What: Despite posting a greater-than-expected loss per share during its earnings release, shares of PDC Energy (PDCE) gained 11% today from raising its guidance for the year as well as getting a boost from the energy industry in general, which gained close to 3% today.
So what: Well, there's something we haven't seen in a while. Unlike many other companies in the exploration and production space that continue to cut capital expenditures, PDC Energy noted in its most recent earnings release that it likes what it is seeing enough to increase capital expenditures. The reason it thinks this is a prudent move is that so far it has been able to exceed its expectations for operations that it laid out in its analyst-day presentation several months ago. One metric of note is that the time from spudding a well to the day it is released has declined from 14 to 10 days, and the operational efficiencies it has gained is giving it a little more flexibility in terms of spending.
Even at today's oil prices, management has upped its year-end guidance for cash flow from $355 million-$380 million to $400 million-$420 million, and it has subsequently uppped its spending from $473 million to $520 million-550 million. Luckily for PDC Energy, it has a pretty strong hedging portfolio all the way out through 2016 that will allow it to get much better than market rate for its oil and provide it with cash to keep operations humming along until hopefully we see a price recovery.
Now what: Most investments in exploration and production companies are speculative bets on oil prices today. Heck, even a small change in the price for a barrel of West Texas Intermediate can swing an oil producer by a couple of percentage points nowadays. However, some of these exploration and production companies are more speculative than others based on their current finances.
PDC is actually in a better situation than most in this regard, with a debt-to-capital ratio today at 28%. If the company can take advantage of the current price cushioning from its hedging portfolio over the next year or so and build up production and pay down debt, it could be in a pretty good position to profit when the market for oil companies takes a turn for the better.
