Q1 2020 Earnings Call

[music].

Good morning, and welcome to the Penn, Virginia first quarter 2020 earnings Conference call, all participants will be in listen only mode.

Did you need assistance. Please signal a conference specialist by pressing the Starkey 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 telephone keypad.

Withdraw your question. Please press Star then too.

Please note. This event is being recorded I.

I would now let's turn the conference over to Clay at Penn Virginia. Please go ahead.

Thank you and good morning, everyone. We appreciate your participation in today's call I'm Clay you all Sop director of Investor Relations and I'm joined this morning by John Brooks, and Virginia, as President and CEO, Rusty Kelly, our senior Vice President and CFO and band Mathis, Our senior Vice President of API.

Rationed and engineering.

Prior to getting started I'd like to remind you we will discuss non-GAAP measures on this call definitions and reconciliations of these measures to the most comparable GAAP measure are provided in our first quarter earnings press release issued yesterday afternoon, which can be found on our website at www Dot Penn Virginia Dotcom what.

I'd also like to point you to 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 are subject to a number of risks and uncertainties that could cause actual results to be materially different from.

Those forward looking statements, including those identified in the risk factors in our most recent annual report on form 10-K, and quarterly reports on form 10-Q.

Finally, after our prepared remarks, we'll answer any questions you may have.

With that I'll turn the call over to John.

Thanks, Blake and thank you all for joining us today.

Hope everyone is safe and well as we manage through the impacts of the Cove is 19 crisis.

First I wanted to extend my thanks, and appreciation to everyone at Penn Virginia for their ongoing efforts to work from home and stay healthy unsafe amid these unprecedented times.

I also want to recognize our field employees, who are on the front line every day.

Kept us running and are largely responsible for the solid first quarter results. We released yesterday. So thank you.

Now I'd like to discuss several of the proactive steps. We've recently taken to navigate this commodity price environment and manage our financial position and our operations.

These actions include early completion of our borrowing base Redetermination halting all drilling and completion activity and curtailing a portion of our current production. We've also constructed a robust hedge book that will help withstand these current prices.

First let's discuss the suspension of drilling and completion operations in mid March we announced our intention to run only one rig beginning in April as commodity prices continued to decline we moved to suspend all drilling and completion operations.

The suspension of a development program has significantly reduced our expected 2020 capital budget and we plan to spend only modest amounts of capital for the balance for the year.

During April we finished the several.

Pads, but we chose not to complete those wells given the price environment.

We currently have eight drilled but uncompleted wells.

I don't anticipating.

I don't anticipate restarting operations or completing those wells until prices return to a level, where we believe we're generating acceptable returns for our shareholders.

During the first quarter, we also secured access to additional crude oil storage. We did this to help ensure we can continue to flow our crude oil production and store those barrels if we didn't want to sell at distressed prices. The storage will also allow us to continue to hold our leases by producing has needed. We now have access to a minimum of 200 and.

50000 barrels of oil storage.

Next let's discuss curtailments in our production.

Given the current pricing levels, we have chosen to curtail the large amount of our production.

We anticipate curtailing approximately 12600 barrels of oil equivalent per day for May which will be dependent on the price environment as we make those decisions.

We will continue to monitor the oil markets to determine when is the appropriate time to bring those wells back online.

Now I'll turn the call over to Rusty.

Thanks, John.

First I will touch on the borrowing base redetermination.

As previously noted we recently completed our spring borrowing base Redetermination. The completion of this process should remove much of the uncertainty associated with the company's liquidity, we believe our robust hedge portfolio and significant free cash flow profile will provide us with the necessary liquidity to operate comfortably, including the ability to restart our capital program.

When the commodity price environment warrants it.

Liquidity as of yesterday, we had approximately 59 million of liquidity, which was comprised of nearly 39 million of cash on hand, and about 20 million available under the revolving credit facility. We expect a portion of our cash on hand to be used to pay remaining invoices still outstanding through May and then reduce our borrowings under the credit facility.

In addition, our strong EBITDA performance and reduction in net debt during the first quarter allowed us to slightly improve our net debt to LTM adjusted EBITDAX ratio to just under 1.6.

Turning to our hedge book, we've implemented a proactive risk management strategy that is designed to protect the company's cash flow, while retaining the option to capture the upside when oil prices rebound, we took the opportunity before the latest dramatic downturn in oil prices to created substantial risk management portfolio of put hedges.

During the second and third quarters of 2020 over and above the originally anticipated volumes. This results in incremental free cash flow in the event that oil prices continue to decline relative to strip pricing, but retain upside exposure in the event of a recovery in pricing.

We currently have over 32000 barrels of oil hedge for the second quarter of 2020 put that into context. We produced just over 20000 barrels of oil per day in the first quarter that hedge position represents more than 150% of what we produced in the first quarter. In addition, given the anticipated shut ins and natural production declines.

And do the Capex reductions, we anticipate that percentage decline even further during the second quarter.

Why we're looking at the possibility of Opportunistically crystallizing the value of some of that over hedged position at this time, we've chosen to keep it in place for downside protection. During this period of significant oil price volatility currently our hedge book is substantially in the money with a mark to market value of approximately 138 million as of May six.

Put simply we make more money in the near term when oil prices go lower so we believe we are well positioned for the current low oil price environment, but due to the substantial utilization and puts in our hedge book, we retain upside exposure in the event of an oil price recovery. We believe this creates a unique investment opportunity for investors looking for strong near.

Term protection with the potential benefit from an oil price recovery in the future.

Our hedge program and proactive reductions of Capex of already resulted in our ability to generate over 10 million a free cash flow in the first quarter and we expect that trend to continue with significant free cash flow projected for the balance of 2020. This free cash flow will allow us to aggressively repay our debt even in low oil price environments.

Given our strong financial position and low leverage we stand ready to Reengage development operations as soon as prices justify adequate returns on our drilling program in all cases, though we remain focused on capital discipline and cash on cash returns for our shareholders now I'll turn it back the call back over to John.

Thanks Rusty.

As a challenging time for our industry.

However, we believe Penn Virginia is an enviable position to weather. The storm, we have a strong balance sheet significant hedge position low cost structure and the ability to generate substantial free cash flow even in a low oil price environment.

And with that we can go to the Q and a portion of the call.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad.

If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.

At this time, we will pause momentarily to assemble a roster.

[noise] [noise]. Our first question comes from Don Mackintosh with Johnson Rice. Please go ahead.

[noise] warning genre seems like.

On a strong quarter and particularly the hedge book you often place.

Strong moved there just on on activity, how how should we think about you all maybe at what point do you think about maybe going in and looking to bring these ducs online or.

Probably too early to think about putting a rig back but maybe if we were going to put a price on at.

What point me or do you think about activity kind of coming back in and even more so kind of the bringing that there's shut in volumes on it.

<unk>.

For my question.

Sure So let's take shut in volumes first.

You know Theres, a number of factors versus just the outright Debbie T.I. differentials are things like that but.

Frankly yen in today's price environment once you get into kind of the mid.

Mid Twentys, which we've obviously done a lot of movement right back to that over the last week, we certainly start considering yet.

It's not really focused just on the marginal cost of production. We have certainly have the ability to produce profitably out of our existing wells at much lower prices, it's really more a balancing of what is the price worth today versus what it will be in the future and given the very strong.

Cash flow position, we have from our hedges, we've decided we will likely be shutting in may having said that we do because of our storage and other flexibility. We do have the ability to bring those on if we continue to see a.

Uptick in the in the commodity price just given the volatile environment.

Likewise, turning to ducks and future drilling and the biggest focus for us is going to be returns.

We're in a strong position we came in with low leverage so we have the ability to.

Spend capital or not spend capital purely based on the returns and Thats really going to be the driving factor. When you look at the economics of the Ducks again that will depend on a number of factors.

Not just the commodity price, but also the service price environments and the shape of the curve that those will be producing into but in general we would want to see.

Prices recover to where you are well into the Thirtys, but you don't have to be too far into make those very economic we have those are some very attractive economic wells. So.

Based on the current environment, we would expect that we're probably not looking on doing that and toward until.

The end of the year, but obviously, that's a lot of that's going to depend on the environment. We're looking.

Full flexibility and liquidity based on what we're looking at to do that and then likewise I'd answer the drilling in a very similar manner, it's going to be very returns focused.

Given that it would involve the full cost of those wells, obviously, we're going to be you would want to see.

Slightly bigger recovery on pricing, but again.

Well, we'll be looking at the service industry as well as availability of crews that can operate safely et cetera.

Okay, great. Thanks, and then as they kind of I guess to delve a little further it might be too early to start thinking about it but you know for for 2021, you should prices kind of get back to 40 $50 level is the thought there.

Kind of.

Maintenance mode or do you think you.

What would it take the kind of like to get back and into a growth mode and obviously the balance sheet is prime or the primary focus year. So is it really more just about what optimizing free cash and you know getting that working that revolver down.

Yes, so what we want to avoid giving guidance you know further out and especially given the fact that 2020 has so much uncertainty I can tell you what's going to be driving thus, though again, it's really a focus on the returns.

In cash on from a cash on cash perspective, I do expect if we get a commodity price recovery, we have the ability of both from well economics as well as liquidity to pick back up to normalized activity levels very quickly.

We do and but I do expect that we will have been able to pay down some debt aggressively before that time.

But that's really what's going to be the driving factor is returns I think youre going to see us kind of go back to strategically moderate growth focused on free cash flow and returns.

And again it will depend on the environment, we're in but Thats really are driving factors.

Okay, great, Thanks, and congrats on a strong quarter.

Thanks, and then thanks Doug.

Your next question is from Jeff Grampp with Northland Capital secured capital markets. Please go ahead.

Morning, guys.

I was curious on it.

What was curious to get your thought process on.

Both winding down another curtailments that you've announced in may as.

As well the overheads book I've seen maybe somewhat correlated and in a sense that you know that's kind of I guess, reducing your conservatism on the oil price, but I'm just kind of curious to get your all's thoughts on how you might evaluate each of those opportunities if you will.

I'm, sorry, I'm not sure I understood. The how how we think about bringing wells back on line from Curtailments and then what was the part on the hedge book.

Yeah, I guess it I think rest in your prepared remarks, you talked about maybe at some point reversing. The fact that you guys are obviously substantially over hedged relative to the to the production volume. So are those are those related at all or are those independent decisions and through that.

Yes, so when you know the the over hedged position with the put contracts I think we look at them you know not just the correlation with the amount of volumes, but also it's we look at it is a substantial insurance policy in a very volatile market.

We like the correlation of an environment that continues to get tougher that also puts pressure on banks and other capital markets makes them less available. So if we're making additional cash flow and things like that get tougher I think that puts us an extremely strong.

Environment. So at that for now we have chosen to leave that in place from a risk mitigation perspective, just given the level of volatility having said that we reserve the right. If we see given the fact that we are shutting things in if we see prices.

Continued to decline, while we certainly reserved the right to kind of lock in some of those some of that increased cash flow just given the fact that it's not.

We're not having to have that.

Cover specific volumes, so, but we'd like that kind of.

Extra cash flow when things get more difficult because if things do improve we will we do expect to see more liquidity more capital markets open and a lot more functionality.

Got it. Thank you and my follow up if you guys are comfortable thrown this out out there.

You have an estimate of what kind of maintenance capital levels could be if we look at I know you guys don't have a formal guidance out and therefore I don't have a specific kind of exit rate for the year, but let's just call. It base base case kind of plan that you guys think might materialize you have an estimate of what kind of maintenance capital could be for you to keep let's call it exit rate type none.

It was flat.

Yeah, I think you're probably looking at a one to one of the half rig program, but I would.

Be hesitant to put a capital associated with that given the pricing environment that we're seeing in the service industry.

But probably a one to one of the have rig program would be would be maintenance for us.

Okay. If I can kind of squeeze related one and then John do you can you give us a sense I think that's kind of been relatively consistent with past numbers, but how much of service prices kind of come down if we were to maybe mark that to market relative to past comments you guys have made.

Well, it's going to be different for the drilling in the completion the completion side of things obviously.

Bears the biggest part of it but depending on what you compare it to I think if you go back and look at say compare it to the first half of 19, you're probably looking at a 15% to 25% reduction maybe even higher in various service segments.

Got it I appreciate it thank you.

Again, if you have a question. Please press Star then one.

The next question is from Richard Tullis with capital One Securities. Please go ahead.

Hi, Thanks, good morning, everyone.

John or Rusty.

Could you talk a little bit about.

Any difficulty you anticipate just time required to return to shut in wells back to to production when that time comes in handy associated cost with that effort.

No.

Sure.

I can take that Richard you know we shut in wells all the time.

An active drilling and completion program. So we've got a fairly good protocol in place for doing that I think.

What we've seen in the past is these wells come back around fairly quickly I guess the improvement over prior.

Shut in event was usually associated with offset fracs. So in this case I think the cost would probably be a little bit less than that because we won't be unloading incremental water volumes associated with defensive preloads or.

Or additional water influx from nearby wells. So you know I think we're fairly confident that we can take proactive measures to ensure the integrity of these wells some of them, we will probably pre treat with a hot oil treatment in corrosion inhibitors and other.

Things have a minor cost that we would take to make sure the wells don't get damaged.

Okay, that's helpful John and.

Just lastly for me I know you just.

You mentioned.

In response to Jeff's question, the cost savings into 15% to 25% range.

For various back actors in the drilling and completion.

Process.

But what do you think the cost would be to drill a well currently your typical eagle Ford well and then how much of that.

Current price do you think would hold some of your own saving some of its service cost savings, but how much of would hold say in a $30 plus oil environment that would require you would require to go back to.

Drilling and completion operations.

Right.

Our operations team has made tremendous strides over the last couple of three years in terms of driving down our cycle times in the cycle times as a biggest driver of our.

Drilling cost with the exception of stimulation costs.

So I I think our drilling cost irrespective of service costs were seeing a decline on the order of 10% to 15% just on cycle time reductions when you look at the overall cycle time reduction for spud to first sales over the last three years, we've reduced that buyer somewhere on the order.

Of three to four weeks so that.

The biggest driver is really going to be on cycle time, and we anticipate a those advantages to remain intact.

And then trying to predict what service cost would be in a recovery environment, because it would be a little tricky, but I I think the numbers I gave previously on the 15% to 25% reduction over the first half of 2019, what would probably hold hold in and beyond that I'm thinking you're you're looking at.

Something on the order of.

$902000 per lateral foot drilled and completed and possibly savings beyond that.

Alright, John Thanks, so much appreciate it.

Thanks Richard.

This concludes our question and answer session I would like to turn the conference back over to John Brooks for any closing remarks.

Thanks will appreciate Charles participation on this morning's call and look forward to next quarter's call. Thanks again.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[noise].