Q1 2021 PDC Energy Inc Earnings Call
Hello, and good day. This is your conference operator today.
Today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold again.
And this is your conference operator.
Today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold and thank you for your patience.
[music].
Okay.
Good day, ladies and gentlemen, and welcome to the PDC energy first quarter 'twenty to turn them on earnings conference call.
At this time all participants are in a listen only mode.
And we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this conference call is being recorded.
I'd now like to turn the conference over to your host Hal Schwartz Investor Relations you may begin Sir.
Thank you and good morning.
On today's call, we have president and CEO Bart Brookman.
<unk>, Vice President and Lance Lauck, Chief Financial Officer, Scott Meyers, and senior Vice President of operations day as well.
Yesterday afternoon, we issued our 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 E Dot com.
On today's call, we will reference both forward looking statements and non U S. GAAP financial measures the appropriate disclosures and reconciliations can be found on slide two and the appendix of that presentation.
With that I will turn the call over to our CEO Bart brookman.
Thank you Kyle.
Let me begin this call with the most sincere thank you for the PDC and employees.
Board of directors investors and service providers.
This has been 15 months of unprecedented risk and uncertainty, but today you will see the resiliency.
Of the PDC story.
And as we emerge from this crisis, even stronger than we were pre pandemic.
The outlook, we will provide today clearly demonstrates the company's top tier financial and operating strategy and I believe it provides one of the most compelling investment opportunities and the.
E&P sector.
Now some first quarter highlights.
Hundred $75 million of free cash flow on a capital spend of $125 million.
And production of $15 7 million barrels of oil equivalent.
We achieved this free cash flow, despite three outlier weather events, two and Colorado and one in the Permian basin, which adversely impacted corporate production by approximately 500000 Boe.
Thank you to our operating team for navigating these very hazardous conditions and always putting safety first.
With the abundant and free cash flow, our balance sheet and shareholder returns remain our primary focus.
For the quarter, we reduced net debt by approximately $230 million maintained 1.3 leverage ratio and we repurchased 600000 shares of stock when.
And when we look back over the last 12 months the company has generated.
$575 million for free cash flow and achieved a 90% free cash flow margin and reduced net debt by approximately $600 million.
All terrific accomplishments and numbers accelerated by the Src merger.
Next our outlook for the next three years modeled at $55 oil and.
And generating what I consider and extremely strong forecast.
We expect the company to maintain discipline around our capital and operating plan.
We plan on and generated one $8 billion to $2 billion on free cash flow by year end 2023.
Calculates the lessons and 50% reinvestment rate.
Our cash flow from operations.
Over the three year period, we plan on reducing debt by lesson by.
By at least $850 million.
And returning more than $650 million to our shareholders through dividends and our stock repurchase program.
All while generating modest production growth and maintaining and industry leading balance sheet.
On the drilling permit side of our business tremendous effort right now by our land and regulatory teams, we expect to submit our first OTT piece and the very near future and by year and we plan to submit over 500 drilling permits to the state of Colorado and the form of OTT piece and a cash.
GAAP.
Now, let's talk ESG.
The company's commitment and actions in this arena are very real.
Some highlights starting with the E for the environment through improved operating practices and midstream modifications flaring in the Delaware is one 2% year to date.
Rhematic improvement from prior year levels, and Pdc's corporate flaring rate is an impressive.
2% year to day.
This is achievable because no flurry and is conducted in Colorado.
On the social side for the yes, we continue to focus on equitable representation in.
And maintain a strong gender and diversity presence and our leadership at PDC and we are proud we have a completely gender balance staff and our.
Corporate offices on.
On the governance side or the G. We have placed an intense focus on refreshment at the board level with an emphasis with an emphasis on diversity of thought gender and background and nearly 60% refreshment rate over the past two years.
Before I turn the call over to Dave.
Just want to reiterate how pleased I am with the overall results and the outlook of the company.
And I believe this is a direct reflection of PDC is quality team and our premier assets.
That I will turn the call over to Dave Willow for an update on the operations.
Thanks Bart.
And the incredible financial results, you highlighted would not be possible without a tremendous work from our operating teams and our field staff throughout the quarter.
Weather is obviously something out of our control, but I am extremely proud of our team's ability to quickly and safely handle the adverse conditions. They faced over the last couple of months.
Looking at slide seven all and we invested approximately $125 million and the first quarter.
Which is right in line with our expectations.
As you can see we generated approximately 175000 Boe per day, and 54000 barrels of oil per day.
Outline the estimated weather related impacts to these volumes.
Adding back in these volumes would have resulted in first quarter volumes closer to the midpoint of our previous guided range.
More specifically for.
The first quarter weather caused us to pull forward a frac holiday previously planned for second quarter into the first quarter.
Just had a couple of small impacts first this caused a small amount of capital to be shifted from the first to the second quarter.
And secondly.
And a handful of new completions were slightly delayed which we expect to lead to a solid volume step change and the second quarter, but also a more pronounced step.
Change in the third quarter.
On the bottom right of the slide you can see a breakdown of activity and the basin.
Again aside from the weather related impact to production volumes, all operating metrics are right down the fairway in terms of expectations.
Importantly, we exit.
Exited the quarter with approximately 200 docs and nearly 300 permits and wattenberg.
And which we expect to cover all of our activity and the third year outlook Scott will provide later.
For the next few minutes on slide eight I wanted to discuss our progress we've made from a wattenberg permit perspective.
As you can recall, we currently focus on to oil and gas development plans or <unk> name, the spinning and the Kenosha.
The table at the top of page eight.
And is intended to show a clear and precise update of the behind the scenes work the team is doing.
The green boxes are notating complete steps yellow for steps that are in progress and.
And blank squares for the key next steps.
At the bottom of the slide we've outlined.
Several key definitions.
As Bart mentioned, we are and the final stages of our prep work on the Spinney, Oh, GDP and anticipate submitting our completed application and the coming weeks.
Once submitted the next step is the completeness determination and which the state and we'll evaluate whether all forms and processes have been completed successfully and if the application is ready for staff review.
As you suspect the Kenosha or GDP, which consists of approximately 70 wells compared to the eight with the Spinney O. G. D. P is a few steps behind.
We continue to make progress and turning yellow boxes to green and expect to submit for completed Kenosha application and the next couple of months.
It is very important to recognize that this is a 30000 foot view of a long detailed oriented process that our team is working tremendously on.
We will continue to stress that our track record of safe and responsible operations best management practices and collaborative relationships with our communities Weld County, and the C. O GCC should lead to a timely approval of future drilling permits.
Yes.
Look for us to provide updates.
Our pending applications.
On this slide throughout the remainder of the year.
On slide nine we give a similar update to our Glendale law capped.
Similar to the O G. D piece, we have debt have a dedicated team assigned to the planning and execution of these projects for PDC.
And on an amazing job to keep us on track for what we hope to be a submitted permit timeframe around it and of the year.
As we highlighted on our year end call. The Gwen Nellix cap has approximately 400 locate and 450 locations and accounts for three years of future turn in line activity.
On the slide we also highlight our recent accomplishments.
Items, and Prague process and the next milestones.
Yes.
As you can see our positive and supportive medians with local communities regulatory bodies and offset operators have contributed to surpassing the protests deadline of our cap boundary with no objections.
We are now set for the commission hearing for a day.
And once approved for the oil and gas Commission would not grant a permit to and any other operator with in the vanilla cap boundary until the completion of our permit process.
Meanwhile, our team continues to work on our infrastructure plans.
Cumulative impact analysis.
Execution of our surface use agreements and any other tests and projects while the most common questions. We get relates to timing of our caps for middle and approval. It's important to recognize the tremendous effort and significant number of key internal checkpoints and this process.
Again look forward to us providing a systematic update of our progress and this format and the upcoming months.
With that I will turn it over to Scott Meyer.
Thanks, Dave and as Bart mentioned, one of our highlights for the first quarter was our significant free cash flow generation of approximately $175 million, which was driven by strong realized pricing on nearly $30 per Boe.
This pricing represents an improvement of more than 50% compared to the first quarter of 2020 and was.
Was driven by significant year over year improvement and our weighted average realized sales price for each oil gas and Ngls.
Along those lines, we've updated our anticipated gross realizations for each commodity.
295% to 98% for oil, 70% to 80% for natural gas and $15 Ngls.
In terms of natural gas the 70% to 80% full year range is partially due to the abnormally high realizations and the first quarter, which include February realizations, well above 100% and above any level that we'd expect to receive on on the ongoing basis.
As Dave mentioned, we lost a fair bit of production at the same time, but we estimate that our natural gas revenues were artificially inflated somewhere to the tune of $25 million to $30 million and the quarter.
On the last slide.
Point out our G&A.
Just over $2 per Boe for the quarter.
And in terms of absolute dollars for first quarter, G&A, including cash and noncash expenses was approximately $33 million. This the specs.
And this to be in the neighborhood of our quarterly run rate moving forward.
Next on Slide 12, we highlight what I would consider the other significant achievements for the quarter.
Our debt reduction and shareholder returns.
Over the past year, we've been very clear of our intentions to focus on debt reduction with total debt near approximately $1 4 billion and I'm proud to say that we've paid off all the debt we inherited with the Src transaction and just one year.
As you can see we paid off over $200 million of net debt and the first quarter and currently sit with an undrawn revolver and $60 million cash balance.
Expect us to use the majority of our free cash flow to reduce debt as we continue to march towards our goal.
$1 billion, just expect us to reach that debt goal much sooner than previously messaged.
At this at that time, we will expect shareholder returns to become the primary use of our free cash flow, while still reducing debt.
And as a reminder, we reinstated our current buyback program in late February and invested $22 million to repurchase approximately 600000 shares and.
And remain active and systematically buying back our stock at.
What will you for you as a significant discount.
As we disclosed last quarter, we expect to commence our dividend program mid year and are still targeting 1% to 2% annualized yield.
Finally in relation to our dividend you can see debt, we've not only completed our base layer hedges for 2022, but have begun to layer and the few 2023 positions with our dividend as part of Pdc's future.
And as part of our risk mitigation strategy look for us to extend the timeframe a couple of quarters from our previous strategy. Our detailed positions can be found and the 10-Q and appendix on slide 18.
Moving to our multiyear outlook as Bart covered we now expect to generate more than $600 million of free cash flow and each of the next three years, we're between one $8 billion to $2 billion.
And this compares to an estimate of one three to $1 5 billion back in February.
It is important to note we've made no material changes to our operating plans over the next three years, we simply updated our pricing assumptions from 45 to $2 50, and 12 to $55 oil $2 50 gas and $15 Ngls.
As Youll notice our updated price assumptions are still comfortably below strip prices, leaving us potential upside to generate even more meaningful free cash flow and he's already lofty projections too.
To note, our cumulative free cash flow projections equate to more than on entire debt balance.
More than half of our current market cap or more than 40% of our enterprise value.
And a $55 world are planned equates to a reinvestment rate of less than 50%.
We are targeting debt reduction of at least $815 million over the three year period with returns to shareholders more than $650 million.
And we feel confident and accomplishing these goals, while we still have another $500 million of additional free cash flow to flex between these buckets again at pricing and below strips.
Finally, our last slide outlines our free cash flow allocation for our 2021 year.
You'll note that we've enhanced several of our key targets first debt reduction in February we were we were targeting and reducing our net debt by at least 200 million, which we accomplished and the first quarter alone.
Now our plan is to reduce net debt by at least $350 million.
Similarly, we had a goal of achieving a onetime leverage ratio by the end of our three year outlook.
We now project that to happen by the end of the year.
Next shareholder returns and February our goal is to return $120 million to our shareholders through share buyback and our expected quarterly dividend now.
And now with better pricing and more free cash flow, we are targeting more than $150 million.
And finally, Youll notice no change to our expected flex bucket, which is primarily used to increase the other two previously mentioned buckets based on market conditions and to accommodate our working capital needs.
Overall, we're incredibly proud of the entire team's ability to execute and once again excited to share our ever improving story with the market with that I will turn the call over to the operator for Q&A.
Ladies and.
And if he would like to ask a question. Please press Star then.
And the number one on your telephone keypad again and that is star one do we draw your question press the pound or Husky. Please standby, while we compile the Q&A roster.
Your first question comes from the line, Brian Daley from Citigroup. Your line is open.
Good morning, and thanks for taking my questions on my first one when I look at your updated multi year free cash flow and shareholder returns guidance on slide 13, I noticed with the higher price deck your debt reduction target actually increased more than the buyback plus dividend bucket there any updated thoughts around the right long term capital structure and at what point.
Does the incremental cash flow start to accrue more to the shareholder return bucket or I guess asked another way is your mental accounting.
The flex free cash flow bucket changed at all.
Yes, I mean thats a great question I think number one when you look at it right now debt pay down still our number one goal.
But we want to start and we have started meaningfully return capital to shareholders. So.
Right now as we're headed towards that $1 billion target I would say debt paydown as our larger focus. However, once we hit that $1 billion target I think youll see that our return on capital to shareholders. We will start it will increase and will be greater than what we are using to pay down debt with so when you look over the three year period.
Getting us down to paying down $850 million of debt will get us down to approximately $750 million of debt, which seems to be a pretty comfortable number for us and then even when you get to that number I think the shareholder returns we would continue to increase from there. So that's just the method to the madness, we just wanted to make sure that paying down debt.
It gives us good financial stability of the company and so Thats our number one priority now, but we do want to begin this shareholder return process and like you said you would expect our first dividend payment sometime this summer.
Great and then maybe one on the operations front can you talk through activity timing. This year. It looks like based on your second quarter volume guidance. Your <unk> year over year commentary it seems to imply pretty healthy sequential oil growth and the third quarter to make all those guidance items square, how should we think about.
And what's driving the sequential trends and could and give those incremental volume slide forward and the <unk>, depending on on ultimate timing there.
Yes, I'll start out and debuted and go into the details. If you remember the first place to start is just with our Delaware cadence and our Delaware completion crews just gotten under the way the last 60 days and those turn on lines are just starting to happen now so I think our Delaware production really is.
And to be increasing pretty significantly and we won't hit our peak probably due sometime in the third quarter is that fair Dave.
Yes, most of our spend will be and the second quarter as we are.
Run that completions crew fulltime and Delaware with production really come on on started the second quarter, but really ultimately most of the production will hit and the third quarter.
And then with the Wattenberg just a quick reminder, if you go back to our <unk>.
10-K slide deck that we had we showed you some of the economics and some of our other areas and the plains area has some of our best economics on those wells, where the focus area of our turn in lines and late December and early January so that does mute a little bit your oil.
And the first and second quarter. However, when you look at the returns and the values that were brings forth for the shareholders. They are phenomenal projects. So I do expect to see a big step between first and second quarter, but even a bigger step between second and third quarter and we are very comfortable for.
Following our production both oil production and our overall production within the annual guidance.
Great I appreciate the comments.
And.
Your next question comes from the line of Neal Dingmann from true is your line is open.
Hey, good morning, guys, it's actually for trans filling in.
And just wanted to maybe brush upon the multiyear outlook when Youre looking at your targets are you going to do anything where you shift maybe where you're targeting if oil prices go higher or if there is a gas price.
Move anything like that or is permitting and timing really kind of lock you in to the production mix that you're already seeing.
I mean, if you're talking about production mix I mean, we're pretty well locked in what we're going to do for this year as we said before the first quarter is going to be our low on a percentage of oil and the low thirties and when the Delaware production starts coming on and Youre going to see the company wide oil production increase and.
Get closer to that mid 30% range. So our.
And our Delaware production the wells, we're turning on and those are all fixed and we're just going through and executing the program and the.
Wattenberg program again, we have a pretty steady cadence and we have the 200 docs out there. So those are what are you going to be turned in line next so theres not theres not a lot of movement.
And the program.
Sorry, I kind of meant more for the multi year outlook and is there any wiggle room.
Two years out kind of situation or is it still steady as she goes for for the plans you have yes.
Yes, I mean, I would say for the volatility it's still pretty much steady as you go I mean, what we're drilling this year and the Delaware will be completed next year, and the Delaware and and the Wattenberg I mean, all of our turn in lines and are either.
Right now or or permitted so the exact order they might move from quarter to quarter, but if you look the next three years, it's all going to be stuff. That's permitted right now for <unk>.
But that's our debt absolutely.
And then really just my my last follow up.
The.
And the GDP and Cip's do you can you talk about the product mix between those three and maybe if that determines timing or.
It's really more about when you get the permits and the door Youll go ahead and develop them.
So starting out with our with our permitting and philosophy, we took on a three pronged approach. So we got two <unk> one smaller one on one larger one and then the granola cap, which will be submitted later in the year.
On the spending is on our planes and it's it's.
Eight miles three mile laterals should be pretty gassy at that point, the Kenosha is over and our kersey area, just south of our main focus area.
That'll be a little more oil <unk> and we're hoping to submit that application here and a couple of months.
And then our big focus project is Glenn and I'll, let cap and Thats really part of our summit area.
And we're really excited about that we're on target to submit that at the end of the year.
And I do believe if you are looking for the oil mix on the three different areas that was outlined on the last on the last few calls that core income.
Okay.
Thank you Karen.
Your next question comes from the line.
I'm on Chowdhry from Goldman Sachs. Your line is open.
Hi, Thank you for taking.
My question can you hear me, yes, yes again.
My first.
And is really going on.
Our free cash flow like you mentioned at current strip, you will likely generate more free cash flow and then 600 million this year and in terms of allocating that cash flow.
Do you think that $2 billion this year and number one priority.
But you also mentioned that your shares are undervalued today.
So I guess I'm just wanted to get your thoughts around if if we actually do achieve a higher oil price do you see the potential to actually probably more towards share repurchase.
And how would you think he got on around the use of free cash flow.
Yes, I think that's a fair question.
When we look at it again, we've laid out our targets here and the $55 World I would say that we would as we get closer to that $1 billion of total debt you could see a slight percentage go a little bit more to the share repurchases, but still when I look at our free cash flow until we hit that 1 billion.
More of it will go towards the debt percentage wise compared to.
And the return on capital to shareholders with that said.
Strip prices, we have an extra $100 million, maybe 100 million plus.
Both buckets could move north.
Great. That's super helpful. Thank you and my follow up question is on <unk>.
Just wanted to get your thoughts around.
And for this year, you mentioned, a frac holiday and first quarter I was still on track for that and it's what you guided and fourth quarter.
For.
And for 'twenty 'twenty, four 2021 and then.
Any any thoughts on inflation and its impact to your Capex program.
Yes, so that Frac holiday that I was alluding to cash.
And what that storm, we decided due.
To shut down our Frac and Wattenberg for about five to six days, we had a frac holiday schedules and the second quarter, So and we're just kind of shifting and that we probably.
Well do that Frac holiday, but we kind of shifted some of that cost from the.
For capital costs from the first quarter to the second quarter there were no.
Not.
Not changing and our long term forecast for the year and feel very confident that we'll be able to meet those numbers.
I think the second part of your question was the cost creep for cost increases that we may be seen and the future.
And.
I guess to summarize that we've seen some pressures from a few providers and contractors, which led to some small concessions really it's the steel the frac and the cement.
And we've seen the most pressure.
They can only account for about 5% to 10% of our fees and <unk>.
Through our formal bidding process earlier this year, we're pretty locked in for the second quarter, we do see.
Maybe a modest increase and cost creep.
Third and fourth quarter, if these commodity prices do hold and though.
Got it so bad for thank you.
As a reminder to ask a question. Please press Star then the number one on your telephone keypad.
And then that is star one.
Your next question comes from the line of.
Michael and shallow from Stifel. Your line is open.
Hey, guys. This is Billy Howe filling in for Mike.
And forecasting $15 for Ngls for 2021, and you realized 21 19, and the first quarter can you say, where Ngls NGL prices are now and have you seen and bracket fundamental shaping out for the remainder of the year.
Lance do you want to jump on that.
Yes sure Great question.
But where we sit right now building I would say the $15 per barrel is conservative.
We see 2021 being above the $15 per barrel Mark if you look at 22 and 'twenty three based on forward projections and loss type of NGL barrel. We think is closer to the 15 per barrel. So if there is a bit and uplift is going to happen here in 2021 versus the $15.
Great. Thanks, that's all for me thanks for the color.
Your next question comes from the line.
Hodge from Wells Fargo. Your line is open.
Hey, guys.
Solid quarter.
My question relates to the cap I'm.
And I'm curious to what extent the almost direct overlap with the mountain view CDP provided a tailwind to your pre submission work and perhaps the pace at which the GCC parse through approval.
I think probably our cap the way, it's outlined today and it's about <unk>.
32005 hundred acres gross acres right now.
I think it's probably.
About two thirds of the mountain view that Src had was working on at the time and.
And about one third of our.
Acreage for the kind of fit like a glove and to that so.
So right now.
It's similar.
<unk>, they werent very lot far and the process and we kind of pulled everything back out and.
And working the new oil and gas commissions new process.
Which we've been in constant communication with them on how we need to take steps forward. So.
That's about where we stand it's going to be about 450 wells and about.
25 pads, but we're making really good progress on and we're very confident and the team were going to be able to tap.
And to execute on this.
Great. That's all for me thanks, guys.
And there are no for the great questions over the phone line at this time I would now like to turn conference back to Mike Brookman.
Closing remarks, Sir yes, RJ, thanks for hosting the call and.
Just thank you to everyone and your ongoing support and we just appreciate you joining us today for what we think is a pretty terrific story. So again. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
And then.
Yes.
[music].
Yes.
And.
Moving on.
[music] refinery.
And.
Okay.
And then.
And.
[music] refinery.
And then.
Great.
[music].
Total net revenues.
[music].
And again.
And.
[music].
And.