Q3 2021 PDC Energy Inc Earnings Call

November 4, 2021

[music].

Yes.

Good day, ladies and gentlemen, and welcome to PDC Energy's third quarter 2021.

At this time all participants are in a listen only mode.

We will conduct a question and answer session and instructions will follow at that time to ask a question during this session.

You really depressed.

As a reminder, this call is being recorded I would now like to turn the conference over to your host Tauscher Investor Relations you may begin Sir.

Thank you and good morning on today's call, we have president and CEO Bart Brookman.

<unk> Vice President Lance Lauck, Chief Financial Officer, Scott Meyers Senior Vice President of operations, Dave Willow Yeah.

Yesterday afternoon, we issued our press release and posted a presentation that accompanies our remarks today. We also filed our Form 10-Q. The press release and presentation are available on the Investor Relations page of our website Www Dot P. D C E Dot com.

On today's call, we will reference both forward looking statements and non U S GAAP financial measures.

Appropriate disclosures and reconciliations can be found on slide two in the appendix of that presentation.

With that I'll turn the call over to our CEO Bart Brookman.

Thank you Kyle and Hello, everyone.

Because I look back on the past 12 to 18 months I could not be more proud of the PDC team are.

Decision, making resilience focus priorities and strategic shifts.

As we accelerate out of last year's deep compression of energy prices.

The company is extremely well positioned for success.

Today.

I hope to reinforce our corporate commitment to safety.

The environment.

Financial and operational excellence.

Delivering value to our shareholders.

Let me address some third quarter highlights.

Free cash flow for the quarter of $268 million on a capital investment of $149 million.

<unk> of capital projects year to date for bolt basins are in line with expectations, including drilling completions and turn in lines.

Production for the quarter.

$18 8 million barrels of oil equivalent.

While we were disappointed in our recent grizzly pad production performance in Delaware.

Our teams have quickly pivoted with strong technical focus on production optimization and we have some very encouraging early results.

Current production for the company has rebounded is now in line with expectations and Dave will touch on this more in a moment.

Operating costs remain in check with lifting costs under $2 50 per Boe.

And G&A all in at $1 64.

We also made tremendous progress on our balance sheet as our quarter end leverage ratio stands at 0.8 debt.

Debt levels for the company continue to decline at a rapid pace, while Ptc's total liquidity currently stands at $1 7 billion.

Now on the ESG front.

First I encourage all of you to view, our recently published sustainability report, which is available on our website.

2021, we've made great strides as we defined aggressive greenhouse gas and methane emission reduction targets for the company established.

Established a zero routine flaring goal by 2025.

<unk> was quality refreshment of the board with a focus on diversity.

And formalized ESG governance at the board level.

In 2022, you can expect a strong emphasis on the continued safety of the PDC employees.

Ongoing emission reductions.

Alrighty and charitable giving.

Diversity at all levels of the organization and sound corporate governance.

So as we close out the year.

As I noted production is rebounding back in line with our expectations.

We anticipate a leverage ratio of <unk> five as.

As we approach year end and our net debt should drop below $1 billion.

The company's free cash flow for the year is expected to exceed $900 million.

And today.

I am pleased to announce we are expanding our shareholder return target for 2021 from $180 million to at least $210 million. These returns will be will primarily be fixed dividend and share repurchases.

However.

Recent discussions with our board of directors have led us to consider a special dividend if necessary to achieve this $210 million goal.

So in closing, let me give a little flavor on 2022 <unk>.

Expect modest single digit annual production growth.

While the company maintained capital discipline in both basins as.

As we enter next year debt reduction will become a lower priority, while we increase our emphasis on shareholder returns.

At the current strip, we believe free cash flow for PDC can exceed $1 billion next year.

And I assure you the company will continue to place the utmost importance on safety and ESG initiatives.

With that I'm going to turn this call over to Dave Willow for an operational update.

Thanks Bart.

Before going through the third quarter results I want to take the opportunity to give thanks to our incredible teams for their tireless work throughout the year.

The focus on safety reliability and execution continues to drive strong financial results that Bart opened with us on the call.

In terms of the third quarter, our capital costs.

And costs were right in line with expectations with capital investments of just under $150 million.

Low under $2 50 per Boe.

And pure leading all in G&A expense of $1 64 per Boe.

For production, we averaged 204000 Boe per day, and approximately 66500 barrels of oil per day.

As we mentioned in our press release last night each of these came in higher than our updated quarterly ranges, which we provided in September due to a net revenue interest clarification received in early October.

<unk> to 'twenty six.

<unk> wells.

Which we turned in line in late June.

In Wattenberg, we continue to run one drilling rig and one completion crew, which led to 20 spuds and 57 turn in lines for the quarter.

As a reminder, we had more Srs and MRO wells turned in line than our typical quarter due to some shifts we made in our completion program early in this year.

Look for the future turn in lines per quarter to be more in the range of 30 to 40 with an emphasis on two mile laterals.

I'll provide a bit more information around the Delaware spacing on the next slide but for the quarter, we had five spuds and zero turn in lines as we laid down our Frac crew.

For the remainder of the year late in the second quarter.

You can see we invested $35 million in the basin in the third quarter with nearly $15 million attributed to large non op projects, we referenced in our last call.

As for the fourth quarter, we expect the capital.

To be very similar to the third quarter less the Delaware non op activity with relatively flat production and modest increase to oil company wide.

Finally in terms of 2022.

We are currently in our bid process with our service providers and begin our internal budget process. As you recall, we messaged in anticipated cost inflation for next year of approximately 5% to 10% back in our August call.

At this time, we are keeping a close eye on things.

I wanted to use.

Iterate, our view to expect some cost creep given pricing at $80 oil and $5 gas.

Moving to slide eight.

I want to spend a few minutes on our relax spacing program in Delaware.

As we mentioned in late September.

Our 2021 turn in line program was bit underwhelmed.

For a production standpoint.

Primarily as a result of sub optimal spacing that averaged 14% to 16 wells per section equivalent.

These wells were drilled in 2019 and early 2020, but.

But not completed until mid 2021 as our completion program was halted at the onset of Covid.

When we resumed activity this year.

Industry peer and non op data suggested a more relaxed spacing design was needed. An example of this you can see at the bottom right hand side of the slide.

As you can clearly see when comparing the two diagrams.

Which are on a half section equivalent basis relax spacing has.

Incredible distance between new wells I'm, sorry increased distance between two wells and also between new wells in parent wells, especially in the Wolfcamp B.

While this obviously leads to reduced wells per target zone and per section.

We do expect increased productivity and economics on a per well basis.

In terms of inventory, we began the year and a five to seven year range that would dissipate and we anticipate a slightly reduction.

Assuming the new spacing.

However at the current prices the Wolf.

The bone Springs, and Wolfcamp C offer a bit of upside to that number we will articulate all of this once we get through our annual year end inventory analysis.

Over the past month, the team has done a tremendous job optimizing field wide production.

We performed several clean outs completed several workover projects and installed esp's on a handful of wells all of which are showing very positive early time results.

While we don't expect to make up for the third quarter production shortfall.

We project these optimization projects to have our fourth quarter, Delaware production back to the levels, we expected mid year.

Shifting to the Colorado permitting slide on slide nine.

You can see our status of our permitting efforts with the state.

As Bart mentioned, we are incredibly proud of the work the various teams have done throughout the year.

That have contributed to the approval of the Spinney, Oh, GDP and some middle of the Kenosha Oh GDP.

We just heard back from the state last week and have a few more items to work through on our Kenosha application, but are hopeful to get through the completeness stage in short order and we would expect a hearing in the late first quarter timeframe next year.

Finally, our cap is still on track to be submitted and the year end timeframe.

Our team has frequently communicated with the Seo GCC Weld County officials and local communities regarding this extensive project.

And we feel real good about where we stand.

On our current DUC and approval permit count is projected to curious into the 2024 timeframe, which has proven to be an incredible asset as operators and <unk> worked through the new process.

With that I will turn it over to Scott Meyers.

Thanks, Dave as Bart mentioned, we continue to March towards our goal of reaching $1 billion in long term debt by year end in fact, we now project to surpass that target.

As you can see on slide 11, we reduced total debt by $400 million since our last earnings call 200 of which was the retirement of our convertible notes and 200 through the partial redemption of our 2024 senior notes.

Earlier. This week, we also called the remaining $100 million of our 2025 notes.

These notes had a somewhat limiting restricted payment basket and given our free cash flow outlook and plans to return significant amounts of capital to shareholder sure shareholders over the next few years, we felt it best to go ahead and call them now.

All in we expect to retire just over $650 million of debt in 2021, resulting in a year end debt balance of approximately $950 million and a year end leverage ratio of approximately <unk> five times having.

Having met and exceeded our debt goal of reaching $1 billion. We are now extremely well positioned to increase the pace of our shareholder return programs, which I'll cover more in a minimum of moment.

Earlier this week, our team amended and extended our credit facility, which you can now see matures in 2026 as opposed to 2023.

At month end, we are currently undrawn on our borrowing base of $2 4 billion, an elected commitment amount of one 5 billion.

I'm incredibly proud that PTC and its syndicate have also included the ability to add sustainably linked ESG kpis and the agreement that once agreed upon may impact various fees and our future.

We're putting our money where our mouth is when it comes to ESG and are committed to achieving the long term goal as Bart highlighted at the opening of the call.

Shifting to hedging we thought that given the recent run at all three commodity prices, we would update the market on a high level hedging philosophy at PTC.

We view the hedge portfolio as a way to protect our future cash flows from the end evitable volatility of the industry.

Generally speaking with the improvements made to our balance sheet over the past few years, we are likely to hedge no more than 50% of our current production through a combination of swaps and costless callers.

First we run a depressed pricing scenario for multiple years, ensuring that we protect our base dividend and interest payments, while maintaining a sub two times leverage ratio. Our goal is to accomplish this through our base their program consisting of swaps.

Ex the hedge committee meets on a quarterly basis and target systematic and opportunistic layers of costless callers to ensure we meet our shareholder return objectives, while leaving upside to what we view mid cycle commodity prices.

Overall, our goal is to mitigate the impact of commodity price volatility, while ensuring we maintain a best in class balance sheet, and a robust and sustainable return of capital program.

For a company of our size, we feel the hedging plays a key part in achieving these goals.

Moving to slide 12, we offer an update of our year to date progress towards our debt reduction and shareholder return goals like many of our peers increased commodity prices have greatly accelerated the pace with which we were able to pay down debt.

Beginning in 2021 with a goal of reaching 1 billion of total debt by year end 2023, we are now projected to be at $950 million by the end of 2021.

Importantly, once again, we've increased our commitment to shareholder returns, which now stands at more than $210 million up from $180 million.

As we've messaged through the year as Bart mentioned in his opening we have now reached an inflection point with our shareholder return program year to date, we returned approximately $130 million to shareholders through our base dividend and share repurchase program with.

With our debt objectives now met for 2021, and our shares trading at what we feel in an extremely attractive valuation, we expect the pace of our buyback program to significantly accelerate heading into next year.

With that said our goal is not to buy back shares our goal is to drive our share price higher and return capital to shareholders through the number of trading days remaining of the year and the existing structure of our share buyback program. We hope to continue the strong prices and hope to continue the strong price performance PDC in.

The board will give consideration to paying a special dividend if needed to accomplish this 2021 golf.

Looking forward you can see extremely impressive multiyear free cash flow outlook at variety of different price decks on slide 13.

We've run our business with a long term mid cycle view of commodity prices. Currently are three year debt reduction and shareholder return objectives are each at $1 billion.

As you see we can achieve this.

With prices that are significantly below current strip.

There are a couple of important things to note as you work your way from left to right on this slide.

The sheer magnitude of the cumulative free cash flow in each.

Scenario, we project to generate after catch.

Pre tax our free cash flow equating to nearly half of our current enterprise value at prices below the current strip, which is truly remarkable.

Our three year debt reduction target of $1 billion is unchanged in each scenario, we project to have some minor liability management initiatives over the next two years, but generally speaking that reduction will not significantly increase the $1 billion target pay down.

Finally shareholder returns in excess of free cash flow, we've just gone over where we stand year to date and our goal of more than 210 in 2021.

It's pretty simple math in order to reach our $1 billion plus goal through 2023, we need to return around $400 million in capital to shareholders in each 22, and 23 with pricing where it is today. Our goal is to aggressively exceed these targets, while also maintaining flexibility to adapt if needed PD.

Pdc's best in class assets allow for incredibly compelling free cash flow story, and our board and management teams are committed to industry, leading return of capital program.

We look forward to update in the February timeframe as we work through our formal budgeting process.

Finally, I want to thank the incredible team at PDC, we've accomplished some major milestones in 2021 and are exiting the year on a trajectory to do even more great things in 'twenty, two and beyond with that I'll turn the call over to the operator for Q&A.

As a reminder to ask a question you will need to press star one on your telephone.

Eduardo question first defense and the standby, while we compile the Q&A roster.

Your first question is from Andrew Ryan JP Morgan Your line is now open.

Yes, good morning, gentlemen, I wanted to ask you a little bit about.

You noted how you've reached an inflection point in terms of.

Cash returned to.

Investors.

And how in the fourth quarter, you are citing 80 million plus of kind.

Cash return some of that through the buyback and the special.

And so I was just wondering is this a special one time type of event just given some of the limitations on the buyback or should we be thinking about this as being something a tool that you could use in 2022 as well when you highlighted 1 billion plus dollars of free cash flow.

And next year.

Yes, I mean, we've had some great discussions with our board and the senior management team as we've gone through over the last several weeks and again, we really prefer the share buyback program, but we know there's limitations, especially when you have to put the buyback program in place during an open window. So I look for the special dividend.

To be a tool in the toolbox that we can use to top off our to make sure we achieve goals that we set out there.

For years to come but our main delivery is going to be the base.

Dividend number one, which we anticipate being able to grow over the next several years and currently with where our shares are priced and our multiples. We think the share buyback will be the main delivery tool for returning capital to shareholders, but we'll always have this other special dividend tool as well that we can use if needed if we are having.

<unk> troubles getting there to our share buyback goal, which would most likely be caused by.

Share price performance in a positive way.

Did we answer the question.

You did get it sorry.

My follow up sorry about that.

It is a need for a second.

Wanted to ask you on slide 13, Bart you've kind of given us some thoughts I know you've previously mentioned some of your thoughts on 2022.

But I wanted to ask you about the level loading of next year's program. I know you, obviously have a pretty sizable DUC wells in progress kind of backlog, but you are bringing in a second rig into the wattenberg in the spring. So I just wanted to.

We think about the 150 wells how level loaded would that be and is there any.

Thoughts on the in the Delaware, how you plan to Pacer activity next year.

Dave you want to touch on this yes.

Yes, I can.

As far as case in Delaware next year, we're going to be really consistent with what we did here. We continue to learn for the asset are blocked foreign central acreage and we will.

We will continue to move forward at the same pace.

We've learned a lot through our.

Last year's program and hopefully we could use that and continue to move forward.

And then one other thing I'll just add is with the Dutch remember for our operational teams and the flexibility they need.

I would not expect our wattenberg field to go much below a 100 125 docks, we really need that flexibility because when you are looking at having $20 to 24 wells on a pad and you want to have one or two pads away.

It really becomes that even though it sounds like a large number for as quick as the teams can complete those wells, they really need that operational flexibility with some of the challenges in the field. So yes, I think that that number will come down a little bit more but I wouldn't look forward going much south of 105.

Yes. The reason we run a higher DUC count is because we try to optimize where we frac how we frac. So that we don't have frac into <unk>.

We have it scheduled out very methodically with wildlife and water distribution in crops.

And the Wellbore integrity program. So that's why we run a little higher DUC count than maybe other basins deal.

At this time.

Great. Thanks, a lot nice results.

Thanks.

Your next question is from Gabe Daoud of Cowen. Your line is now open.

Okay.

There Gabe.

Operator, we may have lost him.

Okay. The next question we have.

Michael Cielo has Michael your line is now open.

Hey, Good morning, guys. This is jared jewelry or for Mike.

Hi, Jared.

Hey, just a couple of questions now that the spiny development has been approved I was kind of curious where that falls in line with your current drill schedule.

If it's a priority to get those wells drilled or kind of just most of the end of the inventory.

So so right now we have.

Plus or minus $160 and 125 permits in hand, and we've pretty much scheduled out our drill schedule for the next couple of years.

This spending will be added after that.

It's a pretty good locations consisting of eight wells three mile laterals. So it'll be added at the end of our drill program. Since we have methodically really thought through that and we are.

We plan on moving forward with what we already have planned.

Dave is it fair to say.

That's true with the Kenosha and the cap program as planned for the next two years.

Then.

And then the Kenosha.

And then we would move to the cap.

As everybody is thinking about where we're going to be drilling in the field. Yes, I think I think as you get out in multiple years of the caps good for seven or eight years.

I think we will start sprinkling in those projects have.

As.

As we methodically look at our drilling program and make sure it makes sense.

Two.

To drill throughout our field and throughout our acreage position to make sure that we have the infrastructure in place that are drilling rigs are moving around methodically. We're looking at the costs on all of that.

So yes.

I think methodically after a couple of years, we will start sprinkling in both the Kenosha and the cap as into our drill program.

Alright, perfect. Thanks, and then.

One follow up have you guys tried any final frac in the Wattenberg and if not do you see an application for it.

You know the way we go about our completion process is we've built efficiencies around tracking 5% to six wells at a time.

And with that we can do the wireline work on.

And we can do the Frac work on the other well and then keep alternating throughout the 5% to six well pads and that's where we've gained the most efficiency.

Our team has done a tremendous job. We're at 18 to 20 stages per day right now what we're averaging in.

Clicking right along so I don't think.

Simultaneous or really something we're considering at this time.

Perfect. That's all from me good quarter guys.

Thank you.

Your next question is from Oliver Huang of Tudor Pickering Holt Your line is open.

Good morning, everyone and thanks for taking my questions.

Just one on the returns front, just kind of given strong line of sight to reaching your absolute debt reduction targets and likely.

Difficult to buy assets accretive to your free cash flow given how robust it looks at strip in the mid to high <unk> percentage on our model. Just wondering what is keeping you all from announcing a more aggressive buyback given how cheap your stock is with free cash flow exceeding the $1 billion or so next year that Bart highlighted in the opening.

Or is it just kind of a way to keep your options and flexibility open.

Yes.

<unk>.

Take all of these things very seriously and do a lot of modeling and basically our number one goal is to reach our debt reduction target of $1 billion, which we're reaching that literally probably this month.

And at that point, we have a new grid going into place, which is going to start picking up the pace of our share buyback program, we will announce more of our goals for 2002 and 23 in February with the rollout of our budget, we want to make sure that we go through and have good robust discussions with the board.

So again, we're very comfortable with that $1 billion plus target for 'twenty, one through 'twenty three and I would expect you would think that we can increase that but before we put any new numbers out there we got to finish our process internally and make sure everybody is comfortable with it but look for the free cash flow to be going again much much more.

<unk> to shareholder returns in 2002, and 'twenty three first our debt Paydown, we are only going to have about $3 to $400 million.

Over the two years to pay down in debt, because we don't want our debt balance really going below $600 million.

Okay. Thank you that's helpful color and just a second question you all talk about the third bone spring and Wolfcamp C offering inventory outside of current prices just given the historical focus on the upper Wolfcamp and the Delaware should we expect to see more activity targeting these kind of going forward in the 2022 program or is that something.

That's more a longer dated and if youre able to maybe talk about internal corporate expectations for these two formations.

I think that as a result of current commodity pricing right now our teams are going back and looking at.

With consideration of the bone Springs, which we've tested in several different areas and has turned out very well. We also look for.

The bone spring sees.

We're currently evaluating really in our central area.

A lot gasior than our other formations right now.

But we'll continue to do that.

We continue to change around our drill schedule a little bit.

Our Delaware asset.

Based off economics and development plans.

And I think that's what we're going to be doing going forward.

Okay. Thanks for the time.

Your next question is from.

<unk> of Goldman Sachs. Your line is open.

Hi, good morning, and thank you for taking my questions.

No problem.

This up spacing in the Delaware I wanted to get your updated thoughts around the number of beds that you need to complete <unk>.

And your plans and I would say if you can provide us an updated timing when did life index.

So right now we run one full time drilling rig and Thats what were projecting out for several years, we can drill about 18 to 20 wells.

What we're currently currently averaging we continue to build efficiencies every day, both in our central and our our block four we're going to be concentrating more next year in our in our block four acreage, which is a little earlier than our central acreage.

What was the second part of the question.

For inventory.

Yes for the inventory our teams are going through their year end process and we'll be looking at that and I would say we would give you some more guidance in February I would say, it's highly likely it's going to come down a little bit from where we were with the relax spacing, but as we've mentioned we also have to consider what's going to what's our.

Program going to look like with the Wolfcamp CS in the Bronx Springs, So we just need a little bit more time on that but we'll give you more information on our February rollout.

Got it that's helpful and then on the PVA, maybe your updated thoughts around M&A and bolt ons.

The Dup spacing in Delaware that publicity was India.

So.

Specifically on the Delaware area, we continue to take a very methodical approach to.

Ads.

Delaware Basin, I would think of it more as a blocking and tackling approach.

These are the types of things, where we seek to see if we can do trades with other parties for longer laterals, we test additional zones like the Wolfcamp C.

In the central area, and the bone spring as well to add value there and if there's a few sections that are close by offsetting us those are the types of things we will look at to see if we can make.

Perhaps a proactive acquisition add some inventory for that.

The company so in general that's rough.

With sort of our approach on that.

I think when you think bigger picture, though we'll look at M&A.

Keep in mind, we have a very disciplined approach to M&A and it's a very high bar, we've talked about that a lot of us in SMT.

Third as well.

Just around the fact that when you look at something like an Src that really met that criteria is got to have the strong financial accretion.

And also brings with a lots of synergies and overlap value creation that type of.

A an approach and all the time just maintain a very strong balance sheet. So we've got a very disciplined call. It very defined and methodical plan related to that we continue to watch we continue to be thoughtful but we.

Our bar is high and what we look at on those fronts.

Got it that makes sense. Thank you.

No questions at this time and I would like to turn the call over to Bart Brookman for closing remarks.

Yes. Thank you.

Thanks, everybody, we had a small crowd today.

<unk> had a lot of other calls we were we were competing with.

Thanks for the support and.

We look forward to February when we can rollout next year's budget and what we think is a pretty terrific outlook.

This concludes today's conference call. Thank you for participating you may now disconnect.

Yeah.

Yes.

[music].

Yes.

Okay.

[music].

Yeah.

Good day, ladies and gentlemen, and welcome to PDC Energy's third 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 to ask a question. During the session you will lead the Crestar one on your telephone.

As a reminder, this call is being recorded I would now like to turn the conference over to your House Carlsberg 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 Lance Lauck, Chief Financial Officer, Scott Meyers Senior Vice President of operations, Dave Willow.

On today's call, we will reference both forward looking statements and non U S. GAAP financial measures the appropriate disclosures and reconciliations can be found on slide two in the appendix of that presentation.

With that I'll turn the call over to our CEO Bart brookman. Thank.

Thank you Kyle and Hello, everyone.

As I look back on the past 12 months to 18 months I could not be more proud of the PDC team.

Our decision, making resilience focus priorities and strategic shifts.

As we accelerate out of last year's deep compression of energy prices.

The company is extremely well positioned for success.

Today.

I hope to reinforce our corporate commitment to safety.

The environment.

Financial and operational excellence.

Delivering value to our shareholders.

Let me address some third quarter highlights.

Free cash flow for the quarter, a $268 million on a capital investment of $149 million.

<unk> of capital projects year to date for both basins are in line with expectations, including drilling completions and turn in lines.

Production for the quarter.

The $18 8 million barrels of oil equivalent.

And while we were disappointed in our recent grizzly pad production performance in Delaware.

Our teams have quickly pivoted.

With strong technical focus on production optimization.

And we have some very encouraging early results.

Current production for the company has rebounded and is now in line with expectations.

Dave will touch on this more in a moment.

Operating costs remain in check with lifting costs under $2 50 per Boe.

And G&A all in at $1 64.

We also made tremendous progress on our balance sheet as our quarter end leverage ratio stands at 0.8.

Debt levels for the company continue to decline at a rapid pace, while Pdc's total liquidity currently stands at $1 7 billion.

Now on the ESG front.

First I encourage all of you to view, our recently published sustainability report, which is available on our website.

<unk> 2021, we've made great strides as we define aggressive greenhouse gas and methane emission reduction targets for the company established.

<unk> established a zero routine flaring goal by 2025.

<unk> was quality refreshment of the board with a focus on diversity.

And formalized ESG governance at the board level.

In 2022, you can expect a strong emphasis on the continued safety of the PDC employees.

Ongoing emission reductions community and charitable giving.

Diversity at all levels of the organization and sound corporate governance.

So as we close out the year.

As I noted production has rebounded back in line with our expectations.

We anticipate a leverage ratio of <unk> five.

As we approach year end and our net debt should drop below $1 billion.

Company's free cash flow for the year is expected to exceed $900 million.

And today.

Recent discussions with our board of directors have led us to consider a special dividend if necessary to achieve this $210 million goal.

So in closing, let me give a little flavor on 2022 <unk>.

Expect modest single digit annual production growth.

While the company maintained capital discipline in both basins as.

As we enter next year debt reduction will become a lower priority, while we increase our emphasis on shareholder returns.

At the current strip, we believe free cash flow for PDC can exceed $1 billion next year.

And I assure you the company will continue to place the utmost importance on safety and ESG initiatives.

With that I'm going to turn this call over to David <unk> for an operational update.

Thanks Bart.

Before going through the third quarter results I want to take the opportunity to give thanks to our incredible teams for their tireless work throughout the year.

The focus on safety reliability and execution continues to drive strong financial results. The Bart opened with on the call.

In terms of the third quarter, our capital costs.

And costs were right in line with expectations with capital investments of just under $150 million.

L O E under $2 50 per Boe.

And pure leading all in G&A expense of $1 64 per Boe.

For production, we averaged 204000 Boe per day, and approximately 66500 barrels of oil per day.

As we mentioned in our press release last night each of these came in higher than our updated quarterly ranges, which we provided in September due to our net revenue interest clarification received in early October.

<unk> to 'twenty six.

Rittenberg wells.

Which we turned in line in late June.

In Wattenberg, we continue to run one drilling rig and one completion crew, which led to 20 spuds and 57 turn in lines for the quarter.

As a reminder, we had more Srs and MRO wells turned in line than our typical quarter due to some shifts we made in our completion program early in this year.

Look for the future turn in lines per quarter to be more in the range of 30 to 40 with an emphasis on two mile laterals.

I'll provide a bit more information around the Delaware spacing on the next slide but for the quarter, we had five spuds and zero turn in lines as we laid down our Frac crew.

For the remainder of the year late in the second quarter.

You can see we invested $35 million in the basin in the third quarter with nearly $15 million attributed to large non op projects, we referenced in our last call.

As for the fourth quarter, we expect the capital.

To be very similar to the third quarter less the Delaware non op activity with relatively flat production and modest increase to oil company wide.

Finally in terms of 2022.

At this time, we are keeping a close eye on things, but I want to iterate.

Iterate, our view to expect some cost creep given pricing at $80 oil and $5 gas.

Moving to slide eight.

I want to spend a few minutes on our relaxed spacing program in Delaware.

As we mentioned in late September.

Our 2021 turn in line program was bit underwhelmed.

For a production standpoint.

Primarily as a result of sub optimal spacing that averaged 14% to 16 wells per section equivalent.

These wells were drilled in 2019 and early 2020, but.

But not completed until mid 2021 as our completion program was halted at the onset of Covid.

When we resumed activity this year industry peer and non op data suggested a more relaxed spacing design was needed. An example of this you can see at the bottom right hand side of the slide.

As you can clearly see when comparing the two diagrams.

Which are on a half section equivalent basis relaxed spacing has.

Incredible distance between new wells I'm, sorry increased distance between two wells and also between new wells in parent wells, especially in the Wolfcamp B.

While this obviously leads to reduced wells per target zone and per section.

We do expect increased productivity and economics on a per well basis.

In terms of inventory, we began the year and a 5% to seven year range that would dissipate and we anticipate a slightly reduction.

Assuming the new spacing.

However, at the current prices the worst.

The bone Springs, and Wolfcamp C offer a bit of upside to that number we will articulate all of this once we get through our annual all year end inventory analysis.

Over the past month, the team has done a tremendous job optimizing field wide production.

We performed several clean outs completed several workover projects and installed esp's on a handful of wells all of which are showing very positive early time results.

While we don't expect to make up for the third quarter production shortfall.

We project these optimization projects to have our fourth quarter, Delaware production back to the levels, we expected mid year.

Shifting to the Colorado permitting slide on slide nine.

You can see our status of our permitting efforts with the state.

As Bart mentioned, we are incredibly proud of the work the various teams have done throughout the year.

Have contributed to the approval of the Spinney, Oh, GDP and some middle of the Kenosha Oh GDP.

Finally, our cap is still on track to be submitted and the year end timeframe. Our team has frequently communicated with the Seo GCC Weld County officials and local communities regarding this extensive project.

And we feel real good about where we stand.

On our current DUC and approval permit count is projected to carry us into the 2024 timeframe, which has proven to be an incredible asset as operators and <unk> worked through the new process.

With that I will turn it over to Scott Meyers.

Thanks, Dave as Bart mentioned, we continue to March towards our goal of reaching $1 billion in long term debt by year end in fact, we now project to surpass that target.

Earlier. This week, we also called the remaining $100 million of our 2025 notes.

These notes had a somewhat limiting restricted payment basket and given our free cash flow outlook and plans to return significant amounts of capital to shareholder shoulder shareholders over the next few years, we felt it best to go ahead and call them now.

Having met and exceeded our debt goal of reaching $1 billion. We are now extremely well positioned to increase the pace of our shareholder return programs, which I'll cover more in a moment.

Earlier this week, our team amended and extended our credit facility, which you can now see matures in 2026 as opposed to 2023.

At month end, we are currently undrawn on our borrowing base of $2 4 billion, an elected commitment amount of up one 5 billion.

I am incredibly proud that PTC and its syndicate have also included the ability to add sustainably linked ESG kpis and the agreement that once agreed upon may impact various fees and our future.

We're putting our money where our mouth is when it comes to ESG and are committed to achieving the long term goal as Bart highlighted at the opening of the call.

Shifting to hedging we thought that given the recent run in all three commodity prices, we would update the market on a high level hedging philosophy at PDC.

We view the hedge portfolio as a way to protect our future cash flows from NAND evitable volatility of the industry.

The hedge committee meets on a quarterly basis and target systematic and opportunistic layers of Costless callers to ensure we meet our shareholder return objectives, while leaving upside to what we view mid cycle commodity prices.

Overall, our goal is to mitigate the impact of commodity price volatility, while ensuring we maintain a best in class balance sheet, and a robust and sustainable return of capital program.

For a company of our size, we feel the hedging plays a key part in achieving these goals.

Beginning in 2021 with a goal of reaching $1 billion of total debt by year end 2023, we are now projected to be at $950 million by the end of 2021.

Importantly, once again, we've increased our commitment to shareholder returns, which now stands at more than $210 million up from $180 million.

With our debt objectives now met for 2021, and our shares trading at what we feel is an extremely attractive valuation we expect the pace of our buyback program to significantly accelerate heading into next year.

With that said our goal is not to buy back shares our goal is to drive our share price higher and return capital to shareholders due to the number of trading days remaining of the year and the existing structure of our share buyback program. We hope to continue the strong prices and hope to continue the strong price performance PDC and the.

The board will give consideration to paying a special dividend if needed to accomplish this 2021 golf.

Yeah.

Looking forward you can see extremely impressive multiyear free cash flow outlook at variety of different price decks on slide 13.

We run our business with a long term mid cycle view of commodity prices. Currently are three year debt reduction and shareholder return objectives are each at $1 billion.

As you see we can achieve this.

With prices that are significantly below current strip.

There are a couple of important things to note as you work your way from left to right on this slide.

The sheer magnitude of the cumulative free cash flow in each.

Scenario, we project to generate after catch.

Pre tax our free cash flow equating to nearly half of our current enterprise value at prices below the current strip, which was truly remarkable.

Finally shareholder returns in excess of free cash flow, we've just gone over where we stand year to date and our goal of more than 210 in 2021.

Pdc's best in class assets allow for an incredibly compelling free cash flow story, and our board and management teams are committed to industry, leading return of capital program.

We look forward to update in the February timeframe as we work through our formal budgeting process.

Finally, I want to thank the incredible team at PDC, we have accomplished some major milestones in 2021 and are exiting the year on a trajectory to do even more great things in 'twenty, two and beyond with that I'll turn the call over to the operator for Q&A.

Thank you reminder, to ask a question you will need to press star one on your telephone.

Alright question first.

And please standby, while we compile the Q&A roster.

Your first question is from Andrew Ryan.

J P. Morgan your line is now open.

Yes, good morning, gentlemen, I wanted to ask you a little bit about.

You noted how you've reached an inflection point in terms of <unk>.

Cash returned to <unk>.

Investors.

And how in the fourth quarter, you are citing 80 million plus of kind of cash return some of that through the buyback and the special.

A free cash flow next year.

A tool in the toolbox that we can use to top off our to make sure we achieve goals that we set out there.

For years to come but our main delivery is going to be the base.

<unk> troubles getting there to our share buyback goal, which would most likely be caused by the.

Share price performance in a positive way.

Maroon did we answer the question.

You did you did sorry.

My follow up sorry about that.

So there's a need for a second.

I wanted to ask you on slide 13, Bart you've kind of given us some thoughts I know you've previously mentioned some of your thoughts on 2022.

Think about those 150 wells how level loaded would that be and is there any.

Thoughts on.

In the Delaware, how how you plan to pace your activity next year.

Dave you want to touch on this.

Yes, I can.

As far as pace in Delaware next year, we're going to be really consistent with what we did here. We continue to learn for the asset are blocked foreign central acreage and we will continue to move forward at the same pace.

We've learned a lot through our.

Last year's program and hopefully we could use that and continue to move forward.

And then one other thing I'll just add is with the Dutch remember for our operational teams and the flexibility they need I would not expect our wattenberg field to go much below a 100 125 docks, we really need that flexibility because when you are looking at having 20% to 24 wells on a pad.

And you want to have one or two pads away.

It really becomes that even though it sounds like a large number for as quick as the team can complete those wells, they really need that operational flexibility with some of the challenges in the field. So yes, I think the debt number will come down a little bit more but I wouldn't look forward going much south of 105.

Yes. The reason we run a higher DUC count is because we try to optimize where we frac how we frac. So that we don't have frac into <unk>.

We are we.

We have it scheduled out very methodically with wildlife and water distribution in crops.

And the Wellbore integrity program. So that's why we run a little higher DUC count than maybe other basins diff.

At this time.

Great. Thanks, a lot nice results.

Thanks.

Your next question is from Gabe Daoud of.

Cowen Your line is now open.

Hi, Gabe.

They're good.

Operator, we may have lost him.

The next question we have.

CLO at Stifel. Your line is now open.

Hey, Good morning, guys. This is jared jewelry or for Mike.

Hi, Jared.

Hey, just a couple of questions.

Now that the spiny development has been approved.

Kind of curious where that falls in line with your current drill schedule.

If it's a priority to get those wells drilled or the kind of just moved to the end of the inventory.

So so right now we have.

Plus or minus $160 and 125 permits in hand.

And we've pretty much scheduled out our drill schedule for the next couple of years.

<unk> will be added after that.

It's a pretty good locations consisting of eight wells three mile laterals. So it'll be added at the end of our drill program since we have methodically really thought through that.

We plan on moving forward with what we already have planned.

David is it fair to say.

That's true with the Kenosha and the cap.

Program is planned for the next two years.

Then.

Spinney and then the Kenosha.

And then we would move to the cap.

As.

Everybody is thinking about where we're going to be drilling in the field, yes, I think I think as you get out in multiple years of the caps good for seven or eight years.

Think we will start sprinkling in those projects have.

As.

As we methodically look at our drilling program and make sure it makes sense.

Two.

So yes.

I think methodically after a couple of years, we will start sprinkling in both the Kenosha and the cap as into our drilling program.

Alright perfect. Thanks.

And then one follow up have you guys tried any final frac in the Wattenberg.

And if not.

Application for it.

Yes.

The way we go about our completion process is we've built efficiencies around tracking 5% to six wells at a time and with that we can do the wireline work on.

Well and we can do the Frac work on the other well and then keep alternating throughout the five to six well pads and that's where we've gained the most efficiency.

Our team has done a tremendous job or at 18% to 20 stages per day right now what we're averaging in.

Clicking right along so I don't think.

Simultaneously or really something we're considering at this time.

Perfect. Thanks, that's all from me good quarter guys.

Thanks Julia.

Your next question is from Oliver Huang of Tudor Pickering Holt Your line is open.

Good morning, everyone and thanks for taking my questions.

Just one on the returns front, just kind of given strong line of sight to reaching your absolute debt reduction targets.

Unlikely.

Being difficult to buy assets accretive to your free cash flow given how robust it looks.

At strip in the mid to high <unk> percentage on our model just wondering what is keeping you all from announcing a more aggressive buyback given how cheap your stock is with free cash flow exceeding the $1 billion or so next year that Bart highlighted in the opening remarks or is it just kind of a way to keep your options and flexibility open.

Yes.

We take all of these things very seriously and do a lot of modeling and.

Basically our number one goal is to reach our debt reduction target of $1 billion, which we're reaching that literally probably this month.

<unk> to shareholder returns in 'twenty, two and 'twenty three first our debt pay down we are only going to have about $3 to $400 million.

Over the two years to pay down in debt, because we don't want our debt balance really going both low $600 million.

Okay. Thank you that's helpful color and just a second question you all talk about the third bone spring and Wolfcamp C offering inventory outside of current prices just given the historical focus on the upper Wolfcamp and the Delaware should we expect to see more activity targeting these zones kind of going forward in the 2022 program or is that something.

That's more a longer dated and if youre able to maybe talk about internal corporate expectations for these two formations.

I think Thats, a result of current commodity pricing right now our teams are going back and looking at.

With consideration of the bone Springs, which we've tested in several different areas and has turned out very well. We also look for.

The bone spring sees.

We're currently evaluating really in our central area.

A lot gasior than our other formations right now.

But we'll continue to do that.

Continued to change around our drill schedule a little bit.

Our Delaware asset.

Based off economics and development plans.

And I think that's what we're going to be doing going forward.

Okay. Thanks for the time.

Your next question is from.

<unk> <unk> of Goldman Sachs. Your line is open.

Hi, good morning, and thank you for taking my questions.

No problem.

I was wondering if you had to updated thoughts around the number of beds that you need to complete them.

And your plans.

And I would say if you can provide us an updated pumps that could likely in that region.

So right now we run one full time drilling rig and Thats what were projecting out for several years, we can drill about 18 to 20 wells.

<unk>.

What was the second part of the question.

For inventory.

Yes for the inventory our teams are going through their year end process and we'll be looking at that and I would say, we'd give you. Some more guidance in February I would say, it's highly likely it's going to come down a little bit from where we were with the relax spacing, but as we've mentioned we also have to consider what's going to what's our.

Programs going to look like with the Wolfcamp CS in the Bronx Springs, So we just need a little bit more time on that but we will give you more information on our February rollout.

Got it that's helpful and then on the <unk> vein, maybe your updated thoughts around M&A and bolt on.

The downspacing in Delaware, how is that publicity evolving here.

So.

Specifically on the Delaware area, we continue to take a very methodical approach to.

Ads.

Delaware Basin I would think.

Are there more is a blocking and tackling approach.

So these are the types of things, where we seek to see if we can do trades with other parties for longer laterals, we test additional zones like the Wolfcamp C.

In the central area and the bone spring as well there's value there and if there's a few sections that are close by offsetting us those are the types of things, we'll look at to see if we can make.

Perhaps a proactive acquisition add some inventory for that for the company. So in general that's roughly sort of our approach on the night I think when you think bigger picture, though we'll look at M&A.

Keep in mind, we have a very disciplined approach to M&A and it's a very high bar, we've talked about that a lot of SMT munis as a board as well.

Around the fact that when you look at something like an src that really met that criteria.

The strong financial accretion.

And also brings with a lots of synergies and overlap value creation that type of.

That approach and in all the time just maintain a very strong balance sheet. So we've got a very disciplined call. It very defined and methodical plan related to that we continue to watch we continue to be thoughtful.

Our bar is high and what we look at on those fronts.

Got it that makes sense. Thank you.

Okay.

No questions at this time and I would like to turn the call over to Bart Brookman for closing remarks.

Yes. Thank you.

Thanks, everybody, we had a small crowd today.

Had a lot of other calls we were we were competing with.

Thanks for the support and.

We look forward to February when we can rollout next year's budget and what we think is a pretty terrific outlook.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2021 PDC Energy Inc Earnings Call

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