Q1 2022 PDC Energy Inc Earnings Call
Yes.
Good day, and thank you for standing by.
Come to the PDC energy first quarter 2022 conference calls.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad.
Please be advised that today's conference call is being recorded if you require any further assistance you May press star zero without further Ado I would like to welcome your speaker for today, Mr. Bill Crawford the floor is yours.
Thank you very much and thank you everybody for joining us today.
Today, we'll be speaking will be Bart brookman, president and CEO .
Handing it over to David Willow, who is our SVP of operations and then onto Scott Meyers, our CFO before I hand, it over I do want to caution everybody to read the forward looking statements and encourage you to read our Form 10-Q that were.
While this morning with the SEC with that I'm, just going to hand, it right over to Bart.
Thank you Bill and welcome everyone.
Let me begin by thanking all of the PDC employees, a terrific quarter as we begin 2022.
Solid execution of our operating plan with continued focus on safety.
Significant efforts on the great Western integration as we plan on closing this transaction tomorrow.
We are excited for the balance of 2022 with new assets being added to Pdc's operating base, which provides additional scale and production and strengthens nearly all of our key financial metrics.
This will fuel.
Top tier financial free cash flow levels for the company as well as shareholder returns and I believe all of this makes PDC one of the most compelling investment stories in the E&P sector.
Now.
Some first quarter highlights.
Production of $17 9 million barrels of oil equivalent exceeding our expectations.
Exceptionally strong production performance from our Delaware team.
Free cash flow.
$319 million on a capital spend of $220 million.
Execution in both basins was extremely efficient and most importantly safe.
Shareholder returns for the quarter of $110 million in the fourth.
From a fixed dividends and share repurchases.
And for the quarter the company purchased approximately one 3 million shares of stock.
From a debt perspective, we closed the quarter with a leverage ratio of four <unk>.
$170 million cash on hand, Scott Meyers will provide more details on the company's financial strength.
All right.
Let's now switch gears and talk about ESG tremendous progress.
Progress and continued social efforts on the company's part.
I am pleased to announce we are on target.
Slightly better for our 2025 emission reduction goals.
For 2021.
An approximate 12% reduction in greenhouse gas emissions and approximately 17% reduction in methane.
The great Western team has done a terrific job and emissions management. This acquisition will be accretive to our emission reduction targets.
And I'd like to remind everyone. These goals have been added to our corporate performance metrics and compensation system.
On the social side of ESG PDC continues its robust giving program supporting over 80 charities in our operating areas and recently, adding Ukrainian humanitarian efforts.
This amounts to approximately $3 $5 million of giving on an annual basis.
And PTC doesn't just give dollars our employees give their time as well.
<unk> more than 4000 hours and community service each year.
Well done.
Now a few closing thoughts for me.
We are extremely pleased we entered the current election cycle and Colorado with no anti industry valid initiatives.
First time in a decade.
You can expect the company's blended budget.
This merger to be finalized shortly after closing tomorrow and announced in early June .
The outlook for the company in the second half of 2022 and future years continues to look incredibly strong.
With 500 Ducks permits in hand, and the highest confidence in the approval of the Kenosha Oh GDP in early June .
Pdc's turn in line schedule of the highest quality projects is mapped by our operating team well into 2024.
Last the.
The scale achieved through the great Western merger cupboard, coupled with the company's multi year top tier inventory gives us the ability to deliver exceptional financial performance and shareholder returns for many many years to come.
With that I'll turn this call over to Dave <unk> for an operational update.
Thanks Bart.
Moving to the operational highlights on slide six I want to first take the opportunity to thank our teams for another incredible quarter.
Coming up on four years without a lost time injury in both assets, we're very proud of our safety record and appreciate the team's focus on safety first.
We had a great start to the year as our teams once again executed on drilling and completion programs.
Unlike last year with significant weather related issues, we had a generally mild winter, which allowed for continued efficiency improvements in our operations and strong financial results as Bart opened up with.
We spent $220 million in the first quarter, which was slightly higher than what we guided to for two reasons.
First the efficiency gains we drove increased the number of completions and new spuds. This accounted for approximately half of the increase.
Other half was due to increases in service costs.
Service costs were higher than originally anticipated due to increases in raw materials, such as steel and.
And pass through items, such as labor diesel profit and chemicals.
We ran a competitive bid process fourth quarter last year when prices were about $80 and we're expecting some inflation to occur when we gave our February update.
However, the significant.
<unk> increase in crude above $100, especially in March drove pass through costs higher than anticipated.
The teams are consistently innovating to find ways to minimize this impact we will have a more robust update later this month, when we rollout our formal guidance.
For production, we averaged a 199000 Boe.
For which 33% was oil and was at the top of our guidance range.
As the teams brought on 49 wells for the quarter.
Wattenberg produced 171000 Boe.
Which was down slightly from the fourth quarter due to the mix of S. R LS and <unk> turned in line.
The Delaware produced 28000 Boe.
Only down from fourth quarter due to no turn in lines in the second half of the year.
And this year's completion program, bringing on wells late in the quarter.
In Wattenberg, we ran one rig and one completion crew all quarter and added a second rig in March.
Our focus continues to be on efficiency and leading the industry from a drilling and completion standpoint by consistently drilling XR else spud to spud and four days and averaging over 20 stages a day on the completion side.
In Delaware, We began our annual completion program early January and ran one drilling rig.
We are seeing strong results from the completion program as we brought on nine wells for the quarter. This.
This year. The completion program is generally on pads with eight to 10 wells equivalent per undeveloped section with relaxed spacing.
The first six wells turned in line, where on the old monarch pad with the three year laterals, and three <unk>, which I talked about last quarter.
We are proud of the team's use of technology to drill these types of wells.
So far the wells have been online for about two months and the initial results are right on expectations.
And we continue to look for other ways on our acreage to apply this technology to organically expand our inventory.
In Delaware. The team is also testing the second bone Springs.
Which was recently completed and is in its initial flowback, we look forward to updating investors on this and other organic inventory expansion opportunities in the coming months.
In addition, the Delaware team produced at a high end of our expectations due to the continued workover and ESP installation program.
This higher than expected chemicals drove L O E to a higher than expected level.
The revenue from the increased production at these prices are very economic.
Moving to slide seven.
As Bart mentioned we.
We will come out with a formal operating guidance in a couple of weeks, but we are generally maintaining our previously released outlook for production and capital.
We raised the floor of our capital range to $950 million from $900 million due to the early may great Western close date.
As well as service cost inflation that I previously mentioned.
For the second quarter, we expect to spend between 250 and 300 million.
This incorporates about two months of completion activity in the Delaware as we finish up this year's capital program from the completion side.
And two months of great Western activity as they currently have one frac crew and two drilling rigs currently operating.
In total we will be running four rigs and one Delaware.
Four rigs in Wattenberg and one in Delaware.
As we end the second quarter, we will provide a more detailed development pace in the upcoming weeks.
We expect production to be 250000 to 260000 Boe per day after we close.
And that is the second half run rate.
For the month of April for Great Western will not be accounted in our books.
So our second quarter production will be slightly below that at 235000 to 245000 Boe per day.
Great Western is currently producing about 52000 Boe per day with several wells coming online.
In addition, we expect to see a decent ramp up in Delaware production with new and Q1 turn in lines.
Moving to slide eight.
Since our last earnings call, we have continued to make progress with our permits.
First we are proud to announce for the first election cycle in nearly a decade.
We do not expect any challenge challenging ballot initiatives March 25th was the deadline to submit an initiative to Colorado Secretary of state and no anti industry ballots were filed.
Second as we discussed in conjunction with the great Western acquisition, we are seeing the Seo GCC approve subsurface drilling permits to form twos as expected.
When a valid.
Approved surface permit exists the form to a.
This was demonstrated with the April 20th approval of great Western <unk> 10, well ocho pads in Adams County.
We continued to make progress on our Kenosha, 70, well, Oh, GDP and expect to have that approved in the coming weeks.
<unk> staff has adjusted our hearing date for administrative reasons. So please note that we are now scheduled for June eight.
We will expect a director's recommendation a few weeks ahead of that.
Also we are expecting the great westerns grow GDP.
We'll be on the docket later in June therefore by the end of the quarter. We expect the next 100 wells.
Or one five rig years to be approved.
Doug Llanelli cap, which was submitted in December to the GCC.
Continues to move along we hosted a joint pre <unk>.
<unk> and Seo GCC meeting to review our submission in April and have received comments back from Weld County, and the GCC staff.
We are in the process of reviewing the comments and are incorporating.
Them into our development planning as we work towards the completeness determination.
Lastly, the table at the bottom of slide eight shows our current inventory of permits in hand, and the pro forma permits with blue italicized font.
To call out a few highlights Pdc's has 123 <unk> hundred 80, <unk> fully permitted locations.
Our acquisition inventory consists of Weld County, where we have a 102 locations with nine approved permits.
Adams County, we have 224 identified locations made up of 23 docks 115 fully approved permits in this area, including the 10 recently received on the Ocho pad.
There are also 86 locations with a form to a.
Which is the surface permit of all future wells facilities and equipment.
These.
Locations similar to all other locate Colorado locations are now only in the need of a form to our subsurface permit to be fully permitted.
Again.
Look for us to provide updates throughout the year as we continue to make progress.
Now I will hand, it over to Scott to discuss our finance.
Thanks, Dave as Bart and Dave mentioned, we started the year.
Operationally strong and that resulted in significant cash flows we produced at the top end of the guidance range and enjoy a enjoyed a pre hedged realized price of just under $50 per Boe.
While operating expenses came in just over $8 per Boe.
LOE was seasonally high as Dave mentioned and production taxes ran about 7% of pre hedged revenue.
Our G&A came in as expected at under $2 per Boe.
We continually improve our overhead efficiencies.
This allowed us to generate $539 million and adjusted cash flow from operations after taking into account the spending $220 million in Capex, we generated $319 million and free cash flow.
The next few lines on the chart show how this free cash flow fits into our recently announced shareholder return framework.
On an annual basis, we're committed to returning 60 plus percent of our post base dividend to our shareholders.
The form of a share repurchase program and a special dividend if needed.
We paid 25 per share quarterly dividend.
By the way we plan to raise to 35 after closing the great Western acquisition.
After subtracting the $25 million from the $3 19, and then multiplying that by 60% we are committing that $176 million will be returned to shareholders.
We were able to buy back one 3 million shares for $85 million in the first quarter. It should be noted that we were blacked out of the market in February due to using shares as consideration for the acquisition.
We have a <unk> one plan in place and our system systematically buying each day and make it take advantage of open windows to buy additional shares.
Look for our Q2 shareholder returns to increase above Q1.
The next slide provides an update on our balance sheet. We ended the quarter with a leverage ratio of four and $171 million of cash on hand.
This number has increased as we head into the great Western closed tomorrow, we will draw on the credit facility to pay the cash portion of the acquisition as well as to pay off their RV al and senior secured notes, we anticipate the free cash flow from the combined companies will easily allow us to pay down the credit facility throughout the year while.
Still honoring our commitment to shareholders.
We just went through our spring redetermination on our credit facility.
And increased our borrowing base to $3 billion.
But left the elected commitment at $1 5 billion.
The reserves supporting our increased borrowing base did not and cruise include the great western assets, which demonstrates the value of our assets.
We have a good layer of hedges on our books to protect the debt Paydown and will inherit additional hedges from great. Western we will provide an update pro forma hedge position soon after close.
As we've discussed this is a highly accretive transaction and we look forward to having a successful integration over the coming months.
Slide 12 is a duplicate of our outlook. We provided at the end of February and all trends are holding strong and we have our annual meeting on may 25th along with our regularly scheduled board meeting to approve our new budget. We will then provide formal guidance to the investment community. This will be ahead.
With a fairly busy investor calendar in June as we participate in several conferences and look forward to seeing many of you there with that I'll turn it over to the operator for Q&A.
Thank you Sir as a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question you May press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Bertrand Jones with <unk>. Please ask your question.
Hey, good morning, guys.
Just wondering if you could start off by kind of diving into the catch up payment on the buyback. It sounds like you were blocked out for part of the quarter could you maybe just.
Blaine to thinking of why you maybe wouldn't Frontloaded and then and then just ease off towards the end of the quarter and why is that you kind of are.
Do we get towards the end of the quarter.
Yes, I mean, we have a <unk> five plan in place, where we systematically buy shares throughout the months, we can only opportunistically buy shares after earning cycles and after a 10-K that window is actually pretty short.
So basically we are buying under our plan through the month of January .
When the deal became more likely we had to shut down the program for the shares were being used so we were blocked out for plus or minus 30 days. So we are now systematically buying again and our new grid that we kind of talked about before thats targeting the $600 million of total share buybacks that we anticipate to have by year.
And so in the second quarter, we anticipate having an open window. So I think we'll do some ketchup shares then we will progress nicely along the plan again, we wanted to kind of dollar cost average this throughout the year and but if we need to have a little bit of a catch up period, we'll do a little bit of that in second quarter.
That makes sense does that imply that the special dividend not a integral part of the program. It's more just that you can't get to it you would use.
Well I would say this our plan is not to buy $900 million worth of stock back in the year, we're going to limit the stock buyback to around that 600 $625 million for the annual so at the end of the year. If when you put the formula and again, we will be updating people in the next months, but clearly you could see on the.
On slide.
Slide 12, using an old price deck of $75.
Our thought was we'd have about $1 3 billion of free cash flow now, obviously with prices higher significantly higher than that but at the end of the year. If the 60% formula ends up being $900 million, we bought back 600, and the special dividend would be the difference to make it up so I would say right now it is highly likely we would have a special dividend.
At year end as long as prices continue but the share buybacks are first and foremost and main way that we're going to do most of this 60% plus.
It makes perfect sense and then the other question is.
With the lack of ballot measures could you just maybe talk about why that happened you did push from the governor is it maybe a vacuum as the rules get ironed out DCC or is there anything else you are seeing.
Well, great question and I could go on and on about this but I think it's a whole bunch of factors I think it's the industry's efforts.
Communicating with.
With the voters in Colorado, I do think the governor has come out a year and a half ago with statements against anti oil and gas valid initiatives.
I think.
In all honesty, I think energy prices and voter perspective on energy independence on obviously, a perception by most voters that.
There is a shortfall of oil right now.
Growing concerned about natural gas so I think all of those come into.
Big picture of.
Of the opposition, maybe not being as Organised.
Funded b.
And looking at the voters in Colorado, who at the end of the day I think are much more supportive of the oil and gas industry in the state so.
I rambled, a little bit on it but.
That's kind of my perspective on it.
Thanks, guys.
Your next question comes from the line of human salary of Goldman Sachs. Please ask your question.
Hi, good morning, and thank you for taking my questions.
My first question My first question was around.
People interact with the great Western Beamon as it got closer to the closing of the transaction.
Would love any updated thoughts around synergies and timing in terms of menu will expect and expect to achieve them.
Let's start.
I mean, clearly from a let's say G&A perspective, you traditionally have always have some transactions that are in transition costs, but when you look from a G&A perspective I think.
We will be adding some bodies, but it's not to the same same level you don't need the same back office support same software's. So there is clearly some synergies there and I would guess, Dave would say when they're integrating the operations and consistent youre going to find some synergies in that area as well is that fair day absolutely.
Working towards.
Now pushing the skater system towards our systems, combining all the different best management practices that we have and what they have together.
Teams have worked tremendously a lot of hours on working together and I want to thank the great Western team and our team for really collaborating really well. So we're very confident we're going to be able to.
Put this team effort together and move right down the path that we are right now without missing a beat.
Great appreciate the thoughts there and then given your efficiencies that exceeding the expectations you had more spuds and completions in Q1, how would you think about the cadence our development in DJ Basin and Delaware.
<unk> to kind of meet your capital budget.
Given the strong commodity price says, we do like the efficiency guide it through.
Two highest spending a higher production for the year.
Yes.
Clearly you saw that we closed the gap a little bit our capital range of that 952, 1 billion and again as Dave said Theres two parts to that one is just some of the cost pressures, we're seeing but now also.
We needed to have some room, whether the deal is going to close in early may or it was going to close in late May early June and clearly we think it's going to close tomorrow, because all lights. There. So it leads to a little bit higher number as well, but when you look at it we're trying to factor all that in our cadence we feel very confident in the second half of the year cadence is going to be that three rig.
<unk>.
The Wattenberg and let's call it one and a half frac.
Frac crews and that's going to be probably the same cadence as it is for 'twenty, three plus or minus we're still working out those details again, we're just getting ready we're ready to start this integration, we really can't start until we close we've done the planning on our side and understand what they're doing right now, but we'll be kicking that off over the next couple.
Weeks, but we have a really good idea that we can grow the company that zero to 5% with these three rigs and one five plus or minus completion crews and again in the Delaware. The Delaware is going to have one fulltime crew and.
Halftime or.
Four.
Two fifths of our completion crew in 'twenty. Three is also expect those to be pretty consistent levels. When we roll out the budget next month and real consistent levels in Delaware with our one rig running in.
Partial completion crew.
I will turn on 15% to 20 wells as we have for the last couple of years long.
Among this is barb, we're pushing hard we're working with Dave.
We obviously took the floor of our range up into the 950 <unk> got the $1 billion of the cap and we're pushing hard and really striving to try to try to be very close to that range.
Is that fair Scott, Yes, that's fair okay.
Great. Thank you thanks for taking my questions.
Your next question comes from the line of Charles Meade with John Johnson Rice your.
Your line is open.
Good morning, Bart and team this is Austin filling in for Charles.
Hi, Charles.
Congratulations on the G&A hearings of Kenosha, Mr followed shortly by the Bro hearing.
You stated in the press release that you submitted several additional <unk>.
How do you expect to over the next coming months.
Is it because the permanent process has gotten easier.
Or is it because you all have learned about the permitting process from the great Western team.
And finally is when all the cap still on the schedule for approval late this year slash early next year.
Yes, I think.
As we outlined our.
<unk>.
Permit strategy early in the year, we started out with the spending which was an eight well pad.
Very well and we learned from that the Kenosha. The 70, well pad was a little more difficult 70, well as opposed to the eight that we first started with.
We're moving right on through there we have all our best management practices in place we've been working really close with the Seo GCC and.
Like I said in my script, hopefully G&A as we'll have approval there.
The granola cap continues to move forward, that's a much larger.
Comprehensive area plan, incorporating 450 wells, we've submitted that it was over 2000 pages and were collaborating both with the county and the <unk> at this time.
Going back and forth on where we picked our locations how we're going to drill our wells and we continue to collaborate to.
To turn that back around incorporating some of the things that they've asked us to and other things will engineered but so we're very confident with that we have the team has.
ROE package, which is coming from great Western we're very confident that that's going to be pushed right on through it's in an industrial area in the north of our acreage.
And very confident with that the team also at the same time is working on several other Oh GDP the Whitney the Bubba trip.
Our southern plains areas and.
We just continue to make great strides on all of those as well so as far as permit flow, we're very confident that we're going to continue.
To be able to see that and keep our program revenue.
Yes, Charles this is Bart just a little bit on this rig.
Really really.
Proud and pleased with the PDC regulatory team and how.
How they have navigated the new permitting process and absolutely I see it as.
Us streamline.
Streamlining learning working with the commission and getting just getting better and better at this.
Understanding all the boxes, we need to check in at the same time, great Western brings some tremendous regulatory skills and the good news for everybody on the call is the planned I think PTC will end up being even better. So both both groups I think bring really strong skill sets in this area.
Thank you I appreciate the color and as a follow up.
You hit on this topic earlier, but regarding the share buyback program.
If there were no catch up quarter, and you arent blocked out.
Should we be thinking of a quarterly buyback pace of about $150 million total with about $120 million.
Programmatic via the <unk> one.
Yeah, I think plus or minus 150 million.
$1 million a quarter is probably a good base plan.
The number of shares we buy does move a little bit with pricing, but I think plus or minus 50, a month as is what we're targeting in some months were a little lighter than that some are a little heavier that but I think that's a fair analysis.
That's all thank you very much thank you.
Yes.
Our next question comes from the line of Oliver one of Peter.
Tudor Pickering your.
Your line is open.
Good morning, everyone and thanks for taking my questions.
Thank you Oliver.
On the returns front, just given the commodity uplift that we've seen versus what's underwritten in your initial two year program, which is obviously driving incremental absolute free cash flow, you're going to be kind of back off any inflationary pressures that you all seen but as we move through the year and closer to year end trying to get a sense for what you all are looking at in order to.
Make the determination on whether to exercise the plus portion of that 60% plus formula which would presumably come in the form of a potential large larger special dividend just kind of looking at how strong the balance sheet looks today.
Yeah no.
I think Thats a fair question I mean, I would say as we're sitting here now when we say the 60% plus I wouldn't necessarily see the pluses going to be that large because we did put.
A decent amount of debt on the books.
When we're rolling out these plants, we want something that works in all different frameworks.
I would sit here and say the plus would be highly <unk>.
More highly likely in the 'twenty three time frame after we get our debt balance in the revolver pay down.
Bit but.
So I would say when youre doing your modeling I would keep it in that low 60% range for this year and look for us to be able to do more in 'twenty three.
Yes.
Perfect and for my follow up just quickly on the services side as we're all aware of material costs labor inflation, all tracking higher just wanted to get a better sense for what PDC has in place contractually or duration wise to kind of help mitigate moves towards spot rates for rigs and crews is it kind of head into the back half of this year and also 2002.
'twenty three.
Okay.
So obviously as I stated on my call.
We're seeing pressures from most providers.
And.
Most of these led to some successions.
We're probably seeing from what we came out with our last guidance, probably another 5% increase as we continue to put our plan together.
We will have a formal cadence and a real good costs, probably hearing about two or three weeks as we put out our budget for the year.
Awesome, Thanks for the time.
Thank you Paul.
There are no further questions at this time I will now turn the call over back to Mr. Bill <unk>.
Bill Crawford.
Well. Thank you very much all for joining today and I appreciate everybody's attention and we'll look forward to updating the market at the end of the month as we said and look forward to getting on the road and talking to many of you in June . Thank you very much.
This concludes today's conference call. Thank you again for joining you may now disconnect.
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