Ranger Oil Corp (ROCC) 2020 Q4 法說會逐字稿

Good morning, and welcome to the Penn Virginia Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Clay Jeansonne, Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. We appreciate your participation in today's call. I'm Clay Jeansonne, Director of Investor Relations, and I'm joined this morning by Darrin Henke, Penn Virginia's President and CEO; Rusty Kelley, our Senior Vice President and CFO; Julia Gwaltney, our Senior Vice President, development.

We will discuss non-GAAP measures on the call. Definitions and reconciliation of these measures to the most comparable GAAP measures are provided in our fourth quarter earnings press release and presentation posted to our website.

Prior to getting started, I'd like to remind you of the language in the forward-looking statements section of the press release, which was issued yesterday afternoon. Our comments today 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, are subject to a number of risks and uncertainties that could cause actual results to 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 in subsequent Form 10-Q. Cautionary language is also included on Slide 1 of the presentation, which is posted on our website. Finally, after our prepared remarks, we will answer any questions you may have.

With that, I'll turn the call over to Darrin.

Thank you, Clay. 2020 was clearly a challenging period for the entire global community, and the oil and gas industry was no exception. As a result of the unprecedented decline in oil prices, Penn Virginia took swift and decisive actions to protect our business.

We believe our operational and financial results for the fourth quarter and 2020 speak clearly to the success of these actions. At the core of our strategy and decision-making in 2020 was the continued emphasis on cost and capital efficiency, cash-on-cash returns, strengthening our balance sheet and maximizing the value of our asset base.

We are proud of our exemplary LOE and adjusted cash G&A expenses of $4.22 per BOE and $2.71 per BOE, respectively. On the capital front, we were able to drill our wells cheaper and faster in 2020. And on a performance basis, the cumulative production from the wells we spud in 2020 is already exceeding D&M's pre-drill forecast by 12%.

Penn Virginia is a company focused on returns. In 2020, that was especially important due to the collapse in oil prices. Given the uncertainty around the duration of the low oil price environment, we immediately ceased all drilling operations and curtailed our production to preserve the value of our PDP base as well as to protect our balance sheet. We opportunistically secured and utilize storage assets to minimize our production curtailment, providing the optionality to sell those barrels at a much higher price.

Starting in the fourth quarter of 2019, the company successfully set a new milestone. That being free cash flow generation. I am pleased to report we continued that trend for every quarter of 2020, with the fourth quarter being the fifth consecutive quarter.

For the full year of 2020, we generated over $50 million in free cash flow, and we expect that trend to continue. Another major accomplishment was the protection and strengthening of our balance sheet. We did this in 2 steps. First, we utilized our free cash flow to reduce debt by more than $50 million. Then on November 3, we announced the Juniper transaction, which was designed to further strengthen our balance sheet. We subsequently closed the transaction on January 15 of this year.

With the free cash flow Penn Virginia generated, coupled with the Juniper transaction, we reduced net debt by more than $180 million from year-end 2019 levels. These proactive steps improved our liquidity position by approximately 163% and extended our debt maturities to 2024.

Finally, our robust hedging program created significant value for our shareholders in 2020. We realized $93 million in cash from our hedging program alone. After subtracting cost to produce those barrels, we generated adjusted annual EBITDAX of $29.89 per BOE or 70% of what WTI averaged for the full year, an accomplishment we are quite proud of.

Of course, none of our success would have been possible without our employees' continued hard work and dedication. Their tireless efforts during these challenging times were materially responsible for our strong results, and I sincerely appreciate everything they do on a daily basis to drive our success.

Turning our attention to 2021. Our strategic focus will be on 4 areas. First, our primary objective will be to increase cash-on-cash returns. We will endeavor to maximize the value of every barrel of oil and cubic feet of gas we produce. In addition, we will continue to scrutinize every capital project to ensure they meet our robust risk-adjusted expectations.

As delineated on Slide 10 of the earnings presentation, the top 250 locations in our 500 well D&M inventory are expected to average an internal rate of return exceeding 40% and a $50 per barrel flat oil price environment.

Secondly, we will always be committed to continuous improvement. Given this commitment, we will relentlessly look for opportunities to improve our operational performance through additional cost control measures and continued pursuit of operational excellence.

We also recognize the importance of ESG. Last year, we created an ESG task force comprised of management representatives from across the company, who are charged with the responsibility to monitor adherence to our ESG standards and formally communicate findings on an ongoing basis to our Board of Directors. Certain initial ESG data will be posted to our website in the near future.

Additionally, we are linking our compensation to achieving short-term and long-term performance metrics, thus coupling management's compensation to shareholder returns.

Finally, we are committed to the generation of free cash flow and plan to use that cash to reduce debt further. Maintaining low leverage and substantial liquidity are key to continued success for Penn Virginia. We believe these shareholder aligned initiatives make Penn Virginia a strong investment opportunity uniquely positioned among our peer group.

And with that, Chad, we can go to the Q&A portion of the call.

(Operator Instructions) And the first question will be from Dun McIntosh with Johnson Rice.

Yes, sir. I was -- first question is around 2021 program and really the decision to stay at 2 rigs. When we last spoke on the third quarter call, you had just got that -- those 2 rigs up and running and oil was $40 then. And so we're kind of thinking about maybe 1, maybe 2, but what were some of the ultimate drivers that really drove you to stick with that 2-rig program?

I think, first and foremost, really understanding our inventory. We did a deep dive last fall. And on Page 10, we talk about our inventory and very strong results going forward. The next 2 years, we project our wells will average 40% rate of return at a $50 flat oil price environment. And you couple that with the way commodity prices have strengthened, to us, it makes sense to go ahead at this time to plan on continuing to run those -- to run the 2 rigs for 2021.

I will tell you that we're going to pay close attention, obviously, to the -- or to the service cost environment. And if we see significant inflation or anything that concerns us around being able to deliver the returns we're talking about, then we would consider maybe slowing down the program if that made sense. So we're -- first and foremost, we're a returns-driven company, cash-on-cash returns, and that's what it's all about.

All right. Great. And I noticed Slide 10, and a lot of good color there. I guess, maybe going a little bit of a different direction. And I'd like to get your thoughts on future M&A opportunities. Obviously, the Juniper deal did a lot for the balance sheet and you're in pretty solid footings looking forward to even if prices do pull back decently from here, not that we have any reason to believe that they would. But it sets you up for the long term. And just what kind of hurdles would a deal have to clear to get the green light from you all as we kind of think about future M&A opportunities?

When we look at our inventory and see the depth and the returns that we can make, M&A is not as critical to us as maybe it might have been in the past. We absolutely will look for opportunities to -- accretive acquisition opportunities. But first and foremost, we're going to focus on developing our inventory and delivering excellent results day in, day out, focusing on continuous improvement, how to drive the performance of our wells, drill them cheaper and quicker.

So in general, M&A, we'll look at opportunities. They need to be accretive. We worked really hard to -- last year to improve our balance sheet, and we absolutely intend to keep a strong balance sheet going forward with any M&A deal that we'll consider.

And the next question will come from Neal Dingmann with Truist.

Maybe my question, Darrin, maybe for you or Rusty, just obviously, as Dun said in very evident post-Juniper and kind of the free cash that you guys are kicking off, just how much improved the balance, not only the balance sheet but just on the go forward.

So with that obviously recognizable now, I'm just wondering, how do you think about -- I see you mentioned the 2-rig program, but I'm wondering, how do you think about sort of your hedging program at all going forward? I guess kind of 2 questions, how do you think about the hedging? And is there sort of at a certain target for leverage, given the sort of improvement that you've already seen now in the balance sheet?

Thanks, Neal. This is Rusty. When we think about hedging, that's obviously, you saw our performance last year, that's a priority tool that we use in order to protect the balance sheet. You'll notice that the next 6 months, we've got a significant downside protection, but we've done it with collars to allow ourselves material upside. When we look at future hedging, as we spend capital, we hope to protect those returns. Again, as Darrin was mentioning, cash-on-cash returns is our chief priority. And so we'll be using a hedging tool to make sure that we protect those returns as we -- and the balance sheet as a whole as we invest capital.

With regard to leverage level, I think we'd like to make sure that we're targeting at least kind of the 1 to 1.5x leverage, though, in an environment like that, we'd like to make sure that the excess free cash flow puts us toward the lower end of that range in environments like this. But we also look at other metrics such as total PDP coverage on a collateral coverage basis, which you'll see in our presentation we highlighted well -- is well over 2x at this point.

No, it makes total sense. And then maybe, Darrin, a question for you or Julia. Just on, it seems like even with now the 2-rig plan, there's -- not only just recently, but now you guys even probably since Darrin has been there notable efficiencies on both the rig and frac side. Could you talk a little bit maybe more color on if you're continuing to see that? And how we should think about maybe if you have the full-time rigs and frac, maybe how many we should start thinking about sort of annually?

Yes. So I'll touch on the efficiencies we're seeing. It -- continuous improvements is very near and dear to me. And every week, we measure small increments of our business looking for improvement. And we've set a number of records even in the last couple of weeks relative to how quick we've drilled certain aspects of our wells. And we're focusing on increasing our pad size and what we've seen often in our industry. When you drill more wells on a pad, you tend to learn how to drill those wells quicker and more efficiently.

And so this year, you'll see us transition to a little bit larger pad size than what we've done in the past. And we're already seeing that pay off in the drill times as we speak ongoing.

On the completion side, we're constantly turning the knobs relative to our frac design, the stage architecture, the intensity per cluster. We're constantly studying our results as well as our peers immediately around us and trying to quickly adopt what others are doing that are really beneficial to the well results as well as come up with our own ideas and test those out statistically.

And the next question will come from Jeff Robertson with Water Tower Research.

A question on some of the data you have on Slide 10. Darrin, you mentioned that the wells for 2020 have outperformed D&M by about 12%. Is there something you can point to that you think is leading to that performance?

I think the way we've completed some of the wells, it's always hard to tease out the results, the improvement and where it's coming from, but certainly feel like some of the tweaks we've made to the completion designs are improving well results.

And I also think we're doing a better job as a company, understanding how to come back into areas that have been drilled previously where there's parent wells and figure out how to drill the child wells and stimulate those child wells and improve performance relative to the parent wells. So it's a constantly evolving process, but those are a few things that I can point to.

And a follow-on that, you talk about the locations that average 40% plus IRR. Can you talk about the sensitivity of the other locations in the inventory and how they respond if -- with oil prices, let's say, if well over $60 versus $50 -- how much -- what that 250 number might grow to?

Yes. That's -- so D&M today has about 500 locations in our inventory. And half of those, we see at an average greater than 40% rate of return in $50 flat environment. At today's current pace of development, that's about 5.5, 6 years of drilling inventory for those 250 locations. And what I think we'll absolutely see going forward regardless of commodity prices, we will learn things technically on our asset that will help us improve those remaining 250 locations and bring them into the drilling inventory with a similar type rate of return at this oil price.

So I -- that's the way I see the future going. And we'll figure out how to make those other 250 commercial regardless of the commodity price generally.

If I can add one more. Your map on Slide 10 shows a lot of different lateral lengths. Across your acreage position, is there a sweet spot for the length of lateral that generates the most efficient use of capital?

I'll speak in general relative to lateral length, because we see this across our entire position that the longer the laterals that we can drill and efficiently complete, the more capital-efficient we are and the greater cash-on-cash returns that we deliver.

And so regardless of where you are in our position, we strive to drill the longest laterals that we can. That being said, we have parent wells that we have to plan around. And at times, we'll drill some wells, plus or minus 5,000-foot laterals. But you'll -- if you look at the D&M type curve average in the upper left-hand corner, over the next 2 years, we're predicting we'll average about an 8,300-foot lateral length.

And we have time for one more question, and the question will come from Nicholas Pope with Seaport Global.

I just wanted to clarify one item here. Just the comment on a prepayment of CapEx for 2021. Where does that -- where did that flow through in the financial statements? Have we already seen that $21 million out of the current cash position? Is that -- am I reading that right?

That's right. This is Rusty. So if you look into the 10-K, you'll see about $14 million of that appear in working capital as prepayments that incorporates what has been paid for, but not yet accrued. In addition, there were some early payments that we made for crude capital in the fourth quarter, but that, from a cash perspective, would normally be paid in the first quarter just due to invoice timing, and we prepaid and early paid both of those locking in some discounts on oilfield service prices. So on an unadjusted basis, you'd have free cash flow on normalized of about $24 million. We had a change in net debt, free cash flow of about $3 million, but we wanted to give that color.

Got it. That makes sense. And I also wanted to clarify on the redemption of these -- the preferred stock and the common units with the Juniper transaction. Where exactly does that stand? I see in the table, you got the -- assuming the full dilution, 37.8 million shares outstanding, where are we in that process? Or is that complete?

So with regard to -- there's no formal process. Those are effectively up private shares in an [up see] corporation format. So those -- you can think about those on an as converted basis as if they're common shares from an economic perspective. But there's no process or time frame of actually exercising and converting those. So you can think of those economically as common shares.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Darrin Henke for any closing remarks.

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

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.