Image source: The Motley Fool.
Penn Virginia Corporation (ROCC)
Q4Â 2019 Earnings Call
Feb 28, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Penn Virginia Corporation Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.
At this time, I'd like to turn the conference over to Clay Jeansonne, Director of Investor Relations. Please go ahead.
Clay Jeansonne -- Director of Investor Relations
Thank you. and good morning, everyone. We appreciate your participation in today's call. I'm joined this morning by John Brooks, Penn Virginia's President and CEO; Rusty Kelley, our Senior Vice President and CFO; and Ben Mathis, our Senior Vice President of Operations and Engineering.
Prior to getting started, I'd like to remind you we will be discussing non-GAAP measures on this call. Definitions and reconciliations of these measures to the most comparable GAAP measure are provided in our fourth quarter and full year 2019 earnings release issued yesterday afternoon, and related presentation posted on our website this morning.
I would also point you to the language in the forward-looking statements section of the press release. 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 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. Cautionary language is also included on Page 1 of the presentation, which we will use to go through today's discussion.
Also during this call, we will also be referencing third-party data and consensus estimates. Please note that we are not endorsing or confirming any of these consensus estimates or public data of our peers in this presentation. Finally, after our prepared remarks, we will answer any questions you may have.
With that, I will turn the call over to John.
John A. Brooks -- President, Chief Executive Officer and Director
Thanks, Clay. First of all, I want to congratulate the entire Penn Virginia team and express my gratitude for their relentless efforts to deliver a great fourth quarter highlighted, first of all, by generating free cash flow, record low operating expenses, peer-leading margins and continued improvement in our leverage ratio. Importantly, we also added in some timely hedges that along with our robust operational results, we believe, uniquely positions Penn Virginia in our industry. The strength of our balance sheet, our strong hedge positions and the short-term nature of our drilling and completion contracts enable us to respond to a sustained lower commodity price environment as we maintain our focus on exercising capital discipline.
So, let's start on Page 3 with why we believe Penn Virginia is solidly positioned for continued success and provides a compelling investment opportunity. We are heavily weighted to oil as evidenced by our fourth quarter 2019 production mix, which was 76% oil, and we expect that trend to continue throughout 2020. Our successful efforts to continue lowering operating costs, coupled with premium product pricing given our strategic location near the Gulf Coast are driving industry leading margins. And through our targeted development efforts, we are planning for moderate oil production growth while maintaining low leverage levels. All of this results in a business that can generate free cash flow, which we did in the fourth quarter and expect the same for full year 2020 assuming $50 per barrel WTI pricing.
Turning to Page 4, Penn Virginia is a pure-play Eagle Ford shale operator in Gonzales, Fayette, Lavaca and DeWitt counties in South Texas. At the end of 2019, we had approximately 100,200 gross acres and 87,400 net acres, of which 99% was operated by the Company and 91% was held by production. We entered 2020 with an estimated drilling inventory of 500 gross or 441 net locations. A continued key focus of our land and technical teams is the ongoing replenishment of our drilling inventory through organic acreage leasing and small acquisitions, as well as acreage swaps with adjacent operators. I'll also want to point out that this inventory count currently only reflects the lower Eagle Ford. Utilizing our recently constructed earth model, we are also evaluating opportunities to further increase our inventory by identifying additional drilling locations in the Upper Eagle Ford and Austin Chalk.
Our product mix in the fourth quarter of 2019 was 90% liquids, and of this, 76% was oil and we proceed -- we received premium Louisiana Light Sweet, also known as LLS, or Magellan East Houston, also referred to as MEH or WTI Houston pricing, which further enhances our adjusted EBITDAX margins. We are targeting mid-single-digit year-over-year oil production growth for 2020. Finally, during 2019, we continued to create value through the drill bit. We replaced over 200% of our production and grew total proved reserves 133 million barrels of oil equivalent, a year-over-year increase of 8% and almost 170% higher than the end of 2016.
The composition of our reserve base at the end of 2019 was 74% crude oil, 15% NGLs and 11% natural gas, with 42% classified as proved developing producing using SEC pricing of $55.67 WTI for oil and $2.58 for natural gas, the Company had total SEC PV-10 proved developed reserves valued at just over $1 billion in value and total proved reserves valued at $1.6 billion. Given this environment, I'd also like to point out that we are approximately 76% hedged for 2020 expected oil volumes based on the midpoint of guidance, with some additional hedges extending into 2021.
So let's move on to Page 5 and take a closer look at our solid operational and financial performance during this past year. I want to thank again everyone on the Penn Virginia team for all of their hard work and dedication in 2019. The result was significant accomplishments across the business and I would like to spend some time this morning highlighting some of those achievements. For the fourth quarter of 2019, we grew total production from the third quarter to 29,314 barrels of oil equivalent per day, which included oil production of 22,211 barrels of oil per day. Importantly, on both of these measures, we exceeded the midpoint of our guidance. Full year 2019 total production averaged 27,730 barrels of oil equivalent per day, which was a 27% increase from 2018. Oil was 74% of total production in 2019, growing 23% to an average of 20,418 barrels of oil per day.
On the operations front, we continue to make significant operational and efficiency improvements. From 2018 to 2019, we reduced our average cycle time by 21 days, going from 87 days to 66 days, a 24% improvement over 2018. Adjusted EBITDAX for full year 2019 increased 18% to $352.2 million or $34.80 per barrel of oil equivalent. Looking more specifically at the fourth quarter of 2019, adjusted EBITDAX increased 11% from the third quarter to $96.4 million or $35.74 per barrel of oil equivalent. Our growth in adjusted EBITDAX in 2019 allowed us to improve our leverage ratio to less than 1.6 times at the end of 2019 and we look forward to further improvement in 2020.
Moving on to Page 6, as I discussed earlier, there are several key attributes that we believe make Penn Virginia an extremely attractive investment. And here on Page 6, we reiterate those attributes, and I'll now spend some time discussing each of these in more detail.
Looking at Page 7, we believe Penn Virginia is one of the highest weighted oil companies in the E&P sector with an acreage position located in the heart of the oil window of the Eagle Ford. Since 2017, we have grown oil volumes by approximately 170%. For 2020, we expect that growth to moderate and we are projecting oil growth of between 2% and 9% year-over-year.
Turning to Page 8. Unlike other basins in the US, the Eagle Ford has many crude oil delivery points and ample takeaway capacity. Penn Virginia has access to Enterprise Products and Kinder Morgan pipelines, which deliver directly into the Houston markets. We also have the ability to deliver crude to the Philips 66 Refinery in Sweeny and to access other waterborne markets, including Corpus Christi via truck or truck to pipe. Penn Virginia remains in an enviable position of geographically and geologically, as our production receives premium pricing that is either LLS or MEH. As of yesterday, both LLS and MEH traded at more than $3 per barrel premium to West Texas Intermediate.
Moving to Page 9. In addition to receiving premium product pricing, driving our high margins has been an unwavering focus on lowering expenses across the business and maintaining a lean cost structure. This can be seen on Page 9, where we show a 21% decrease in annual adjusted direct operating expenses from $14.40 per barrel of oil equivalent in 2017 to $11.36 per barrel of oil equivalent in 2019. As a reminder, adjusted direct operating expense is the sum of lease operating expenses, GPT, production and ad valorem taxes and cash G&A adjusted for some one-time items and this is reconciled in the appendix of the presentation.
Looking specifically at LOE, for the full year of 2019, our LOE was $4.26 per barrel of oil equivalent, down 6% from the prior year and 26% from 2017. I am pleased to report that for the fourth quarter of 2019, we achieved a record low level for LOE of $3.65 per barrel of oil equivalent. Now, we are focused on three initiatives to continue to drive down LOE. First, we are continuing to implement our fieldwide smart gas lift intermittent system, which optimizes volumes of lift gas utilized to maximize oil production for volumes of injected lift gas. Currently, approximately 85% of our wells are on gas lift, which reduces costs associated with down-hole repairs and maximizes well uptime.
Secondly, we continue to expand our saltwater disposal or SWD system. Currently, between 10% to 40% of our produced water is transported via our approximately 30-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. And third, we continue to focus on maximizing the competitive advantages of our contiguous acreage footprint. This allows us to build out our SWD system more cost effectively, expand centralized gas lift delivery, maximize third-party pipeline takeaways for oil and gas and reduce labor cost by optimizing our workforce effectiveness. Also, it should be noted that substantially all oil and gas pipeline build out costs are borne by our midstream partners.
Our adjusted cash general and administrative expenses were reduced to $2.04 per barrel of oil equivalent in 2019, which was 41% lower than in 2017. Similar to LOE, we saw a strong fourth quarter in 2019 with adjusted cash G&A expenses coming in at $1.61 per barrel of oil equivalent.
Moving to Page 10. As part of Penn Virginia's commitment to continuous improvement, we are dedicated to lowering capital spending by driving efficiencies throughout the organization as well as working closely with our service providers, while also maintaining a safe work environment. The two charts on the top of Page 10 clearly illustrates the improved operational execution of our technical team over the past few years. The charts are showing our average drilling feet per day from spud to rig release for the last three years. With our two-string well design, our average effective drilling feet per day improved 58% from 2017 to 2019. Likewise with our three-string well design, our average effective drilling feet per day also improved, down 18% since 2017.
The chart on the bottom of Page 10 shows a significant improvement over the past few years in cycle time, which is the number of days from spud of the first well on the pad to flowback of the wells. With the efficiency improvements made in our drilling and completion operations between 2018 and 2019, we have been able to shorten our operational cycle times and accelerate the start of production by an average of three weeks per pad. Finally in 2019, we continued to work safely. Our overall safety performance measured by total recordable incident rate or TRIR came in at 0.27, which is one of the best years we've had in our history. To be clear, working safely is a top priority and ingrained in our core values. And as such, I congratulate everyone on the Penn Virginia team on this important achievement.
On Page 11, we show our peer-leading adjusted EBITDAX per barrel of oil equivalent, which increased by 29% from 2017 to $34.80 per barrel of oil equivalent for the full year 2019. It is crucial to keep in mind that at the end of the day, we are in the business of producing and selling our oil and gas for a margin. And on this chart, we also show by year, the average West Texas Intermediate price and Penn Virginia's adjusted EBITDAX as a percent of West Texas Intermediate driving the steady improvement in this metric from 53% in 2017 to 58% for 2018% and 61% in 2019. It has been our close to focus on ensuring we operate with a lean cost structure. We have been successful and continuing to increase our margin even as commodity prices declined.
Looking specifically at the fourth quarter of 2019, we posted adjusted EBITDAX of $35.74 per barrel of oil equivalent. This equates to a 63% margin to the average West Texas Intermediate price for the period. We expect adjusted EBITDAX per barrel of oil equivalent to remain at a high level for 2020.
On Page 12, we provide some highlights concerning our 2020 capital spending plan. The plan is designed to provide moderate production growth and more importantly, additional free cash flow generation for the full year. Drilling and completion capital for 2020 is estimated at between $265 million and $295 million, which reflects a 15% to 20% reduction compared to 2019 for comparable development pace. Contributing to our lower expected spending level will be further drilling and completion efficiency gains and a continued low service cost environment. All of our 2020 capital will be focused on the Eagle Ford with 95% directed toward drilling and completion and the balance focused on facilities, pipelines and grassroots acreage leasing. We expect that approximately 55% of our capital could be spent in the first half of the year.
This year we are targeting to spud 47 gross or approximately 40 net wells. This compares to 41 net wells spud in 2019. For 2020, we expect to turn in line 50 gross or approximately 43 net wells. Last year, we turned in line a similar number of net wells. Looking specifically at the first quarter, we expect to spud 12 gross or approximately 10 net wells and turn in line 10 gross or approximately eight net wells.
I will now hand it off to Rusty to discuss our capital structure and peer comparisons as well as provide additional specifics on our 2020 financial outlook and current hedge position.
Russell T. Kelley -- Senior Vice President, Chief Financial Officer and Treasurer
Thanks, John. Good morning, everyone. On Page 13, we show the cadence of improvement in Penn Virginia's financial position. The Company has successfully driven it's net debt to adjusted EBITDAX ratio down from 2.2 times at year-end 2017 to less than 1.6 times at the end of 2019.
On Page 14, over the next several slides, we're going to compare Penn Virginia to a large group of E&P companies that range from large cap to small cap. Turning to Page 14, we show oil as a percent of total production reported for the third quarter of 2019. Penn Virginia is one of the highest weighted companies in the E&P sector, with oil comprising 76% of our production stream for the fourth quarter. This was a 3% increase from what we have shown on this slide in the third quarter.
Moving on to Page 15, we look at how consensus estimates rank Penn Virginia as compared to the same group of companies when it comes to profit after operating cash cost. Based on this data, we have the second highest adjusted EBITDA per BOE ratio in this group. Bottom line, our relentless focus on cost optimization is continuing to drive expenses down and generate strong cash margins.
Lastly, on Page 16, we look at the relative trading multiples. Recent consensus estimates have Penn Virginia trading at one of the lowest multiples for 2020 compared to the same E&P peer group. As such, with the growth we laid out for you, lean cost structure, strong cash margins, low leverage and a view for continued free cash flow generation, we believe that Penn Virginia provides a very compelling investment opportunity.
Now turning our attention to Page 17. For the full year, we expect oil volumes of 20,800 to 22,200 barrels of oil per day, and total production in the range of 27,300 and 29,100 BOE per day. This translates into moderate mid-single-digit year-over-year oil growth, which is expected to be funded from cash flow from operations. We've also laid out our cost structure guidance below. I would reiterate, as John said before, that our capex implies a 15% to 20% reduction over 2019 levels for a similar pace of development activities.
Turning to Page 18, we summarize our hedge positions we have in place for our oil production, which we entered into to help mitigate commodity price risk. Since our last quarterly update, we took advantage of certain periods of strength in oil prices to add to both our 2020 and 2021 hedge positions through a combination of swaps and collars. The details of all of our positions can be found in the appendix of this presentation. As you can see, we are very well hedged for 2020 with approximately 76% of our oil production at the midpoint of guidance. Also, we've hedged approximately two-thirds of our anticipated natural gas volumes. We will continue to watch the markets closely and look for opportunities to add further hedge positions that will support and protect our capital budget and balance sheet.
I would now like to turn it back to John for some concluding comments before Q&A. John?
John A. Brooks -- President, Chief Executive Officer and Director
Thanks. Rusty. On Page 19, we summarize our list of major accomplishments for 2019, of which there were many, and I'm not going to discuss these in detail as we've covered them previously. However, I believe this list clearly represents our continued track record of success and further supports why we believe Penn Virginia is an attractive investment. As we have discussed in the past, we believe there are four keys to Penn Virginia's continued success.
First is our close focus on cost. To remain profitable in this volatile commodity price environment, you must maintain a lean cost structure. We have taken significant costs out of the business over the past few years and we'll continue to look for additional opportunities moving forward. The result has been Penn Virginia achieving what we believe is one of the lowest cost structures of all small cap oil-weighted E&Ps.
Next, you must maintain or improve margins. Complementing our cost structure enhancements is our strategic location that is in close proximity to the Gulf Coast. This should continue to provide Penn Virginia to access premium priced markets, which further supports our industry-leading margin profile. And the most important measure is the ability to generate free cash flow. Ultimately, you must live within your means and we achieved that goal in the fourth quarter, while continuing to execute on our strategic well development program. We believe this makes Penn Virginia unique, a proven small cap that is focused on growing production while also generating free cash flow.
And ensuring financial discipline. Given the current and expected continued volatility in the energy commodity markets, we will remain hyper-focused on maintaining financial discipline, supported by strong balance sheet and low levels of leverage. We look forward to another successful year in 2020.
And with that, Allison, we can go to the Q&A portion of the call.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions]
And our first question today will come from Dun McIntosh of Johnson Rice. Please go ahead.
Dun McIntosh -- Johnson Rice -- Analyst
Good morning, John, and congrats on a strong quarter.
John A. Brooks -- President, Chief Executive Officer and Director
Thanks.
Dun McIntosh -- Johnson Rice -- Analyst
A question about 2020 plan, you have two rigs out there, with commodities obviously coming under pretty severe pressure in this past couple of weeks, and oil at $44 this morning. Just wondering what sort of flexibility you all had under that program to kind of adjust your activity and John, solve free cash, because I mean, I would assume that, that's kind of the goal here as well. So just thoughts around controlling activity if commodities are going to stay down below $50 here?
John A. Brooks -- President, Chief Executive Officer and Director
Yeah, all of our operational contracts are short-term in nature. Basically, we can react within the 30-day to 90-day window on the outside. So, the drilling contracts are pad-to-pad and the completion contracts are in the 60-day to 90-day window. So, we've got very short-term contracts that give us a lot of flexibility to respond to market conditions.
Dun McIntosh -- Johnson Rice -- Analyst
Great. And then, just one more, maybe kind of macro basin level. I mean, you all do have one of the stronger balance sheets in the small cap space and which you are all waiting, but I'm wondering how you think about maybe M&A opportunities or A&D it's out there right now, I'd have to imagine that bid ask or the asking prices have got to start coming down at some point with prices here. So just kind of your view on the Eagle Ford and potential for consolidation, maybe not at the large-scale, but you had to pick up bits and pieces here and there.
John A. Brooks -- President, Chief Executive Officer and Director
Well, we're focused, number one, on our current business plan and maintaining the financial discipline and making sure that we have continued liquidity in these volatile markets. That being said, we're always open to opportunities as they arise, but they have to be accretive in nature and fit within the overall business plan.
Dun McIntosh -- Johnson Rice -- Analyst
Alright. Perfect. That sounds good. Think you, John, and congrats on a good quarter and a good luck in 2020 plan.
John A. Brooks -- President, Chief Executive Officer and Director
Thank you.
Russell T. Kelley -- Senior Vice President, Chief Financial Officer and Treasurer
Thanks, Dun.
Operator
Our next question will come from Jeff Grampp of Northland Capital Markets. Please go ahead.
Jeff Grampp -- Northland Capital Markets -- Analyst
I was curious on the capital side for you guys, John, I think maybe it was last call that you mentioned the cost of an Eagle Ford rig you saw coming down 15% or so from the prior $150 million a year that you guys are kind of assuming it, it seems like the guidance that you put out maybe only gives you a portion of that credit relative to that number for just kind of doing that simple math. So I just kind of wonder if maybe there is some conservatism in the capital guide or maybe just the program is maybe generally different such that, that math doesn't quite work out like we think it would?
Russell T. Kelley -- Senior Vice President, Chief Financial Officer and Treasurer
Hey, this is Rusty. I'll take a shot at that. So, the current -- rather given the efficiencies that we're seeing on kind of a per rig basis, I want to really direct the cadence of development is really very similar to 2019. I think, John's comments that he has made previously was kind of on a per rig basis should be taken as -- this is how for similar development plan, you'd see kind of I think you said 15% to 20%, I think what you'll see is for similar development plan, we're right in there. And that's based on kind of environment we are seeing in the fourth quarter. We'll see where this actually pins out, but I think they are fairly consistent for a similar development plan as last year.
Jeff Grampp -- Northland Capital Markets -- Analyst
Got it. Okay, that's helpful. I know kind of doing some of the land work, incorporating some more XRLs was a big kind of project for you guys internally. I was just kind of wondering how that's trending or maybe year-over-year '19 versus '20, how big of a component of the program are those extended reach laterals for you guys?
John A. Brooks -- President, Chief Executive Officer and Director
Well, we have a lot more XRLs in the deeper part of the acreage and we're focusing more in the oilier up dip portion where we still have some XRLs up there. It is not in the 8,000 foot to 10,000 foot range as much as it's going to probably be in the 6,000 foot to 8,000 foot [Phonetic] range for XRLs. So, we're going to continue to focus on the heavier oil weighting and by nature of the plan of development, we'll probably have fewer XRLs this year than last year.
Jeff Grampp -- Northland Capital Markets -- Analyst
Got it. And if I can sneak one more in, John, you mentioned kind of Chalk and Upper Eagle Ford upside for you guys in terms of inventory count. Are any of those making on the drill schedule in '20? Or does this environment make here, I guess, a little bit less interested in kind of the delineation aspect of spend in capital?
John A. Brooks -- President, Chief Executive Officer and Director
Well, I mean, you raised a good point, and we certainly don't want to do anything that takes away from the high return Lower Eagle Ford development program that we have planned. That being said, we do have a Upper Eagle Ford test slated for somewhere in the middle of this year after we get exactly where the drill schedule it comes in on, but we're pretty excited about the potential for that well. So we do plan on getting at least one Upper Eagle Ford test in this year, and that's basically the direct outcome of our earth model.
Jeff Grampp -- Northland Capital Markets -- Analyst
Got it. We'll look forward to it. I appreciate the time.
John A. Brooks -- President, Chief Executive Officer and Director
Thanks, Jeff.
Operator
[Operator Instructions] Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Brooks for any closing remarks.
John A. Brooks -- President, Chief Executive Officer and Director
Thanks, Allison. Thank you for your time this morning and your interest in Penn Virginia. We look forward to talking to you again next quarter.
Operator
[Operator Closing Remarks]
Duration: 30 minutes
Call participants:
Clay Jeansonne -- Director of Investor Relations
John A. Brooks -- President, Chief Executive Officer and Director
Russell T. Kelley -- Senior Vice President, Chief Financial Officer and Treasurer
Dun McIntosh -- Johnson Rice -- Analyst
Jeff Grampp -- Northland Capital Markets -- Analyst
