Q2 2020 Penn Virginia Corp Earnings Call

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Good day and welcome to the Penn, Virginia Second quarter 2020 earnings Conference call, all participants will be any listen only mode.

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After todays presentation, there will be an opportunity to ask questions to ask your question in the press Star then one on your Touchtone phone to withdraw your question. Please press Star then too.

Please note that today is being recorded.

I would now let's turn the conference over to Mr. claims you also please go ahead.

Thank you Sean and good morning, everyone. We appreciate your participation in today's call I'm Clay you all saw director of Investor Relations and Im joined this morning by John Brooks, and Virginia's President and CEO.

Rusty Kelly, our senior Vice 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 discuss non-GAAP measures on this call definitions and reconciliations of these measures to the most comparable GAAP measure or provided in our second quarter earnings press release issued yesterday afternoon, which can be found on our website Www Dot Penn Virginia Dot com.

I would also point you to the language and the forward looking statement 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 comment on operational guidance.

Moving to a number of risk and uncertainties that could cause actual results to be materially different from those forward looking statements, including those identified and our most recent annual report on form 10-K in quarterly reports on form 10-Q.

Finally, after our prepared remarks, we'll be happy to take your questions with that I'll turn the call over to John.

Thanks, Good we appreciate everyone joining in for today's call.

Second quarter was clearly a challenging period for the entire global community and for the oil and gas industry in particular.

The backdrop of an OPEC in Russia oil price battle simultaneous with unprecedented supply and demand disruptions as a result of the coded 19 global pandemic required Penn Virginia to take Swift and decisive actions to protect our business.

We believe our operational and financial results for the second quarter speak clearly took success of our efforts in summary, we beat consensus expectations across the board, including production EBITDAX.

Yes and capital.

Of course, none of this would have been possible without the continued hard work dedication of our employees.

There are laser focused on providing efficient operations. During these challenging times was largely responsible for a second quarter results and I appreciate everything they do on a daily basis to drive our success.

But the core of our decision making process in this environment has been a continued emphasis on capital discipline preservation of our balance sheet and cash on cash returned.

In supported this effort, we developed and are executing on a multifaceted plan to navigate and mitigate the precipitous decline in crude oil pricing.

This includes a comprehensive hedging and product stored strategy that resting will discuss in more detail shortly complemented by a prudent capital spending program.

In April we suspended all drilling and completions operations, which resulted in only $10.7 million of accrued capital during the second quarter.

Included in capital spending for the second quarter was the completion of Threed Ducks in June.

The guidance, we issued last night reflects the completion of our five remaining ducs during the third quarter.

Finally, I would note that we also curtailed production during the second quarter, albeit at a lower level than we expected as a result of a number of strategic actions we undertook during the period.

And with that I will turn the call over to Rusty.

Thanks, John.

Recognizing the potential impacts in our industry can face due to the unprecedent supply and demand disruptions, we evaluated a number of strategies to mitigate the financial impact of a declining or depressed commodity price environment and how to best predict protect our production volumes on that pricing front, we proactively established incremental put.

Contracts that allowed the company to benefit from falling prices in the second quarter. As a result, we were able to generate a realized oil price of more than $50 per barrel, which drove incremental cash flow that was used to pay down debt and payables at an accelerated pace.

We continue to hold a very strong hedge position going forward that we believe will protect our downside, but continued to give us upside exposure if oil prices increase overtime. In addition in March and April we proactively secured additional third party oil storage to provide us maximum operating flexibility in early may four.

Pricing for June when taking effect of differentials was approximately $20 per bear higher than May take advantage of this market dislocation, we elected to store a significant portion of our may oil production rather than fully shutting in by utilizing our storage we were able to capture the arbitrage and sell that store production in June at a much higher price.

Thanks.

I would also like to note that as a result in the short term nature of our production shut in as John discussed our PDP wells are performing very well with no degradation to the production profiles currently evident.

Our continued emphasis on capital discipline preservation of our balance sheet and cash on cash returns resulted in free cash flow of 6.6 million for the second quarter. Our current focus remains on decreasing our debt outstanding in the quarter, we reduced our payables by approximately 45 million and reduced net debt by approximately 7 million.

Looking ahead, we expect to generate positive free cash flow through the remainder of the year and plan to use that free cash flow to continue to reduce debt.

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

Thanks Rusty.

While we're clearly pleased to see an improved pricing environment. Since we last spoke in early may we fully recognize that we continue to operate in a volatile environment. While this is a challenging time for our industry. We believe Penn Virginia is uniquely positioned for further success.

Supporting this view as our strong balance sheet substantial hedge position low cost structure and the continued goal of generating free cash flow to pay down debt for the benefit of our shareholders.

And with that Sean we can go to accumulate portion of the call.

Thank you we will now begin the question and answers.

Excuse me question answer session to ask your question you May Press Star then one on your Touchtone phone.

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If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.

The first question today, we will come from Neal Dingmann mature.

Please go ahead.

Thanks for the details John My first question for I guess for urea really Youre Rusty.

You've laid out now and I think a pretty comprehensive plan into into next year that.

It will cheap free cash flow in all some just wondered.

When you look at your business now and a continued basis I guess, what I'm asking is just maybe if you could refer how you're thinking about maintenance capital into 21 for Bob.

We have spent and production basis.

Sure now I'll take that I think from.

Maintenance capital, obviously were too when we first think of you know our spending depending on the environment. The main driver here is going to be our cash on cash returns, we've got to leverage profile and the balance sheet that we don't need to.

Spend just to prop up leverage ratios. So we will be focused on cash on cash returns and as you've seen through our guidance. There is a little bit of decline were willing to take in the near future given the lower price environment. However directly to your questions on a maintenance.

Capital I hesitate to give you a dollar figure.

But to maintain production at these levels would incur just over a one and half rig type program that we can get back to fairly easily.

But I think going forward as a general strategy, we're going to be looking at the same thing that we released in the market at the beginning of the year of drilling inside of cash flow.

At a very moderate growth pace, and creating a free cash flow profile in order to reduce debt and find ways and a more normalized and commodity price environment to return cash to shareholders.

Great Great to hear the stability and then just really one certainly unrelated did I read.

Could you just on people if you loans I think Joe receive or just if you could just tell the status or what's going on around that with you. All did you getting benefit there. Thank you.

Sure sure Neil.

So when the market with the market backdrop souring at the beginning of the year with uncertainty at a peak and kind of that March April timeframe, we made a cautionary decision to take the PPP loans.

Just a little over a million dollars, but given our strong quarter results and the resulting liquidity within proving commodity backdrop, we felt like the responsible action to do as good storage was to go head and repay that in fall. So while we took it we've already paying it back and fall and we didnt see forgetting so that that is no longer.

With us.

Very good thanks, guys.

And the next question will come from Don Mackintosh with Johnson Rice. Please go ahead.

Hi, John.

Yes, Hi, a quick question one of the things we've seen go into the second quarter has been kind of lower salary and you all delivered just saying well or some of the drivers that drove that down and how sticky do you think these cost reductions could be going forward.

This is rusty out I'll take that is too.

As well when we look we've dug into this we're very pleased with the operational team being very focused on cost a lot of the drivers there were due to the shut ins we had lower lifting costs, we had lower salt water disposal. Those were probably the two biggest facets of that some of that though is.

As we did an economic analysis of wells, we made sure that what was shut and since we didnt have to fully shutdown, which are in lower your higher cost wells with lower production volumes, which left on some of our newer producers with lower operating cost. So the average for the quarter did come out.

Substantially lower than than our typical rate I think what youre going to see with regard sticky. This.

Is you really focusing on absolute dollars to look at kind of the first quarter is seeing kind of a run rate on absolute dollars.

And as we add more wells those will probably offset some of the cost reductions that we've got but I would I would kind of think of it is a similar absolute dollar to the first quarter, recognizing we will have a little bit of.

As we guided to a small amount of declines on a per unit basis, you'll likely see that creep up until we get back to.

Get back to activity, but on an absolute dollar we have the ability to hold that pretty constant.

Thanks, Rusty and then maybe one more or maybe for Ben Joe can provide some color around the Threeq you got it looks like you know production is pretty much in Milan are right in line with expectations, but I just trying to get a sense for maybe the timing of when those jobs come on and then dovetail on a little bit off Neil's question earlier.

How are you thinking about timing for maybe putting a rig back out there that can be more of a price driven decision or.

Do you have your kind of already have that on the books just what are you thinking at this stage.

Sure. So starting backwards, we dealt with the last part of your question. We don't have something on the books as we speak again, our main driver is going to be the cash on cash returns and so it's going to be a big.

Focus on not just the commodity backdrop, but the stability of the commodity backdrop and then the oil price service.

Outlook. So what were what we're planning on doing as you've seen what the guide that Capex really.

Contemplates the the completion of the remaining five ducts, it's hard for me talking exact dates because it's not where you've got turned online spend a lot of those things clean up over the quarter et cetera. So thats why Weve tried to guide to give you a good feel of when you put all that together and sometimes the diesel.

Im range can ever vote, very short time can create.

You know some ups and downs, but we feel very good about the guide from from a perspective of production level, but right now given the current environment I think thats what were expecting.

As a whole for the third quarter and asked for going forward. There. What we would want to see is probably a mid fortys oil price environment with according well field service, we're going to watch that very closely if oil field service prices are cheaper you might see US act a little bit quicker if there a pop up you may see us.

More conservative, but we would want to see something then kind of the mid fortys with a sustained viewpoint being able to see that sustained with the upward kind of trending commodity price. So based on that that will kind of give you feel of what we're looking at.

Alright. Thank you Ross then a look forward to following along.

All right appreciate it thanks, Doug.

And our next question will come from Richard Tullis with capital one. Please go ahead.

Thanks, Good morning, everyone.

For us here John.

Looking looking out.

For Q and then into 2021, what do you think you can hold your oil cut a level that I know, it's been 70, 677% past couple of quarters identified that a couple of percent below that 70% to 73%. The prior couple of quarters. What do you what do you see as far as well.

Oil component as you go into 2021 kind of using your base plan.

Sure I'll take that when we look at the components of what will be coming on we are you've got these ducs coming on in a good core area. That's that's fairly oily. They are also.

Flush production, you're going to have a pretty good high oil cut above the average and so as we keep this.

Production stable to slightly declining I think we'll hold that percentage.

Here in the near term likewise, as we get back to kind of full activity youre going to have a higher proportion of our total production being new production, which that tends to err on a higher kind of a higher oil cut so I would say.

On the initial decline that you're seeing over the next kind of quarter, you're seeing our.

Our guide on oil so you get a few feel for the absolute you might have a little bit of decrease in oil cut for total production, but then as we start bringing stuff online I think youre going to see that get back to kind of this 77, and possibly slightly higher but I think kind of where we are now is a good kind of long rain.

A long run percentage to focusing on.

That's that's helpful Rusty and just as the second question I know in the release.

You are you provided.

Updated reserve numbers, along with peak PV 10.

I guess as of August.

It's interesting to see the PD.

PV 10 proved developed.

Using strip prices as of early August.

Could you maybe give a little more details on just what you see there for the PDP component of that because it.

Obviously a healthy.

Healthy number compared to enterprise value. So maybe just to get a little more info on the PDP component.

Sure almost all of that as the P is PDP I think we had a few wells just from a timing perspective that are classified and PMP that should be in PDP and may already within either now or in the immediate future we'll be back on on in PDP, but it's a very.

Okay, very small fraction of the total.

What I would say that.

The reason why we address that amount and specialty strip pricing, we wanted to make sure that the market.

Was able to look at two things one was the ability to.

To have confidence in our.

PDP base Theres been a lot of questions on when you shut in wells are they coming back online. We've had a lot of a lot of production history, just given how quickly we were able to bring those back online and we thought in addition to US saying it have a third party validation was going to be very helpful. The market, but second and.

More importantly, theres been questions about the stability of our liquidity. In addition to our being able to pay down that data I think this will show the market.

And investors a very strong collateral.

Pace relative to our debt that I think you can look through and.

Get a fuel for our ability to work with.

Our RBL lenders as well as our term loan lenders given that extremely strong PDP value and collateral coverage base.

Alright, well, thanks very much that's all for me.

Thanks.

And the next question will come from Jeff Grampp with Northland Capital markets. Please go ahead.

Morning, guys.

What's curious if we can just circle back to the.

The thought process behind.

Adding a drilling rig and when that makes sense can you guys just kind of touched on what that general timing looks like in terms of from from the let's call. Today that you guys decide you want to start sharing a rig and moving forward, what's kind of that time gap between when oil starts to come.

Based on the project size that that you guys, who look to us to develop the assets with.

Okay.

So I'll have been jump in if you see fit but I think what we typically see is kind of the full we have quite full cycle costs, but when you're talking about mobilizing the rig and hope to first spot to actually having something turned online if you do something at the beginning of a.

Quarter, you're going to see that start to contribute closer to the ended the quarter. You can we can do it inside of a quarter.

But whenever you make those decisions I think you're going to see you know that two to three month all in kind of time lag from mode now.

The following continual operations, you'll get a little quicker than that just because the efficiencies that just moving a rig youre not having full kind of mobilization process getting everything set up et cetera, you have.

The pads getting built in front of view, but for that first kind of restart thats, probably a good general timeline.

Alright, Thanks, Rusty my follow up in the past you guys has kind of been able to cobbled together some bolt on acreage and your general neighborhood to effectively replaced some of the inventory that you guys had been consuming does that do those type of opportunities pencil out in this environment.

Yes, I know you obviously emphasize focus on cash on cash return so does that kind of conflict with that mindset or how does the land strategy fit in in this environment.

We certainly don't want to lose sight of that but we're also in this environment given the fact that we aren't using up inventory through drilling. We're also not as aggressive about replacing it we have been doing some small.

Very and I'd say very small kind of tack ons Trish.

Shaping out some of the the rough edges of our acreage in tier both interior and exterior serially, but thats, a very small proportion theres a little bit of that in our Capex guide for the third quarter, but I think you'll see us kind of get back to normal course there.

As we as we start operations backup.

All right understood part to that.

Thanks. Thanks.

As a reminder, if you would like to ask your question. Please press Star then one to answer the question Q.

The next question will come from Nicolas Pope with Seaport. Please go ahead.

Morning, guys.

Good morning, where Nick.

I just wanted to.

Talk a little bit.

About the storage that you guys procured and how that kind of affected the the oil differentials in Twoq, you and what we might.

What that might look like I guess going forward, how long that storage laugh and how that might affect kind of the oil differentials were talking about going forward over the next year. So.

Sure. So in the second quarter, we did the appropriate that storage as a risk management tool and it worked out very very well in that in addition to being able to turn on our shut ins.

Earlier than anticipated, we're also able to store a lot of our may.

Production, which is when the differentials really blew out in most markets and so instead of having to accept that differential we were able to produce but go ahead and sell that into June contracts, where the differential came back in materially and as a result kind of your weighted average differential which.

Much better than if we kind of just produced evenly.

You know across.

Across the second quarter, so thats, how it affected it going forward, we're not seeing a huge differential we did get that storage from both second quarter and third quarter.

Just from a again a risk management perspective of this period of potential volatility we are seeing a little bit a different kind of month by month and so while we're optimizing that.

Through storage, you're not seeing these huge kind of $20 swings in a month by month and part of that was storage part of it was just movement and the Wi Fi in EMEA age of between month by month, but youre seeing a little bit of that but not a.

Cereal change kind of month by month in the in the third quarter and so overall differentials are a little bit wider than they are in a normalized environment 55, or 50 to 55 environment. We I think we were seeing kind of flat to negative one dollar all in differential now we're kind of looking if.

You are looking at spot rate, we're seeing kind of between three and $4, but we do expect as Emil mentioned.

Hi.

Differentials are kind of coming back to normalized which is the biggest driver for us than we do expect that you'd see that kind of return closer to kind of parity with Wi Fi as as oil prices kind of get back to a more normalized environment.

Got it that makes sense.

Thanks and.

Just move into that kind of the options you have a free cash flow for the remainder of the year you mentioned.

Uh huh.

The credit facility and the term loan.

What's the I guess, what's the priority and what's the flexibility you have between those two.

Pieces of debt and how you might be able to pay those.

Those off.

That's one of the options you're looking at for for the cash flow, Yes, I think.

And so I think the environment like this I think liquidity is probably my primary priority and that's going to aim to paying for doing debt reduction paying down the RBL and increasing that liquidity in fact, we have.

The growing collateral coverage I'd like to use the RBL as a true working capital facility versus a source of long term debt. So if anything you know I'm, probably looking to potentially term out a portion of that RBL facility, if and when the capital markets allow but again I think with that growing color.

Lateral coverage that we have as you see the market stabilize a little bit more with the commodity backdrop I think those are things that are very much in view and possible.

Got it makes sense alright, that's all had thanks guys.

Okay.

This will conclude today's question and answer session I would now like to turn the conference back over to Mr. Brooks for any closing remarks.

Thanks, Sean and thank you all for your time this morning and for your interest in Penn, Virginia, We look forward to talking to you again this quarter.

Thank you. The conference has now concluded. We appreciate you attended today's presentation you may now disconnect.

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Right.

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