Q2 2021 Penn Virginia Corp Earnings Call

[music].

Good day and welcome to the Penn Virginia Corporation second quarter 2021 earnings conference call on.

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I would now like to turn the conference over to the company. Please go ahead. Thank you and good morning, everyone I'm Clay <unk> director of Investor Relations for Penn, Virginia Corporation and.

And we're pleased today to discuss of our second quarter 2021 operational and financial results.

With me today is Darren Hinky, our President Chief Executive Officer and director.

Also joining us and available for our Q&A session are Rusty Kelley, our senior Vice President Chief Financial Officer, and Treasurer, and Julia Gwaltney, Our senior Vice President of development.

Before we begin.

I'd note that today, we will discuss certain non-GAAP measures definitions and reconciliations of these measures to the most comparable GAAP measure are provided in the company's second quarter earnings presentation and press release that can be found at www Dot Penn Virginia Dot com.

Our comments today will also contain forward looking statements within the meaning of the federal Securities Law. These statements, which include but are not limited to comments on the pending merger with Lonestar resources and our operational guidance are subject to a number of risks and uncertainties that could cause actual results to be.

Materially different from those forward looking statements, including those identified in the risk factors in the company's most recent annual report on form 10-K, and quarterly reports on form 10-Q.

So with that I will now hand, it over to Darren to discuss our second quarter 2021 results and recent events Darrin.

Thank you clay.

We appreciate everyone joining us for today's call.

Wow I couldn't be prouder of our team.

This quarter has been 1 of the best performing quarters for Penn, Virginia, which could not have been achieved without the tireless efforts of our entire employee base.

It's quite rare that all within 1 month, we get to announce significantly exceeding production expectations lowering per well capital cost improving operating costs as well as announce of pending transformational merger.

Furthermore, we are gaining access to the high yield capital markets, expanding liquidity and having 1 of our highest free cash flow quarters in recent history.

Now, let me touch on some of those achievements in a bit more detail.

After raising our all of the guidance last quarter, we again exceeded the high end of oil sales guidance with 20117 barrels of oil per day.

And total sales volumes of 24844 barrels of oil equivalent per day.

Both for the second quarter of 2021.

Adjusted EBITDAX came in at 77 million of <unk>.

64% increase from the first quarter and beating Wall Street consensus estimates.

Our operations team did an outstanding job during the quarter, reducing estimated per well costs by approximately 4% compared to initial guidance estimates for wells completed in the second quarter of 2021.

Likewise, our production team continued to focus on lowering cost and reducing expenses.

These actions lowered operating expenses per Boe.

The approximately 19% as compared to the first quarter of 2021.

I'm also happy to report, we generated significant free cash flow for the seventh consecutive quarter.

Which lowered our net debt by approximately $30 million to $334 million as of June 30th.

The mid July we were pleased to announce our pending all stock acquisition of Lonestar resources, We view the transaction as attractively valued at a purchase price of less than $30000 per flowing Boe per day of current production, which implies the discount to PV 10 value.

<unk> of Lone star's proved developed producing reserves.

In aggregate, we expect that the strategic combination will build on our financial strength and flexibility and be accretive on key per share metrics.

The complementary nature of Lone star's high quality assets provides Penn Virginia additional scale to deliver of continuous operational and development excellence.

The result is the significant increase in free cash flow generation supported by an estimated $20 million per year of identified tangible synergies.

The combination will also materially enhance our inventory of high return drilling locations.

<unk> the opportunity for additional extended reach laterals that are typically more efficient from a capital spending perspective.

Driving higher rate of return well economics.

Importantly, the addition of lone star's approximate 250 identified gross well locations results and an anticipated 50% increase in the high rate of return drilling inventory for Penn Virginia.

On a combined basis and only targeting 1 landing zone in the lower Eagle Ford Horizon Independent Reserve auditors estimate we have an approximate 750 well inventory.

2 thirds of the combined company's future wells are estimated to average.

Approximately 65% while level rates of return.

When calculated using a flat $60 per barrel price.

All of 750 locations are expected to have an approximate 50% well level rate of return at the same flat $60 per barrel price.

Nice returns to say the least and these returns are based on third Party Reserve report assumptions.

To put that in context I am pleased to report that to date. The wells. We spud in 2020 are currently outperforming our independent reserve auditors type curve projections by approximately 14% on accumulative basis.

Implying the returns previously mentioned are likely conservative.

Beyond the 750 wells reflected in our inventory count we believe an incremental 150 gross potential wells can be added on Penn Virginia's acreage alone as a result of the work we and the industry have performed evaluating the upper Eagle Ford formation the all.

And chalk formation Downspacing results in selected areas and future participation in non operated wells.

As we integrate lone star, we anticipate our future of well count could increase significantly.

Protection of the balance sheet is core to our disciplined approach to running the business our.

Our pending transaction with Lone star is expected to be significantly accretive to free cash flow and the other financial metrics and thus should facilitate Penn Virginia, retaining a strong balance sheet and ample liquidity.

It is anticipated the combined entity will reach its targeted leverage ratio of 1 times early next year.

And just last week, we priced an inaugural $400 million of senior unsecured notes successfully accessing the high yield capital markets day.

These notes will allow us to refinance the lone star's existing long term debt and Penn Virginia is second lien term loans.

Upon closing the merger Penn Virginia is capitalization is expected to include these notes and an upsized revolving credit facility to enhance liquidity.

We believe the pending acquisition of Lone Star is the next logical step in our journey to drive further targeted consolidations in the highly fragmented Eagle Ford.

The combination of follows our recent junior per transaction, which added overlapping core acreage improved our balance sheet and further positioned Penn Virginia as a consolidator of choice.

Numerous subscale operators in the Eagle Ford create a robust set of potential acquisition candidates.

As such we look forward to evaluating additional targeted acquisitions that will further reduce per unit costs expand margins enhanced returns and increased financial strength and market relevance.

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

Yeah.

Thank you we will now begin the question and answer session.

Ask the question you May Press Star then 1 on your Touchtone phone.

If you use of the speaker phone, we ask that you. Please pickup your handset before pressing the keys to withdraw your question. Please press star the 2.

Today's first question comes from Neal Dingmann with true of Securities. Please go ahead.

Good morning on 2 questions 1 maybe first just debt.

For you on that.

On slide 12 could you talk a bit about.

<unk> met with you just a little bit, but again more I'd like to hear more about inventory just it appears on that slide that I guess, the 2 questions about inventory.

Could you give color on the 500 locations I know it does talk about details on what you think the.

So the returns are on that but I'd like to hear your thoughts on that and again, what you've continued to sort of discoveries.

Discoveries you've been there on on the inventory.

Yes.

Sure Neil Thank you for the question.

So relative to those 500 locations.

That is the only on Penn Virginia land.

That is only 1 landing zone in the lower Eagle Ford Horizons, and its what the well spacing in the 450 to 500 feet range.

It's a conservative approach on those 500 future well inventory.

For Penn, Virginia, when we looked at Lone star They add an incremental 250 gross locations.

Also only in 1 landing zone in the a and.

In the lower Eagle Ford.

Beyond that of the things we're looking at on page page 15, We show you. Some downspacing that we've done early this year well, we've drilled wells offsetting parent wells as closest 315 feet and Penn Virginia is in a unique situation, where many of the parent wells were completed.

Good with the legacy hybrid gel completions, and they werent really very productive and what that leaves us with an opportunity to even space our future of wells closer to those parent wells and on these 2 examples on page 15, you know these wells are even producing of greater rate of return than our than what we've shown on our inventory slide over.

100% on these groups of wells that we drilled earlier this year of the rep and check in the months and ranch and not only of those wells outperforming what we had projected from an inventory standpoint, but we actually improved the parent well production by about 30% just from the.

Offsetting fracs on how they improve the parent wells so yeah.

Great inventory.

Of the combined company 750 wells is what our reserve auditors of showing and we think we can we can add you know of hundreds of wells beyond that as we continue to understand our rock as well as lone star's rock and we're digging into that every day.

Great details here you guys did a good job delineating that its really been of nice nice change and then maybe just the 2 for Rusty for you just could you talk a little bit about I know you've had some pretty nice hedges. Both you put them on kind of as the quarter goes in and prior. So my thought is I guess my question is 1 just could you just talk overview on.

The guys for hedges philosophy today is now the obviously balance sheet is much improved and you know is that balance sheet, even gets down I guess, according to my math could be down to 1 times or so.

If you include 1 of the strike, let's say early next year, including loan it once you get to that.

Could you just talk about how you would the hedging philosophy of sort of stay the same pre and post you know of leverage kind of hitting that debt that 1 ish times.

Sure so taking those kind of in reverse I do I would like to emphasize that 1 times leverage is is the goal here and we are very fixated on making sure that we get get there as quickly as possible part of that is the use of our capital to.

To be very disciplined in line with what we talked about and as commodity prices of increased we've really use that excess free cash flow to pay down debt and just get to that 1 times quicker. So we're very focused on that part of that strategy. Though also is our hedge program, which is the question. You asked so we continue to have a similar.

Strategy currently and.

We will likely have a very similar strategy, even when we get to 1 times, which is to protect the capital invested as we invest it. So what you've seen is as we roll we continue to have a strategy of 70% to 80% of anticipated production.

Hedged in the near term, which we've defined as 6 to 12 months you have seen us inside of that the difference that we've done is we have widened out some of those colors, just given the inflationary risk, but in today's environment have been able to put the floors of those recent recent hedges.

Even though you see the averages here on the slides, we've got a lot of near term hedges with swaps with 7 of handles and floors on those colors with 6 handles giving us upside into the into the sevens as we go out further into the curve, we tend to hedge out to 18 to 24 months, but we have widened those collars.

And were really protecting that 55 floor, which in today's market gives us substantial upside up to what we're seeing kind of at today's spot rates, but we don't anticipate that to change materially other than to make sure that we continue to protect.

The balance sheet from of binary position and as we have lower leverage we may continue to look at wider and more upside opportunities such as $55 puts that we've utilized or wider callers, but that's the only change we anticipate.

Very good thanks, guys nice quarter.

And our next question today comes from Charles Meade of Johnson Rice. Please go ahead.

Yes, good morning, guys.

I wanted to our guys and girls, ladies and gentlemen.

I Wonder if we could go back to them. So the the question on the inventory, but slightly from the from a different angle your slide.

Slide 13 and 14.

To me it seems the to me it.

I think the that southwest extension of your acreage is is more derisked in the industry since down there and that the and that the you know the.

On the greater rate of change on your inventory depth of quality is probably more likely in that that northeast extension, but I wonder if you're if you you know how you might agree or disagree with that with that perception and and give us a little bit of a time on on when we might might.

<unk> learned a little bit more about these are big 5 wells.

Yeah, So I think.

Relative to the northeast acreage.

As you head North East off of this map on page 13, we certainly see more clay enter the system and there is the point out there were the results aren't as good and and so you could add a lot more sticks on this acreage than what we what we did in just the hundred debt, we're reflecting in our inventory here on slide 13, but the the results of <unk>.

Impressive if you look at the small tech well 12 month kume of 155000 barrels of oil from the 6500 foot lateral and I want to be clear of that that's the oil that's not equivalent that is that is the actual oil cube for that well and then we brought on the motto Cup with the Penn Virginia completion earlier this year about 250 barrels a day IP 30.

Weird, finishing up the fracs today on the big 5 pad in coiled tubing rig will be the drill those wells out. So we'll we'll initiate flow back on those wells here on the AR in the immediate future.

Certainly excited about the the.

The productivity that will see out of those wells.

You know when you are back on page 12.

Relative to our excuse me I'm going to go to page 14.

Answering your questions around the southwest acreage.

I do think it is more delineated there's EOG has drilled a lot of wells in this area as well we were shown on the wells on the map that either Penn, Virginia, or Lonestar has drilled since 2018 and so there is a number of EOG wells right in the middle of the between the Penn Virginia acreage in yellow on the Lone star in Blue.

And it's definitely a focus area for them and they've made a lot of really strong wells in this area of write off of our leased lines and.

And of the helping us put together our type curves, but do you look at our recent Emerald well performance there.

The longer laterals.

Completion design and different flowback strategy.

Those wells are triple the IP 30 versus Penn Virginia is last attempt in this area a couple of years back. So we've made some material.

Step change improvements in how we drill and complete those wells and Lonestar has drilled some really attractive wealth down on their acreage which are reflected on the on a different slide their results. So.

Excited about that area I do think it is a little more proven.

You know relative to all of the acreage versus the northeast acreage.

But as we continue to develop the northeast acreage there could be a lot more than just the 100 wells that we're reflecting at this time in our inventory.

Oh, yeah, it sounds more like a like an elevator trip rather than the step change down there but.

If I could go back to Rusty the the comment you made about the target for the target for the 1 times net.

Net debt or debt to EBITDA is there a.

Oil price or are.

You know a set of commodity prices that you have in mind. When you are when you put that target or is it does it float up and down as the that's the.

Outlook change.

Obviously commodity the higher the commodity price the more free cash flow the can be generated but when we've made those statements I believe what we used was a strip pricing, but the the comment made about early 2022 was cash.

Of the $60 and and up type of pricing when we budgeted those numbers.

Got it. Thank you that's it from me I appreciate it.

Thank you Charles.

Ladies and gentlemen, as a reminder, if you'd like to ask the question. Please press Star then 1 on our next question comes from the Davis Metros with RBC capital markets. Please go ahead.

Good morning, all and thanks for taking my question I guess, the first 1 of its kind of of 2 partner..1 is there kind of an update on what you're seeing on the surface of raw materials cost inflation side of the equation and then secondly, you all have made good strides in reducing your well costs I'm just wondering 1 additional levels levers are you guys seeing.

<unk> to kind of grind those lower overtime, and maybe offset some inflation in the next year.

Yeah, so inflation year to date, we certainly have seen inflationary pressures, we see it first.

First and foremost probably the largest percentage on anything made of steel I'm seeing the significant pressure there and then we've seen pressure on trucking.

The drilling rigs and then the frac fleets and in year to date, the first half of the year I'm really proud of how the teams performed we've been able to overcome those inflationary pressures through operational execution and efficiencies.

We set of couple of drilling records. This year for the company, we drilled the about 7400 feet on 1 well in 19 of half hours we.

We cut a mile and 1 well in the little over 12 hours.

Or are those are great great progress by our drilling team to to reduce time and time is money and our business of course net on the Frac side.

We're getting more efficient getting more sand and water on the ground each and every day. We also did some Simon <unk> in the second quarter, where we're fracking 2 wells simultaneously and saw some efficiencies. There. So that's a really proud of the team and how they've overcome the inflationary pressures and actually came in in the second quarter of 4.

Percent under our expectations from a cost standpoint on a per well basis.

As we look forward to the second half of the year, we're continuing to see the inflationary pressures and.

We're going to attack on the same way, where we're consistently looking for opportunities to do better tomorrow, what we're doing today and.

Figure out of.

Yeah.

It's the everyday strive for.

Improving the results and how we do it so that's really how we intend to to overcome additional.

Collection rate pressures that we will see in the in the second half of the year as well.

Got it good to hear and kind of my second question of building on that last part no. It's probably too early for kind of form of 2022 plants, but just high level as you kind of approach next year's budgeting process is there kind of any inflation level you guys are baking into your estimates as well as kind of accounting from the Lone star activity is there maybe.

General idea on the NIM.

The amount of pills or activity you guys are planning for next year.

Yeah, we haven't had any guidance for 'twenty 2 at this point.

We anticipate closing the acquisition in the fourth quarter and we're looking at a lot of different a different bunch of cases for next journey of Lone Star has been running a rig Penn Virginia has been running 2 rigs. So obviously, a logical case would be to look at the 3 rig program and we'll be looking at other pace of development as well relative to.

2 of inflation going forward you know we are constantly updating our cost models on what our wells will cost and including changes we see on the on the horizon relative to inflationary pressures and when we model of those accordingly.

Got it thanks.

Yes, Sir.

And ladies and gentlemen, our next question today comes from Nicholas Pope at of Seaport Global. Please go ahead.

Good morning.

Good morning, Nick.

How about can you talk a little bit with with the recent debt debt issuance of when that comes out of escrow like how are you prioritizing I guess what.

I guess, what the post merger what pay down would look like and what the priority is of of kind of on the balance sheet. What you guys have.

And kind of where the focus will be on the on.

On the term loans the.

On the credit facility and how you think about the priorities for pay down whenever whenever that comes through.

Sure.

So the high yield proceeds when they are released from escrow as noted in the offering memorandum will fully repay and refinance the lone star current long term debt both their revolver as well as the term loan that they have will also fully refinance.

The term loan the second lien term loan at Penn Virginia.

And then any additional proceeds or <unk>.

Differences will be made up by our revolver and then future pay downs from the free cash flow will then be again directed toward our existing revolver, allowing us to get down to that 1 times. So the pro forma capitalized structure would just leave us on a combined basis with a high yield unsecured.

Notes as well as a conforming bar RVO.

Got it that's helpful.

And moving over to operating cost.

Looking at the.

Kind of quarter to quarter moves on a unit basis operating costs.

Gathering costs were down to Q, a fair amount from <unk> guidance is kind of back towards the more.

Kind of the range, where they've been at the last the previous 2 quarters and just can you talk a little bit about the cadence of that and what's kind of causing the.

That movement in operating and gathering costs there.

On.

I. Thank you for the question this is Julia.

On the actual run rate it was fairly flat just slightly down on a unit cost basis.

Obviously, it was down to the production.

The guidance that we had.

So what we're saying going forward is that just the ongoing continual run rate pretty flat to what we have always been saying on maintaining workover expenses at the same level that we've had the solar so thats why youre seeing the flight.

The reduction to match to the overall year run rate, but going forward it pretty flat.

Yeah. That's helpful. That's all I had thank you.

Thank you Nicholas.

Ladies and gentlemen. This concludes the question and answer session I would like to turn the conference back over to the management team for final remarks.

Well, thanks to everyone for participating on the call today are really really good questions.

It's really a privilege to to announce everything that we've done this quarter that the.

We had of beat and raise in the first quarter and then we beat production again in the second quarter.

The wells we're drilling this year, we're outperforming on the inventory projections that we've shown great rate of returns I really appreciate the questions around our inventory I think that.

Penn Virginia is inventory and then combine that with lone star.

Got an incredible 12 to 15 year inventory going forward just in 1 landing zone in the lower Eagle Ford. So a lot of a lot of neat things to come I look forward to.

Learning from the Lone star assets, and how they operate their wells and applying those learnings to Penn, Virginia, and vice versa there'll be some some synergies there that we can share.

And improve the lone star operations as well so thanks again for calling in and look forward to talking to you soon.

Thank you. The this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines.