PDC Energy Inc (PDCE) 2021 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PDC Energy First Quarter 2021 Earnings Conference Call.

(Operator Instructions) As a reminder: This conference call is being recorded.

I would now like to turn the conference over to your host, Kyle Sourk, 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 and Senior Vice President of Operations Dave Lillo.

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.pdce.com. 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 2 and the appendix of that presentation.

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

Thank you, Kyle.

Let me begin this call with the most sincere thank you to the PDC employees, our Board of Directors, investors, banks and service providers. This has been 15 months of unprecedented risk and uncertainty, but today you will see the resiliency of the PDC story as we emerge from this crisis even stronger than we were pre pandemic. The outlook we will provide today clearly demonstrates the company's top-tier financial and operating strategy, and I believe it provides one of the most compelling investment opportunities in the E&P sector.

Now some first quarter highlights: $175 million of free cash flow on a capital spend of $125 million and production of 15.7 million barrels of oil equivalent. We achieved this free cash flow despite 3 outlier weather events, 2 in Colorado and 1 in the Permian Basin, which adversely impacted corporate production by approximately 500,000 BOE. Thank you to our operating teams for navigating these very hazardous conditions and always putting safety first.

With the abundant free cash flow, our balance sheet and shareholder returns remain our primary focus. For the quarter, we reduced net debt by approximately $230 million, maintained a 1.3x leverage ratio. And we repurchased 600,000 shares of stock. When we look back over the last 12 months: The company has generated $575 million of free cash flow, achieved a 90% free cash flow margin and reduced net debt by approximately $600 million, all terrific accomplishments and numbers accelerated by the SRC merger.

Next, our outlook for the next 3 years modeled at $55 oil and generating what I consider an extremely strong forecast. Expect the company to maintain discipline around our capital and operating plan. We plan on generating $1.8 billion to $2 billion of free cash flow by year-end 2023, which calculates to less than 50% reinvestment rate of our cash flow from operations. Over this 3-year period, we plan on reducing debt by less than -- by at least $850 million and returning more than $650 million to our shareholders through dividends and our stock repurchase program, all while generating modest production growth and maintaining an industry-leading balance sheet.

On the drilling permit side of our business, tremendous effort right now by our land and regulatory teams. We expect to submit our first OGDPs in the very near future. And by year-end, we plan to submit over 500 drilling permits to the State of Colorado in the form of OGDPs and a CAP.

Now let's talk ESG. The company's commitment and actions in this arena are very real. Some highlights, starting with the E or the environment: Through improved operating practices and midstream modifications, flaring in the Delaware is 1.2% year-to-date, a dramatic improvement from prior year levels. And PDC's corporate flaring rate is an impressive 0.2% year-to-date. This is achievable because no flaring is conducted in Colorado.

On the social side or the S, we continue to focus on equitable representation. We maintain a strong gender and diversity presence in our leadership at PDC, and we are proud. We have a completely gender-balanced staff at our corporate offices. On the governance side or the G, we have placed intense focus on refreshment at the Board level with an emphasis on diversity of thought, gender and background; and nearly 60% refreshment rate over the past 2 years.

Before I turn the call over to Dave, I just want to reiterate how pleased I am with the overall results and the outlook of the company. I believe this is a direct reflection of PDC's quality team in our premier assets.

With that, I'll turn the call over to Dave Lillo for an update on the operations.

Thanks, Bart. The incredible financial results you highlighted would not be possible without a tremendous work from our operating teams and our field staff throughout the quarter. Weather is obviously something out of our control, but I'm extremely proud of our team's ability to quickly and safely handle the adverse conditions they faced over the last couple of months.

Looking at Slide 7. All in, we invested approximately $125 million in the first quarter, which was right in line with our expectations. As you can see, we generated approximately 175,000 BOE per day and 54,000 barrels of oil per day. We've outlined the estimated weather-related impacts to these volumes. Adding back in these volumes would have resulted in first quarter volumes closer to the midpoint of our previous guided range. More specifically, the first quarter weather caused us to pull forward a frac holiday previously planned for second quarter into the first quarter. This had a couple of small impacts. First, this caused a small amount of capital to be shifted from the first to the second quarter. And secondly, a handful of new completions were slightly delayed, which we expect to lead to a solid volume step change in the second quarter but also a more pronounced step change in the third quarter.

On the bottom right of the slide, you can see a breakdown of activity in the basin. Again aside from the weather-related impact to production volumes, all operating metrics are right down the fairway in terms of expectations. Importantly, we exited the quarter with approximately 200 DUCs and nearly 300 permits in Wattenberg, which we expect to cover all of our activity in the third year (sic) [3-year] outlook Scott will provide later.

For the next few minutes, on Slide 8, I want to discuss our progress we've made from a Wattenberg permit perspective. As you can recall, we're currently focused on 2 oil and gas development plans or OGDPs named the Spinney and the Kenosha. The table at the top of Page 8 is intended to show a clear and precise update of the behind-the-scenes work the team is doing. The green boxes are annotating complete steps, yellow for steps that are in progress and blank squares for the key next steps. At the bottom of the slide, we've outlined several key definitions.

As Bart mentioned, we are in the final stages of our prep work on the Spinney OGDP and anticipate submitting our completed application in the coming weeks. Once submitted, the next step is the completeness determination and which the state will evaluate whether all forms and processes have been completed successfully and if the application is ready for staff review. As you suspect, the Kenosha OGDP, which consists of approximately 70 wells compared to the 8 with the Spinney OGDP, is a few steps behind. We continue to make progress in turning yellow boxes to green and expect to submit the completed Kenosha application in the next couple of months. It is very important to recognize that this is a 30,000-foot view of a long detailed oriented (sic) [detail-oriented] process that our team is working tremendously on. We will continue to stress that our track record of safe and responsible operations; best management practices; and collaborative relationships with our communities, Weld County and the COGCC should lead to a timely approval of future drilling permits. Look for us to provide updates to our pending applications on this slide throughout the remainder of the year.

On Slide 9, we give a similar update to our Guanella CAP. Similar to the OGDPs, we have a dedicated team assigned to the planning and execution of these projects for PDC. They have done an amazing job to keep us on track for what we hope to be a submitted permit time frame around the end of the year. As we highlighted on our year-end call, the Guanella CAP has approximately 450 locations and accounts for 3 years of future turn-in-line activity.

On the slide, we also highlight our recent accomplishments, items in process and the next milestones. As you can see, our positive and supportive meetings with local communities, regulatory bodies and offset operators have contributed to surpassing the protest deadline of our CAP boundary with no objections. We are now set for the commission hearing for a stay, and once approved, the oil and gas commission will not grant a permit to any other operator within the Guanella CAP boundary until the completion of our permit process. Meanwhile, our team continues to work on our infrastructure plans, cumulative impact analysis, execution of our surface use agreements and any other tasks and projects. While the most common questions we get relates to timing of our CAP submittal and approval, it's important to recognize the tremendous effort and significant number of key internal checkpoints in this process. Again look forward to us providing a systematic update of our progress in this format in the upcoming months.

With that, I will turn it over to Scott Meyer (sic) [Scott Meyers].

Thanks, Dave.

And as Bart mentioned, one of our highlights to the first quarter was our significant free cash flow generation of approximately $175 million, which was driven by strong realized pricing of nearly $30 per BOE. This pricing represents an improvement of more than 50% compared to the first quarter of 2020; and was driven by significant year-over-year improvement in our weighted average realized sales price for each of oil, gas and NGLs.

Along those lines, we've updated our anticipated gross realizations for each commodity to 95% to 98% for oil, 70% to 80% for natural gas and $15 NGLs. In terms of natural gas, the 70% to 80% full year range is partially due to the abnormally high realizations in the first quarter, which include February realizations well above 100% and above any level that we'd expect to receive on an ongoing basis. As Dave mentioned, we lost a fair bit of production at the same time, but we estimate that our natural gas revenues were artificially inflated somewhere to the tune of $25 million to $30 million in the quarter.

On the last slide, I'll point out our G&A, just over $2 per BOE for the quarter. In terms of absolute dollars, the first quarter G&A, including cash and noncash expenses, was approximately $33 million. This expects -- expect this to be in the neighborhood of our quarterly run rate moving forward.

Next, on Slide 12, we highlight what I would consider the other significant achievements for the quarter, our debt reduction and shareholder returns. Over the past year, we've been very clear of our intentions to focus on debt reduction. With total debt near approximately $1.4 billion, I'm proud to say that we've paid off all of the debt we inherited with the SRC transaction in just 1 year. As you can see, we paid off over $200 million of net debt in the first quarter and currently sit with an undrawn revolver and $60 million cash balance. Expect us to use the majority of our free cash flow to reduce debt as we continue to march towards our goal of $1 billion. Just expect us to reach that debt goal much sooner than previously messaged.

At this -- at that time, we will expect shareholder returns to become the primary use of our free cash flow while still reducing debt. As a reminder: We reinstated our current buyback program in late February and invested $22 million to repurchase approximately 600,000 shares and remained active in systematically buying back our stock at we -- what we view as a significant discount. As we disclosed last quarter, we expect to commence our dividend program midyear and are still targeting 1% to 2% annualized yield. Finally, in relation to our dividend, you can see that we've not only completed our base layer hedges for 2022 but have begun to layer in a few 2023 positions. With our dividend as part of PDC's future and as part of our risk mitigation strategy, look for us to extend the time frame a couple of quarters from our previous strategy. Our detailed positions can be found in the 10-Q; and appendix, on Slide 18.

Moving to our multiyear outlook. As Bart covered, we now expect to generate more than $600 million of free cash flow in each of the next 3 years or between $1.8 billion to $2 billion. This compares to an estimate of $1.3 billion to $1.5 billion back in February. It is important to note we have made no material changes to our operating plans over the next 3 years. We simply updated our pricing assumptions from $45, $2.50 and $12 to $55 oil, $2.50 gas and $15 NGLs. As you'll notice, our updated prices assumptions are still comfortably below strip prices, leaving us potential upside to generate even more meaningful free cash flow than these already lofty projections.

To note. Our cumulative free cash flow projections equate to more than our entire debt balance or more than half of our current market cap or more than 40% of our enterprise value. In a $55 world, our plan equates to a reinvestment rate of less than 50%. We are targeting debt reduction of at least $850 million over the 3-year period, with returns to shareholders more than $650 million. We feel confident in accomplishing these goals while we still have another $500 million of additional free cash flow to flex between these buckets, again at pricing below strip.

Finally, our last slide outlines our free cash flow allocation for our 2021 year. You'll note that we've enhanced several of our key targets: first, debt reduction. In February, we were targeting reducing our net debt by at least $200 million, which we accomplished in the first quarter alone. Now our plan is to reduce net debt by at least $350 million. Similarly, we had a goal of achieving a 1x leverage ratio by the end of our 3-year outlook. We now project that to happen by the end of the year.

Next, shareholder returns. In February, our goal was to return $120 million to our shareholders through share buyback and our expected quarterly dividend. Now with better pricing and more free cash flow, we are targeting more than $150 million. Finally, you will notice no change to our expected flex bucket, which is primarily used to increase the other 2 previously mentioned buckets based on market conditions and to accommodate our working capital needs.

Overall, we're incredibly proud of the entire team's ability to execute and once again excited to share our ever-improving story with the market.

With that, I'll turn the call over to the operator for Q&A.

(Operator Instructions) Your first question comes from the line of Brian Downey from Citigroup.

My first one: When I look at your updated multiyear free cash flow and shareholder returns guidance on Slide 13, I notice, with the higher price deck, your debt reduction target actually increased more than the buyback-plus-dividends bucket there. Any updated thoughts around the right long-term capital structure? And at what point does the incremental cash flow start to accrue more to the shareholder return bucket? Or I guess, asked another way, has your mental accounting of the flex free cash flow bucket changed [at all]?

Yes. I mean that's a great question. I think, number one, when you look at it right now, debt paydown is still our #1 goal, but we want to start and we have started meaningfully returning capital to shareholders. So right now as we're headed towards that $1 billion target, I would say debt paydown is our larger focus. However, once we hit that $1 billion target, I think you'll see that our return of capital to shareholders will start -- it will increase and will be greater than what we are using to pay down debt. So when we look over the 3-year period, getting us down to -- paying down $850 million of debt will get us down to approximately $750 million of debt, which seems to be a pretty comfortable number for us. And then even when you get to that number, I think the shareholder returns would continue to increase from there. So that's just the method to the madness. We just want to make sure that paying down debt gives good financial stability to the company. And so that's our #1 priority now, but we do want to begin the shareholder return process and, like I said, expect our first dividend payment sometime this summer.

Great. And then maybe one on the operations front. Can you talk through activity timing this year? It looks like -- based on your second quarter volume guidance, your 4Q year-over-year commentary, it seems to imply a pretty healthy sequential oil growth in the third quarter to make all those guidance items square. How should we think about what's driving those sequential trends? And could any of those incremental volumes slide forward into 2Q, depending on ultimate timing there?

Yes. I mean I'll start [on it]. Dave, you can go into the details. If you remember, the first place to start is just with our Delaware cadence. And our Delaware completion crew has just gotten under the way in the last 60 days, and those turn-in-lines are just starting to happen now, so I think our Delaware production really is going to be increasing pretty significantly. And we won't hit -- or peak probably for -- sometime in the third quarter. Is that fair, Dave?

Yes. Most of our spend will be in the second quarter as we run that completions crew full time in Delaware, with production really coming on. It started in the second quarter, but really ultimately most of the production will hit in the third quarter.

Yes. And then with the Wattenberg, just a quick reminder, if you go back to our 10-K slide deck that we had. We showed you some of the economics in some of our other areas. And the Plains area has some of our best economics, and those wells were the focus area of our turn-in-lines in late December and early January. So that does mute a little bit your oil growth in the first and second quarter. However, when you look at the returns and the values that we're bringing forth to the shareholders, they're phenomenal projects. So I do expect to see a big step between first and second quarter but even a bigger step between second and third quarter. And we are very comfortable with following our production, both oil production and our overall production, within those annual guidance.

Your next question comes from the line of Neal Dingmann from Truist.

It's actually Bertrand filling in. Just wanted to maybe brush upon the multiyear outlook. When you're looking at your targets, are you going to do anything where you shift maybe where you're targeting if oil prices go higher or if there's a gas price move, anything like that? Or has permitting and timing really kind of locked you in to the production mix that you're already seeing?

I mean, if you're talking about production mix, I mean, we're pretty well locked in what we're going to do for this year. As we've said before, the first quarter's is going to be our low -- our percentage of oil are in the low 30s. And when the Delaware production starts coming on, you're going to see the company-wide oil production increase and get closer to that mid-30% range. So our Delaware production, the wells we're turning on, those are all fixed. We're just going through and executing the program. And the Wattenberg program, again, we have a pretty steady cadence and with 200 DUCs out there. So those are what are going to be turned in line next, so there's not a lot of movement in the program.

Sorry. I kind of meant more for the multiyear outlook. Is there any "wiggle room 2 years out" kind of situation? Or is it still steady as she goes for the plans you have?

Yes. I mean I would say, for the multi, it's still pretty much steady as you go. I mean we're -- what we're drilling this year in the Delaware will be completed next year in the Delaware. And in the Wattenberg, I mean, all of our turn-in-lines and -- are either spuds right now or permitted. So the exact order, they might move from quarter to quarter, but if you look the next 3 years, it's going to be stuff that's permitted right now or spud. Is that fair, Dave?

Absolutely.

And then really just my last follow-up is the OGDPs and CAPs. Do you -- can you talk about the product mix between those three and maybe if that determines timing? Or it's really more of a, when you get the permits in the door, you'll go ahead and develop them.

So starting out with our permitting philosophy. We took on a three-pronged approach. So we got 2 OGDPs, 1 smaller one, 1 larger one; and then the Guanella CAP, which will be submitted later in the year. The Spinney is in our Plains. And it's 8 miles, 3-mile laterals; should be pretty gassy at that point. The Kenosha is over in our Kersey area, just south of our main focus area. That'll be a little more oilier, and we're hoping to submit that application here in a couple months. And then our big focus project is the Guanella CAP. And that's really part of our Summit area and we're really excited about that. We're on target to submit that at the end of the year.

And I do believe, if you're looking for the oil mix on the 3 different areas, that was outlined on the last Q call. Is that correct, Kyle?

Okay. Thank you.

Your next question comes from the line of Umang Choudhary from Goldman Sachs.

Can you hear me?

Yes.

Yes, we can...

My first question is really around use of free cash flow. Like you mentioned, at current strip, you will likely generate more free cash flow than $600 million this year. And in terms of allocating that cash flow, the -- reducing debt to $1 billion is your #1 priority, but you also mentioned that your shares are undervalued today, so I guess I just wanted to get your thoughts around if we actually do achieve a higher oil price. Do you see the potential to actually deploy more towards share repurchase? And how are you thinking around the use of free cash flow?

Yes. I think that's a fair question. And when we look at it -- again, we've laid out our targets here in a $55 world. I would say that we would -- as we get closer to that $1 billion of total debt, you could see a slight percentage go a little bit more to the share repurchases, but still when I look at our free cash flow, until we hit that $1 billion, more of it will go towards the debt percentage-wise compared to the return of capital to shareholders. With that said, if, strip prices, we have an extra $100 million, maybe $100 million-plus, both buckets could move north.

Great. That's super helpful. And my follow-up question is on CapEx. Just wanted to get your thoughts around your TILs for this year. You mentioned a frac holiday in first quarter. Are we still on track for the TILs which you guided in fourth quarter for 2021? And then any thoughts around inflation and its impact to your CapEx program?

Yes. So that frac holiday that I was alluding to came with that storm. We decided to shut down our frac in Wattenberg for about 5 to 6 days. We had a frac holiday scheduled in the second quarter, so we were just kind of shifting that. We probably won't do that frac holiday, but we kind of shifted some of that costs from -- the capital costs from the first quarter to the second quarter there. We're not changing our long-term forecast for the year and feel very confident that we will be able to meet those numbers. I think the second part of your question was the cost creep or cost increases that we may be seeing in the future. And I guess, to summarize that: We've seen some pressures from a few providers and contractors, which led to some small concessions. Really it's the steel, the frac and the cement that we've seen the most pressure. They can only account for about 5% to 10% of our AFEs. And through our formal bidding process earlier this year, we're pretty locked in for the second quarter. We do see maybe a modest increase in cost creep third and fourth quarter if these commodity prices do hold in, though.

(Operator Instructions) Your next question comes from the line of Michael Scialla from Stifel.

This is Billy Howell filling in for Mike. You're forecasting $15 for NGLs for 2021, and you realized $21.19 in the first quarter. Can you say where NGL prices are now and how you see the market fundamentals shaping up for the remainder of the year?

Lance, do you want to jump on that?

Yes, sure. Great question. From where we sit right now, Billy, I would say the $15 per barrel is conservative. We see 2021 being above the $15 per barrel mark. If you look at '22 and '23, based on forward projections and our type of NGL barrel, we think it's closer to the $15 per barrel. So yes, there is a bit of an uplift that's going to happen here in 2021 versus the $15.

Your next question comes from the line of [Tom Hodge] from Wells Fargo.

A solid quarter. My question relates to the CAP. I'm curious to what extent the almost direct overlap with the Mountain View CDP provided a tailwind to your pre-submission work and perhaps the pace at which the COGCC will parse through approval.

I think probably our CAP, the way it's outlined today -- and it's about 32,500 acres, gross acres, right now. I think it's probably about 2/3 of the Mountain View that SRC had -- was working on at the time and about 1/3 of our acreage. [So they] kind of fit like a glove into that. So right now it's similar. They weren't very far in the process. And we kind of pulled everything back out; and working the new oil and gas commission's new process, which we've been in constant communication with them on how we need to take steps forward. So that's about where we stand. It's going to be about 450 wells and about 25 pads, but we're making really good progress. And then we're very confident in the team we're going to be able to execute on this.

And there are no further questions over the phone line at this time. I would now like to turn the conference back to Bart Brookman for closing remarks. Sir?

Yes. No, great, yes. Thanks for hosting the call. And just thank you to everyone, on your ongoing support. And we just appreciate you joining us today for what we think is a pretty terrific story. So again thank you.

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