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Penn Virginia Corporation (ROCC)
Q1 2020 Earnings Call
May 9, 2020, 9:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the Penn Virginia First Quarter 2020 Earnings Conference Call. [Operator Instructions]
I would now like to turn the conference over to Clay at Penn Virginia. Please go ahead.
Clay Jeansonne -- Investor Relations
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 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 discuss non-GAAP measures on this call. Definitions and reconciliations of these measures to the most comparable GAAP measure are provided in our first quarter earnings press release issued yesterday afternoon, which can be found on our website at www.pennvirginia.com. I would also like to point you to 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 and quarterly reports on Form 10-Q. Finally, after our prepared remarks, we'll answer any questions you may have.
With that, I'll turn the call over to John.
John A. Brooks -- President, Chief Executive Officer And Director
Thanks, Clay, and thank you all for joining us today. I hope everyone is safe and well as we manage through the impacts of the COVID-19 crisis. First, I want to extend my thanks and appreciation to everyone at Penn Virginia for their ongoing efforts to work from home and stay healthy and safe amid these unprecedented times. I also want to recognize our field employees who are on the front line every day. You've kept us running and are largely responsible for the solid first quarter results we released yesterday. So thank you. Now I'd like to discuss several of the proactive steps we've recently taken to navigate this commodity price environment and manage our financial position and our operations. These actions include early completion of our borrowing base redetermination, halting all drilling and completion activity and curtailing a portion of our current production. We've also constructed a robust hedge book that will help us withstand these current prices. First, let's discuss the suspension of drilling and completion operations. In mid-March, we announced our intention to run only one rig beginning in April.
As commodity prices continued to decline, we moved to suspend all drilling and completion operations. The suspension of our development program has significantly reduced our expected 2020 capital budget, and we plan to spend only modest amounts of capital for the balance of the year. During April, we finished several pads, but we chose not to complete those wells given the price environment. We currently have eight drilled but uncompleted wells. We don't anticipate any -- we don't anticipate restarting operations or completing those wells until prices return to a level where we believe we are generating acceptable returns for our shareholders. During the first quarter, we also secured access to additional crude oil storage. We did this to help ensure we could continue to flow our crude oil production and store those barrels if we didn't want to sell at distressed prices.
This storage will also allow us to continue to hold our leases by producing as needed. We now have access to a minimum of 250,000 barrels of oil storage. Next, let's discuss curtailments in our production. Given the current pricing levels, we had chosen to curtail a large amount of our production. We anticipate curtailing approximately 12,600 barrels of oil equivalent per day for May, which will be dependent on the price environment as we make those decisions. We will continue to monitor the oil market to determine when is the appropriate time to bring those wells back online.
Now I'll turn the call over to Rusty.
Russell T. Kelley, Jr. -- Senior Vice President, Chief Financial Officer And Treasurer
Thanks, John. First, I'll touch on the borrowing base redetermination. As previously noted, we recently completed our spring borrowing base redetermination. The completion of this process should remove much of the uncertainty associated with the company's liquidity. We believe our robust hedge portfolio and significant free cash flow profile will provide us with the necessary liquidity to operate comfortably, including the ability to restart our capital program when the commodity price environment warrants it. For liquidity, as of yesterday, we had approximately $59 million of liquidity, which was comprised of nearly $39 million of cash on hand and about $20 million available under the revolving credit facility. We expect a portion of our cash on hand to be used to pay remaining invoices still outstanding through May and then reduce our borrowings under the credit facility. In addition, our strong EBITDA performance and reduction in net debt during the first quarter allowed us to slightly improve our net debt to LTM adjusted EBITDAX ratio to just under 1.6.
Turning to our hedge book. We've implemented a proactive risk management strategy that is designed to protect the company's cash flow while retaining the option to capture the upside when oil prices rebound. We took the opportunity before the latest dramatic downturn in oil prices to create a substantial risk management portfolio of put hedges during the second and third quarters of 2020 over and above the originally anticipated volumes. This results in incremental free cash flow in the event that oil prices continue a decline relative to strip pricing, but retain upside exposure in the event of a recovery in pricing. We currently have over 32,000 barrels of oil hedged for the second quarter of 2020. To put that into context, we produced just over 20,000 barrels of oil per day in the first quarter. That hedge position represents more than 150% of what we produced in the first quarter.
In addition, given the anticipated shut-ins and natural production decline due to capex reductions, we anticipate that percentage to climb even further during the second quarter. While we're looking at the possibility of opportunistically crystallizing the value of some of that over hedged position, at this time, we've chosen to keep it in place for downside protection during this period of significant oil price volatility. Currently, our hedge book is substantially in the money with a mark-to-market value of approximately $138 million as of May six. Put it simply, we make more money in the near term when oil prices go lower, so we believe we are well positioned for the current low oil price environment. But due to the substantial utilization and puts in our hedge book, we retain upside exposure in the event of an oil price recovery.
We believe this creates a unique investment opportunity for investors looking for strong near-term protection with a potential benefit from an oil price recovery in the future. Our hedge program and proactive reductions of capex have already resulted in our ability to generate over $10 million of free cash flow in the first quarter, and we expect that trend to continue with significant free cash flow projected for the balance of 2020. This free cash flow will allow us to aggressively repay our debt even in low oil price environments. Given our strong financial position and low leverage, we stand ready to reengage development operations as soon as prices justify adequate returns on our drilling program. In all cases, though, we remain focused on capital discipline and cash-on-cash returns for our shareholders.
Now I'll turn it back -- the call back over to John.
John A. Brooks -- President, Chief Executive Officer And Director
Thanks, Rusty. This is a challenging time for our industry. However, we believe Penn Virginia is in an enviable position to weather this storm. We have a strong balance sheet, significant hedge position, low-cost structure and the ability to generate substantial free cash flow even in a low oil price environment.
And with that, we can go to the Q&A portion of the call.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Dun McIntosh with Johnson Rice. Please go ahead
Dun McIntosh -- Johnson Rice -- Analyst
Good morning, John. Congrats on a strong quarter and particularly the hedge book that you all put in place, strong move there. Just on activity, how should we think about -- you all maybe -- at what point do you think about maybe going and looking to bring those DUCs online? Or probably too early to think about putting a rig back, but maybe if we were going to put a price on it, what point in the year do you think about activity kind of coming back and even more so kind of bringing the shut-in volumes on? It would be my warm-up question.
John A. Brooks -- President, Chief Executive Officer And Director
Sure. So let's take shut-in volumes first. There's a number of factors versus just the outright WTI differentials, things like that. But frankly, in today's price environment, once you get into kind of the mid-20s, which we've obviously done a lot of movement right back to that over the last week, we certainly start considering it. It's not really focused just on the marginal cost of production. We have certainly have the ability to produce profitably out of our existing wells at much lower prices. It's really more a balancing of what is the price worth today versus what it will be in the future. And given the very strong cash flow position we have from our hedges, we've decided we will likely be shutting in, in May. Having said that, we do -- because of our storage and other flexibility, we do have the ability to bring those on if we continue to see an uptick in the commodity price just given the volatile environment. Likewise, turning to DUCs and future drilling, the biggest focus for us is going to be returns. We're in a strong position.
We came in with low leverage. So we have the ability to spend capital or not spend capital purely based on the returns, and that's really going to be the driving factor. When you look at the economics of the DUCS, again, that will depend on a number of factors, not just the commodity price, but also the service price environment and the shape of the curve that those will be producing into. But in general, we would want to see prices recover to where you're well into the 30s. But you don't have to be too far in to make those very economic. We have -- those are some very attractive economic wells. So based on the current environment, we would expect that we're probably not looking on doing that toward -- until the end of the year.
But obviously, that's -- a lot of that's going to depend on the environment we're looking at. But we do have full flexibility and the liquidity based on what we're looking at to do that. And then likewise, I'd answer the drilling in a very similar manner. It's going to be very returns-focused given that it would involve the full cost of those wells. Obviously, we're going to be -- you would want to see a slightly bigger recovery on pricing. But again, we'll be looking at the service industry as well as availability of crews that can operate safely, etc.
Dun McIntosh -- Johnson Rice -- Analyst
Okay. Great. And then as a kind of -- I guess, to go a little further, it might be too early to start thinking about it. But for 2021, should prices kind of get back to a $40, $50 level? Is the thought there kind of a maintenance mode? Or do you think -- what would it take to kind of to get back into a growth mode? And obviously, the balance sheet is the primary focus here. So is it really more just about what optimizing free cash and getting that -- working that revolver down?
John A. Brooks -- President, Chief Executive Officer And Director
Yes. So what -- we want to avoid giving guidance further out and especially given the fact that 2020 has so much uncertainty. I can tell you what's going to be driving this, though. Again, it's really a focus on the returns and cash on -- from a cash-on-cash perspective. I do expect if we get a commodity price recovery, we have the ability, both from well economics as well as liquidity, to pick back up to normalized activity levels very quickly. We do and -- but I do expect that we will have been able to pay down some debt aggressively before that time. But that's really -- what's going to be the driving factor is returns. I think you're going to see us kind of go back to strategically moderate growth focused on free cash flow and returns. And again, it will depend on the environment we're in, but that's really our driving factors.
Dun McIntosh -- Johnson Rice -- Analyst
Great, and congrats on a strong quarter.
John A. Brooks -- President, Chief Executive Officer And Director
Thanks, Dun.
Operator
The next question is from Jeff Grampp with Northland Capital Markets. Please go ahead
Jeff Grampp -- Northland Capital Markets -- Analyst
I guess I was curious to get your thought process on both winding down the curtailments that you've announced in May as well as the over hedged book. Those seem maybe somewhat correlated in the sense that that's kind of, I guess, reducing your conservatism on the oil price. But I'm just kind of curious to get your all thoughts on how you might evaluate each of those opportunities, if you will.
John A. Brooks -- President, Chief Executive Officer And Director
I'm sorry, I'm not sure I understood the -- how we think about bringing wells back online from curtailments? And then what was the part on the hedge book?
Jeff Grampp -- Northland Capital Markets -- Analyst
Yes. I guess -- I think, Rusty, in your prepared remarks, you talked about maybe, at some point, reversing the fact that you guys are obviously substantially over hedged relative to the production volume. So are those related at all? Or are those independent decisions? And how do you go through that?
Russell T. Kelley, Jr. -- Senior Vice President, Chief Financial Officer And Treasurer
Yes. So when the over hedged position with the put contracts, I think we look at them not just the correlation with the amount of volumes, but also it's -- we look at it as a substantial insurance policy in a very volatile market. We like the correlation of an environment that continues to get tougher. That also puts pressure on banks and other capital markets, makes them less available. So if we're making additional cash flow when things like that get tougher, I think that puts us in an extremely strong environment.
So at the -- for now, we have chosen to leave that in place from a risk-mitigation perspective, just given the level of volatility. Having said that, we reserve the right, if we see, given the fact that we are shutting things in, if we see prices continue to decline. Well, we certainly reserve the right to kind of lock in some of that increased cash flow, just given the fact that it's not -- we're not having to have that cover specific volumes. So -- but we like that kind of extra cash flow when things get more difficult, because if things do improve, we will -- we do expect to see more liquidity, more capital markets open and a lot more functionality.
Jeff Grampp -- Northland Capital Markets -- Analyst
Got it. And for my follow-up, if you guys are comfortable throwing this out there. Do you have an estimate of what kind of maintenance capital levels could be if we look at -- I know you guys don't have a formal guidance out, and therefore, don't have a specific kind of exit rate for the year, but let's just call it base case kind of plan that you guys think might materialize. Do you have an estimate of what kind of maintenance capital could be for you to keep, let's call it, exit rate type numbers flat?
John A. Brooks -- President, Chief Executive Officer And Director
Yes. I think you're probably looking at a one to 1.5 rig program, but I would be hesitant to put a capital associated with that given the pricing environment that we're seeing in the service industry. But probably a one to 1.5 rig program would be maintenance for us.
Jeff Grampp -- Northland Capital Markets -- Analyst
Okay. If I can kind of squeeze a related one, and then, John, do you -- can you give us a sense because I think that's kind of been relatively consistent with past numbers, but how much of service prices kind of come down if we were to maybe mark that to market relative to past comments you guys have made?
John A. Brooks -- President, Chief Executive Officer And Director
Well, it's going to be different for the drilling and the completion. The completion side of things, obviously, bears the biggest part of it. But I -- depending on what you compare it to, I think if you go back and look at, say, compare it to the first half of '19, you're probably looking at a 15% to 25% reduction, maybe even higher in various service segments.
Jeff Grampp -- Northland Capital Markets -- Analyst
Got it. I appreciate it.
Operator
Thank you. Again [Operator Instructions] The next question is from Richard Tullis with Capital One Securities. please go ahead
Richard Tullis -- Capital One Securities -- Analyst
Rusty, could you talk a little bit about any difficulty you anticipate and just time required to return the shut-in wells back to production when that time comes and any associated cost with that effort?
Russell T. Kelley, Jr. -- Senior Vice President, Chief Financial Officer And Treasurer
Sure. I can take that, Richard. We shut in wells all the time in the active drilling and completion program. So we've got a fairly good protocol in place for doing that. I think what we've seen in the past is these wells come back around fairly quickly. I guess the improvement over a prior shut-in event was usually associated with offset frac. So in this case, I think the cost would probably be a little bit less than that because we won't be unloading incremental water volumes associated with defensive preloads or additional water influx from nearby wells. So I think we're fairly confident that we can take proactive measures to ensure the integrity of these wells. Some of them we will probably pretreat with a hot oil treatment in corrosion inhibitors and in other things of a minor cost that we would take to make sure the wells don't get damaged.
Richard Tullis -- Capital One Securities -- Analyst
Okay. That's helpful. John, and just lastly for me, I know you just mentioned in response to Jeff's question the cost savings in the 15% to 25% range for various factors in the drilling and completion process. What do you think the cost would be to drill a well currently, your typical Eagle Ford well? And then how much of that current price you think would hold -- some of it is your own savings, some of it is service cost savings, but how much of it would hold, say in a $30-plus oil environment, that would require -- you would require to go back to drilling and completion operations?
John A. Brooks -- President, Chief Executive Officer And Director
Well, our operations team has made tremendous strides over the last couple of three years in terms of driving down our cycle times. And the cycle times is the biggest driver of our drilling costs with the exception of stimulation cost. So I think our drilling cost, irrespective of service costs, we're seeing a decline on the order of 10% to 15% just on cycle time reductions. When you look at the overall cycle time reduction for spud to first sales, over the last three years, we've reduced that by somewhere in the order of three to four weeks.
So the biggest driver is really going to be on cycle time, and we anticipate those advantages to remain intact. And then trying to predict what service cost would be in a recovery environment would be a little tricky. But I think the numbers I gave previously on the 15% to 25% reduction over the first half of 2019 would probably hold in. And beyond that, I'm thinking you're looking at something on the order of $900 to $1,000 per lateral foot drilled and completed and possibly savings beyond that.
Richard Tullis -- Capital One Securities -- Analyst
All right. John. Thanks so much. Appreciate it.
John A. Brooks -- President, Chief Executive Officer And Director
Thanks, Richard.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to John Brooks for any closing remarks.
John A. Brooks -- President, Chief Executive Officer And Director
Thanks. We appreciate you all's participation on this morning's call and look forward to next quarter's call. Thanks again.
Operator
[Operator Closing Remarks]
Duration: 23 minutes
Call participants:
Clay Jeansonne -- Investor Relations
John A. Brooks -- President, Chief Executive Officer And Director
Russell T. Kelley, Jr. -- Senior Vice President, Chief Financial Officer And Treasurer
Dun McIntosh -- Johnson Rice -- Analyst
Jeff Grampp -- Northland Capital Markets -- Analyst
Richard Tullis -- Capital One Securities -- Analyst
