Q3 2020 Penn Virginia Corp Earnings Call

Good day and welcome to the Penn, Virginia third quarter 2014 earnings Conference call.

All participants will be in listen only mode.

So do you need assistance, please singly focused specialists, especially the star followed by zero.

After todays presentation, there will be an opportunity to ask questions.

You asked a question that was asked all the Mormon we've touched on so.

Well George Your question. Please press Star then too.

Please note today's event is being recorded.

I would now like to turn the conference over to clay.

Correct.

Sure Alicia Please go ahead.

Thank you and good morning, everyone. We appreciate your participation in today's call.

I'm joined this morning by guarantee Inky, Penn Virginia's President and CEO.

Rusty Kelly, our senior Vice President and CFO and Ben Matt, That's our senior Vice President of operations and engineering.

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

I would also point to you the language in the forward looking section of the press release, our comments today will contain forward looking statements within the meaning of the federal Securities Law. These statements, which include but are not limited to comments on our operational guidance or subject to a number of risks and uncertainties that cause 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 our quarterly report on form 10-Q.

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

Thanks Clay, we very much appreciate everyone joining us for today's call. Our team again delivered solid performance in the third quarter as steady execution has become par for the course at Penn Virginia.

On the sales front, we beat on oil by selling 18383 barrels per day, which was higher than the midpoint of guidance of 18000 barrels of oil per day.

Higher than expected sales were primarily a function of the positive results obtained from the five DUC wells, we turned to sales in July as well as our constant focus on optimizing our base production.

Looking at expenses for the third quarter, we posted adjusted direct operating expenses at $10.88 per barrel.

This low operating expense typifies, our lean cost structure and culture of cost containment.

Put simply we leave no stone unturned to find ways to improve the operating performance of our business.

The same holds true for capital spending where we continue to do more with less.

Capex for the third quarter was $8 million, 27% below the low end of guidance.

We also continue to benefit from our substantial hedge position.

Clear example was in the third quarter, where we realized an oil price of $48.28 per barrel, including hedge settlements.

The combination of increased operational efficiencies reduced capital spending and protecting our best in class margins through prudent risk management supports one of Penn, Virginia as a key priorities generating free cash flow for the long term benefit of our shareholders.

I am pleased to report that we generated free cash flow of $34 million during the third quarter.

All of which was used to pay down debt.

We continue to remain squarely focused on delivering value over volume through disciplined spending.

Surveys of our strong balance sheet driving strong cash on cash returns and further debt reduction.

We believe we can maintain production within cash flow at an oil price of $40 per barrel and generate free cash flow to reduce debt at $45 per barrel.

Next I would like to spend a moment discussing our announcement earlier. This week concerning this strategic investment in Penn, Virginia by Juniper capital Advisors, which is expected to close in the first quarter of 2021.

We view this transaction as truly transformational for the company and one that will best position Penn Virginia for long term success.

The opportunity to immediately infuse a $150 million in cash coupled with the acquisition of oil and gas assets located within and adjacent to our acreage is extremely attractive on multiple fronts.

First the transaction will substantially improve Penn, Virginia, its balance sheet and financial position as it would more than double the equity market cap of the company, while paying down well over $100 million of debt.

In addition, it allows us to push out the maturity of our second lien term loan by two years to September of 2024, and reduce annual interest expense by an estimated 20%.

Equivalent to $6 million per year.

Second the transaction would add production and cash flow and lower our cost structure through the inclusion of junipers approximate 4100 acres with no expected increase to gionee.

Third the transaction will enhance our position in the Eagle Ford Junipers assets like Penn Virginia's are located on private fee lands and provide for multiple additional drilling locations on the eagleford trends proven geology.

Penn Virginia has expanded footprint created by the transaction also affords the opportunity to drill longer laterals.

And finally, this strategic transaction will provide Penn, Virginia additional room to move to maneuver through a potential lower for longer oil price environment.

In summary, the juniper transaction will materially strengthen our balance sheet improve our liquidity profile increase our maturity runway and add important scale to the business through the bolt on assets acquired.

We believe this transaction will prove to be a key milestone for the company.

To wrap things up in Virginia delivered on plan and posted solid results for the third quarter.

The period also marked our fourth consecutive quarter of generating free cash flow.

Looking at the remainder of this year and into the next we believe we are in a strong position for continued success.

Most important of all I'm very proud of our team's accomplishment given the challenging backdrop their laser focus on operational excellence continues to set the company apart from other small cap the NPS.

I appreciate everyone's hard work dedication and efforts to promote to continued safety and well being of our fellow employees as well as our contractors and service providers.

So with that we will open up the call to questions.

Operator.

Thank you we will now begin the question answer session.

To ask a question first of all the Mormon Touchtone phone.

The speaker phone. Please go ahead Sir.

Let's see.

Well John a question Please press Star group.

Today's first question comes from Dumbarton pause with Johnson Rice. Please go ahead.

Good morning Darren.

Good morning, how are you doing.

Good and welcome aboard the bin Virginia shift look forward to working with you going forward.

Hi, I just had a quick question on on Juniper and kind of what that might mean I know you haven't given a ton of color around 21, but obviously you get a big liquidity boost here and.

What does that mean for the 21 program it would.

Take that a little more activity I assume you've talked about.

Companies talked about a maintenance program going forward in the past and just kind of what.

What juniper does mean for the 21 from an activity standpoint.

Yes, so you know.

The transaction definitely improves our balance sheet, but it really doesn't change our outlook relative to activity, we're going to look at commodity prices and a $40 environment. We feel like we can maintain production and within within cash flow and if we see a $45 price environment, we feel like we can.

Maintain production, maybe grow single digit, but more importantly, I continue to reduce debt with our free cash flow.

Okay, great. Thanks, and then.

Maybe just a little color I mean costs came in on the Opex side lower again, this quarter and Jim.

No, Matt you're seeing some pretty good reductions on the DNC side as well.

And if they are already put a rig back out there.

Do you think these are pretty sticky is this something that youd look to maybe lock in lower costs or do you think that just where the service market. As you think you can continue to get kind of a favorable cost in a spot scenario.

Yes, I think the.

Service costs are definitely in a in a great time for industry to date, we have.

However, not only are we seeing improvements via service costs, but we're also seeing continued improvements through our efficiency.

Efficiency gains and all have been maybe speak just a touch about those those gains relative to cycle times and.

Completion times sure.

So comparing to 2019 to where we are now and where we see we're going to we're going to be we've.

We've seen roughly a.

15% to 18% reduction in our in our cost per lateral foot.

Total costs and about.

About 45% of that on the drilling side is just improvements and how we're doing things efficiency gains 55% of that roughly is that related to service cost. So there is some some some risk of that going away if it for reducing if.

If we see a change and activity level in the us on the completion side about a third of that is related to.

Design changes that we're making that that will be locked in and about two thirds of that is related to service cost.

All right. Thank you all very much.

And our next question comes from Neal Dingmann with Trust. Please go ahead.

What it all and again congrats on the steel it's good it looks really good ahead of time.

My My question does it looks like you guys I'm just looking like what you unrest have been able to do on the free cash flow side and then you are mentioning that last sort of comment about just efficiencies and I'm wondering is that what's driving I guess my question is is it a better decline rate is it is it efficiencies lower cost.

Maybe if you could just give a little light because it does seem like you I don't know that the fully that the market's fully appreciated but it does seem like you're getting better free cash flow with limited activity I just wanted to see if you are rusty can speak around that.

Yes, I'll start off and then I'll.

Turn over to Rusty to add some comments as well.

Relative to.

The second third quarter, our Ducs have come on there theres strong producers and certainly thats, helping us with our our production and then from an EPS on the expense side, we've seen reduction in our chemical costs, we've seen optimization on our gas lift, which which lowers our operating expenses and and we do.

Good for a period of time reduce some of our expense Workovers and we're back doing those and we're picking up production volumes. Accordingly. So those are those are things that are improving the production and reducing our expenses.

I'll, let russ to add some color as well.

Thanks, Darren talked about the expense side I'd also highlight on the on the top of the line the Gulf Coast margins and our access to those those markets as well as our hedge position is continue to make the topline a lot stronger than.

A lot of other folks that we've seen in the industry. So we continue to maintain a lot of those policies and manage that that I think combined that with the efficiencies in the cost structure is what leads to some of those margins.

Yes.

And then given given the benefit you all have I guess my follow up would just be.

I know it would be nice to see you all as consolidated taken over some of the people that operate in as well how do you balance either you know as you said I know John you mentioned about free cash flow still being the priority paying down debt, but I'm. Just wondering when you look at growth on a go forward here for the next year or two how do you think about sort of internal versus external what makes the most sense.

You want to think about our industry more generally I definitely think we are going to continue to see consolidation we've seen dramatic consolidation here recently.

That makes sense to do most everyone I think.

The way Penn, Virginia is going to approach consolidation, it's all about.

Value for our shareholders. So.

The way, we're going to do we'll look at opportunities and we may be we may be an acquired down the road or we may get acquired we're pretty agnostic on that it really is all about doing what's right for the shareholder.

Thats great answer thanks, so much guys.

Our next question comes from Richard Tullis with capital one. Please go ahead.

Hey, Thanks, good morning, everyone.

Rusty if you could maybe provide a little history as background on how the the juniper deal kind of came together and did did PVA see look at any other potential options for.

Steven this same objectives.

Yes, so although I'll, let rusty address that question.

Sure. So just from a highlight will will give a lot more detail in the proxy itself, but June.

Juniper has operated assets on a lease line boundary with US we've known each other well work together is operating partners in over the past few months have had a number of conversations of how to work together.

We did talk to a number of potential capital advisors or sorry providers and looked at a number of different alternatives and what kept we kept coming back to a potential partnership with juniper, just given the operating synergies knowledge of the asset base and frankly, the relationship and viewpoint.

A common strategy.

That's helpful. Thank you.

I see and just as a follow up I know this deal doesn't change as Darren said the go forward.

Activity clad but within that activity set do you perhaps start drilling on some of the juniper acreage in 2021.

We will certainly consider that if its great acreage and it fits very well into our portfolio of opportunities. It allows us to drill longer laterals. It adds a number of new wells to our inventory. So we're we're in the middle of the process thinking about 21 activity levels as we speak and and.

Most likely that acreage will play a role next year.

All right well that's all from me. Thank you.

And ladies and gentlemen, as a reminder to ask a question. Please press Star then one today's next question comes from Michael spoke with Seaport Global. Please go ahead.

Good morning, guys.

Good morning.

I was hoping we could talk a little bit.

About.

The juniper acquisition and kind of what things are going to look like.

Once it's completed.

Obviously, they have a lot of other assets in the portfolio Im just curious what kind of.

Protection.

And governance, we're going to see.

For kind of what's going to become the minority public shareholders.

This go forward entity.

In looking at assets and kind of keeping some sort of separation between the two it.

Talk a little bit about that.

Yeah, I'll have I'll have rusty address that.

Sure so the only anticipated.

Overlap right now is the assets that we acquired in the transaction with regard to governance protections. We have standard protections in place for minority shareholder protections any affiliated transactions would have to be reviewed by those members of the board that are non affiliated to June.

But again, what I would I would point to those is the protections that are very standard, but I think the real.

The real benefit here is the common viewpoint on strategy with regard to paying down debt living inside of free cash flow and.

Developing with a good sense of capital disciplined by somebody that's now a majority shareholder in shares those same views.

And what's what's the board makeup going to be posts.

[music].

Post the transaction like what's the the numbers on that.

Yes, so it will be the existing four four.

Our members plus five new board members from Juniper.

And.

It will be nine board members total.

[music].

Okay.

That's really all I had thanks guys.

And ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Glenn Please.

Final remark.

We thank everyone for calling in today, and we look forward to delivering impressive results in the future take care.

Thank you. This concludes today's conference call. We thank you all for joining todays presentation. You may now disconnect your lines and have a wonderful day.