PDC Energy Inc (PDCE) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the PDC Energy First Quarter 2022 Conference Call. (Operator Instructions) Please be advised that today's conference call is being recorded. (Operator Instructions)

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 Lillo, who is our SVP of Operations; and then on to 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 filed 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 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 provide additional scale in 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 of $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, $110 million in the form of fixed dividends and share repurchases. And for the quarter, the company purchased approximately 1.3 million shares of stock.

From a debt perspective, we closed the quarter with a leverage ratio of 0.4 and $170 million cash on hand. Scott Meyers will provide more details on the company's financial strength in a moment.

Let's now switch gears and talk about ESG. Tremendous progress and continued social efforts on the company's part. I am pleased to announce we are on target or 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 in 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 humanitary efforts. This amounts to approximately $3.5 million of giving on an annual basis. And PDC doesn't just give dollars. Our employees give their time as well, volunteering more than 4,000 hours in community service each year, a job well done.

Now a few closing thoughts for me. We are extremely pleased. We entered the current election cycle in Colorado with no anti-industry ballot initiatives, the first time in a decade. You can expect the company's blended budget post 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 DUCs and permits in hand and the highest confidence in the approval of the Kenosha OGDP 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 scale achieved through the Great Western merger, coupled with the company's multiyear 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 Lillo for an operational update.

Thanks, Bart. Before moving to the operational highlights on Slide 6, I want to first take the opportunity to thank our teams for another incredible quarter, and coming up on 4 years without a lost time injury in both assets. We are 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 2 reasons. First, the efficiency gains we drove increased the number of completions and new spuds. This accounted for approximately half of the increase. The 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 pass-through items such as labor, diesel, proppant 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 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 roll out our formal guidance.

For production, we averaged 199,000 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 171,000 BOE, which was down slightly from the first quarter due to the mix of SRLs and XRLs turned in line.

The Delaware produced 28,000 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 1 rig and 1 completion crew all quarter and added a second rig in March. Focus continues to be on efficiency and leading the industry from a drilling and completion standpoint by consistently drilling XRLs spud to spud in 4 days and averaging over 20 stages a day on the completion side.

In Delaware, we began our annual completion program early January and ran 1 drilling rig. We have seen strong results from the completion program as we brought on 9 wells for the quarter. This year, the completion program is generally on pads with 8 to 10 wells equivalent per undeveloped section with relaxed spacing. The first 6 wells turned in line were on the [Old Monarch] pad with the 3 U-Laterals and 3 SRLs, 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 2 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 and higher-than-expected chemicals drove LOE to a higher-than-expected level, but the revenue from the increased production at these prices are very economic.

Moving to Slide 7. As Bart mentioned, 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 million and $300 million. This incorporates about 2 months of completion activity in the Delaware as we finish up this year's capital program from the completion side and 2 months of -- Great Western activity as they currently have 1 frac crew and 2 drilling rigs currently operating. In total, we will be running 4 rigs and 1 Delaware, 4 rigs in Wattenberg and 1 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 250,000 to 260,000 BOE per day after we close, and that is the second half run rate. 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 235,000 to 245,000 BOE per day. Great Western is currently producing about 52,000 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 8. 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 challenging ballot initiatives. March 25 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 COGCC approved subsurface drilling permits, the Form 2s as expected. When a valid approved surface permit exists the Form 2A. This was demonstrated with the April 20 approval of Great Western's 10 well Ocho pads in Adams County.

We continue to make progress on our Kenosha 70-well OGDP and expect to have that approved in the coming weeks. The COGCC staff has adjusted our hearing date for administrative reasons. So please note that we are now scheduled for June 8. We will expect a Director's recommendation a few weeks ahead of that. Also, we are expecting the Great Western's Broe OGDP will be on the docket later in June. Therefore, by the end of the quarter, we expect the next 100 wells or 1.5 rig years to be approved.

The Guanella CAP, which was submitted in December to the OGCC continues to move along. We hosted a joint pre-WOGLA and COGCC meeting to review our submission in April and have received comments back from Weld County and the COGCC 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 8 shows our current inventory of permits in hand and the pro forma permits with blue italicized font.

To call out a few highlights. PDC has 123 DUCs, 180 fully permitted locations. Our acquisition inventory consists of Weld County, where we have 102 locations with 9 approved permits. Adams County, we have 224 identified locations made up of 23 DUCs, 115 fully approved permits in this area, including the 10 recently received on the Ocho pad. There are also 86 locations with a Form 2A, which is the surface permit of all future wells, facilities and equipment. These locations similar to all other Colorado locations, are now only in the need of a Form 2 or 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 enjoyed a prehedged 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 as we continually improve our overhead efficiencies. This allowed us to generate $539 million in adjusted cash flow from operations. After taking into account the spending $220 million in CapEx, we generated $319 million in 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 are committed to returning 60-plus percent of our post base dividend to our shareholders in the form of a share repurchase program and a special dividend if needed. We paid $0.25 per share quarterly dividend, which, by the way, we plan to raise the $0.35 after closing the Great Western acquisition.

After subtracting the $25 million from the $319 million and then multiplying that by 60%, we are committing that $176 million will be returned to shareholders. We were able to buy back 1.3 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 10b5-1 plan in place and are systematically buying each day and make it -- take advantage of open windows to buy additional shares. So 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 $0.4 million and $171 million of cash on hand. This number has increased as we head into the Great Western close tomorrow. We will draw on the credit facility to pay the cash portion of the acquisition as well as to pay off their RBL 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 commitments at $1.5 billion. The reserve supporting our increased borrowing base did not 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. We have our annual meeting on May 25, along with the regularly scheduled board meeting to approve our new budget. We will then provide formal guidance to the investment community. This will be ahead of 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.

(Operator Instructions) Our first question comes from the line of Bertrand Donnes with Truist.

Just wondering if we 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 explain the thinking on why you maybe wouldn't front load it and then just ease off towards the end of the quarter and why instead you kind of are doing it towards the end of the quarter?

Yes. I mean we have the 10b5 plan in place where we systematically buy shares throughout the month. We can only opportunistically buy shares after earnings cycles. And after a 10-K, that window is actually pretty short.

So basically, we were buying under our plan through the month of January, when the deal became more likely, we had to shut down the program because shares were being used. So we were blocked out for plus or minus 30 days. So we are now systematically buying again in our new grid that we kind of talked about before that's targeting this $600 million of total share buybacks that we anticipate to have by year-end.

So in the second quarter, we anticipate having an open window. So I think we'll do some catch-up shares then, and we'll progress nicely along the plan. Again, we want to kind of dollar cost averages throughout the year. And -- but if we need to have a little bit of catch-up period, we'll do a little bit of that in the second quarter.

That makes sense. Does that imply that the special dividend is not an integral part of the program? It's more of just that if 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 million, $625 million for the annual. So at the end of the year, when you put the formula in, and again, we'll be updating people in the next months. But clearly, you could see on slide -- or 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, it's significantly higher than that. But at the end of the year, if the 60% formula ends up being $900 million and we bought back $600 million and the special dividend would be the difference to make it up.

So I would say right now, it's highly likely we would have a special dividend at year-end as long as prices continue, but the share buybacks are first and foremost in main way that we're going to do most of this 60% plus.

Makes perfect sense. And then the other question is, with the lack of ballot measures, could you just maybe talk about why that happened? Is it a push from the governor? Is it maybe a vacuum as the rules get ironed out with the COGCC or is there anything else you're seeing?

Well, great question. 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 the voters in Colorado. I do think the governor has come out 1.5 years ago with statements against anti-oil and gas ballot initiatives. I think -- in all honesty, I think energy prices and voter perspective on energy independence and obviously, a perception by most voters that there's a shortfall of oil right now and growing concern about natural gas.

So I think all of those come into a big picture of the opposition maybe not being as organized: a, 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.

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

My first question was around, as you interact with the Great Western team and as you get closer to the closing of the transaction, would love any updated thoughts around synergies and timing in terms of when you expect -- expect to achieve them?

Yes. I mean, clearly, from a say, G&A perspective, you traditionally have always have some transactions or transition costs. But when you look from a G&A perspective, I think we will be adding some bodies, but it's not the same level. You don't need the same back-office support, same softwares. So there's clearly some synergies there. And I would guess, Dave would say when they're integrating the operations and consistent, you're going to find some synergies in that area as well. Is that fair, Dave?

Absolutely. Working towards right now pushing the SCADA system towards our systems combining all the different best management practices that we have and what they have together. The 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 your thoughts there. And then given your efficiency and exceeding expectations. You had more spuds and completions in Q1. How are you thinking about the cadence of development in DJ Basin and Delaware, is the thought process to kind of meet your capital budget? Or given the strong commodity prices, you would do like the efficiencies carried through to higher spending and higher production for the year?

Yes. I mean, clearly, you saw that we closed the gap a little bit in our capital range of that $950 million to $1 billion. And again, as Dave said, there's 2 parts to that. One is just some of the cost pressures we're seeing. But now also, we need to have some room whether the deal is going to close in early May or it was going to close in late May or early June. And clearly, we think it's going to close tomorrow, it's all lights there. So that 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 the second half of the year cadence is going to be that 3 rigs in the Wattenberg and let's call it, 1.5 frac crews. And that's going to be probably the same cadence it is for 23 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 it 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 of weeks. But we have a really good idea that we can grow the company at 0% to 5% with these 3 rigs and 1.5 plus or minus completion crews. And again, the Delaware, the Delaware is going to have 1 full-time crew and halftime or for 2/5 of a completion crew in '23 as well. So expect those to be pretty consistent levels when we roll out the budget next month.

Yes. And real consistent levels in Delaware with our 1 rig running and our partial completion crew, we'll turn on 15 to 20 wells as we have the last couple of years.

Umang, this is Bart. We're pushing hard. We're working with Dave. We obviously took the floor of our range up into the $950 million. We've got the $1 billion at the cap, and we're pushing hard and really striving to try to be very close to that range. Is that fair, Scott?

Yes. It's fair.

Your next question comes from the line of Charles Meade with Johnson Rice.

This is Austin filling in for Charles. Congratulations on the June 8 hearing for Kenosha, which is followed shortly by the Broe hearing. And you stated in the press release that you submitted several additional OGDPs or you expect to over the next coming months? Is this because the permitting process has gotten easier? And or it's because you all have learned about the permitting process from the Great Western team. And finally, is the Guanella CAP still on the schedule for approval late this year/early next year?

Yes. I think as we outlined our permit strategy early in the year, we started out with the Spinney, which was an 8-well pad, and that went very well, and we learned from that.

The Kenosha, the 70-well pad was a little more difficult, 70 wells opposed to the 8 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 COGCC. And like I said in my script, hopefully, June 8, we'll have approval there.

The Guanella CAP continues to move forward. That's a much larger comprehensive area plan, incorporating 450 wells. We've submitted that. It was over 2,000 pages, and we're collaborating both with the county and the COGCC 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 turn that back around incorporating some of the things that they've asked us to and other things will engineer out. So we're very confident with that.

We have -- the teams have the Broe 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 OGDPs, the Whitney, (inaudible) in 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 running.

Yes, Charles, this is Bart. Just a little bit on this. We're really, really proud and pleased with the PDC regulatory team and how they have navigated the new permitting process. And absolutely, I see it as us streamlining, learning, working with the commission and just getting better and better at this in understanding all the boxes we need to check. And at the same time, Great Western brings some tremendous regulatory skills. And the good news for everybody on the call is the blend, I think PDC will end up being even better. So both groups, I think, bring really strong skill sets in this area.

I appreciate the color. I have a follow-up. You hit on this topic earlier, but regarding the share buyback program, if there were no catch-up quarter and you weren't blocked out, should we be thinking of a quarterly buyback pace of about $150 million in total with about $120 million programmatic via the 10b5-1?

Yes. I think plus or minus $150 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 million a month is what we're targeting and some months, we're a little lighter than that, so were a little heavier than that. But I think it's a fair analysis.

Our next question comes from the line of Oliver Huang of Tudor, Pickering.

On the returns front, just given the commodity uplift that we've seen versus what's underwritten in your initial 2-year program, which is obviously driving incremental absolute free cash flow, even if you kind of back off any inflationary pressures that you've 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 that 60%-plus formula, which would presumably come in the form of a potential larger special dividend? Just kind of looking at how strong the balance sheet looks today.

Yes. No, I think it's a fair question. I mean I would say, as we're sitting here now, when we say the 60% plus, I wouldn't necessarily say the plus is going to be that large because we did put a decent amount of debt on the books. When we're rolling out these plans, we want something that works in all different frameworks. I would sit here and say the plus would be highly -- a lot more highly likely in the '23 time frame after we get our debt balance and the revolver pay down a bit. But -- so I would say when you're doing your modeling, I'd keep it in that low 60% range for this year and look for us to be able to do more in '23.

Perfect. And for my follow-up, just quickly on the services side, as we're all aware of material cost, 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 crude as it kind of head into the back half of this year and also 2023.

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'll have a formal cadence and real good costs, probably here in about 2, 3 weeks as we put out our budget for the year.

There are no further questions at this time. I will now turn the call over back to Mr. Bill Crawford.

Well, thank you very much all for joining today, and 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.