Q2 2019 Earnings Call

Good day.

Welcome to the <unk> second quarter 2013 earnings conference call.

All participants will be in a list.

After todays presentation, there will be an opportunity to ask questions.

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Two please note this event is being recorded.

I would now like to turn the conference over to Mr. <unk> director of Investor Relations. Please go ahead.

Thank you Shawn and good morning, everyone.

We appreciate your participation in today's call.

Unclaimed <unk> director of Investor Relations and I'm joined this morning by John Brooks.

Penn, Virginia, President and CEO .

Steve Hartman, our Chief Financial Officer, and Bad Mathis, our senior Vice President of operations and engineering.

We will discuss non-GAAP measures on the call definitions and reconciliations of those measures to the most comparable GAAP measures.

Got it in our second quarter earnings release, and the presentation posted on our website. This morning.

Prior to getting started I would like to remind you of the language in the forward looking statement section of the press release.

Which was released yesterday afternoon, our comments today will contain forward looking statements within the meaning of the federal Securities law.

These statements which include but are not limited to comments on our operational guidance. Any you 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 our most recent annual report on Form 10-K .

As they may be amended and subsequent Form 10-Q s.

Cautionary language is also included on slide one of the presentation.

We will use the presentation to go through today's discussion.

Finally, after our prepared remarks, we will answer any questions you may have.

With that.

During the call over to John .

Which one.

Let's start on page three with a quick company overview.

Penn Virginia is a pure play Eagle Ford shale, operator in Gonzales Fayette Lavaca in Dewitt counties in South Texas.

We have approximately 998500 gross acres and 84400 net acres in the Eagle Ford, which is approximately 92% held by production and 99%, which is operated by Penn Virginia.

Our estimated drilling inventory at June Thirtyth, 2019 was 510 gross or 438 net locations.

I should point out that this inventory count is only for the lower Eagle Ford.

One of our goals for our land and technical team was to continue replenishing that inventory through organic leasing small acquisitions as well as acreage swaps with adjacent operators.

We also hope to increase that count by identifying additional location inventory in the upper Eagle Ford.

In Austin chalk from our recently constructed Earth model.

Our product mix in the second quarter was 87% liquids of which 72% was oil.

Penn Virginia is oil production receives premium, Louisiana light, sweet, which we sometimes refer to as LLS.

Or magellan's East Houston also referred to as any age pricing, which enhances our adjusted EBITDAX margins.

We're currently running two rigs and one dedicated frac spread.

We are targeting year over year production growth for 2019 of 25% to 30% and we are well on our way to achieving that target based on our first half results.

Let's move on to page four and take a closer look at our solid operational and financial performance for the second quarter.

[noise] for the first half of 2019 production averaged 26278 barrels of oil equivalent per day, which was a 37% increase from the same period last year.

For the second quarter of 2019, we grew total production, 13% over the first quarter.

We continued to benefit from our close proximity to the LLS and MGH markets, which resulted in a first quarter realized oil price of $62.63.

This was approximately $2.70 higher them or 105% above the average W.T. high price for the second quarter.

Adjusted EBITDAX for the first half for the year was 168.7 million, which was 34% higher than the same period last year or $35.48 per barrel of oil equivalent.

Looking specifically at the second quarter of 2019, adjusted EBITDAX was 85 million slightly higher than the first quarter.

We recorded adjusted direct operating expenses of $11.65 per barrel of oil equivalent for the first half of 2019.

Which is a 5% improvement year over year, our growth in adjusted EBITDAX allowed us to improve our leverage ratio to 1.6 times as compared to 1.7 times at the end of 2018.

And 2.4 times at June Thirtyth of 2018.

Finally increased production lower costs and continued strong pricing drove adjusted net income per share for the first six months of the year up 8% to $4.23 per diluted share from the first half of last year.

[noise] looking at page five we believe there are five keys to Penn Virginia has continued success.

Starting with production growth with a continuous two rig program, we expect production growth of 25% to 30% this year.

And to generate free cash flow in the fourth quarter.

Looking beyond 2019, assuming we maintain a two rig program. We expect production growth will moderate as we begin to generate free cash flow.

We have a focus on cost and then this volatile commodity price environment to remain profitable you must maintain a lean cost structure. We believe Penn Virginia has one of the lowest cost structures for an old way the DMP.

We need to maintain strong margins as I mentioned previously our close proximity to the Gulf Coast allows Penn Virginia to access premium priced markets.

This includes accessing Gulf coast waterborne markets, such as Corpus Christi by truck and the LLS mph markets through multiple pipeline access points.

And ensure financial discipline, given the current and expected continued volatility in the energy commodity markets. We remain laser focused on maintaining financial discipline and a strong balance sheet.

Growing production, while drilling within cash flow is a great example of that.

And finally, the most important measure it generate free cash flow ultimately you must live within your means and we expect to generate free cash flow beginning in this years fourth quarter.

We believe this makes Penn Virginia unique proven small cap with solid production growth and a clear path to free cash flow generation in the near term.

Turning to our capital budget for 2019 that is summarized on page six.

Capital spending is currently estimated at 335 million to 355 million all of it in the Eagle Ford.

This represents a slightly lower budget then we presented in the first quarter, 97% of total spending will be directed towards drilling and completion with a balanced focused on facilities pipelines in grassroots acreage leasing.

As I mentioned previously our plan assumes continuation of a two rig program.

For the full year 2019, we expect to drill approximately 44 gross or 39 net wells.

In the second half of the year, we expect to drill 19 gross wells in area one in seven wells in the area too.

We have seen significant decreases in overall drilling and completion costs comparing the second quarter of 2019 to the second quarter of 2018, we saw a drilling and completion costs reduced by approximately 10% to 15% after adjusting for completion design differences.

We also expect to benefit from additional service cost reductions beginning in the fourth quarter.

The organization is hyper focused on lowering cost by driving efficiencies throughout the organization and working with our service providers to control costs.

Finally, I would note that we recently elected to defer capital expenditures related to our your project as we continue to focus our efforts on generating near term free cash flow.

We're still very encouraged by ongoing third party IOR projects in the most immediate vicinity of our acreage and plan to continue the necessary engineering studies to lay the groundwork for future development enhanced oil recovery on our acreage position.

Turning to the next slide as I mentioned in my brief comments on the company overview slide.

One of our goals for the pit, Virginia land and technical teams is to continue replenishing, our drilling inventory and growing it further through organic acreage leasing small acquisitions acreage swaps with adjacent operators and delineation drilling.

We call. This our focus on the ground game, we believe we can replenish inventory for a two rig program by adding between 3000 to 4000 net acres per year.

In 2017, and 18, we added 3366 and 4336 net acres respectively.

We have completed several small acreage transactions. So far this year and we're currently working on several additional transaction, which give us confidence in our ability to accomplish our target for the year.

Next let's take a quick look at our inventory over time in the graph at the bottom right. In 2017 2018, we were successful in not only replacing our net inventory of future drilling locations, but also growing it. This year, we have set a target of increasing our location inventory to 486 net drilling locations by year end 2019.

Turning to the total length of lateral feet available in our drilling inventory, which is the solid black line plotted above the net location bars, we refer to that as total net treatable lateral feet. We've also been successful in increasing that number every year.

We can increase net treatable lateral feet in several ways by adding inventory to leasing swaps acquisitions, including the acquisition of additional net interest in our existing gross inventory answered delineation drilling.

Another part of the ground game is to find areas, where we can increase lateral links, thereby increasing total treatable lateral feet.

As an example, we recently executed an acreage swap with an offset operator that added 40000 feet of net treatable lateral although net acreage was not increased yielding a positive outcome for both parties as we were both able to benefit by capturing otherwise stranded acreage.

This year, we have set a target of increasing or net treatable lateral feet inventory to 3 million net lateral feet by year end 2019.

We've also completed the first phase of constructing our Earth model as you may recall from prior discussions the Earth model combines petrophysical data seismic data well logs and other downhole information to more accurately map the subsurface geology of our acreage position.

This allows us to generate a three dimensional view of the subsurface to help optimize our lower Eagle Ford drilling program.

Identify upper Eagle Ford and potentially other targets and guide our enhanced oil recovery evaluation.

Initial results are promising indicating additional potential prospects in the upper Eagle Ford well most of our early technical efforts have been focused we look forward to keeping everyone apprised of our efforts on this important patent initiative.

Looking at page eight we believe Penn Virginia is one of the highest weighted oil companies in the NP sector with oil comprising 72% of our production stream for the second quarter.

With an overall blended quality that averages approximately 45 degree API gravity.

We are especially well positioned as the entirety of our oil production is sold into the LLS or EMEA each market as of yesterday LLS is trading at a four dollar and 58 cents premium to WT and MGH is trading at a $3.62 premium to WT.

Moving on to page nine we believe Penn Virginia has one of the lowest levels of lease operating expenses per barrel of oil equivalent in our peer group and the industry.

Especially given our heavy weighting to oil.

For the second quarter of 2019 Halloween per BOE, we was at record low for the company at $4.09 per BOE, we down 17% from the first quarter.

Given the progress in reducing our Ela, we we are updating our guidance. We now expect Halloween to average between $4 and 30 ships and $4.50 per BOE, we for 2019, which is materially lower than our previous estimate before dollars and 50 cents to $5 per Boe.

We are focused on three initiatives to keep a low we at low levels.

First we continue to implement our field wide smart gas lift interim enersystem, which optimizes volumes of lift gas.

Currently approximately 80% of our wells on gas lift, which reduces costs associated with downhole repairs and maximizes well uptime.

Second we also continue to expand our salt water disposal or has WD system currently 30% to 35% of our produced water is transported via our 22 mile system.

For every barrel of produced water, we transport on pipe, we save approximately $1.25 per barrel versus having to transport via truck to third party disposal sites.

And third we continue to focus on maximizing the competitive advantages of our contiguous acreage footprint.

This allows us to build out our as WD system more cost effectively expand a centralized gas lift livery maximize third party pipeline takeaways for oil and gas and reduce labor costs by optimizing our workforce effectiveness.

Also should be noted that substantially all oil and gas pipeline buildout costs are borne by our midstream partners.

Moving on to page Tim Unlike other basins in the US the Eagleford has many crude oil delivery points and virtually no pipeline constraints.

Good Virginia is in an enviable position geographically as well as geologically as all of our production receives premium pricing that is either LLS or mph.

We have access to enterprise products in Kindred, Morgan pipelines, which delivers directly into the Houston markets.

We also have the ability to deliver crude to the Phillips 66 refinery and Sweeney and to access other waterborne markets, including Corpus Christi via truck or pipe.

These factors are the primary reason Penn Virginia is recording crude realization of $2.70 above wtvr.

In addition, we have ample takeaway capacity with multiple marketing options for both our oil and gas for the foreseeable future.

Turning to slide 11, I'm going to walk you through the Penn Virginia value proposition over the next several slides starting with production growth to be clear, we are targeting getting to free cash flow in the fourth quarter. So while production growth is obviously important managing the timing of our drilling and completion schedule and our level of spending is critical.

That being said in 2019, we expect 25% to 30% production growth over 2018 based on our current plan.

Our guidance for third quarter of 2019 is 28420 9100 barrels of oil equivalent per day.

More importantly oil production is expected to grow by approximately 9% from the second quarter and we expect oil growth into the fourth quarter. We expect full year production of between 27420 7700 barrels of oil equivalent per day.

And this growth leads us to slide 12, where we show our adjusted direct operating expenses on a per barrel of oil equivalent basis.

In 2018, we recorded $11.99 per barrel of oil equivalent for our adjusted direct operating expenses.

This is the sum of Ela, we GPG production and AD valorem taxes and cash DNA adjusted for some one time items, which is reconciled in the appendix of the presentation.

Now that's down from $14.40 per barrel of oil equivalent in 2017.

And we continued to improve on that number by lowering our cash cost to $11.67 per Boe in the first quarter and slightly improving on that number in the second quarter to $11.64 per view it.

Over the next several slides, we compare Penn Virginia to certain of our small to midsize MP peers.

On on 13 here, we have historical data for peer companies, which was sourced from peers press releases filings in presentations and other public data.

I should know that we are I should note that we are not endorsing or confirming any of the public data of our peers in this presentation, but based on this data we had the highest adjusted EBITDAX per BOE, we ratio in our peer group during the first quarter of 2019.

Bottom line, our relentless focus on cost optimization is continuing to drive expenses down and generate strong cash margins.

Slide 14 shows our adjusted EBITDAX per BOE, we over time.

For full year 2018, we generated $37.70 per barrel of oil equivalent and match that number in the first quarter.

For the second quarter, we still generated strong margins, even though we experienced a decline in commodity prices.

We have benefited greatly from lower cost and premium pricing, which is reflected in our cash margins.

Importantly, we expect adjusted EBITDAX per BOE, we to remain at a high level for the balance of the year.

Turning to slide 15, we believe comparing our net debt to adjusted EBITDAX ratio as compared to our peer group is a good indicator of Penn Virginia's relative financial Street.

And as can be seen from the slide According to this data we compare very favorably.

On slide 16, we show the cadence of improvement in our financial position over the past couple of years.

We have successfully driven our net debt to adjusted EBITDAX ratio down from 2.6 times at year end 2017 to 1.7 times at year end 2018.

We saw further improvement in the first quarter of 2019 and maintain that strong ratio in the second quarter.

We expect the downward trend to continue with a targeted leverage ratio of approximately 1.5 times by year end 2019.

The company is committed to maintaining financial discipline and a strong balance sheet.

Turning to valuation metrics on the next slide.

Here on slide 17 within the Eagle Ford, Although we are not endorsing such numbers consensus estimates have Penn Virginia trading at one of the lowest multiples for 2019 compared to peer companies.

With the growth I laid out for you the low cost structure very strong cash margins low leverage ratio and a clear path to free cash flow during the fourth quarter and beyond we believe that Penn Virginia is an attractive investment.

On slide 18, we summarize the attributes that we believe makes been Virginia quality investment.

In this volatile commodity price environment, you need to be profitable through all cycles, you must maintain a lean and low cost structure.

And we believe in Virginia has one of the lowest cost structures for an oil weighted MP as exemplified by our second quarter 2019, adjusted direct operating expense of $11.64 per barrel of oil equivalent.

Our proximity to waterborne markets allows print virginians access premium priced markets as our crude oil prices realized 105% WCS.

Access to Corpus Christi by truck and the LLS in any h. markets by multiple pipeline access points helped to maintain our strong price and combined with.

Pure leading low operating costs, our second quarter 2019, adjusted EBITDAX was $33.53 per barrel of oil equivalent.

To survive and grow during turbulent times, you must maintain financial discipline and preserve the balance sheet and we will continue to do so.

Our second quarter 2019, net debt to LTM adjusted EBITDAX ratio was 1.6 times and we expect it to decline further.

And with the continuous to rig program, we expect production growth of 25% to 30% for 2019.

Finally in Virginia is unique in the small cap space with production growth and a clear path to generating free cash flow beginning in the fourth quarter.

And plan to continue living within our means in 2020 and beyond.

And with that Sean we can go to Q and a portion of the call.

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

To ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Okay.

Our first question today will come from Dustin Tillman with Wells Fargo. Please go ahead.

Hey, guys. Thanks for taking the call.

Can you talk about the balance sheet and.

As you think about you see.

When you start to generate additional cash flow next year, where that goes to and how you're thinking about the balance sheet longer term.

[noise].

Well, it's it's a high class problem to have.

I think we would probably.

Look to reducing debt as our as our first option.

Further strengthening the balance sheet is is one of many ways that we can return cash to our shareholders.

And does it make sense to then refinance the term loan to like some additional flexibility.

I think you know right now we're not looking to do that in the near term, but we certainly have that option as time goes by.

Dustin we can pay down part of the term loan too as well with free cash flow.

[noise].

Our next question today will come from Ray Deacon with Petro Lotus analytics. Please go ahead.

Yeah, Hey, good morning, I was wondering if you could convert that 8 million foot target of lateral to.

You are.

Your number.

Well I think it was a $3 million.

Was where we plan to be at year end.

Right.

Got it.

How many years of inventory would that be.

Well, we want to keep at least a minimum 10 year rolling.

Okay got it thank you.

As a reminder, if you would like to ask your question. Please press Star then one.

At this time and there are no further questions in the question queue and I would like to turn the conference back over to John Brooks for any closing remarks.

Thank you for your time this morning, and your interest in Penn, Virginia, We look forward to talking to you again next quarter.

Thank you. The conference has now concluded we appreciate your todays attendance and you may now disconnect.