to get started again with the completion.
Okay. Okay, perfect. So kind of two years on the permits and then another two that that that seems great. And then you know I I think I know the answer to this but obviously, it's hard to collect signatures. These days can you give any updates do you think we're we're I don't want to say out of the woods, but do you think the situations getting better vis-a-vis.
The the ballot risk.
Yeah, I <unk> wells is a great question in in that wouldn't classifiers out of the woods, but.
We know the opposition has some proposals on setbacks and financial assurance out there.
We're hearing rumors that are contemplating the signature collection process I would I would.
State that that process in a cobin world is going to be incredibly difficult. So I think it's going to be a wall for them as far as trying to collect those signatures effectively.
I think I think everyone knows I think they need it right at 125000, a valid signature so they probably need to collect around 200000, and they normally did that and very crowded venues like flea markets and.
Errors and things like that so those obviously are not those are not events that are happening right now in colorado or across the country. So.
I think I think all that leans in our favor.
Well good know any any silver lining to the situation is as well. So thank you for the question.
Yeah.
Thank you.
My next question.
Down Mackintosh, which often right okay.
<unk> running a quick question on the on the shut in a deep Watson color about how those are split maybe between the wattenberg into Delaware and and you know we've heard on some of your peers talked about maybe bring and volumes back on in June but it sounds like you. All are are pretty set with with keeping those in through June.
So <unk> just your thoughts there and maybe what it would take to bring those on a little earlier any color would be appreciated.
Yeah. This is Lance you know when we go through this shut in analysis, we actually in we project. This 20% to 30% that includes wells shut in in both basins and so you know we're looking at all the role of the same in both basins. You know the two areas have perhaps a different you know quality ducks on the crude so that has to be factor.
And then of course, we look at the operating costs and well by well Pat Pat basis. So.
Both areas have curtailments in the numbers that we're we're looking at as far as you know what we look at as far as you know reducing her talman over time you know the key driver on this is just netback that we're projecting going forward and so you know as we look at oil sales for now the month of.
June we start to look at the differential pricing that we're seeing their couple with a nymex pricing and then we start to project. Okay. What will be the net back from what we project for the next month and then based on that we've got some tremendous modeling that our operations teams runs through so then say okay based upon.
That netback, while prize and then the associated gas and then jump prices as well run that through and say, okay. What should the actual curtailment look like in both areas. So.
As the differentials improve as the Nymex improves as we lock that again for the company. That's when you'll see us to you know reduce the amount of could tell us how we see going forward.
Alright, Thanks, that's it for me.
Thank you.
As a reminder, ladies and gentlemen that star want to ask the question.
Hi next question comes from.
Rainy with Keybank.
Okay.
Yeah. He just wanted to quickly expands on the answer to the the last question certainly understand it's Christ depending on the decisions that you bring back out of the shut ins certainly looks to me that you guys are running a relatively draconian downside case, you know price forecast here and and 2020.
I certainly hope it it plays out the upside there, but can you be look more specific and you know if we can't get to a you know a 35 dollar W.T.I. World say in the next couple of months do you think all these shut ins mobile probably and what can you kind of tell us about sort of the right price point start by bringing the curtail bombs back on line.
Yeah, you know Leo what we've said in in the market just to start is that you know what we're looking at 20 to 30 per cent as far as our projections that we have for for this year. We project at the third quarter will be much less shut in at the 25 dollar per barrel numbers that you see on Slideseven and then.
Also for the order as if we see more the D. ducks, improving we expect very little shut ins and the fourth quarter. So.
So your case at $35 per barrel I'd have to first look and see what the differentials due to make sure what that netback looks like but you know with that you know expect to see most solve our production you know coming back online within the whole company and that's assuming there's not this you know some you know unforeseen you know tremendous.
Widening of those differences that we've talked about.
Okay. That's a that's very helpful color. He does mentioned in your <unk> you know remarks here that of course, yeah, you're the right to adjust your guidance you know here and 2020, but if the the one thing you mentioned is that you're there could be an adjustment to the G.L.R.R. guidance just wanting to see if we can provide any more color.
What might be thinking what the variables all I I kind of that up and down here.
Yeah. This has got an I I think that that's that's a really good question and that's part of what it was lance's describe the for instance, the process of shutting in well what are the doctors in understanding which wells to shut in which wells to produce.
Comes around the G.O.R. and as those prices fluctuate in a relative since between oil and gas.
You start changing your expectations of which wells you produce so with oil drops very low and gas is very high we're going to produce the highest g. orwell's that we have.
Vice versa is as bad as those prices if if they would shift the other way that really is the factor that the plays into that when you start managing this and the teams are prepared to make those adjustments as we go through the.
The quarter through the year or whatever is required and it's it's a really important part of a mix of production that we have we're not we're not a gas along company and we're not an oil alone company. It really is a good combination that allows us that flexibility.
Thanks is very helpful.
Thank you.
Next question.
Michael's.
April.
Morning, I think you're thinking my question. This is actually and you gotta must with an information.
I will maybe you could provide some additional color on basic planning 2021 under the current development plan Okay.
Yeah, you know as you know as a company in general we haven't you know come out with an official sort of based decline for a company. There's just so many factors that go into that that cause that to have pretty wide you know range of the of outcomes and and and part of that as as for example, say line pressures dropping in.
The Wattenberg field and that will be favorable for flattening of the decline. So you know, but as you look at out over the next two years 2020 2021, you know we're we're looking at a bottom have around 63 million barrels equivalent for this year, that's about approximately a a 10% decline.
From our pro forma 2019 numbers I think from there you know what for US to continue going forward to have you know slow steady you know build in production over time. This methodical that is you know really an output, though because what what we're really driving here is is free cash flow.
So that we can then reduce our data over time and so that's our key focused how we have so that's our focus in in you know so think of production as an output and the capital programs that you're seeing you know, it's kind of the flat to very very modest kind of growth going into 21.
That's really helpful. Thank you.
Thank you.
<unk> <unk> football like my mom.
Thank you operator, and thank you everyone for your ongoing support.
Everybody from peace P.D.C. hopes that everybody out there is healthy.
And but look forward to getting back to the new normal one of these days, but again, thank you for the support.
Right.
Okay. Thank you.
Okay.
[music].