Q4 2020 Penn Virginia Corp Earnings Call

Good morning, and welcome to the Penn, Virginia fourth quarter and full year 2020 earnings conference call.

All participants will be in a listen only mode.

Should you need assistance. Please signal conference specialist by pressing Starkey followed by zone.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Clay Jostle director of Investor Relations. Please go ahead.

Thank you and good morning, everyone. We appreciate your participation in today's call I'm Clay. He also direct of Investor Relations and I'm joined this morning by Darren Yankee.

Penn Virginia's President and CEO, Rusty Kelley, our senior Vice President and CFO, Julia Gaultney, our senior Vice President development.

We will discuss non-GAAP measures on the call definitions and reconciliation of these measures to the most comparable GAAP measures are provided in our fourth quarter earnings press release and presentation posted to our website.

I already getting started I'd like to remind you of the language in the forward looking statements section of the press release, which was issued yesterday afternoon. Our comments today 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 materially different from those forward looking statements, including those identified in the risk factors in our most recent annual report on form 10-K.

As they may be amended in subsequent form 10-Q cautionary language is also included on slide one of the presentation, which is posted on our website.

Finally, after our prepared remarks, we will answer any questions you may have with that I'll turn the call over to Darren.

Thank you Clay 2020 was clearly a challenging period for the entire global community and the oil and gas industry was no exception.

As a result of the unprecedented decline in oil prices and Virginia took swift and decisive actions to protect our business.

We believe our operational and financial results for the fourth quarter and 2020 speak clearly to the success of these actions.

At the core of our strategy and decision, making in 2020 with a continued emphasis on cost and capital efficiency cash on cash returns strengthening our balance sheet and maximizing the value of our asset base.

We are proud of our exemplary LOE and adjusted cash G&A expenses of $4 22 per Boe and.

And $2 71 per Boe, respectively.

On the capital front, we were able to drill our wells cheaper and faster in 2020 and on a performance basis. The cumulative production from the wells. We spud in 2020 is already exceeding dnm's pre drill forecast by 12%.

Penn Virginia is a company focused on returns in 2020 that was especially important due to the collapse in oil prices given.

Given the uncertainty around the duration of the low oil price environment. We immediately ceased all drilling operations and curtailed our production to preserve the value of our PDP base.

Well as to protect our balance sheet.

We opportunistically secured and utilize storage assets to minimize our production curtailment, providing the optionality to sell those barrels at a much higher price.

Starting in the fourth quarter of 2019, the company successfully set a new milestone that being free cash flow generation I am pleased to report we continued that trend for every quarter of 2020 with the fourth quarter being the fifth consecutive quarter.

For the full year of 2020, we generated over $50 million and free cash flow and we expect that trend to continue.

Another major accomplishment was the protection and strengthening of our balance sheet. We did this in two steps first we utilized our free cash flow to reduce debt by more than $50 million. Then on November 3rd we announced the general per transaction, which was designed to further strengthen our balance sheet with <unk>.

Subsequently closed the transaction on January 15th of this year.

With the free cash flow Penn, Virginia generated coupled with the general per transaction, we reduced net debt by more than $180 million from year end 2019 levels.

These proactive steps improved our liquidity position by approximately 163% and extended our debt maturities to 2024.

Finally, our robust hedging program created significant value for our shareholders in 2020.

We realized $93 million in cash from our hedging program alone after subtracting cost to produce those barrels we generated adjusted annual EBITDA <unk> of $29 89 per Boe.

For 70% of what W. T I averaged for the full year, an accomplishment we are quite proud of.

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

Their tireless efforts during these challenging times from a materially responsible for our strong results and I sincerely appreciate everything they do on a daily basis to drive our success.

Turning our attention to 2021, our strategic focus will be on four areas.

First our primary objective will be to increase cash on cash returns, we will endeavor to maximize the value of every barrel of oil in cubic feet of gas we produce.

In addition, we will continue to scrutinize every capital project to ensure they meet our robust risk adjusted expectations.

As delineated on slide 10 of the earnings presentation. The top 250 locations and our 500, well D. N M inventory are expected to average an internal rate of return exceeding 40% and a $50 per barrel flat oil price environment.

Secondly, we will always be committed to continuous improvement.

This commitment we will relentlessly look for opportunities to improve our operational performance for additional cost control measures and continued pursuit of operational excellence.

We also recognize the importance of ESG.

Last year, we created an ESG task force comprised of management representatives from across the company, who are charged with the responsibility to monitor adherence to our ESG standards and formally communicate findings on an ongoing basis to our board of directors.

Certain initial ESG data will be posted to our website in the near future.

Additionally, we're linking our compensation to achieving short term and long term performance metrics, thus coupling management's compensation to shareholder returns.

Finally, we are committed to the generation of free cash flow and plan to use that cash to reduce debt further.

Maintaining low leverage and substantial liquidity are key to continued success for Penn Virginia.

We believe these shareholder aligned initiatives make Penn, Virginia, a strong investment opportunity uniquely positioned among our peer group.

And with that Chad, we can go to the Q&A portion of the call.

Thank you 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 two.

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

And the first question will be from Dun Mcintosh with Johnson Rice. Please go ahead.

Good morning, Darren how are you all doing.

Good day, thank you for doing that.

Call today.

Yeah sure.

And your first question around around 'twenty or 'twenty, one program and are really the decision to stay at two rigs you know when we last spoke on the third quarter call. You. All just got debt second those two rigs up and running and you know oil is $40 then and so you know we kind of thought thinking about maybe one maybe two but what are what were some of the ultimate drivers of it.

Really drove you to stick with the with that two rig program.

No I think first and foremost.

Really understanding our inventory we did a deep dive last fall and on page 10, we talk about our inventory in and very.

Very strong results going forward. The next two years, we project our wells will average.

You know 40% rate of return at $50 flat oil price environment, and you couple that with the way commodity prices have strengthened and.

To us it makes sense to go ahead at this time to plan on continuing to run those to run the two rigs for 2021 I will tell you that we're going to pay close attention, obviously to the commodity or to the service cost environment and if we see a significant inflation or anything that concerns us around.

Being able to deliver the returns we're talking about and then we would consider.

You know maybe slowing down the program if that made sense. So we are first and foremost we're returns driven company cash on cash returns and that's what it's all about.

Alright, great. Thanks, Yeah noticed slide 10 on a lot of good color there I.

I guess, maybe going a little bit of a different direction and I wanted to get your thoughts on future M&A opportunities obviously.

The Juniper deal did did a lot for the balance sheet and your pretty solid footing you know looking forward, even even if prices do pull back decently from here.

We have any reason to believe that they would but you know it sets you up for the long term and I'm. Just you know what kind of hurdles would the deal have to clear to get the green light from you all.

As we kind of think about.

For future M&A opportunities.

You don't want to when we look at our inventory and see the depth and the returns that we can make M&A is not as critical to us as maybe it might have been in the past, we absolutely will look for opportunities too.

Accretive acquisition opportunities, but first and foremost we're going to focus on developing our inventory and delivering excellent results day in day out focusing on continuous improvement how about how to drive the.

Performance of our wells drilling cheaper and quicker so.

In General M&A, we'll we'll look at opportunities they need to be accretive we worked really hard to last year to improve our balance sheet and we absolutely intend to keep a strong balance sheet going forward with with any M&A deal that we'll consider.

Alright, Thank you all.

Thank you. Thank you and the next question will come from Neal Dingmann with Truest. Please go ahead.

Hey, guys. Thanks for the details so far they've.

Maybe my question, maybe for you or Rusty just.

This is done said in very even post juniper and kind of debt free cash for you guys are kicking off just how much improved the balance not only the balance sheet, but just on a go forward. So with that obviously recognizable now I'm just wondering how do you think about it.

I see that your you mentioned the two rig program, but I'm wondering how do you think about sort of your hedging program at all.

But going forward I guess kind of two questions. How are you thinking about the hedging and you know he is there a.

Sort of at a certain target for leverage you know given that sort of improvement that you've already seen we're now at the balance sheet.

Okay.

Yeah. Thanks, Neil this is rusty when we think about hedging. That's obviously you saw our performance last year that is a priority.

Tool that we use in order to protect the balance sheet you will notice that the next six months, we've got a significant downside protection, but we've done it with collars to allow ourselves material upside when we look at future hedging as we spend capital we hope to protect those returns again as Darin was mentioning cash on cash returns as our chief priority.

And so we will be using a hedging tool to make sure that we protect those returns as we and the balance sheet as a whole as we invest capital with regard to leverage level I think we.

We'd like to make sure that we're targeting at least kind of the one to one five times leverage though in an environment like that we'd like to make sure that the excess free cash flow puts us towards the lower end of that range.

In an environment like this but we also look at other metrics such as total PDP coverage on a collateral coverage basis, which youll see in our presentation. We highlighted well is well over two times at this at this point.

Okay.

No. It makes it makes total sense and then maybe Darren a question for you or Julia just on it seems like even with now the two rig plan. There's there's not not only just recently, but now you guys you'd probably sits there and it's been there notable efficiencies on both the rig and Frac side could you talk a little bit.

Maybe more color on you know if you're continuing to see that and you know how we should think about.

Maybe if you have the full time rigs and Frac.

Maybe how many we should start thinking about sort of annually.

Yeah.

Yeah. So all the I'll touch on the efficiencies. We're seeing you know it's a continuous improvements is very near and Dear to me and an ever.

Every week, we we measure.

Small increments of our business looking for improvement and we've said a number of records even in the last couple of weeks.

Relative to how quick we drilled certain aspects of our wells and we're focusing on.

Increasing our pad size than what we've seen often in our industry. When you drill more wells on a pad you you tend to learn how to drill those wells quicker and more efficiently and so this year, you will see us transition to a little bit larger pad size and what we've done in the past and we're already seeing that pay off in the drill times.

As we speak ongoing on the on the completion side, where we're constantly turning the knobs relative to our Frac design the stage architecture. The intensity per cluster, we're constantly studying our results as well as our peers immediately around us and trying to quickly.

What others are doing that are that are really beneficial to the well results as well as its come up with our own ideas and test those out statistically.

Very good thanks, so much.

Yeah.

And the next question will come from Jeff Robertson with Watertown Research. Please go ahead.

Thank you a question on some of the data you have on.

Slide 10.

Darren you mentioned that the wells for 2028 outperformed <unk> by about 12 percentage is there something you can point to that you think is is leading to that performance.

I think the the way we've completed some of the wells.

It's always hard to tease out.

The results the improvement and where it's coming from but certainly feel like some of the tweaks. We've made to the completion designs are improving improving well results and I also think we're doing a better job as a company understanding how to come back into areas that had been drilled previously where theres parent wells and figure out how to drill.

For the child wells and stimulate those child wells and improved performance relative to the parent wells. So that's a constantly evolving process, but those are those are a few things that I can point to.

And a follow on to that.

Can you talk about the locations that average 40% plus IRR can you talk about the sensitivity of the other locations in the inventory.

And how they respond if oil prices, let's say, if one were <unk> 60 versus <unk>.

50 D D.

How much what that 250 number might grow to.

Yeah.

So D N M. Today has about 500 locations in our inventory and half of those we see it.

Average greater than 40 per cent ready to return and $50 flat environment.

At today's current pace of development, that's about a 556 years of drilling inventory for those 250 locations.

What I think we'll absolutely see going forward, regardless of commodity prices, we will learn things technically on our asset.

That will help us improve those remaining 250 locations and bring them into the drilling inventory with a similar type of rate of return.

At this oil price so.

That's the way I see the future going.

Well, we'll figure out how to make those other 250 commercial regardless of the commodity price generally.

If I could add one more your map on slide 10 shows a lot of different lateral lengths.

Across your acreage position is there a sweet spot for the length of lateral that generates the most capital.

Efficient use of capital.

You know I'll speak in general relative to lateral lengths because we see this across our entire position that the longer laterals that we can drill and efficiently complete the.

The more capital efficient we are in the greater cash on cash returns that we deliver.

So regardless of where you are in our position we strive to drill the longest laterals that we can that being said you know we have parent wells that we have to plan around and at times.

We'll drill some wells plus or minus 5000 foot laterals, but Joe if you look at the data in type curve average in the upper left hand corner over the next two years, we're predicting we'll average about 8300 foot lateral length.

Great. Thank you.

And we have time for one more question and the question will come from Nicholas Pope with Seaport Global. Please go ahead.

Good morning, guys how are you doing.

Doing well thank you.

I just wanted to clarify.

One item here just the comment on a prepayment.

Uh Huh of Capex for 2021, where does that where does that flow through.

In the financial statements have we already seen that 21 million out of the current cash position is that am I reading that right.

That's right. This is rusty so.

And you look into the 10-K, youll see about $14 million of that appear in working capital as prepayments that incorporates what has been paid for but not yet accrued. In addition, there were some early payments that we made for crude capital in the fourth quarter, but debt from a cash perspective.

Active would normally be paid in the first quarter, just due to invoice timing and we prepaid an early paid both of those walking in some discounts on oilfield service prices. So on an unadjusted basis you'd have free cash flow on a normalized of about $24 million. We had a change in net debt free cash flow of about <unk>.

3 million, but we wanted to give that color.

Got it that makes sense.

And I also wanted to clarify on the redemption of these.

These.

<unk> stock and the common units with the with the with the Juno for transaction.

Where exactly does that stand I see in the table you got the you know the.

Assuming the full dilution 37 8 million shares outstand.

Outstanding where are we in that in that process.

Or is that complete now with regard to there's no formal process. Those are effectively private shares in an up C Corporation format. So those you can think about those on an as converted basis as if their common shares from an economic perspective, but there is no process.

Or a timeframe of actually exercising.

And converting those so you can think of those economically as common shares.

Okay. That's all I had thank you.

Thank you.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Derek <unk>.

For any closing remarks.

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

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

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