Q3 2020 PDC Energy Inc Earnings Call
Ladies and gentlemen, this is the operator is that he's gone for instance is scheduled to begin momentarily until that time your lines will be placed on hold until the conference. They get again, ladies and gentlemen. This is the operator did.
Did each gone for instance is scheduled to begin momentarily until that side, you're like they said hold until the country. So again. Thank you.
[music].
Shouldn't both follow on that side I saw.
As a reminder, this conference is being recorded I would now like to third upon free to celebrate the your host files for Investor Relations you may begin.
Thank you and good morning.
Today's call, we have president and CEO, Bart Brookman Executive Vice President Chief Financial Officer, Scott Meyers.
Senior Vice President of operations Dave.
Yesterday afternoon, we issued a press release and posted a presentation that accompanies our remarks today.
We also filed our form 10-Q.
The press release and presentation are available on the Investor Relations page of our website www Dot P.D.C. dot com.
On today's call will reference some forward looking statements.
Non-GAAP financial measures the appropriate disclosures and reconciliations can be found in our presentation.
Additionally, we modified our terminology from free cash flow to adjusted free cash flow definition and formula remain unchanged from prior disclosure.
With that I'll turn the call over to our CEO Barbara.
Thank you Carl.
Everyone. Let me begin this call with some numbers.
Third quarter.
I felt was for the year 2020 2021.
I encourage you to study these results.
Because I believe they demonstrate the strength of the company and the tremendous value we see prisons.
For the quarter.
$225 million free cash flow.
Approximately 20% of the company's common market capitalization.
Debt for the quarter was reduced by approximately 215 million.
The leverage ratio quarter, Randy one point so.
Production.
17.7 million barrels of oil equivalent well above our expectations.
And the cost structure is a result of both the Src merger and our intense focus in this area.
$4 per Boe.
It is combined elderly and January.
Record.
Company.
Good for Ptcs revised outlook 2020 annualized free cash flow is anticipated to exceed $350 million.
Going forward, you can expect quarter after quarter pursuit of free cash flow and next year, we anticipate approximately 300 million of free cash flow at $40 oil.
This calculates to yield based on the enterprise value of the company over 10% talk.
Top tier amongst our peers.
In the near future, we believe our total debt level will be reduced below $1.5 billion.
Long term goal remains to drive line and drive our leverage ratio to the 1.0 level, which we consider the gold standard for today's industry.
Now let me cover a few key themes I'd like you to take from the call today.
Burst sustainability of our capital programs, particularly in the state of Colorado later in the call Dave Loulo will review review or turn in line schedule that is virtually the shirt well into 2024 with over 475, combined ducks and improved performance.
In hand.
232 permits over the last two months.
We remain very confident because we'll continue onto the recent modifications to the approval process at the state of Colorado.
Second thing.
Movements store capital efficiency and the tremendous positive strides our operating teams have made in both basins, we expect a 5% to 10% improvement in our per well costs as we finalize for 2021 budget, helping us drive continued quality drilling returns in the Wattenberg and Delaware.
35.
Financial focus I've already touched upon balance sheet strength as we strive for long term 1.0 leverage ratio consistent and sustainable free cash flow and intense cost management.
And the last thing.
Expect modest production growth of up to 10%, while we continue to obtain permits driving quality drilling returns and deliver the outstanding financial metrics I've outlined.
So in closing let me thank all of the PDC employees.
During this period than we have experienced demand destruction incredible commodity price volatility.
And overhaul to our work environment, including extra health protocols and working remotely you have demonstrated the commitment and resolve to help PTC remains strong resilient and focus during this uncertain me again I think.
With that Im going to turn the call over to Dave Willow for an operational update.
Thanks, Bart before I begin I'd like to take a moment to thank the team for their tremendous effort in the recent months our.
Our planning and development.
Good story permitting and land groups have worked tirelessly collectively to ensure PDC is well positioned both now and the future.
Moving to the third quarter slide seven.
We invested approximately 35 million to run one wattenberg drilling rig for three months, while resume in Wattenberg completions in September.
Due to the lack of new turn in lines in the basin.
And as we articulated in our last call both production and oil production were relatively flat on a sequential basis compared to the second quarter more specifically total production of 192000 BOE per day represented an increase of 3% from.
Second quarter, while oil production of 65000 barrels per day was a decrease of 4%.
The discrepancy lies.
Twain the movement in total production and oil production is primarily related to late second quarter activity in each basin.
In Wattenberg, we returned to production previously curtailed.
Higher G.O. are wells that offset quarter over quarter growth in the Delaware, which was driven by late second quarter turn in lines.
Finally from an L. Luis standpoint, I'm extremely proud of our results for the quarter of just over $2 per BLE.
In Wattenberg, our team has done a great job of optimizing the size and utilization of our compression fleet.
And renegotiating contracts, while effectively managing the staff.
And realizing the benefits of consistently lower line pressures.
In Delaware, we have converted several locations to the power grid and eliminated the need for electrical generation.
We're very excited about our trend in our L. are we the last quarters, but are keeping a close eye on our cost as there is potential.
For some of these savings store wrote in 2021 due to the changing Colorado regulatory backdrop.
Slide eight takes us to look at Wattenberg drilling and completion efficiencies that we have realized through 2020.
Beginning at the top of the slide you can see a 10% improvement in the number of hours per day spent pumping compared to the first quarter of 2019. So.
Simply put.
Yes, Nonproductive time has reduced our team is completing and not swapping equipment and dealing with minor maintenance.
There is a direct correlation in the number of stages per day, and ultimately dollars per well.
Recently, our Wattenberg team has reached levels of safely completing an amazing 20 plus stages per day.
From a drilling standpoint, the story is much the same the spud to spud drill times for our Wattenberg. That's our sales are down to an average of six days in 2020.
This isn't an improvement of 20% compared to only a year ago. These.
These efficiencies.
And what we believe the Seo GCC will require moving forward.
Second.
Business density in proximity.
As we show in the middle of the slide the four surface locations associated with the 32, well permits had an average of 10.
Business units.
Bill I am sorry building units within 2000 feet and an average distance to the nearest b U of less than a thousand feet.
I know this is tough to visualize but less than 10 building units within a radius of nearly a half a mile is representative of our rural nature of our position.
Finally, our team is hopeful that we will receive additional permits between now and the end of the year, which will further increase our projected year and counts to north of 500, combined and secure our turn in line activity into 2025 at the current pace.
Moving to slide 10.
We provide a comparison of are permitted and unpermitted surface locations.
First it's very important we don't overlook the most important factor of our position we are 100% located within Weld County, Colorado.
Much of the story becomes extremely challenged if that were not the case now.
Next it is critical that you keep in mind that none of these future locations have gone through potential surface pad optimization or alternative site analysis that could favorably change some of the stats.
[noise] finally, our permitting strategy moving forward is focused on taking advantage of our contiguous acreage position by several surface locations together to form oil and gas development plans or Oh gdp's.
And comprehensive area plans are caps. This is aligned with the C. O GCC stated desire for operators to take advantage of long over the long term approach to planning and development in our state.
I won't go through all the data on the slide but you can see we provided a look of are permitted and unpermitted locations in terms of both building unit density and proximity to the nearest building unit or B U.
We feel these measures are important as they characterize our ability to either gain unanimous consent.
Or demonstrate equivalent protections and the C. O GCC hearing process are intent on slides eight or nine and 10.
Is to paint a very clear picture the combination of our best management practices. Our community relationships are rural acreage position entirely in Weld County positions PDC for successful partnership with the C. O GCC, we have tremendous <unk>.
Confidence in our long term Wattenburg development plan.
With that I would like to turn it over to Scott Myers, Chief Financial Officer.
Thanks, Dave as we've highlighted so far the third quarter feature tremendous results that we're very proud of but before we reviewed the financials in more detail I want to extend my deepest gratitude to the entire accounting department, especially those located in our West Virginia Office four years you have them.
History extreme professionalism and proficiency over the past several months these traits and more we're once again on display as you insured we made a smooth transition to a centralized location in Denver.
We're excited to welcome the new hires and no. They will continue with the high standards that you've established again. Thank you.
As a reminder, or non-GAAP reconciliations were figure shown on slide 12 can be found in our appendix.
On the left hand side of the slide provides an overview of a number of key financial results for the quarter, but I want to take a minute and focus on the two grass on the right.
First our G&A.
For the third quarter, our cash in non-cash G&A came in at 32 million $1 84 per Bowie compared to 41 million and $3 23 per boat in the third quarter of 2019.
This represents an improvement of more than 40% and is a very clear sign of the positive benefits that we're realizing from our Src merger.
Importantly, the lack of non-recurring light blue bar on the graft indicates we've more or less reached our run rate G&A.
As we continue to work through our 2021 budgeting process expect PDC to meet or improve on these already impressive numbers.
Next adjusted free cash flow.
Over the past five quarters PDC it delivered a staggering 440 million of adjusted free cash flow. This includes all deal cost and integration costs.
And they do not include our $82 million of proceeds from a midstream.
Delaware divestiture.
Amidst all the uncertainty in commodity prices and politics and the industry in general these results highlight our asset quality.
Overall team performance at managing costs and are proof that our commitment to capital discipline and focus on execution is paying off.
Moving to slide 13, we provide an overview of our balance sheet and hedge position Lamb.
Last week, we completed our fault redetermination of our credit facility.
Resulting in a borrowing base and commitment level of 1.6 billion.
In the quarter, we successfully paid down $215 million, a total debt through our free cash flow when considering are small tack on bond beyond September you can see we have borrowings of $285 million on a revolver and liquidity of one 4 billion as of September 30th.
It's also worth noting that in October alone, we pay down an additional $70 million of debt.
PDC is it clear stated goal of utilizing free cash flow to reduce total debt to a level of 1.5 billion.
And a cyclical industry with commodity price volatility our view like many others is a clean balance sheet with low that is the first step before initiating sustainable shareholder friendly initiatives.
Moving to our guidance and our outlook.
We first cover of 2020 projections on slide 14.
The biggest adjustment is our increased the projected adjusted free cash flow for the year now north of $350 million compared to prior guidance of approximately 300 million.
Much of this increase is due to maintaining our capital discipline, while improving our cost structure and differentials. We now assume 250 gas and $10 NGL realizations compared to the prior guidance of two dollar gas and nine dollar Ngls, while our oil assumption remains at $35 a barrel.
From an operational perspective, we still project running one rig and one crew in the deejay with minimal Delaware activity through here and.
This should result in capital investments of approximately $110 million for the fourth quarter.
It's worth noting that are anticipated quarterly average exit right for oil was unchanged at 60000 barrels per day.
On a Bowie basis, we now expect 175000 barrels are per day compared to prior guidance 170.
Both of these represent decreases from the third quarter less than 10%, which is relatively consistent with our prior guidance.
Finally, before opening the called Q&A I want to cover our two year outlook.
As Dave mentioned, we're in the early stages of our annual budgeting process and our 2021 numbers are still in outlook at this point, but seeing how we're really just talk in the next five quarters. The team is getting really dialed in.
There were a couple of highlights worth mentioning on this slide first in addition to increasing our 2020 free cash flow. We've also increased our 2021 free cash flow projection from $250 million to $300 million.
Each of these adjusted free cash flow figures represents not only an extremely impressive free cash flow yield, but a free cash flow to enterprise value of 10% or more.
From the third COVID-19 through 2021, we know project to generate approximately $850 million a free cash flow on essentially at $40 deck.
Additionally, we've generated free cash flow and for the past five quarters and over the next five quarters, we projected to.
To generate more than $400 million of additional free cash flow and approximately $650 million of capital investment, which brings me to my second point Ah reinvestment rate.
The guidance and outlook that you see in 2000 22021, each reflect the reinvestment right below 70% at $40 oil as I said earlier, our current focus is exclusively on debt reduction, but our strategies quickly positioning us for a multifaceted approach to meaningful capital return.
Turns to shareholders in this low price world. These.
These numbers across the board can compete toe to toe with any company in the sector. This as a direct testament to the quality of our team and our assets at PDC, we have a track record of execution.
At at year end, we expect to have four years of Wattenberg turning lines in hand, and we're focused on achieving this plan for years to come.
With that I'll turn the call over to operator for Q&A.
Thank you again participants if you would like to ask the question. Please.
And then the number one on your telephone keypad again, that's fine then the number one I get a telephone people that'll be dry your question bench to sit down.
We have a question coming from the line Brian balcony.
The Grill your line is now open.
Hey, good morning, Thanks for taking my questions apart with the the healthy free cash flow as you noted that levels are now down below $1.7 billion at the end of October and you've lay out a path of continued material free cash flow into 2021 that should put your billing and a half.
Dollar target that you you talked about last quarter clearly in sight, how are you thinking about timing and the preferred menu of options for shareholder returns once you get down to those that levels.
Yeah, Let me start now flipped us over to Scott, but.
Our first goal is to get to the one five level and then work with the board on our options at the current stock price I would say our share repurchase program would be re initiated and that would be our first priority and then obviously you have the dividend discussion out there.
Which I think we would start on the share repurchase side.
First step obviously, keeping an eye on our stock price and then always had those discussions around dividends, but wouldn't make a commitment on that right now Scott do you want to add to that I think that that's really good bargain just remember it's going to be a dual faceted approach, we're going to continue to pay down debt as well.
Because our overall that goal is to get us to 1.0 leverage ratio as well so I.
I agree with 100% of everything you just said yard so thanks.
Great and then as a follow up on the Colorado front. The 32 additional location permits that you received during September and October you you noted in the deck. The average proximity to the nearest building unit with 750 feet based.
Based on what we know so far could you characterize once the new mission change will making goes into effect next year, how do you anticipate that permitting process to play out versus the the permits you. Just received you anticipate a similar experience or any additional regulatory hurdles in the permitting process come January.
So this is Dave Lolo I'll take that one.
I think what we have is the permits that came in and the the last recent months have gone through a.
What they call in.
Directors objective criteria those were.
Temporary guidelines put in place until the final rules are in place.
We've worked extremely hard with the oil and gas Commission hand in hand to come up with the new rules.
And what can be done to best predict environments and.
Building unit.
Locations.
We feel very confident.
In going forward to meet the same criteria as the new rules are.
That are that are coming out here in the final wording is on November 20th.
And really the Criterias that no oil and gas location in a working path can be located between 502000 from a building unless one more of the following criteria satisfied and that's getting consent are going through and oil and gas development plan or a cap or.
All year equipments out to 2000.
Or do you show equivalent protections that protect the the environment.
Going through the new rules as we see them today.
Well first go through a surface use agreement with the landowners.
We will notify the business the Bu owners within 2000 feet will go through the local review with the government with the local community, which.
Which at this point is a local a process, which we will continue to do to get their approval and then at that point you submit a to a to the.
Julie Murphy.
C O G C staff once you get the recommendation it will go to a hearing where we will go in front of the professional permanent.
Commission and at that point, we should be able to influence getting our permits based on our best management practices and everything that we've been doing.
Up to this point.
It was a lengthy.
Brian I think they've done a great job of showing these incredible knowledge of what's going on.
Let me, let me just take a simplified spin on it.
We have all the confidence.
We've got great knowledge of the new rules.
The answer is yes, some of the criteria for those permits we received a similar to the.
Technical initiatives and best practices, we're going to have to show the Commission's if we don't if we don't get the B U owners consent on the drilling we have a lot of confidence that we will we will be getting consent.
We have the utmost confidence in the in the communities in the county.
And I think the last component of this as we have the Oh GDP process in the CIP process that they've touched upon those are both.
New.
Areas that will give us other avenues to obtain permits in larger quantities actual so.
Again, a lot a lot of new things here, but overall.
We have confidence kosta practices technical and operational practices. We have had in the past are similar to what the commission is looking for in the future and we will continue to implement those in our operating reputation in the state of Colorado and with the Commission.
So favorable we have a lot of confidence in this.
Okay I appreciate the comments.
Your next question comes from the line well Ma'am can give you a Goldman Sachs. Your line is now open.
Hi, good morning, Thanks for taking my questions.
Wanted to follow up on the free cash flow priorities.
You mentioned Friday.
To use the free cashless towards a tech reduction and return of cash to shareholders.
In the past you had also mentioned the benefit of greater scale in your Delaware operations.
What parts on using free cashflow towards M&A.
Especially given recent proposed rule changes in Colorado and decent consolidation and then and then in the industry.
Additional scaled right now an asset acquisitions would be a lower priority.
R R.
Priorities right now are ongoing execution as I noted quarter after quarter.
Reduction below the one five and then if Scott Myers noted continued improvements in balance sheet, while we give consideration to the.
Return to shareholders.
Great. Thanks.
And my follow up is on paying 21 spending plans you potentially contemplating completing motivated in 2021 at the same budget due to cost savings philosophy Klee, what are they looking at that can drive your decision to what's more activity versus generating more free cash flow is it efficiencies from consistent operations audio.
He was on the macro and how do you balance it with me.
Potential bomb, it's and and how that process plays out next year.
Yes.
Great question and that's the whole thesis of our budgeting argument how do how do we go through this and number one is free cash flow and that's what we're going to drive to make sure that as we said today I am very confident in a $40 a world having over $300 million.
Also besides just being able to generate free cash flow, it's really important to have operational efficiencies. So when you have when you have a wattenburg drilling rig and a wattenburg completion crew and minimizing your downtime gives you the same crew and consistency. So we're not really looking for a production.
Number we're looking for consistent season operations that fit within our free cash flow definition, so our growth, whereas we're done with this.
Using that low single digit kind of timeframe are number range, it's going to be the output based on what's best to stay within our free cash flow our capital budget range and the production will end up being a more of an output as we want to make sure that we have the most efficient operations, which continually to derive value.
By driving total costs down from a capex perspective, so hopefully that gives you some insight in right now from sitting where we are today at $5 million to $600 million Capex range with low single digit growth rate feels very comfortable from where we're sitting in our budgeting process currently.
Great. Thank you.
Your next question comes from the line of no Big men from curious security Yeah line is now open.
Since it on Neil's behalf. Thanks for taking my question.
So obviously you all continue to generate really great free cash flow with your current plan.
So with that in mind, and noting that you currently have any activity in the Delaware I'm, just wondering whether you consider directing any activity away from Colorado to the Delaware and if so what sort of factor you look for in order to go ahead and.
That decision.
The the first and foremost is.
Having returns on our drilling completion activities before we deploy anyway.
We have the challenge of today of doing that it probably a 40 to 45 dollar outlook.
To what Dave Willow talked about our capital structure, we're actually excited about where we're at in our overall drilling F&D Ah returns, we can achieve in both basin. So yes, we.
We are looking at budgets being finalize what we're looking at.
Kicking off activity in the Delaware.
Then some time late this year early next year, both completion and drilling wise, we have I believe year and around 18 or 19 ducks in Delaware that obviously, you'll be a first focus and then we'll create new completion opportunities with the drilling rigs. So we have that in our plan.
<unk>.
We're going to balance that with steady state Wattenberg of one sputter rib one larger rig for the horizontal portion of the whole and one frankly that is Dave touchstone will be incredibly efficient.
But again to Scott Myers comments that he just went through we have a commitment on capital discipline pursuing free cash flow cost controlling the company.
All while we believe we can achieve modest production growth.
That's a great color I really appreciate that so I guess my second question is with regard to see your 2021 outlook. So you've suggested overall sequentially flat production into next year.
Fourth quarter 20.
Quarter to 21 declining about 5%.
So given that information I'm just wondering how we can look at your exited the exit finishing 2021 and if you could comment on that.
Yes, the again just to reiterate when you look at when you look at our 21 production cadence are low point will be our first quarter.
And it will be less than 5% is what we see from our fourth quarter and remember there's two last days in the first quarter. So that's a big impact of of that statement. Then you look throughout with the consistent Wattenburg program in our Delaware program being restarted you'll see a.
Probably the largest jump would be between the first and second quarter or maybe a split between the first and second second and third quarter, but you're going to see steady increases and all all throughout the year. When you look at the fourth quarter exit rate for 2020, and you compare that to 2021 that's about it.
10% change in our forecast so those are the high levels steady growth between the quarters first quarter being the lowest and first quarter next year being less than 5% of what the fourth quarter is most of that being driven with two last days.
Great. Thank you very much for that answer any congrats again on the court.
Thank you.
Again, ladies and gentlemen, and if you have a question at this time, please fast side than the number one I need telephone keypad again, that's fine and the number one on your telephone keypad. Your next question comes from the line Michael Shala.
<unk> Your line is now open.
Good morning. Thank you for taking my question and congrats on the quarter is is actually the atoms depending for Mike I was hoping that you could provide additional color on your 2021 outlook.
Given where oil and natural gas prices are today.
It it makes sense for a period eight to focus 820, 21 activity planning areas with the higher caseloads ratio.
Well I would say that.
When you, especially when you look at the Wattenberg.
We already have a pretty strong planned in place we have to permit which takes a year then you drilled the wells and with our duck inventory we have.
We have to drill we're obviously going to drawer ducks are turned on line or ducks first so when I look at it do we have a little bit of flexibility maybe I will tell you that we're drilling we're completing wells in all three areas next year and so we're going to have some planes some summit and some kersey.
So we're pretty comfortable that.
Whichever the way the prices go we have we're having the ability to manage through that but I don't think you're going to see a major shift just with the permitting process and our inventory and ducks, we already have we're pretty much said and the cadence that we're going to have.
That's very helpful. Thank you my photo updates on your hygiene program.
Decent comfortable at their current levels for 21.
Volume, Sir we do expect to increase your hedges.
Yeah, that's great question, and I would say, yes, I am comfortable with that does not mean I wouldn't increase the percentage is either we have a price view and number one is we always want to consider are firstly or hedging we call our base layer and that protects the balance sheet for 2021, I'm pretty comfortable with that.
If we get some prices, we get a little run the market, we don't mind, taking some of that risk off the table. So I would say you could still see some small layers in 21, our base layers, we're still looking at layering and base layers and 22. So more of a program right. Now is focused in 22, but if you get some price spikes or something that we feel that's favorable.
We would still consider doing something more than 21.
That's really helpful and that's it for me, Thank you and congrats again in the corner.
Thank you.
Again participants if you would like to ask the question the specified Linda number one I know sounded fun people that starred in the number one on your telephone keypad.
The state of my colleagues can you predict question again, that's fine, but the number one on your telephone.
Hi, I'm showing no further question at this time I would I would like to turn the conference back to Mister Martin Brookman for closing remarks.
Yeah, Thank you frenzy and.
Thank you everyone like I said we're.
Proud of proud of our team here at PVC, we're proud of the quarter.
We appreciate your ongoing support through these.
Incredibly challenging industry conditions were in.
<unk>.
Look for more more positive results in the future. So again thank you.
And ladies and gentlemen. This concludes today's conference call. Thank you for your participation give me now disconnect.
[music].