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Penn Virginia Corporation (ROCC)
Q3 2020 Earnings Call
Nov 6, 2020, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Penn Virginia's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Clay Jeansonne, Director of Investor Relations. Please go ahead.
Clay P. 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 Darrin Henke, 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 for this measure to the most comparable GAAP measure are provided in our third quarter earnings press release issued yesterday afternoon which can be found on our website at www.pennvirginia.com. I would also point to you the language in the forward-looking 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 cause -- 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 our quarterly report on Form 10-Q. Finally, after our prepared remarks, we'll be happy to take your questions. With that, I'll turn the call over to Darrin.
Darrin Henke -- President, Chief Executive Officer and Director
Thanks, Clay. We very much appreciate everyone joining us for today's call. Our team again delivered solid performance in the third quarter as steady execution has become par for the course at Penn Virginia. On the sales front, we beat on oil by selling 18,383 barrels per day which was higher than the midpoint of guidance of 18,000 barrels of oil per day. Higher-than-expected sales were primarily a function of the positive results obtained from the five DUC wells we turn to sales in July, as well as our constant focus on optimizing our base production. Looking at expenses for the third quarter. We posted adjusted direct operating expenses of $10.88 per barrel. This low operating expense typifies our lean cost structure and culture of cost containment. Put simply, we leave no stone unturned to find ways to improve the operating performance of our business. The same holds true for capital spending where we continue to do more with less. capex for the third quarter was $8 million, 27% below the low end of guidance. We also continue to benefit from our substantial hedge position. A clear example was in the third quarter where we realized an oil price of $48.28 per barrel, including hedge settlements.
The combination of increased operational efficiencies, reduced capital spending and protecting our best-in-class margins through prudent risk management supports one of Penn Virginia's key priorities, generating free cash flow for the long-term benefit of our shareholders. I am pleased to report that we generated free cash flow of $34 million during the third quarter, all of which was used to pay down debt. We continue to remain squarely focused on delivering value over volume through disciplined spending, preservation of our strong balance sheet, driving strong cash-on-cash returns and further debt reduction. We believe we can maintain production within cash flow at an oil price of $40 per barrel and generate free cash flow to reduce debt at $45 per barrel. Next I would like to spend a moment discussing our announcement earlier this week concerning the strategic investment in Penn Virginia by Juniper Capital Advisors, which is expected to close in the first quarter of 2021. We view this transaction as truly transformational for the company and one that will best position Penn Virginia for long-term success. The opportunity to immediately infuse $150 million in cash coupled with the acquisition of oil and gas assets located within and adjacent to our acreage is extremely attractive on multiple fronts. First, the transaction will substantially improve Penn Virginia's balance sheet and financial position as it would more than double the equity market cap of the company while paying down well over $100 million of debt.
In addition, it allows us to push out the maturity of our second lien term loan by two years to September of 2024 and reduced annual interest expense by an estimated 20%, equivalent to $6 million per year. Second, the transaction would add production and cash flow and lower our cost structure through the inclusion of Juniper's approximate 4,100 acres with no expected increase to G&A. Third, the transaction will enhance our position in the Eagle Ford. Juniper's assets, like Penn Virginia's, are located on private fee lands and provide for multiple additional drilling locations on the Eagle Ford trend's proven geology. Penn Virginia's expanded footprint created by the transaction also affords the opportunity to drill longer laterals. And finally, this strategic transaction will provide Penn Virginia additional room to maneuver through a potential lower-for-longer oil price environment. In summary, the Juniper transaction will materially strengthen our balance sheet, improve our liquidity profile, increase our maturity runway and add important scale to the business through the bolt-on assets acquired. We believe this transaction will prove to be a key milestone for the company. To wrap things up, Penn Virginia delivered on plan and posted solid results for the third quarter. The period also marked our fourth consecutive quarter of generating free cash flow.
Looking at the remainder of this year and into the next, we believe we are in a strong position for continued success. Most important of all, I'm very proud of our team's accomplishments. Given the challenging backdrop, their laser focus on operational excellence continues to set the company apart from other small-cap E&Ps. I appreciate everyone's hard work, dedication and efforts to promote the continued safety and well-being of our fellow employees as well as our contractors and service providers. So with that, we will open up the call to questions. Operator?
Questions and Answers:
Operator
[Operator Instructions] Today's first question comes from Dun McIntosh with Johnson Rice. Please go ahead.
Duncan Scott McIntosh -- Johnson Rice & Company -- Analyst
Good morning, Darrin.
Darrin Henke -- President, Chief Executive Officer and Director
Good morning, Dun. How you doing?
Duncan Scott McIntosh -- Johnson Rice & Company -- Analyst
Good. And welcome aboard the Penn Virginia ship. Look forward to working with you going forward. I just had a quick question on Juniper and kind of what that might mean. I know you haven't given a ton of color around '21, but obviously, you get a big liquidity boost here. And what does that mean for the '21 program? It would -- if you think about a little more activity, I assume, you talked about, companies talked about a maintenance program going forward in the past. And just kinda, what Juniper does mean for the '21 from an activity standpoint.
Darrin Henke -- President, Chief Executive Officer and Director
Yeah. So the transaction definitely improves our balance sheet, but it really doesn't change our outlook relative to activity. We're gonna look at commodity prices. And in a $40 environment, we feel like we can maintain production, and within cash flow. And if we see a $45 price environment, we feel like we can maintain production, maybe grow single digit. But more importantly, continue to reduce debt with our free cash flow.
Duncan Scott McIntosh -- Johnson Rice & Company -- Analyst
Okay, great. Thanks. And then, maybe just a little color. I mean, costs came in on the OpEx side lower again this quarter. And I have to imagine you're seeing some pretty good reductions on the D&C side as well. And I see you already put a rig back out there. Do you think these are pretty sticky? Is this something that you look to maybe lock in lower costs? Or do you think that, just where the service market is, you think you can continue to get kind of a favorable cost in a spot scenario?
Darrin Henke -- President, Chief Executive Officer and Director
Yeah. I think the service costs are definitely in a great time for our industry to date. We -- however, not only are we seeing improvements via service costs, but we're also seeing continued improvements through our efficiency gains. And I'll have Ben maybe speak just a touch about those gains relative to cycle times and completion times.
Benjamin A. Mathis -- Senior Vice President, Operations
Sure. So comparing 2019 to where we are now and where we see we're gonna -- we're going to be, we've seen roughly a 15% to 18% reduction in our cost per lateral foot, total all cost. And about 45% of that on the drilling side is just improvements in how we're doing things. Efficiency gains, 55% of that roughly is related to service cost. So there is some risk of that going away if -- or reducing if we see a change in activity level in the U.S. On the completion side, about 1/3 of that is related to design changes that we're making that will be locked in. And about 2/3 of that is related to service cost.
Duncan Scott McIntosh -- Johnson Rice & Company -- Analyst
All right. Thank you all very much.
Operator
And our next question today comes from Neal Dingmann with Truist. Please go ahead.
Neal David Dingmann -- Truist Securities -- Analyst
Good morning, all. And again, congrats on the steal, it's gonna -- it looks really good ahead of time. My question, Darrin, it looks like you guys, I'm just looking like what you and Rus have been able to do on the free cash flow side. And Dun, you were mentioned in that last sort of comment about, just efficiencies. And I'm wondering, is that what's driving -- I guess my question is, is it a better decline rate? Is it efficiencies, lower cost? Maybe if you could just give a little light cause it does seem like -- I don't know that the -- that the market is fully appreciated, but it does seem like you're getting better free cash flow with limited activity. And I just wanted to see if you or Rusty could speak around that.
Darrin Henke -- President, Chief Executive Officer and Director
Yeah, I'll start off, and then I'll turn over to Rusty to add some comments as well. Relative to the second and third quarter, our DUCs have come on. They're strong producers, and certainly that's helping us with our production. And then from -- on the expense side, we've seen reduction in our chemical costs. We've seen optimization on our gas lift, which lowers our operating expenses. And we did, for a period of time, reduce some of our expense workovers. And we're back doing those, and we're picking up production volumes accordingly. So those are things that are improving the production and reducing our expenses. And I'll let Rusty add some color as well.
Russell T. Kelley, Jr. -- Senior Vice President, Chief Financial Officer and Treasurer
Yeah, I think Darrin talked about the expense side. I'd also highlight on the top of the line. The Gulf Coast margins and our access to those markets, as well as our hedge position has continued to make the top line a lot stronger than a lot of other folks that we've seen in the industry. So we continue to maintain a lot of those policies and manage that, that I think combined that with the efficiencies and the cost structures, what leads to some of those margins.
Neal David Dingmann -- Truist Securities -- Analyst
And then, given the benefits you all have, I guess my follow-up would just be, I know it would be nice to see you all as consolidated, taking over some of the people that are operating as well. How do you balance either, as you said, I know, Darrin, you mentioned about free cash flow still being the priority, paying down debt. But I'm just wondering, when you look at growth on a go-forward here for the next year or two, how do you think about sort of internal versus external, what makes the most sense?
Darrin Henke -- President, Chief Executive Officer and Director
When I think about our industry, more generally, I definitely think we're gonna continue to see consolidation. We've seen dramatic consolidation here recently, and that makes sense to most everyone, I think. The way Penn Virginia is gonna approach consolidation, it's all about value for our shareholders. So the -- we're gonna do -- we'll look at opportunities. And we may be an acquirer down the road or we may get acquired. We're pretty agnostic on that. It really is all about doing what's right for the shareholder.
Neal David Dingmann -- Truist Securities -- Analyst
That's a great answer. Thanks so much, guys.
Operator
And ladies and gentlemen, our next question from Richard Tullis with Capital One. Please go ahead.
Richard Merlin Tullis -- Capital One -- Analyst
Hey, thanks. Good morning, everyone. Darrin and Rusty, if you could, maybe provide a little history of the background on how the Juniper deal kind of came together. And did PBAC look at any other potential options for achieving the same objectives?
Darrin Henke -- President, Chief Executive Officer and Director
Yeah. So I'll let Rusty address that question.
Russell T. Kelley, Jr. -- Senior Vice President, Chief Financial Officer and Treasurer
Sure. So just from a highlight, we'll give a lot more detail in the proxy itself. But Juniper has operated assets on the lease line boundary with us. We've known each other well, worked together as operating partners. And over the past few months, have had a number of conversations of how to work together. We did talk to a number of potential capital advisors -- or sorry, providers, and looked at a number of different alternatives and what kept -- we kept coming back to a potential partnership with Juniper just given the operating synergies, knowledge of the asset base, and, frankly, the relationship and viewpoint of a common strategy.
Richard Merlin Tullis -- Capital One -- Analyst
That's helpful. Thank you, Rusty. And just as a follow-up, I know this deal doesn't change, as Darrin said, the go-forward activity plans. But within that activity set, do you perhaps start drilling on some of the Juniper acreage in 2021?
Darrin Henke -- President, Chief Executive Officer and Director
We will certainly consider that. It's great acreage, and it fits very well into our portfolio of opportunities. It allows us to drill longer laterals. It adds a number of new wells to our inventory. So we're in the middle of the process thinking about 2021 activity levels as we speak. And most likely, that acreage will play a role next year.
Richard Merlin Tullis -- Capital One -- Analyst
All right. Well, that's all for me. Thank you.
Operator
[Operator Instructions] Today's next question comes from Nicholas Pope with Seaport Global. Please go ahead.
Nicholas Paul Pope -- Seaport Global Securities -- Analyst
Good morning, guys.
Darrin Henke -- President, Chief Executive Officer and Director
Good morning.
Nicholas Paul Pope -- Seaport Global Securities -- Analyst
I was hoping we could talk a little bit about the Juniper acquisition and kinda what things are gonna look like once it is completed. Obviously, they have a lot of other assets in their portfolio. I'm just curious what kind of protections and governance we're gonna see for kind of the -- what's gonna become the minority public shareholders in this go-forward entity, and looking at assets, and kind of keeping some sort of separation between the two entities. Can you talk a little bit about that?
Darrin Henke -- President, Chief Executive Officer and Director
Yeah. I'll have Rusty address that.
Russell T. Kelley, Jr. -- Senior Vice President, Chief Financial Officer and Treasurer
Sure. So the only anticipated overlap right now is the assets that we acquired in the transaction. With regard to governance protections, we have standard protections in place for minority shareholder protections. Any affiliated transactions would have to be reviewed by those members of the Board that are nonaffiliated to Juniper. But again, what I would point to those is the protections that are very standard. But I think the real benefit here is the common viewpoint on strategy with regard to paying down debt, living inside of free cash flow, and developing with a good sense of capital discipline by somebody that's now a majority shareholder and shares those same views.
Nicholas Paul Pope -- Seaport Global Securities -- Analyst
And what's the Board makeup gonna be post the transaction? Like what's the numbers on that?
Darrin Henke -- President, Chief Executive Officer and Director
Yeah. So it will be the existing four Board members plus five new board members from Juniper. And that -- so it will be nine board members total.
Nicholas Paul Pope -- Seaport Global Securities -- Analyst
Got it. Okay. That's really all I had. Thanks, guys.
Operator
And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.
Darrin Henke -- President, Chief Executive Officer and Director
We thank everyone for calling in today, and we look forward to delivering impressive results in the future. Take care.
Operator
[Operator Closing Remarks]
Duration: 19 minutes
Call participants:
Clay P. Jeansonne -- Director of Investor Relations
Darrin Henke -- President, Chief Executive Officer and Director
Benjamin A. Mathis -- Senior Vice President, Operations
Russell T. Kelley, Jr. -- Senior Vice President, Chief Financial Officer and Treasurer
Duncan Scott McIntosh -- Johnson Rice & Company -- Analyst
Neal David Dingmann -- Truist Securities -- Analyst
Richard Merlin Tullis -- Capital One -- Analyst
Nicholas Paul Pope -- Seaport Global Securities -- Analyst
