Q2 2021 PDC Energy Inc Earnings Call
[music].
Okay.
Thank you and good morning on today's call, we have president and CEO, Bart Brookman Executive Vice President Land Block Chief Financial Officer, Scott Meyers, and senior Vice President of operations and stable, though.
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 dot com.
<unk> call, we will reference both forward looking statements and non U S. GAAP financial measures the appropriate disclosures and reconciliations can be found on slides 2 and the appendix of that presentation.
With that I will turn the call over to Barbara.
Thank you Kyle and Hello, everyone.
A tremendous quarter for the company as Pdc's era of free cash flow generation and <unk>.
Shareholder returns and continues to accelerate.
Throughout the call you will see operating and financial results, which I believe are top tier oil.
The industry and truly differentiate PDC.
And fourth quarter free cash flow of $165 million on a capital investment of $178 million.
Both better than expectations.
Production for the quarter $17.4 million barrels of oil equivalent in line with our expectations and currently we have steady state highly efficient operations and bolt basins and delivering strong drilling and completion results.
The company's balance sheet continues to strengthen and debt reduction remains a priority leverage ratio quarter and 1.2.
And net debt for the company of $1.3 billion.
Cost for the company continue to be well managed lifting cost came in at $2.43 per Boe.
And for the quarter $38 million was returned to the shareholders as we initiated the Companys first dividend and continue to repurchase shares.
Year to date, approximately $60 million has been returned to shareholders and we anticipate the total shareholder returns will exceed $180 million by year end 2021.
Now, let me cover the company's outlook through year end 2023.
A reflection of the quality of our assets and our execution capability.
We anticipate free cash flow, we will target to $5 billion on a capital spend of approximately $1.8 billion.
Reinvestment rate, 40% to 45% of our adjusted cash flow from operations and simultaneously, we expect to drive our leverage ratio well below 1 and.
And pay down our debt by approximately $1 billion.
This robust free cash flow provides an opportunity to return over $1 billion to our shareholders through dividends and share repurchases all while we control costs continue to improve the efficiency and our operations and modestly grow the production for the company and quite a story for PDC.
And <unk>.
As I conclude my comments today, let me update you on Ptc's ongoing ESG progress.
Early fall sustainability report, which I encourage all of you to read.
Detailed the great strides we have made in many areas.
Today, I would like to hit some of the key highlights.
Company has devoted considerable engineering and environmental resources towards managing our emissions and I and I'm proud to announce quantifiable goals through 2020.5 that include.
A 60% reduction and greenhouse gas emissions and.
And a 50% reduction and methane intensity.
Currently PDC has also achieved a flurry percentage for the company of approximately.
0.1%, which I believe is top tier for the industry.
Goal is to achieve zero routine flaring by 2025 and significant time acceleration from our prior commitments.
And additionally.
So important and our business today I would like to thank all of our field operations, and Texas and Colorado for their ongoing focus on safety.
Bolt basins just celebrated 3.
<unk> plus years without a single lost time injury.
As we look at the ever evolving world of ESG and I am pleased with the tremendous progress we have made and the goals. We have set as a company and the environmental and emission controls and the safety and welfare of the PDC employees and the extensive focus on our communities and share.
Given and the ongoing governance improvements for the company.
With that I'll turn this call over to Dave Willow for an update on Pdc's operations.
Thanks Bart.
You mentioned, there's a lot to be excited about this quarter first and foremost is our ability to operate safely and each of our assets.
A tremendous amount of effort and emphasis on training and really instilling a culture that prioritizes safety throughout our organization.
Kudos to everybody for these achievements.
In terms of operations for the quarter.
Invested approximately $180 million and saw some solid sequential production growth compared to the first quarter.
As we highlighted and the press release capital was a bit below our initial expectations is around $15 million of non op activity has shifted from the second quarter and late in the third quarter.
That said production still came in ahead of expectations. Both in terms of total and oil due to the strong performance and <unk>.
<unk> wells and slight acceleration of our Delaware base and turn in lines and.
Wattenberg, we spud and turn in line just over 20 wells.
We had some changes to our operations schedule and that led us to focus on larger pads and larger laterals compared to the first quarter and resulted in quite a bit.
Net fewer turn in lines.
Heading into the back half of the year, they are actually more srs and <unk> and the schedule. So expect the turn in lines per quarter to be doubled if not more than the second quarter level.
And Delaware.
And we turned in line our entire program for the quarter. Thanks to the efficiency gains on the drilling and completion side.
We have been realizing year to date.
We released our completion crew.
For the year, but remain active with 1 drilling rig and the team is excited to get back at it early in 2022.
And.
Moving to the next slide as Bart covered.
The consistency with our messages in the past couple of months we.
We started to see some cost inflation related to higher commodity prices, but we expect to start trickling into our <unk> for the rest of the year.
And in Wattenberg and were expecting well costs to increase approximately 10% to around $4 million 4 and ex R. L.
No secret to anyone on this call and steel service costs and diesel are much more expensive than they were 6 months ago.
And while.
These don't make up a huge portion of our ASC and the magnitude of the cost increase is pretty substantial.
The commodity prices where.
And where we are.
We also returned from <unk>.
Cost concessions provided to us back in the middle of total debt.
The good news is the wells that we expect to turn in line and the remainder of the year were.
And were drilled and cased around a year ago at lower pricing and what Youre seeing now is a blend of past and current costs.
<unk>.
As I mentioned and Delaware, our completion activity is done for the year. So much of the cost pressure is really irrelevant until we go back out to bid this fall.
More importantly, we've managed to continue increasing our drilling and completion efficiencies and are now averaging <unk> of approximately $7.5 million.
5% below budgeted cost of 7.9 million per well.
On the drilling side.
C and the benefit of our relationship with HMP drilling.
And gene to a rotary <unk> technology and.
Modifying our wellbore construction.
All of which have helped improved our spud to rig release times by approximately 25% to 30% compared to last year.
In terms of completion.
The main driver of cost savings and switching to a dual fuel blend utilizing 50% natural gas and 50% diesel.
And utilizing.
Water during our Frac.
Switching gears, we provide a high level update to our permit progress on slide 9.
Just last week, our Spinney, Oh, GDP pass through the completeness determination stage with the state and.
And has a commission board hearing date currently scheduled for October 6.
Given that everybody is and unchartered water and working through a new process.
We're pleased with the state's ability to give us yet.
Get us through the completion period.
And this period and on the docket and such a timely fashion.
It has been great and been a great team effort on both PDC and GCC side as.
As far as the Kenosha, GDP and vanilla cap. The team continues to work and make good strides and turning yellow boxes green.
Our goal for the middle for the Kenosha application will be late in the third quarter and we're now.
Ill, let application around the end of year timeframe.
As a reminder.
Crude the spinney Kenosha and <unk> represent over 500 future drilling locations and Weld County.
With our current permit count and DUC backlog.
Cover our turn in lines.
And through 2027.
With that I will turn it over to Scott Meyers.
Yes.
Thanks, Dave.
As always my comments will include GAAP non-GAAP and forward looking statements. So I encourage you to see our reconciliations found in the appendix.
Thus far we've given several components of our updated guidance on slide 11, you can find it all in 1 place as well as some quarterly commentary.
Most importantly, we are expected to generate more than $800 million free cash flow this year compared to prior guidance of 600 million.
Obviously benefited from and improve from pricing backdrop.
33% increase and expected free cash flow compares to a 5% increase at the midpoint of our capital investment range.
To reiterate the increase and projected capital to the top half of the previous range simply due to cost inflation and we're sticking with our operating cadence.
And table on the right hand side of this slide clearly shows significant improvement to our free cash flow margin and free cash flow yields.
And importantly, you can also see our increases to our projected production and shareholder returns this year.
In terms of debt, we now expect to reach $1 billion.
Our target by year end, which means we will have reduced our total debt by approximately 600.002 million 21.
We also expect our trailing 12 month leverage ratio less than 1 times by the end of next quarter.
As far as shareholder returns.
Began the year targeting and $120 million.
Increased it to $150 million and May and.
And again and increasing at this time to more than $180 million.
Approximately $36 million of these returns should come from our quarterly base dividend, meaning we project more than $145 million of shareholder share repurchases. This year.
Finally in terms of production changes to our completion schedule and non op program have resulted us narrowing our guidance range of 190, non at 95000 Boe per day, and 64% to 66000 barrels of oil per day.
We still project strong sequential growth and the third quarter and strong Q4 over Q4 growth of approximately 15%.
Physicians as well heading into 'twenty 2.
Realistically production continues to be and output for PDC.
Our focus on generating free cash flow and down our debt and shareholder returns.
Moving to the balance sheet on slide 12, you can see we reduced our net debt by approximately $50 million and the second quarter and now.
We have a cash balance over 100 million and as we prepare for the settlement of our converts next month.
In order to reach our $1 billion debt target.
We'll obviously have to pay down a bit more debt than just the converts so look for PDC to consider various other management liability tactics and the third and fourth quarter and.
In the quarter, we returned just under $40 million of capital to shareholders.
Payment of our first quarterly per share dividend and we repurchased approximately 660000 shares.
And again, given the pace at which we're paying down debt inflection point for our shareholder return initiatives is quickly approaching.
We're excited about the opportunity to drastically increase the pace of our share buyback program, hopefully increase our base dividend and the near future.
Most of this is evident on slide 13, when you look at our multi year outlook. We're now projecting a 3 year cumulative after tax free cash flow of approximately $2.5 billion.
And this represents nearly 2 times our current debt balance.
Almost half of our enterprise value.
And importantly, it's a $600 million increase from more than 30% compared to our prior.
Prior outlook cumulative capex and increased only $100 million.
We're also increasing our cumulative debt reduction and shareholder return targets for the 3 years, each being more than $1 billion.
And our debt our prior commitment was $8.50 per shareholder return targets it increased from $6.50.
Very important to note debt through June 30th.
This year, we've had total shareholder returns of approximately $60 million. This.
And this means to hit our $1 billion number.
Through 2023 over the next 30 months and expected to average at least $30 million of shareholder returns per month over that time period.
Again, we hope to achieve this through an accelerated share buyback program and our quarterly dividends with a willingness to consider other forms and future years.
I wanted to close the call with 1 last thank you to our team it's been a tremendous start to the year and it's exciting time to be at PDC employee and shareholder.
I'll turn the call over for Q&A.
As a reminder, at this time, if you would like to ask a question. Please press star and the number 1 on your telephone.
Draw your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Brian Downey of Citigroup.
Good morning, Thanks for taking my questions maybe for <unk>.
Scott and I wanted to ask on shareholder returns Youre now Amy as you mentioned per 1 billion plus dollars of total shareholder return through <unk>.
2023 to 180 of that $180 million of debt plus this year.
Scott you mentioned, the implied 30 million plus P.
And for per month, there almost triple year shareholder return tastes from <unk> 21, as that shareholder return paced start kicking into higher gear and once you hit debt targets. Later this year. How are you thinking about the best split between repurchases and dividends over the medium term.
Yes, that's a great question and yes.
You are right, we still are going to hit that I want to hit that $1 billion target before you really see us pivot, but again once we hit that pivot youre going to see the debt paydowns come down quite a bit still paying down debt, but at a much slower pace and thats youre going to see the inflection there of the return of capital to shareholders.
<unk>.
And we're still a big believer right now that we are undervalued on the share buyback. So I would say youre going to see both.
Growth and our dividend, but I'd say the more substantial portion is going to be the growth and our shareholder our share buyback program.
We know that we talked about it we talked about the politics of Colorado. When we get these permits approved we think it's going to be a lift and the stock and so until that time, we think buying back shares is a really good option for PDC.
Great and then maybe 1 on the operations front on well cost and capital guidance, you mentioned, a roughly 10% increase due to cost inflation and walk through some of the drivers there Dave you mentioned.
The drilling and completion efficiency opportunities what are you baking in in terms of future efficiency potential and that that well cost expectation and do you anticipate being able to offset any of that 10%.
We're doing extremely well and our Delaware drilling and completions right now.
And we're utilizing newer technology with rotary <unk>.
Leveraging our new relationship with HMP drilling.
We continue to lower costs, there and that's going to offset our cost.
Increases that we see and Delaware on the Wattenberg side, we continue to be very effective with our drilling and completions were averaging 4 days.
And <unk> in Wattenberg, and we continue to have improvements every day. So we're hoping.
And that our efficiencies will continue to.
Move and the right directions and try to offset some of these cost increases that we're seeing right now.
Brian It's Alan.
And this question.
Let me just add a little flavor.
We're extremely proud of our Wattenberg team.
This last 5.7 years, if you go back and look.
The advancements we've made.
And pushing our efficiencies to 4 day type spud to spud drill times and.
Some day.
20 to 24 stages per day.
And then you couple that efficiency and that optimization of our of our development program with.
With the.
And the pandemic.
Sessions that came out that gave us the ability through our efficiencies and.
And.
Tremendous pricing by a lot of other vendors to announce a $3.6 million ex <unk>.
And so.
I know I know theres been some comments about the 10% and maybe we're an outlier, but we didn't feel it was appropriate to not let the market no debt. We are so efficient and we continue to try to find ways to optimize that but the right thing to do was to let you guys know hey, we're coming off the pandemic.
And we're having some masks and our efficiencies are so dialed in and it's hard to squeeze more and more out of it. So I think we absolutely did the right thing here and.
Again, we're exceptionally proud of the team and the efficiencies they have achieved.
And.
In the Wattenberg field and in the Delaware and some of the please 1 on the other day, Dave called out.
I appreciate the color and thanks, everyone.
And.
Your next question comes from the line of Michael <unk> of Stifel.
Hi, good morning, guys.
You talked about moving your GDP and GAAP projects forward and the Seo GCC kind of moving through uncharted water here.
Maybe high level thoughts on the whole permitting process.
And.
And don't have any permits have been granted this year and I guess, what gives you the confidence that you.
Youre going to get across the finish line on these projects going forward.
I think we've made tremendous progress right.
Right now our team is currently working on <unk>.
And the Spinney B and 1 of them that.
Has the board hearing scheduled for October 6.
Other 1 more where we're working through and.
And on my slide that I have been working to change those yellow box as green as I mentioned.
We've adopted.
The new policies and regulations and the new processes that the oil and gas Commission wants us to go forward with with these longer term and more extensive development plans and the team's been working very very close with the GCC and I feel we're making really really good.
Progress moving towards getting these 2.
Approval.
I believe.
And that the.
The progress, we're making is right along the timeframe that we need.
Based on the current DUC count and the current.
Permit count that we have out there so right now it's not worrying us at all and <unk>.
Continue to work with the <unk> very closely and making sure that these development plans and all the.
Applications and the processes that we need to go through.
Done effectively the first time, so that they can move through the process as it was kind of the outline for us.
Got it Okay and is it fair to say I guess, the permitting process has slowed down for the industry as a whole is it just a function of <unk> asking for these larger projects rather than granting 1 off permits as they have and the past.
Yes, I think so.
The spending is an 8 well package.
And with 1 facility and Thats. The 1 we started from we were learning through the process and we're getting better at it and the next 1 that we'll be submitting and will be a 70, well package with 3 different facility sites and we will we'll take the learnings from the very first 1 and apply them to the second 1 so that we can move through the process quicker.
And then we can apply all of that to our cap, which is arguable Ela cap, which is made up of over 450 wells. So very pleased with the team the results and the progress we've made so far.
Very good and you.
You talked about.
And with you and Dave and Bart talked about the.
Deflation.
And in Wattenberg, and some of your competitors actually most of them seem to believe they can offset inflation with efficiencies you guys seem to be acknowledging that.
Well costs are going higher and I guess your debt.
I guess the.
Small numbers working against you when you get down to 4 days of drilling and 20.
<unk> 20, plus stages and a day.
Pretty hard to squeeze out more as Bart said I guess as you think about so acknowledged 10%.
Inflation and the second half here and you think about 'twenty 2.
Yes.
Would you anticipate that that number would go higher.
And that.
Some of the benefits that you saw.
And.
And the early part of this year is that fair and right now we kind of have old Pos and new costs coming together, where we spud most of the wells will be turned in line and the second half of the quarter about a year ago. So we took advantage of drilling those and casing them last year. So we got the lower prices.
Along with that with our procurement process.
Pretty much tied up all the production equipment as far as steel cost increase we've tied that up till the end of the year. So we're taking advantage of that.
What we're seeing next year.
We're thinking it's going to be and the $4.4 million range to 2 to drill a well and that's from the start to the and.
We will know a lot more after we go through our formal bidding process and we.
Pretty much kicked that off from the fourth quarter, we don't like to get too far ahead of.
Of that or start at too early because then you don't get pricing that you can you can rely on so and the fourth quarter, we'll really understand our costs, a little better but like Bart said, we wanted to make sure that everybody was aware and I don't think its.
It's just to US I think everybody and our industry is starting to see these.
Concessions come off that were given during COVID-19 and the steel and cement and the frac activity and everything picking up just a little bit, but we'll know more and the fourth quarter and it's really based off of commodity prices and activity levels and.
And each individual base and won't have those costs back to GAAP and <unk>.
And I'd, just add a little bit and color on the when you look at 'twenty, 2 and 23 and our press release, we have updated debt guidance range to 6 to 650, just so everybody is aware of it and Thats, where we get to the $1.8 billion for the 3 year cumulative investments so and we believe those debt the cost increases that they have is already factored into that guidance.
Thanks.
That's good to hear.
And last 1 from me.
There's been a lot of consolidation in your neighborhood here just.
Thoughts on.
M&A activity and are you feeling any pressure to do anything on the M&A front given the activity you've seen in the DJ basin.
And.
To answer the last part no we're not feeling any pressure.
Focused on execution right now and we obviously are always keeping our eyes open if the right opportunity came along and.
I think I think as we think about additional scale, obviously that's something.
And tactically, we would we would like but I think the goal is.
Stated many times as we look at different projects, we want to make sure. We're focused on not just getting bigger as a company, but getting better as a company. So.
Mike.
And Lance is on your I can ask him to add a little flavor to this but.
Right now the company's focus is on our execution and the free cash flow that <unk> laid out to you guys.
We're happy with the way things are going in both basins and the balance sheet.
We were if we were to give anything and consideration and our commitment to our investors as our balance sheet is always a priority and we're looking for projects like I said that would improve the company.
And be accretive on an inventory basis and be accretive on financial terms, So lance or are you out there.
Think you are connected.
Yes, Mike Good question I think the other thing I'll just add to this and all of us with the free cash flow business model.
Target and sort of that.
3 ish percent compounded annual growth rate as a company and with that we continue to if you will stretch and the inventory life that we have and both basins and the other thing I would add to that is and our teams continue to look for.
Especially focus here and the Wattenberg downspacing opportunities and.
And kind of picking that right spacing that at these prices that we see and project going forward can deliver additional inventory on our existing acreage base. So that will continue.
The other thing, we'll always do as well as just continue to work on trades those are very <unk>.
Vision for both parties, and then come and join and acreage together drill longer laterals.
And we'll continue to all the time as well so.
Sounds good thank you guys.
Thank you.
Your next question comes from the line of you May and Calgary of Goldman Sachs.
Taking my questions.
And my first question is on your free cash flow allocation plans between debt reduction and shareholder returns.
Given our strong balance sheet and then like you mentioned you believe your share is undervalued wanted to get your thoughts on deploying more cash towards share repurchase or dividends with this being done debt.
Below the $1 billion that you're targeting for this year.
Yes, I think it's I mean, it's a <unk>.
Questions are fair question, I think ultimately for the company getting our debt balance right to give us more flexibility for if there is a reversal of the current commodity price is still my number 1.
For the company.
Src transaction, we did was fantastic, but at the same time and the pandemic hit I would love to have been able to buy back more shares and I just couldn't because my debt burden was too high so we're going to as you heard we've already raised the target again. This year, we're going to have a very active share buyback program and I think getting our overall interest.
And.
Is just really really important so we can be super successful and thrive in any commodity price environment. So look for more returns, but look for us to get that debt to $1 billion first before you really see is put it into the next gear.
Got it great.
So.
And I guess my next question is on hedging.
Given your reinvestment rate is expected to be very low for the next 3 years and your balance sheet is ex.
And it would be strong.
Wanted to get your thoughts on what level of oil and gas production do you plan to hedge going forward.
Yes, and again.
And I can give it to you from commodity, but we always start with cash flows. That's our number 1 thing and I'm here to protect cash flows and the company.
And so overall how are our thought process is migrating slightly as youre going to probably see less hedges and any 1 individual year, because we can protect a little bit less cash flow with our debt coming down and at the same time, we're hedging out a little bit further than we have because we do have that dividend.
And that we're protecting so I would say from a volume perspective look is to be more unhedged and we've been in the past, but maybe a little bit longer out duration and when you see this $2.5 billion dollar number and what I, we will lock in a little bit from these small wedge of the hedges, we just do a little bit of a time and we're able to lock in and we're locking.
And that $2.5 billion to a degree on some of these prices. So look for us to continue the program, but overall slightly lower level than you've seen us and the past you will not see us go to $6 or 7% with our debt level and the way. It is now that we have done.
Several times in the past and we had higher levels of debt.
Great. Thank you so much.
Your next.
Question comes from the line of Rohan <unk>.
<unk> of J P. Morgan.
Yes. Good morning, gentlemen, I was wondering if you could kind of help us.
And with how you think the sequential progression of volumes could trend and kind of <unk> and <unk> I know that maybe some non op pads got shifted a little bit in terms of timing, but maybe you could help.
<unk>.
And the buy side there is out there had been asking us questions on the <unk> trajectory.
Yes, I think and the press release, we tried to outline some of this but we see and the.
A nice step up again, and the third quarter I think from an overall production standpoint that 5% to 10% range oil is going to be higher and thats due to our Delaware turn in line schedule.
Even though we did turn it and all the wells as Dave has said.
And our last turn on and was June 2017, 28th right towards the end of the month and most of the wells. If you took the average we're on for about 30 days, so having that Delaware and Delaware being our oiler and obviously the beginning part of the world is going to help boost that production. So you can look for our oil growth to be quarter over quarter more to that 15% to 20% rate.
<unk> and then a little changed from we said and the secular with some of the schedules and the moving and we.
And to move some of our shorter laterals, it's going to cause our fourth quarter to now go up compared to what we were expecting prior and you will see some modest growth from third quarter to fourth quarter as well and I think we put in the release about what 15% Q4 over Q4 of the yearly so we feel pretty good about those which will really Bob.
And about those numbers when we go through this the stairstep youre going to see and the third quarter really going to help generate a lot of free cash flow and so for us to print well over 200 million next quarter.
And free cash flow next quarter great great.
And then just on the buyback you guys mentioned that you could maybe step up the pace of the buyback I know you have a Tim.
And <unk> plan, but what kind of latitude do you have to kind of supplement.
The buyback with the stock kind of coming off a little bit.
Thoughts on that I know as you kind of look at.
But dealing with some debt reduction and as well as returning cash via the buyback.
Yes, we like to have that program in place. So that like every day, we don't have to only worry about open windows. We just go in and and followed the plan. So look for a steady state. There are some opportunities when windows are open to potentially get a few more shares and we may or may not use that tool.
I am sitting at today very confident that we'll be able to hit that total return of over $180 million at this point with the debt reduction and my guess is we'll be able to do a little bit more. So yes. We think there's some opportunities here. So we're going to keep executing the plan and keep up keep buying shares back.
Great I'll turn it over thanks.
Yes.
Your next question comes from the line of Bertrand Zone of choice.
Good morning, guys.
I am probably beating a dead horse here, but on the 3 year outlook.
Free cash flow per cent of your market cap really sticks out and I'd, probably conjecturing here, a little bit, but I have to assume that income because some investors just maybe don't think its going to come back and in share repurchases or something like that can you can you maybe talk about the balance.
And you get debt to $1 billion.
Purchases as a plug or if a good asset comes along and would you kind of replace it or and asset.
You purchased asset you also need to maintain that same level of repurchases and then kind of maybe on the other side of that is how sticky is the repurchase preference dividends become what everybody starts looking at do you switch over or is it kind of and internal and AB.
Repurchase opportunity provides the highest return.
Yes.
Other questions there and let me let me start out as again when Barton says we wanted not only a bigger company, but it has to be a better company that would encompass being able to do deals and still be able to execute on these various plans paying down and $1 billion of debt, that's very reasonable and that we could have a situation where we're doing acquisition that we add some debt that's still going to be then.
Just to continue paying it down.
Share repurchases, we think.
We agree with you I think our stocks flow undervalued, obviously, we've talked already on the call about the permit status. We really think we're going to re rate when that does so the share buybacks very attractive to us right now as far as the variable dividend and things I know, there's other companies that have done it we're going to sit here, we're going to study it and if over the next year or 2.
When we re rate when we get the permits as David said, we'll then at that time, we might consider if that's what the market's rewarding right now I think it's just too early to tell I understand why people are doing what theyre doing but were in a little bit of a different situation with.
With the with the permitting issue that we think the bankshares back is the right answer for our company. So we have a lot of faith and the program. We have a lot of face and our numbers. Our teams are doing an excellent job delivering value for PDC every day, so feel very confident and the 3 year outlook.
Absolutely that makes sense and then really the only follow up is on the inflation topic is there some of the other companies are kind of talking to is there. Some wiggle room, where may be you can lock in a longer term contract or a larger order with your vendors in.
And the fourth quarter.
Bid cycle or is it is that not available or is it just not worth it because you'd prefer to have the flexibility. So that you can kind of adjusted to market cycles.
So just given a little color around that like on our drilling rig and Delaware, we just locked in a 1 year.
Contract with them basically at the same cost that we were at this last year.
With a few incentives for them to work with us and drill faster. So we're pretty confident and that is going to stay really consistent.
Our bidding process.
It's 1 of the top notch.
Processes that I've seen and working for several companies.
<unk>.
Go out too.
I think there was probably.
43 vendors with 43 different types of topics that we bid and we try to lock in for best pricing getting 3 quotes for each type of topics.
So I think we're just going to have to see how the commodity price and prices play out and I think the activity level and I think thats going to have a big influence on what we can lock in for next year and what is going to have to be a variable type costs.
Commodity prices. So we will just have to see as we kick off our formal bidding process here and the fourth quarter.
That's perfect. Thanks, guys.
At this time I would now like to turn the call over to Mr. Bart Brookman for closing remarks.
Thank you Alicia I'll make it short thank you everyone great quarter more to come and.
And.
As always thank you for the ongoing support.
This concludes today's conference call you may now disconnect.
Okay.
Yes.
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Good day, ladies and gentlemen, and welcome to the PDC Energy second quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this call is being recorded I.
I would now like to turn the conference over to your host Kyle sort Investor Relations you may begin sir.
Thank you and good morning on today's call, we have president and CEO, Bart Brookman Executive Vice President Land Block Chief Financial Officer, Scott Meyers and.
Senior Vice president of operations and stable.
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 dot com.
<unk> call will reference both forward looking statements and non U S. GAAP financial measures the appropriate disclosures and reconciliations can be found on slide 2 and the appendix of that presentation.
With that I'll turn the call over to Barbara.
Thank you Kyle and Hello, everyone.
A tremendous quarter for the company as Pdc's era of free cash flow generation and <unk>.
Shareholder return continues to accelerate.
Throughout the call you will see operating and financial results, which I believe are top tier oil.
The industry and truly differentiate PDC.
Fourth quarter free cash flow of $165 million on a capital investment of $178 million.
Both better than expectations.
Production for the quarter $17.4 million barrels of oil equivalents inline with our expectations and currently we are steady state highly efficient operations and bolt basins and delivering strong drilling and completion results.
The company's balance sheet continues to strengthen and debt reduction remains a priority leverage ratio quarter and 1.2 and net.
Net debt for the company of $1.3 billion.
Cost for the company continue to be well managed.
Lifting cost came in at $2.43 per Boe and.
And for the quarter $38 million was returned to the shareholders as we initiated the Companys first dividend and continue to repurchase shares.
Year to date, approximately $60 million has been returned to shareholders and we anticipate the total shareholder return will exceed $180 million by year end 2021.
Now, let me cover the company's outlook through year end 2023, a reflection of the quality of our assets and our execution capability.
We anticipate free cash flow will target 2.5 billion.
On a capital spend of approximately $1.8 billion.
Reinvestment rate from 40% to 45% of our adjusted cash flow from operations and simultaneously, we expect to drive our leverage ratio well below 1 point.
And pay down our debt by approximately $1 billion.
Robust free cash flow provides an opportunity to return over $1 billion to our shareholders through dividends and share repurchases all while we control costs continue to improve the efficiency and our operations and modestly grow production for the company.
A story for PDC.
As I conclude my comments today, let me update you on Ptc's ongoing ESG progress.
Early fall sustainability report, which I encourage all of you to read will detail the great strides we have made in many areas.
And today I would like to hit some of the key highlights.
The company has devoted considerable engineering and environmental resources towards managing our emissions and I am proud to announce quantifiable goals through 2020.5 that include a.
A 60% reduction and greenhouse gas emissions and a.
A 50% reduction and methane intensity.
Currently PDC has also achieved a flurry percentage for the company of approximately <unk> <unk>.
0.1%, which I believe is top tier for the industry.
Goal is to achieve zero routine flaring by 2025 and significant time acceleration from our prior commitments.
And additionally.
So important and our business today I would like to thank all of our field operations, and Texas and Colorado for their ongoing focus on safety.
Both basins just celebrated.
<unk> plus years without a single lost time injury.
As we look at the ever evolving world of ESG and I'm pleased with the tremendous progress we have made and the goals. We have set as a company and the environmental and emission controls and the safety and welfare of the PDC employees and the extensive focus on our communities and charity.
Given and the ongoing governance improvements for the company.
With that I'll turn this call over to Dave Willow for an update on Pdc's operations.
Thanks, Bart as you mentioned, there's a lot to be excited about this quarter.
First and foremost is our ability to operate safely and each of our assets.
We put a tremendous amount of effort and emphasis on training and really instilling a culture that prioritizes safety throughout our organization, so kudos to everybody for the user achievements.
In terms of operations for the quarter.
We invested approximately $180 million and saw.
<unk> from solid sequential production growth compared to the first quarter.
And as we highlighted and the press release capital was a bit below our initial expectations is around $15 million of non op activity has shifted from the second quarter.
And the third quarter.
That said production still came in ahead of expectations. Both in terms of total and oil due to the strong performance and Wattenberg wells and slight acceleration of our Delaware Basin turn in lines.
And Wattenberg, we spud and turn in line just over 20 wells.
We had some changes to our operations schedule and that led us to focus on larger pads and larger laterals compared to the first quarter and resulted in quite a bit fewer turn in lines.
Heading into the back half of the year, there are actually more Srs and MRM and on the schedule and so expect the turn in lines per quarter to be doubled if not more and the second quarter level.
And Delaware.
We turned in line our entire program for the quarter, thanks to the efficiency gains on the drilling and completion side.
We have been realizing year to date.
We released our completion crew.
For the year, but remain active with 1 drilling rig and the team is excited to get back at it early in 2022.
Moving to the next slide as Mark covered.
And the consistency with our messages in the past couple of months we.
We've started to see some cost inflation related to higher commodity prices and we expect to start trickling into our <unk> for the rest of the year.
And in Wattenberg, and we're expecting and well costs to increase approximately 10% to around $4 million or in ex R. L.
And it's no secret to anyone on this call and the steel service costs and diesel are much more expensive than they were 6 months ago.
And while.
Please don't make up a huge portion of our <unk> the magnitude of the cost increase is pretty substantial.
The commodity prices, where we are.
We also return from cost concessions provided to.
Back in the middle of total debt.
The good news is the wells that we expect to turn in line and the remainder of the year.
Drilled and cased around a year ago at lower pricing and.
And what Youre seeing now is a blend of past and current costs.
Yeah.
As I mentioned and Delaware, our completion activity is done for the year.
So much of the cost pressure is really irrelevant until we go back out to bid this fall.
And importantly, we've managed to continue increasing our drilling and completion efficiencies and are now averaging XR <unk> of approximately $7.5 million or 5% below budgeted cost of $7.9 million per well.
On the drilling side, we're really seeing the benefit of our relationship with HMP drilling.
And gene to a rotary <unk> technology and <unk>.
Modifying our wellbore construction.
All of which have helped improved our spud to rig release times by approximately 25% to 30% compared to last year.
In terms of completion.
Main driver of cost savings or switching to a dual fuel blend utilizing 50% natural gas and 50% diesel.
And utilizing.
This water during our Frac.
Switching gears, we provide a high level update to our permit progress on slide 9.
Just last week, our Spinney, Oh, GDP pass through the completeness determination stage with the state and.
And has a commission board hearing date currently scheduled for October 6.
Given that everybody is and unchartered water and working through a new process.
We're pleased with the state's ability to give us yet.
And get us through the completion period and <unk>.
And this period and on the docket and such a timely fashion.
It has been great and been a great team effort on both PDC and GCC side as.
As far as the Kenosha, GDP and vanilla cap. The team continues to work and make good strides and turning yellow boxes green.
Our goal for the middle for the Kenosha application will be late in the third quarter and vanilla application around the end of year timeframe.
As a reminder.
Crude the spinning Kenosha, and Glendale, and represent over 500 future drilling locations and Weld County.
With our current permit count and DUC backlog, so and cover our turn in lines through 2027.
With that I will turn it over to Scott Meyers.
Thanks, Dave.
And as always my comments will include GAAP non-GAAP and forward looking statements. So I encourage you to see our reconciliation found in the appendix.
Thus far we've given several components of our updated guidance on slide 11, you can find it all in 1 place as well as some quarterly commentary.
Most importantly.
And to generate more than 800 million free cash flow this year compared to prior guidance of $600 million.
And obviously benefited from and improve from pricing backdrop, and a 33% increase and expected free cash flow compares to a 5% increase at the midpoint of our capital investment range.
To reiterate the increase and projected capital to the top half of the previous range.
Due to cost inflation, and we're sticking with our operating cadence and <unk>.
Table on the right hand side of this slide clearly shows significant improvement to our free cash flow margin and free cash flow yields.
And importantly, you can also see our increases to our projected net production and shareholder returns this year.
In terms of debt, we now expect to reach $1 billion.
Our target by year end, which means we will have reduced our total debt by approximately $600 million and 2021.
We also expect our trailing 12 month leverage ratio less than 1 times by the end of next quarter.
As far and shareholder returns.
And began the year targeting and $120 million.
Increased to $150 million in May and again, increasing and less time to more than $180 million.
Approximately $36 million of these returns should come from our quarterly base dividend, meaning we project more than $145 million of shareholder our share repurchases. This year.
Finally in terms of production changes to our completion schedule and non op program have resulted in us and narrowing our guidance range of 190 and 195.
BOE per day, and 64 to 66000 barrels of oil per day.
We still project strong sequential growth and the third quarter and strong Q4 over Q4 growth of approximately 15%.
<unk> us well heading into 2000 til and.
Realistically production continues to be and output for PDC.
Our focus on generating free cash flow and down our debt and shareholder returns.
Moving to the balance sheet on slide 12, you can see we reduced our net debt by approximately $50 million and the second quarter and now have a cash balance over $100 million as we prepare for the settlement of our converts next months.
And in order to reach our $1 billion debt target.
And we'll obviously have to pay down a bit more debt than just the converts and look for PDC to consider various other management liability tactics and the third and fourth quarter.
In the quarter, we returned just under $40 million of capital to shareholders through the P.
Payment of our first quarterly 12 cents per share dividend and we repurchased approximately 660000 shares.
And again, given the pace at which we're paying down debt and inflection point for our shareholder return initiatives is quickly approaching.
We're excited about the opportunity to drastically increase the pace of our share buyback program, hopefully increase our base dividend and the near future.
Most of this is evident on slide 13, when you look at our multi year outlook. We're now projecting a 3 year cumulative after tax free cash flow of approximately $2.5 billion.
And this represents nearly 2 times our current debt balance.
Almost half of our enterprise value.
Importantly, it's a $600 million increase from more than 30% compared to our prior outlook, while cumulative capex has increased only $100 million.
We're also increasing our cumulative debt reduction and shareholder return targets for the 3 years, each being more than $1 billion.
Our debt our prior commitment was 850 and per shareholder return targets it increased from $6.50.
Very important to note debt through June 30th.
This year, we've had total shareholder returns of approximately $60 million. This means to hit our $1 billion number.
Through 2023 over the next 30 months and expected to average at least $30 million of shareholder returns per months over that time period.
Again, we hope to achieve this through an accelerated share buyback program.
And our quarterly dividends with a willingness to consider other forms and future years.
I want us to close the call with 1 last thank you to our team and it's been a.
And to start to the year and it has.
Exciting time to be at PDC employee and shareholder that I will turn the call over for Q&A.
Yes.
As a reminder, at this time, if you would like to ask a question. Please press star and the number 1 on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question comes from the line of Brian Downey of Citigroup.
Good morning, Thanks for taking my questions, maybe from BARDA, Scott and I wanted to ask on shareholder returns Youre now Amy as you mentioned per $1 billion and total shareholder return through.
2023 to 180 of that $180 million of that plus this year.
Scott you mentioned, the implied 30 million plus P.
<unk> per per month, there almost triple year shareholder return from <unk> 21, as that shareholder return paced starts kicking into higher gear and once you hit debt targets. Later this year. How are you thinking about the best split between repurchases and dividends over the medium term.
Yes, and so that's great question and yes you.
You are right, we still are doing ex.
And that I want to hit that $1 billion target before you really see us pivot, but again once we hit that pivot youre going to see the debt debt paydowns come down quite a bit still paying down debt, but at a much slower pace and thats youre going to see the inflection there.
The return of capital to shareholders.
We're still a big believer right now that we are undervalued on the share buyback, so I would say youre going to see both.
Growth and our dividend, but I'd say the more substantial portion is going to be the growth and our shareholder our share buyback program.
We know that we talked about and we talked about the politics of Colorado. When we get these permits approved we think it's going to be a lift on the stock and so until that time, we think buying back shares is a really good option for PDC.
Great and then maybe 1 on the operations front on and on well cost and capital guidance, you mentioned, a roughly 10% increase due to cost inflation and walk through some of the drivers there Dave you mentioned.
The drilling and completion efficiency opportunities what are you baking in in terms of future efficiency potential and that that well cost expectation and do you anticipate being able to offset any of that 10%.
We're doing extremely well and our Delaware drilling and completions right now.
And we're utilizing newer technology with rotary <unk>.
Leveraging our new relationship with agent P drilling.
We continue to lower costs, there and that's going to offset our cost.
Increases that we see and Delaware on the Wattenberg side, we continue to be very effective with our drilling and completions were averaging 4 days.
<unk> and Wattenberg and we continue to have improvements every day. So we're hoping.
And that our efficiencies will continue.
To move and the right directions and tried to offset some of these cost increases that we're seeing right now.
Brian.
And this question let.
Let me just add a little flavor.
We're extremely proud of our Wattenberg team.
And this last 5.7 years, if you go back and look.
The advancements we've made and <unk>.
Pushing our efficiencies to 4 day type spud to spud drill times and.
And some days.
24 stages per day.
And then you couple that efficiency and that optimization of our of our development program with.
With.
The pandemic.
Insertion. So it came out that gave us the ability through our efficiencies.
And.
Tremendous pricing by a lot of other vendors to announce a $3.6 million ex RL.
And so.
I know I know theres been some comments about the 10% and maybe we're an outlier, but we didn't feel it was appropriate to not let the market no debt.
We are so efficient and we continue to try to find ways.
Optimize that before.
Right thing to do was to let you guys know hey, we're coming off the pandemic or having some masks and our efficiencies are so dialed in and it's hard to squeeze more and more out of it. So I think we absolutely did the right thing here and.
Again, we're exceptionally proud of the team and the efficiencies they have achieved.
<unk>.
In the Wattenberg field and in the Delaware and some of the please 1 on the other day, Dave called out.
Yes.
I appreciate the color and thanks, everyone.
Okay.
Your next question comes from the line of Michael <unk> of Stifel.
Hi, good morning, guys.
You talked about moving your GDP and GAAP projects forward and the GCC kind of moving through uncharted water here.
And maybe high level thoughts on the whole permitting process.
Okay.
And if any permits have been granted this year and I guess, what gives you the confidence debt.
Youre going to get across the finish line on these projects going forward.
I think we've made tremendous progress right.
Right now our team is currently working on 2 <unk>.
And the Spinney B and 1 of them that.
Has the board hearing scheduled for October 6.
Other 1 more where we're working through and.
And on my slide that I have working to change those yellow box as green as I mentioned.
We've adopted.
And the new policies and regulations and the new processes that the oil and gas Commission wants us to go forward with with these longer term and more extensive development plans and the team's been working very very close with the GCC and I feel we're making really really good.
Progress moving towards getting names too.
Approval.
I believe.
And that the.
And the progress, we're making is right along the timeframe that we need based.
And based on the current DUC count and the current per.
And account that we have out there so right now it's not worrying us at all and.
Continue to work with the <unk> very closely and making sure that these development plans and all the.
Applications and the processes that we need to go through.
<unk> done effectively the first time, so that they can move through the process as it was kind of the outline for us.
Got it Okay and is it fair to say I guess, the permitting process has slowed down for the industry as a whole is it just a function of <unk> asking for these <unk>.
And as your projects rather than granting 1 off permits as they have and the past.
Yes, I think so.
The spending is an 8 well package.
And with 1 facility and Thats. The 1 we started from what we're learning through the process and we're getting better at an excellent and that will be submitted and will be a 70, well package with 3 different facilities sites and we will take the learnings from the very first 1 and apply them to the second 1 so that we can move through the process quicker.
And then we can apply all of that to our cap, which is arguing and ela cap, which is made up of over 450, well. So very pleased with the team the results and the progress we've made so far.
Very good and.
You talked about.
With you, David and Bart talked about the.
Deflation.
And in Wattenberg, and some of your competitors actually most of them seem to believe they can offset inflation with efficiencies you guys seem to be acknowledging that.
Well costs are going higher and I guess your debt is.
I guess the.
Small numbers working against you when you get down and it's where days of drilling and <unk>.
20, plus stages and a day.
Pretty hard to squeeze out more as Bart said I guess as you think about so you've knowledge, 10% and <unk>.
Place and in the second half here and you think about 'twenty 2.
Yes.
And would anticipate what that number would go higher.
And that.
Some of the benefits that you saw.
And.
And the early part of this year is that fair and right now we kind of have all toss and new costs coming together, where we spud most of the wells will be turned in line and the second half of the quarter about a year ago. So we took advantage of drilling those encasing them last year. So we got the lower prices.
Along with that with our procurement process.
Pretty much tied up all the production equipment as far as steel cost increase we've tied that up until the end of the year. So we're taking advantage of that what we're seeing next year.
We're thinking it's going to be and the $4.4 million range to 2 to drill a well and thats from the start to the and.
We will know a lot more after we go through our formal bidding process and we.
Pretty much kicked that off from the fourth quarter, we don't like to get too far ahead of.
That are started too early because then you don't get pricing that you can you can rely on and so in the fourth quarter, we'll really understand our costs, a little better but like Bart said, we wanted to make sure that everybody was aware and I don't think its.
It's just to US I think everybody and our industry are starting to see these.
Concessions come off that were given during COVID-19 and the steel and cement and the frac activity and everything and picking up just a little bit and will.
No more and fourth quarter, and it's really based off of commodity prices and activity levels and.
And each individual base and won't have those cash rents here and there.
And I, just add a little bit and color on the when you look at 'twenty, 2 and 23 and our press release, we have updated debt guidance range to 6 to 650, just so everybody is aware of it and that's where we get to the $1.8 billion for the 3 year cumulative investments so and we believe those debt to cost increases that they have is already factored into that guide.
Thanks.
And that's good to hear.
And last 1 from me.
There's been a lot of consolidation in your neighborhood here.
Thoughts on.
M&A activity and are you feeling any pressure to do anything on the M&A front given the activity you've seen in the DJ basin.
Yes.
And to answer the last part no we're not feeling any pressure.
Focused on execution right now and we obviously are always keeping our eyes open if the right opportunity came along and items.
I think I think as we think about additional scale, obviously that's something.
Tactically, we would we would like but I think the goal as I've stated many times as we look at different projects, we want to make sure. We're focused on not just getting bigger as a company, but getting better as a company. So.
Mike.
And Lance is on your I can ask him net a little flavor to this but.
Right now the company's focus is on our execution and the free cash flow that <unk> laid out to you guys.
We're happy with the way things are going in both basins and the balance sheet.
Rewarded if we were to give anything into consideration and our commitment to our investors as our balance sheet is always a priority and we're looking for projects like I said that would improve the company and.
And be accretive on an inventory basis and be accretive on financial terms. So lance are you out there.
Think you are connected.
Yes, no Mike Good question I think the other thing I'll just add to this as all of us with the free cash flow business model.
Target and sort of that.
3 ish percent compounded annual growth rate as a company and whats.
We continue to if you will stretch and the inventory life that we have and both basins and the other thing I would add to that and see our teams continue to look for.
Especially focus here and the Wattenberg downspacing opportunities and kind of picking that right spacing that at these prices that we that we see and project going forward can deliver additional inventory on our existing acreage base. So that will continue.
The other thing, we'll always do as well as just continued work on the trade and those are very good.
<unk> for both parties, and then come and join and acreage together drill longer laterals.
And we will continue to oil Tom as well so.
Sounds good thank you guys.
Thank you.
Your next question comes from the line of <unk> Chowdhry of Goldman Sachs.
For taking my questions.
And my first question is on your free cash flow allocation plans between debt reduction and shareholder returns.
Given our strong balance sheet and then like you mentioned you believe your shares are undervalued wanted to get your thoughts on deploying more cash towards share repurchase and dividends with it being done debt.
Below the $1 billion that you're targeting for this year.
Yes, I think it's I mean, it's a <unk>.
Questions are fair question, I think ultimately for the company getting our debt balance right to give us more flexibility for if there is a reversal of the current commodity price is still my number 1.
For the company.
Src transaction, we did was fantastic, but at the same time when the pandemic hit I would love to have been able to buy back more shares and I just couldn't because my debt burden was too high so we're going to as you heard we've already raised the target again. This year, we're going to have a very active share buyback program and I think getting our overall interest.
<unk> and <unk>.
Is just really really important so we can be super successful and thrive in any commodity price environment. So look for more returns, but look for us to get that debt to $1 billion first before you really see is put it into the next gear.
Got it really has.
So.
And I guess my next question is on hedging.
Given your reinvestment rate is expected to be very low for the next 3 years and your balance sheet and is expected to be strong.
Wanted to get your thoughts on what level of oil and gas production do you plan to hedge going forward.
Yes, and again.
And I can give it to you from commodity, but we always start with cash flows. That's our number 1 thing and I'm here to protect cash flows and the company.
So overall how are our thought process is migrating slightly as youre going to probably see less hedges and any 1 individual year, because we can protect a little bit less cash flow with our debt coming down at the same time, we're hedging out a little bit further than we have because we do have that dividend.
And that we're protecting so I would say from a volume perspective look is to be more unhedged and we've been in the past, but maybe a little bit longer out duration and when you see this $2.5 billion dollar number and what I, we will lock in a little bit from these small ledges. The hedges, we just do a little bit of a time, we're able to lock in and we're locking.
And that $2.5 billion to and agree on some of these prices. So look for us to continue the programs, but overall slightly lower level than you've seen us and the past you will not see us go to $6 or 7% with our debt level and the way. It is now that we have done.
Well times in the past and we had higher levels of debt.
Great. Thank you so much.
Your next question comes from the line of Rohan.
Joe Rob of J P. Morgan.
Yes. Good morning, gentlemen, I was wondering if you could kind of help us.
And with how you think the sequential progression of volumes could trend and kind of <unk> and <unk> I know that maybe some non op pads got shifted a little bit in terms of timing, but maybe you could help.
Buy side there is out there had been asking us questions on that <unk> trajectory.
Yes, I think and in the press release, we tried to outline some of this but we see and.
A nice step up again, and the third quarter I think from an overall production standpoint that 5% to 10% range oil is going to be higher and thats due to our Delaware turn in line schedule.
Even though we did turn and all the wells as Dave has said.
And our last turn on and was June 2017, 28, right towards the end of the month and most of the wells. If you took the average we're on for about 30 days, so having that Delaware, Delaware being our oiler and obviously the beginning part of the world is going to help boost that production. So you can look for our oil growth to be quarter over quarter more to that 15% to 20% rate.
And then a little changed from we said the secular with some of the schedules and the moving and we.
And to move some of our shorter laterals, it's going to cause our fourth quarter to now go up compared to what we were expecting prior and Youll see some modest growth from third quarter to fourth quarter as well and I think we put in the release about what 15% Q4 over Q4 of the yearly so we feel pretty good about those.
And really bumped it about those numbers when we go through this the stairstep youre going to see and the third quarter really going to help generate a lot of free cash flow and so for us to print well over to $200 million next quarter.
And free cash flow next quarter great great.
And then just on the buyback you guys mentioned that you could maybe step up the pace of the buyback I know you have a 10.
<unk> 5 plan, but what kind of latitude do you have to kind of supplement.
The buyback with the stock kind of coming off a little bit.
Thoughts on that I know as you kind of look at.
But dealing with some debt reduction and as well as the returning cash via the buyback.
Yes, we like to have that program in place. So that like every day, we don't have to only worry about open windows. We just go in and and followed the plan. So look for a steady state. There are some opportunities when windows are open to potentially get a few more shares and we may or may not use that tool.
Where I'm sitting at today very confident that we'll be able to hit that total return of over $180 million at this point with the debt reduction and my guess is we'll be able to do a little bit more. So yes. We think there's some opportunities here. So we're going to keep executing the plan and keep up and keep buying shares back.
Great I'll turn it over thanks.
Yes.
Your next question comes from the line of Bertrand <unk> of choice.
Good morning, guys.
And I am probably beating a dead horse here, but on the 3 year outlook.
Free cash flow percent of your market cap really sticks out and I, probably conjecturing here, a little bit, but I have to assume that it's become because some investors just maybe don't think its going to come back and share repurchases or something like that can you can you maybe talk about the balance.
And you get debt to 1 billion is it.
Purchases as a plug or if a good asset comes along and would you kind of replace it and asset.
And you purchased asset you also need to maintain that same level of repurchases and then kind of maybe on the other side of that how sticky is the repurchase preference dividends become what.
But he starts looking at do you switch over or is it kind of and internal and re.
Repurchase opportunity provides the highest return.
Yes.
A lot of questions there and let me let me start out as again, when Barton says, we want and not only a bigger company, but it has to be a better company that would encompass being able to do deals and still be able to execute on these various plans paying down $1 billion of debt.
It's very reasonable that we could have a situation where we're doing acquisition that we add some debt that's still going to be then a focus to continue paying it down.
Again share repurchases. So we think it is.
We agree with you and particularly <unk>.
<unk> undervalued, obviously, we've talked already on the call about the permit status. We really think we're going to re rate when that does share buybacks very attractive to us right now as far as the variable dividend and things I know, there's other companies that have done it we're going to sit here, we're going to study it and if over the next year or 2.
When we re rate when we get the permits and as David said, we'll then at that time, we might consider and Thats, what the market's rewarding right now I think it's just too early to tell I understand why people are doing what theyre doing but were in a little bit of a different situation.
And with the with the permitting issue that we think that buying shares back is the right answer for our company. So we have a lot of faith and the program. We have a lot of face and our numbers. Our teams are doing an excellent job delivering value for PDC every day, so feel very confident and the 3 year outlook.
Absolutely that makes sense and then really the only follow up is on the inflation topic is there some of the other companies are kind of talking to is there. Some wiggle room, where may be you can lock in a longer term contract or a larger order with your vendors in in the fourth quarter bid cycle or is it is that non.
Available or is it just not worth it because you'd prefer to have the flexibility. So that you can kind of adjusted market cycle.
So just given a little color around that like on our drilling rig and Delaware, we just locked in 1 year.
Contract with them basically at the same cost that we were at this last year.
With a few incentives for them to work with us and <unk>.
Oil faster, so we're pretty confident and that is going to stay really consistent.
And our bidding process.
It's 1 of the top notch.
<unk> that I've seen and working for several companies.
We.
Go out too.
I think there was probably.
43 vendors with 43 different types of topics that we bid and we try to lock in for best pricing getting 3 quotes for each type of topics.
So I think we're just going to have to see how the commodity price and prices play out and I think the activity level and I think thats going to have a big influence on what we can lock in for next year and what is going to have to be a variable type costs from.
And the commodity prices. So we will just have to see as we kick off our formal bidding process here and the fourth quarter.
That's perfect. Thanks, guys.
At this time I would now like to turn the call over to Mr. Bart Brookman for closing remarks.
Yes, Thank you Alicia I'll make it short thank you everyone great quarter more to come.
And.
As always thank you for the ongoing support.
This concludes today's conference call you may now disconnect.