PDC Energy Inc (PDCE) Q1 2021 Earnings Call Transcript

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PDC Energy Inc (PDCE)
Q1 2021 Earnings Call
May 7, 2021, 8:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good evening, ladies and gentlemen, and welcome to the PDC Energy First Quarter 2021 Earnings Conference Call. [Operator Closing Remarks]

I would now like to turn the conference over to your host palsar Investor Relations. You may begin sir.

Kyle Sourk -- Senior Manager, Corporate Finance And Investor Relations

Thank you and good morning. On today's call, we have president and CEO, Barton Brookman, Executive Vice President Lance Lauck, Chief Financial Officer Scott Myers, and Senior Vice President of Operations days Whoa. Yesterday afternoon, we issued our press release and posted a presentation that accompanies our remarks today. We also filed our forum. Thank you. The press release and presentation are available on the investor relations page of our website www.pdc.com. On today's call, we will reference both forward looking statements and non US GAAP financial measures. The appropriate disclosures and reconciliations can be found on slide two and the appendix of that presentation.

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

Barton R. Brookman -- President And Chief Executive Officer

Thank you, Kyle. Let me begin this call with the most sincere thank you to the PDC employees or Board of Directors, investors, banks and service providers. This has been 15 months of unprecedented risk and uncertainty. But today you will see the resiliency of the PDC story. As we emerged from this crisis even stronger than we were pre pandemic. The outlook we will provide today clearly demonstrates the company's top tier financial and operating strategy, and I believe it provides one of the most compelling investment opportunities in the EMP sector. Now, first quarter highlights $175 million of free cash flow on a capital span of $125 million in production of 15 point 7 million barrels of oil equivalent. We achieved this free cash flow despite three outlier weather events to in Colorado and one in the Permian Basin, which adversely impacted corporate production by approximately 500,000.

Thank you to our operating teams for navigating these very hazardous conditions and always putting safety first. With the abundant free cash flow. our balance sheet and shareholder returns remain our primary focus. For the quarter we reduced net debt by approximately $230 million Maintain a 1.3 leverage ratio, and we repurchased 600,000 shares of stock. When we look back over the last 12 months, the company has generated $575 million of free cash flow achieved and 90% free cash flow margin and reduce net debt by approximately $600 million. All terrific accomplishments and numbers accelerated by the SRC merger. Next, our outlook for the next three years model that $55 oil and generating what I consider an extremely strong forecast. Expect the company to maintain discipline around our capital and operating plan. We plan on generating 1.8 to $2 billion dollars of free cash flow by year end 2023 calculates the lesson 50% reinvestment rate of our cash flow from operations.

Over the three year period, we plan on reducing debt by less than it by at least $850 million dollars and returning more than $650 million to our shareholders through dividends and our stock repurchase program. All while generating models production growth, and maintaining an industry leading balance sheet. On the drilling permit side of our business tremendous effort right now by our land and regulatory teams. We expect to submit our first odd piece in the very near future. And by year end, we plan to submit over 500 drilling permits to the state of Colorado in the form of odd piece and a capital.

Now let's talk ESG the company's commitment and actions in this arena are very real. Some highlights starting with the E or the environment. Through improved operating practices and mystery modifications. Flaring in the Delaware is 1.2% a year today, a dramatic improvement from prior year levels. And pdcs corporate flaring rate is an impressive point 2% year today. This is achievable because no flaring is conducted in Colorado. On the social side, or the as we continue to focus on equitable representation.

We maintain a strong gender and diversity presence in our leadership at PDC. And we are proud we have a completely gender balanced staff and our corporate offices. On the governance side or the GE we have placed intense focus on refreshment at the board level, with an emphasis with an emphasis on diversity of thought, gender, and background in nearly 60% refreshment rate over the past two years.

Before I turn the call over to Dave, I just want to reiterate how pleased I am with the overall results and the outlook of the company. I believe this is a direct reflection of pdcs quality team in our premier assets. With that I'll turn the call over to Dave Willow for an update on the operations. Thanks for the incredible financial results you highlighted would not be possible without a tremendous work from our operating teams and our field staff throughout the quarter. Weather is obviously something out of our control. But I'm extremely proud of our team's ability to quickly and safely handle the adverse conditions they faced over the last couple of months.

Looking at slide seven all in we invested approximately 125 million in the first quarter, which is right in line with our expectations. As you can see, we generated approximately 175,000 VOD per day and 54,000 barrels of oil per day. We've outlined the estimated weather related impacts to these volumes, adding back in these volumes would have resulted in first quarter volumes closer to the midpoint of our previous guided range. More specifically, the first quarter weather caused us to pull forward a frack holiday previously planned for second quarter into the first quarter just had a couple of small impacts.

First, this caused a small amount of capital to be shifted from the first to the second quarter. And secondly, a handful of new completions were slightly delayed, which we expect to lead to a solid volume step change in the second quarter, but also a more pronounced step change in the third quarter. On the bottom right of the slide. You can see breakdown of activity in the basin. Again, aside from the weather related impact to production volumes, all operating metrics are right down the fairway in terms of expectations.

Importantly, we exit accident the quarter with approximately 200 docks and nearly 300 permits in Wattenberg which we expect to cover all of our activity in the third year outlook Scott will provide later. For the next few minutes on slide eight, I want to discuss our progress we've made from a Wattenberg permit perspective. As you can recall, we currently focused on two oil and gas development plans or Oh gdps, named the spinny and the Kenosha. The table at the top of page eight is intended to show a clear and precise update of the behind the scenes work the team is doing. The green boxes are notating complete steps, yellow for steps that are in progress, and blank squares for the key next step.

At the bottom of the slide, we've outlined several key definitions. As Barb mentioned, we are in the final stages of our prep work on the spinny Oh GDP, anticipates submitting our completed application in the coming weeks. Once submitted, the next step is the completeness determination, in which the state will evaluate whether all forms and processes have been completed successfully. And if the application is ready for staff review.

As you suspect the Kenosha with GDP, which consists of approximately 70 wells, compared to the eight with the spinning of GDP, is a few steps behind. We continue to make progress and turning yellow boxes to green and expect to submit the completed conoce application in the next couple of months. It is very important to recognize that this is a 30,000 foot view of a long, detailed oriented process that our team is working tremendously on. We will continue to stress that our track record of safe and responsible operations, best management practices and collaborative relationships with our communities.

Well, county in the CO GCC should lead to a timely approval of future drilling permits. Look for us to provide updates to our pending applications on this slide throughout the remainder of the year. On slide nine, we give a similar update to our glenella cap. Similar to the O gdps. We have dedic have a dedicated team assigned to the planning and execution of these projects for PDC. They have done an amazing job to keep us on track for what we hope to be a submitted permit timeframe around the end of the year. As we highlighted on our year end call the glenella cap has approximately 400 locate 450 locations and accounts for three years of future turn in line activity.

On the slide we also highlight our recent accomplishments, items in progress process. And the next milestones, as you can see are positive and supportive meetings with local communities. regulatory bodies, and offset operators have contributed to surpassing the protest deadline of our cap boundary with no objections. We are now set for the commission hearing for a stay. And once approved, the oil and gas commission will not grant a permit to any other operator within the guanella cap boundary until the completion of our permit process.

Meanwhile, our team continues to work on our infrastructure plans, cumulative impact analysis, execution of our surface use agreements and any other tasks and projects. While the most common questions we get relates to timing of our capsule middle and approval. It's important to recognize the tremendous effort and significant number of key internal checkpoints in this process. Again, look forward to us providing a systematic update of our progress in this format in the upcoming months.

With that, I will turn it over to Scott Meyer.

R. Scott Meyers -- Chief Financial Officer

Thanks, Dave. And as Mark mentioned, one of our highlights of the first quarter was our significant free cash flow generation of approximately 175 million, which was driven by strong realized pricing of nearly $30 per VoIP. This pricing represents an improvement of more than 50% compared to the first quarter of 2020, was driven by significant year over year improvement in our weighted average realized sales price for each oil, gas and NGLS.

Along those lines, we've updated our anticipated gross realizations for each commodity to 95 to 98%, for oil 70 to 80% for natural gas and $15 NGLS in terms of natural gas, the 70 to 80% for your range is partially due to the abnormally high realizations in the first quarter, which includes February realizations well above 100% and above any level that we expect to receive on an ongoing basis.

As Dave mentioned, we lost a fair bit of production at the same time, but we estimate that our natural gas revenues were artificially inflated somewhere then tune of 25 to 30 million in the quarter. On the last slide, I'll point out Bart JNA, just over $2 per view he for the quarter. In terms of absolute dollars, the first quarter ga including cash and non cash expenses was approximately 33 million. This this that's expected this to be in the neighborhood of our quarterly run rate moving forward.

Next on slides, well, we highlight what I would consider the other significant achievements for the quarter our debt reduction and shareholder returns. Over the past year, we've been very clear of our intentions to focus on debt reduction, with total debt near approximately 1.4 billion. I'm proud to say that we've paid off all the debt we inherit with the SRC transaction in just one year. As you can see, we paid off over 200 million of net debt in the first quarter, and currently sit with an undrawn revolver, and 60 million cash balance. Expect us to use the majority of our free cash flow to reduce debt as we continue to march toward a roll of $1 billion. just expect us to reach that debt goal much sooner than previously messaged.

At this at that time, we will expect shareholder returns to become the primary use of our free cash flow while still reducing that. As a reminder, we reinstated our current buyback program in late February and invested 22 million to repurchase approximately 600,000 shares and remain active and systematically buy back our stock that we what we feel is a significant discount.

As we've disclosed last quarter, we expect to commence our dividend programs mid year and are still targeting one to 2% annualized yield. Finally in relation to our dividend, you can see that we've not only completed our base layer hedges for 2022. But it began the layer in the future 2023 positions, whether their dividend as part of pvcs future. And as part of our risk mitigation strategy. Look for us to extend the timeframe a couple of quarters from our previous strategy.

Our detailed positions can be found in the 10 Q and appendix in slide 18. Moving to our multi year outlook as Mark covered, we now expect to generate more than 600 million of free cash flow in each of the next three years. We're between 1.8 to $2 billion dollars. This compares to an estimate of 1.3 to 1.5 billion back in February is important to note we have made no material changes to our operating plans over the next three years. We simply updated our pricing assumptions from 45 to 50 and 12 to $55 oil, 250 gas and $15 NGLS.

As you'll notice our updated prices, assumptions are still comfortably below strip prices, leaving us potential upside to generate even more meaningful free cash flow than these already lofty projections. To know our cumulative free cash flow projections equate to more than our entire debt balance. We're more than half of our current market cap or More than 40% of our enterprise value. in a $55 world, our plan equates to a reinvestment rate of less than 50%. We are targeting debt reduction of at least 850 million over the three year period, with returns to shareholders more than 650 million. We feel confident accomplishing these goals while we still have another 500 million of additional free cash flow to flex between these buckets, again at pricing below stress. Finally, our last slide outlines our free cash flow allocation for our 2021 year.

You note that we've enhanced several of our key targets. First debt reduction. In February, we were we were targeting reducing our net debt by at least 200 million, which we accomplished in the first quarter alone. Now our plan is to reduce net debt by at least 350 million. Similarly, we had a goal of achieving a one time leverage ratio by the end of our three year outlook. We now projected to happen by the end of the year, next shareholder returns. In February, our goal was to return 120 million to our shareholders through share buybacks and our expected quarterly dividend. Now with better pricing and more free cash flow, we are targeting more than 150 million.

Finally, you'll notice no change to our expected flex bucket which is primarily used to increase the other two previously mentioned buckets based on market conditions and to accommodate our working capital needs. Overall, we're incredibly proud of the entire team's ability to execute. And once again excited to share our ever improving story with the market.

With that, I'll turn the call over to the operator for q&a.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Brian Valley from Citigroup. Your line is open.

Brian Valley -- Citigroup -- Analyst

Morning and thanks for taking my questions. And my first one when I when I look at your updated multi year free cash flow and shareholder returns guidance on slide 13. I noticed with the higher price deck your your debt reduction target actually increased more than the buyback plus dividends bucket there any updated thoughts around the right long term capital structure? And at what point does the incremental cash flow start to accrue more to the shareholder return bucket? Or I guess, after another way? Has your mental accounting? The flex free cash flow bucket changed?

Barton R. Brookman -- President And Chief Executive Officer

Yeah, man, it's a great question. I think number one, when you look at it right now, debt paid down store number one goal. But we want to start we have started meaningfully returning capital to shareholders. So right now as we're headed toward that $1 billion target I would say debt pay down is our larger focus. However, once we hit that $1 billion target, I think you'll see that our returning capital to shareholders will start being it will increase and will be greater than what we are using to pay down debt with so when you look over the three year period, getting us down to paying down 850 million a debt will get us down to approximately 750 million of debt, which seems to be a pretty comfortable number for us.

And then even when you get to that number, I think the shareholder returns would continue to increase from there. So that's just the method to the madness. We just want to make sure that paying down debt is good financial stability of the company. And so that's our number one priority now. But we we do want to begin this year holder return process and like you said you expect our first dividend payment sometime this summer.

Brian Valley -- Citigroup -- Analyst

Great. And then maybe one on the the operation front. Can you talk through activity timing this year, it looks like based on your second quarter volume guidance, your fourth year year over year commentary, it seems to imply pretty healthy sequential oil growth in the third quarter to make all those guidance items square. How should we think about what's driving those sequential trends and could then give those incremental volumes fly forward in the two queue depending on on ultimate timing?

Barton R. Brookman -- President And Chief Executive Officer

Yeah, I mean, I'll start on debuts and go into the details. If you remember the first place to start is just with our Delaware cadence. And our Delaware completion crews just gotten under the way the last 60 days. And those turning lines are just starting to happen now. So I think our Delaware production really is going to be increasing pretty significantly. And we won't hit our peak probably sometime in the third quarter. Is that fair? Dave?

David Lillo -- Senior Vice President, Operations

Yeah, most of our standard will be in the second quarter as we run that completions group full time in Delaware, with production really coming on started the second quarter, but really, ultimately, most of the production will hit in the third quarter. And then with the Wattenberg, just a quick reminder, you know, if you go back to our 10k slide deck that we had, we showed you some of the economics and some of our other areas in the plains area has some of our best economics and those wells were the focus area of our turning lines in late December and early January. So that does mute a little bit your oil growth in the first and second quarter. However, when you look at the returns and the values that we're bringing forth to the shareholders, they're phenomenal project. So I do expect to see a big step between first and second quarter, but even a bigger step between second and third quarter. And we were very comfortable following our production, both oil production and our overall production within those Daniel guidance.

Operator

Your next question comes from the line of Neal Dingmann from Truist. Your line is open.

Neal Dingmann -- Truist -- Analyst

Hey, morning, guys, it's actually for trans filling in, he just wanted to maybe brush up on the multi year outlook, when you're looking at your target is, are you going to do anything where you shift maybe where you're targeting, if oil prices go higher, or if there's you know, a gas price move anything like that, or is permitting and timing really kind of locks you in to the production mix that you're already seeing.

Barton R. Brookman -- President And Chief Executive Officer

I mean, if you're talking about production mix, I mean, we're pretty well locked in what we're going to do for this year, as we said before, the first quarters is going to be our low our percentage oil in the low 30s. And when the Delaware production starts coming on, you're gonna see the company wide oil production increase, and, you know, get closer to that mid 30% range. So, you know, our Delaware production, you know, the wells were turning on, those are all decks, we're just going through and executing the program and the Wattenberg program.

Again, it we have a pretty steady cadence, and, you know, we have the 200 doctors out there. So those are what are going to be turned in like next year, there's not there's not a lot of movement in the program. More for the multi year outlook, is there any wiggle room, you know, two years out kind of situation? Or is it still, you know, steady as she goes for, for the plan do? Yeah, I mean, I would say for them also, it's still pretty much steady as you go. I mean, we're, what we're drilling this year in the Delaware will be completed next year in the Delaware and in the Wattenberg. I mean, all of our turning lines, and are either buds right now, or, or permitted.

So you know, the exact order they might move from quarter to quarter, but if you look the next three years, it's going to be stuff that's permanently right now or spot. Absolutely. And really just my, my last follow up is the, the gdps, and CIPS Do you can you talk about the product mix between those three, and maybe if that determines timing or, or it's really more about when you get the permits in the door, you'll, you know, go ahead and develop them.

So starting out with our, with our permitting philosophy, you know, we took on a three pronged approach. So we had two gdps, one smaller one, one larger one, and then the glenella cap, which will be submitted later in the year. The spinny is in our planes. And it's, it's a eight miles, three mile laterals should be pretty gassy at that point. The Kenosha is over in our kirsi area, just south of our our main focus area. That'll be a little more oilier. And we're hoping to submit that application here in a couple months. And then our big focus project is the glenella cap, and that's really part of our summit area. And we're really excited about that we're on target to submit that at the end of the year. Tonight, I do believe if you're looking for the oil mix on the three different areas that was outlined on the last on the last few calls that correct Thank you.

Operator

Your next question comes from the line of Umang Choudhary from Goldman Sachs. Your line is open.

Umang Choudhary -- Goldman Sachs -- Analyst

I thank you for taking my question. Can you hear me? Yes, yes, again. My first question is really around use of free cash flow, like you mentioned at current strip, you will likely generate more free cash flow than $600 billion this year. And in terms of allocating that cash flow, reducing that to a billion dollars is your number one priority. But you also mentioned that your shares are under value today. So I guess I'm just wanted to get your thoughts around if we actually do achieve a higher oil price, do you see the potential to actually deploy more toward share repurchase? And how to get around around user free cash flow?

R. Scott Meyers -- Chief Financial Officer

Yeah, I think I think that's a fair question. You know, when we look at it, again, when we laid out our targets here, in the $55 world, I would say that, we would, as we get closer to that $1 billion of total debt, you can see a slight percentage go a little bit more to the share repurchases. But still, when I look at our free cash flow until we hit that billion dollars, more of it will go toward the debt percentage wise compared to returning capital to shareholders. With that said, If strip prices, you know, we have an extra 100 million, maybe 100 100 million plus, you know, both buckets could move north.

Umang Choudhary -- Goldman Sachs -- Analyst

Great, that's super helpful. Thank you. And my follow up question is on exempt capex. Just wanted to get your thoughts around your tips for this year. You mentioned a frack holiday in first quarter is still on track for the tariffs which are guided in fourth quarter for 2020 for 2021. And then any thoughts around inflation and its impact your capex program?

R. Scott Meyers -- Chief Financial Officer

Yeah, so that frack holiday that I was alluding to, came with that storm, we decided to shut down our frac and Wattenberg for about five to six days, we had a frat holiday scheduled in the second quarter. So we were just kind of shifting that we probably won't do that back holiday, but we kind of shifted some of that cost from the the capital costs from the first quarter to the second quarter there. We're not, we're not changing our long term forecast for the year and feel very confident that we'll be able to meet those numbers. I think the second part of your question was the cost, creep or cost increases that we may be seen in the future. And I guess to summarize that we've seen some pressures from a few providers and contractors, which led to some small concessions, really, it's the steel, the frack and the cement. The we've seen the most pressure, they can only account for about five to 10% of our ASB is and you know, through our formal bidding process earlier this year, we're pretty locked in for the second quarter. We do see, you know, maybe a modest increase in toss creep, third and fourth quarter if these commodity prices do hold in.

Umang Choudhary -- Goldman Sachs -- Analyst

Got it? Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Michael Scialla from Stifel. Your line is open.

Billy [Phonetic] -- Stifel -- Analyst

Hey, Billy, how filling in for Mike. Are you forecasting $15 for NGLS for 2021. And you realize 2119 in the first quarter. Can you say we're NGO NGO prices are now and how you see the market fundamentals shaking out for the remainder of the year.

Barton R. Brookman -- President And Chief Executive Officer

Lance you want to jump on that?

Lance A. Lauck -- Executive Vice President, Corporate Development And Strategy

Yeah, sure. A great question. For where we sit right now, Billy, I would say that $15 per barrel is conservative. You know, we'd see 2021 being above the $15 per barrel mark. If you look at 22 and 23. Based on forward projections and our type of ngl barrel, we think is closer to the 15 per barrel. So if there is a bit of an uplift is going to happen here in 2021 versus the $15.

Billy [Phonetic] -- Stifel -- Analyst

Great, thanks. That's all for me. Thanks for the caller.

Operator

Your next question comes from line of Tom Hodge from Wells Fargo. Your line is open.

Tom Hodge -- Wells Fargo -- Analyst

Hey guys, solid quarter. My question relates to the cap. I'm curious to what extent the almost direct overlap with the Mountain View CDP provided the tailwind to your pre submission work. And perhaps the pace at which the CO GCC will parse through approval.

Lance A. Lauck -- Executive Vice President, Corporate Development And Strategy

I think probably our cap the way it's outlined today, and it's about 32,500 acres, gross acres right now, I think it's probably about two thirds of the mountain view that SRC had was working on at the time and about one-third of our acreage that kind of fit like a glove into that. So right now, you know, it's similar, they weren't very long, far in the process. And we kind of pulled everything back out, and working the new oil and gas Commission's new process, which we've been in constant communication with them on how we need to take steps forward. So that's about where we stand. It's going to be about 450 wells and about 25 pads, but we're making really good progress. And then we're very confident as a team, we're going to be able to execute on this.

Tom Hodge -- Wells Fargo -- Analyst

Great. That's all for me. Thanks, guys.

Operator

And there are no further questions over the phone line at this time. I would now like to turn the conference back to mark Bergman, for closing remarks.

Barton R. Brookman -- President And Chief Executive Officer

Thanks for hosting the call and to say thank you to everyone your ongoing support. And we just appreciate you joining us today for what we think is a pretty terrific story. So again, thank you.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Kyle Sourk -- Senior Manager, Corporate Finance And Investor Relations

Barton R. Brookman -- President And Chief Executive Officer

R. Scott Meyers -- Chief Financial Officer

David Lillo -- Senior Vice President, Operations

Lance A. Lauck -- Executive Vice President, Corporate Development And Strategy

Brian Valley -- Citigroup -- Analyst

Neal Dingmann -- Truist -- Analyst

Umang Choudhary -- Goldman Sachs -- Analyst

Billy [Phonetic] -- Stifel -- Analyst

Tom Hodge -- Wells Fargo -- Analyst

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