PDC Energy, inc (PDCE) Q2 2021 Earnings Call Transcript

Image source: The Motley Fool.

PDC Energy, inc (PDCE)
Q2 2021 Earnings Call
Aug 5, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the PDC Energy Second Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Kyle Sourk, Investigation Relations. You may begin, sir.

Kyle Sourk -- Director Corporate Finance & Investor Relations

Thank you, and good morning. On todays call, we have President and CEO, Bart Brookman; Executive Vice President, Lance Lauck; Chief Financial Officer Scott Meyers; and Senior Vice President of Operating, Dave Lillo. Yesterday afternoon, we issued our press release and posted a presentation that accompanies our remarks today. We also filed our Form 10-Q. The press release and presentation are available on the Investor Relations page of our website, www.pdce.com. On todays call, we will reference both forward-looking statements and non-U.S. GAAP financial measures. The appropriate disclosures and reconciliations can be found on slide two and the appendix of that presentation. With that, Ill turn the call over to Bart Brookman.

Barton R. Brookman -- Chief Executive Officer, President & Director

Thank you, Kyle, and hello, everyone. A tremendous quarter for the company as PDCs era of free cash flow generation and shareholder returns continues to accelerate. Throughout the call, you will see operating and financial results, which I believe are top tier for the industry and truly differentiate PDC. Fourth quarter free cash flow of $165 million on a capital investment of $178 million, both better than expectations; production for the quarter, 17.4 million barrels of oil equivalent, in line with our expectations; and currently, we have steady state, highly efficient operations in both basins, delivering strong drilling and completion results. The companys balance sheet continues to strengthen and debt reduction remains a priority. Leverage ratio, quarter end, 1.2 times and net debt for the company of $1.3 billion. Costs for the company continue to be well managed. [Indecipherable] costs came in at $2.43 per BOE.

And for the quarter, $38 million was returned to the shareholders as we initiated the companys first dividend and continue to repurchase shares. Year-to-date, approximately $60 million has been returned to shareholders, and we anticipate the total shareholder return will exceed $180 million by year-end 2021. Now let me cover the companys outlook through year-end 2023, a reflection of the quality of our assets and our execution capability. We anticipate free cash flow will target $2.5 billion on a capital spend of approximately $1.8 billion, our reinvestment rate of 40% to 45% of our adjusted cash flow from operations and, simultaneously, we expect to drive our leverage ratio well below 1.0 and pay down our debt by approximately $1 billion. This robust free cash flow provides an opportunity to return over $1 billion to our shareholders through dividends and share repurchases, all while we control costs, continue to improve the efficiency in our operations and modestly grow the production for the company. Quite a story for PDC. As I conclude my comments today, let me update you on PDCs ongoing ESG progress.

Our early fall sustainability report, which I encourage all of you to read, will detail the great strides we have made in many areas. Today, I would like to hit some of the key highlights. The company has devoted considerable engineering and environmental resources toward managing our emissions. And I am proud to announce quantifiable goals through 2025 that include a 60% reduction in greenhouse gas emissions and a 50% reduction in methane intensity. Currently, PDC has also achieved a flaring percentage for the company of approximately 0.1%, which I believe is top-tier for the industry.

Our goal is to achieve 0 routine flaring by 2025, a significant time acceleration from our prior commitments. And additionally, so important in our business today, I would like to thank all of our field operations in Texas and Colorado for their ongoing focus on safety. Both basins just celebrated 3-plus years without a single lost-time injury. As we look at the ever-evolving world of ESG, I am pleased with the tremendous progress we have made and the goals we have set as a company. The environmental and emission controls, the safety and welfare of the PDC employees and the extensive focus on our communities and charitable giving and the ongoing governance improvements for the company. With that, Ill turn this call over to Dave Lillo for an update on PDCs operations.

David J. Lillo -- Senior Vice President of Operations

Thanks, Bart. As you mentioned, theres a lot to be excited about this quarter. First and foremost is our ability to operate safely in each of our assets. We put a tremendous amount of effort and emphasis on training and really instilling a culture that prioritizes the safety throughout our organization. So kudos to everybody for these achievements. In terms of operations for the quarter, we invested approximately $180 million and saw some solid sequential production growth compared to the first quarter. As we highlighted in the press release, capital was a bit below our initial expectations, as around $15 million of non-op activity shifted from the second quarter to late in the third quarter. That said, production still came in ahead of expectations, both in terms of total and oil due to the strong performance in Wattenberg wells and slight acceleration of our Delaware Basin turn-in lines. In Wattenberg, we spud and turned in line just over 20 wells. We had some changes to our operation schedule that led us to focus on larger pads and larger laterals compared to the first quarter and resulted in quite a bit fewer turn-in lines.

Heading into the back half of the year, there are actually more SRLs and MRLs on the schedule. So expect the turn-in lines per quarter to be doubled, if not more, than the second quarter level. In Delaware, we turned in line our entire program for the quarter, thanks to the efficiency gains on the drilling and completion side weve been realizing year-to-date. We released our completion crew for the year, but remain active with one drilling rate, and the team is excited to get back at it early in 2022. Moving to the next slide. As Bart covered, the consistency with our messages in the past couple of months. Weve started to see some cost inflation related to higher commodity prices that we expect to start trickling into our AFEs for the rest of the year. In Wattenberg, were expecting well costs to increase approximately 10% to around $4 million for an XRL. Its no secret to anyone on this call that steel, service costs and diesel are much more expensive than they were six months ago. And while these dont make up a huge portion of our AFE, the magnitude of the cost increase is pretty substantial.

The commodity prices, where we are, we also return some cost concessions provided to us back in the middle of COVID. The good news is the wells that we expect to turn in line the remainder of the year were drilled and cased around a year ago at lower pricing. So what youre seeing now is a blend of past and current costs. As I mentioned in Delaware, our completion activity is done for the year. so much of the cost pressure is really irrelevant until we go back out to bid this fall. More importantly, weve managed to continue increasing our drilling and completion efficiencies and are now averaging XRLs of approximately $7.5 million or 5% below budgeted costs of $7.9 million per well. On the drilling side, were really seeing the benefit of our relationship with H&P drilling, changing to a rotary, steerable technology and modifying our wellbore construction, all of which have helped improve our spud to rig release time by approximately 25% to 30% compared to last year. In terms of completion, the main driver of cost savings is switching to a dual fuel blend utilizing 50% natural gas and 50% diesel and utilizing reduced water during our fracs.

Switching gears, we provide a high-level update to our permit progress on slide nine. Just last week, our Spinney OGDP passed through the completeness determination stage with the state and has a commission board hearing date currently scheduled for October 6. Given that everybody is in unchartered water and working through a new process, were pleased with the states ability to get us through the completeness period and on the docket in such a timely fashion. It has been a great team effort on both PDC and COGCC side. As far as the Kenosha OGDP and Guanella CAP, the team continues to work to make good strides in turning yellow boxes green. Our goal for submittal for the Kenosha application will be late in the third quarter and the Guanella application around the end of year time frame. As a reminder, if approved the Spinney, Kenosha and Guanella represent over 500 future drilling locations in Weld County. With our current permit count and DUC backlog, this would cover our turn-in-lines through 2027. With that, I will turn it over to Scott Meyers.

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

Thanks, Dave. As always, my comments will include GAAP, non-GAAP and forward-looking statements; so Id encourage you to see our reconciliation found in the appendix. Thus far, weve given several components of our updated guidance, but on slide 11, you can find it all in one place as well as some quarterly commentary. Most importantly, we expect to generate more than $800 million of free cash flow this year compared to prior guidance of $600 million. Weve obviously benefited from an improved pricing backdrop with a 33% increase in expected free cash flow compares to a 5% increase at the midpoint of our capital investment range. To reiterate, the increase in projected capital to the top half of the previous range is simply due to cost inflation as were sticking with our operating cadence. The table on the right-hand side of the slide clearly shows significant improvements to our free cash flow margin and free cash flow yields.

Importantly, you can also see our increases to our projected debt reduction and shareholder returns this year. In terms of debt, we now expect to reach $1 billion, our target, by year-end, which means we will have reduced our total debt by approximately $600 million in 2021. We also expect our trailing 12-month leverage ratio to be less than 1 times by the end of next quarter. As far as shareholder returns, we began the year targeting $120 million, increased it to $150 million in May and are again increasing at this time to more than $180 million. Approximately $36 million of these returns should come from our quarterly base dividend, meaning we project more than $145 million of share repurchases this year. Finally, in terms of production, changes to our completion schedule and non-op program have resulted in us narrowing our guidance range 190,000 to 195,000 BOE per day and 64,000 to 66,000 barrels of oil per day. We still project strong sequential growth in the third quarter and strong Q4 over Q4 growth of approximately 15%, which positions us well heading into 22. Realistically, production continues to be an output for PDC. Our focus on generating free cash flow, paying down our debt and shareholder returns. Moving to the balance sheet on slide 12.

You can see we reduced our net debt by approximately $50 million in the second quarter and now have a cash balance over $100 million as we prepare for the settlement of our converts next month. In order to reach our $1 billion debt target, well obviously have to pay down a bit more debt than just the converts. Look for PDC to consider various other management liability tactics in the third and fourth quarter. In the quarter, we returned just under $40 million of capital to shareholders through the payment of our first quarterly $0.12 per share dividend, and we repurchased approximately 660,000 shares. Again, given the pace at which were paying down debt, the inflection point for our shareholder return initiatives is quickly approaching. Were excited about the opportunity to drastically increase the pace of our share buyback program and hopefully increase our base dividend in the near future. Most of this is evident on slide 13, when you look at our multiyear outlook. Were now projecting a 3-year cumulative after-tax free cash flow of approximately $2.5 billion. This represents nearly 2 times our current debt balance or almost half of our enterprise value. Importantly, its a $600 million increase or more than 30% compared to our prior outlook, while cumulative capex has increased only $100 million.

Were also increasing our cumulative debt reduction and shareholder return targets for the three years, each being more than $1 billion. For debt, our prior commitment was $850 million. And for shareholder return targets, it increased from $650 million. Its very important to note that through June 30, this year, weve had total shareholder returns of approximately $60 million. This means to hit our $1 billion number through 2023 over the next 30 months, we expect to average at least $30 million of shareholder returns per month over that time period. Again, we hope to achieve this through an accelerated share buyback program and growth in our quarterly dividends, with a willingness to consider other forms in future years. I want to close the call with one last thank you to our team. Its been a tremendous start to the year, and its an exciting time to be a PDC employee and shareholder. With that, Ill turn the call over for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Brian Downey of Citigroup.

Brian Downey -- Citigroup -- Analyst

Good morning. Thanks for taking my questions. Maybe for Bart or Scott. I wanted to ask on shareholder returns. Youre now aiming, as you mentioned, for $1 billion-plus of total shareholder return through 2023, $180 million of that, $180 million of that plus this year. Scott, you mentioned the implied $30 million plus pace per month there, almost triple your shareholder return pace from 2Q 21. As that shareholder return pace starts kicking into higher gear once you hit debt targets later this year, how are you thinking about the best split between repurchases and dividends over the medium term?

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

Yes. Its a great question. Yes, to start out, youre right. We still are going to hit that or want to hit that $1 billion target before you really see us pivot. But again, once we hit that pivot, youre going to see the debt pay downs come down quite a bit, still paying down debt but at a much slower pace, and youre going to see the inflection there of the return of capital to shareholders. Were still a big believer right now that we are undervalued on the share buyback. So I would say youre going to see both growth in our dividend, but Id say the more substantial portion is going to be the growth in our shareholder or our share buyback program. We know that -- we talked about it. We talked about the politics of Colorado. When we get these permits approved, we think its going to be a lift on the stock. And so until that time, we think buying back shares is a really good option for PDC.

Brian Downey -- Citigroup -- Analyst

Great and maybe one on the operations front. On well costs and capital guidance, you mentioned a roughly 10% increase due to cost inflation, and walked through some of the drivers there. Dave, you mentioned some of the drilling and completion efficiency opportunities. What are you baking in, in terms of future efficiency potential in that well cost expectation? And do you anticipate being able to offset any of that 10%?

David J. Lillo -- Senior Vice President of Operations

Were doing extremely well in our Delaware drilling and completions right now. Were utilizing newer technology with rotary steerables, leveraging our new relationship with H&P drilling. We continue to lower costs there, and thats going to offset our cost increases that we see in Delaware. On the Wattenberg side, we continue to be very effective with our drilling and completions. Were averaging four days for an XRL in Wattenberg and we continue to have improvements every day. So were hoping that our efficiencies will continue to move in the right directions and try to offset some of these cost increases that were seeing right now.

Barton R. Brookman -- Chief Executive Officer, President & Director

Let me just add a little flavor. Were extremely proud of our Wattenberg team. This last five, seven years, if you go back and look, the advancements weve made and pushing our efficiencies to four to eight type spud-to-spud drill times and some days, 20 to 24 stages per day, and then you couple that efficiency and that optimization of our development program with the pandemic, the concessions that came out, that gave us the ability through our efficiencies and tremendous pricing by a lot of the vendors to announce a $3.6 million XRL. I know theres been some comments about the 10%, and maybe were an outlier, but we didnt feel it was appropriate to not let the market know that we are so efficient and we continue to try to find ways to optimize that, but the right thing to do was to let you guys know, hey, were coming off the pandemic, were having some asks, and our efficiencies are so dialed in, its hard to squeeze more and more out of it. So I think we absolutely did the right thing here. And again, were exceptionally proud of the team and the efficiencies they have achieved in the Wattenberg field and the Delaware and some of the things going on there that Dave called out.

Brian Downey -- Citigroup -- Analyst

Appreciate the call. Thanks everyone.

Operator

Your next question comes from the line of Michael Scialla of Stifel.

Michael Scialla -- Stifel -- Analyst

Hi, good morning Dave. Dave, you talked about moving your OGDP and CAP projects forward and the COGCC kind of moving through uncharted water here. Just maybe high-level thoughts on the whole permitting process. Have any permits been granted this year? And I guess, what gives you the confidence that youre going to get across the finish line on these projects going forward?

David J. Lillo -- Senior Vice President of Operations

I think weve made tremendous progress. Right now, our teams currently working on two OGDPs. The Spinney being one of them that has a board hearing scheduled for October 6, the other one where were working through, and on my slide that I have, working to change those yellow boxes green, as I mentioned. Weve adopted the new policies and regulations and the new processes that the oil and gas commission wants us to go forward with, with these longer-term and more extensive development plans. The teams been working very, very close with the COGCC, and I feel were making really, really good progress moving toward getting these to approval. I believe that the progress were making is right along the time frame that we need based on the current DUC count and the current permit count that we have out there. So right now its not worrying us at all and continue to work with the COGCC very closely and making sure that these development plans and all the applications and the processes that we need to go through are done effectively the first time so that they can move through the process as it was kind of outlined for us.

Michael Scialla -- Stifel -- Analyst

Got it. Okay. And is it fair to say, I guess, the permitting process has slowed down for the industry as a whole. Is it just a function of COGCC asking for these larger projects rather than granting one-off permits as they have in the past?

David J. Lillo -- Senior Vice President of Operations

Yes, I think so. The Spinney is an eight well package with one facility, and thats the one we started from. Were learning through the process and were getting better at it. The next one that well be submitting will be a 70 well package with three different facility sites, and well take the learnings from the very first one and apply them to the second one so that we can move through the process quicker. And then we can apply all that to our CAP, which is our Guanella CAP, which is made up of over 450 wells. So very pleased with the team, the results and the progress weve made so far.

Michael Scialla -- Stifel -- Analyst

Very good. And you talked about, you, Dave and Bart talked about the inflation in Wattenberg, some of your competitors, actually, most of them seem to believe they can offset inflation with efficiencies. You guys seem to be acknowledging that well costs are going higher. And I guess your thought is, I guess, the law of small numbers works against you when you get down to four days of drilling and 20-plus stages in a day, pretty hard to squeeze out more, as Bart said. I guess, as you think about -- so you acknowledge 10% inflation in the second half here. As you think about 22, would anticipate that number would go higher given that some of the benefits that you saw in the early part of this year. Is that fair to --

David J. Lillo -- Senior Vice President of Operations

Right now we kind of have old costs and new costs coming together, where we spud most of the wells will be turned in line in the second half of the quarter about a year ago. So we took advantage of drilling those and casing them last year, so we got the lower prices. Along with that, with our procurement process, we pretty much tied up all the production equipment as far as steel costs increase. Weve tied that up until the end of the year, so were taking advantage of that. What were seeing next year, were thinking its going to be in the $4 million range to drill a well, and thats from the start to the end. We will know a lot more after we go through our formal bidding process, and we pretty much kick that off in the fourth quarter. We dont like to get too far ahead of that or start it too early, because then you dont get pricing that you can rely on. So in the fourth quarter, well really understand our costs a little better. But like Bart said, we wanted to make sure that everybody was aware, and I dont think its just to us. I think everybody in our industry is starting to see these concessions come off that were given during COVID and the steel and the cement and the frac activity and everything picking up just a little bit. But well know more in the fourth quarter. And its really based on commodity prices and activity levels in each individual basins on how those costs are factored out.

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

And Dave, just to add a little bit of color. When you look at 22 and 23 in our press release, we have updated that guidance range to $600 million to $650 million, just so everybodys aware of it, and thats where we get to the $1.8 billion for the three-year cumulative investment. And we believe that the cost increases that they have is already factored into that guidance.

Michael Scialla -- Stifel -- Analyst

Thats good to hear. Last one for me. Bart, theres been a lot of consolidation in your neighborhood here. Just thoughts on M&A activity? And are you feeling any pressure to do anything on the M&A front, given the activity youve seen in the DJ Basin?

Barton R. Brookman -- Chief Executive Officer, President & Director

Yes. And to answer the last part, no, were not feeling any pressure. Were focused on execution right now. We obviously are always keeping our eyes open if the right opportunity came along. And I think as we think about additional scale, obviously, thats something tactically we would like. But I think the goal, as Ive stated many times, as we look at different projects, we want to make sure were focused on not just getting bigger as a company, but getting better as a company. So Mike, and Lance is on here, I can ask him to add a little flavor to this. But right now, the companys focus is on our execution, the free cash flow that Meyers laid out to you guys. Were happy with the way things are going in both basins. The balance sheet, if we were to give anything in consideration, our commitment to our investors is the balance sheet is always a priority, and were looking for projects, like I said, that would improve the company and be accretive on an inventory basis and be accretive on financial terms. So Lance, are you out there? I think youre connected.

Lance A. Lauck -- Executive Vice President of Corporate Development & Strategy

Yes. Yes, Mike, good question. I think the only thing Id just add to this is, obviously with the free cash flow business model, were targeting sort of that three-ish percent compounded annual growth rate as a company. And with that, we continue to, if you will, stretch the inventory life that we have in both basins. And the other thing Id add to that is our teams continue to look for, especially focus here in the Wattenberg, down-spacing opportunities and kind of picking that right spacing at these prices that we see and project going forward can deliver additional inventory on our existing acreage space. So thatll continue. The other thing well always do as well is just continue to work with trades. Those are very efficient for both parties and then kind of joining acreage together to drill longer laterals; thats something well continue to do over time as well.

Michael Scialla -- Stifel -- Analyst

Sounds good. Thank you guys.

Lance A. Lauck -- Executive Vice President of Corporate Development & Strategy

Thank you.

Operator

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

Umang Choudhary -- Goldman Sachs -- Analyst

-- Taking my questions. My first question is on your free cash flow allocation plans between debt reduction and shareholder returns. Given your strong balance sheet and like you mentioned, you believe your shares are undervalued, wanted to get your thoughts on deploying more cash toward share repurchase or dividends versus paying down debt below the $1 billion which youre targeting for this year?

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

Yes. I think its -- I mean its a fair question. I think ultimately, for the company, getting our debt balance right to give us more flexibility for if theres a reversal of the current commodity price is still my number one goal for the company. The SRC transaction we did was fantastic. But at the same time, when the pandemic hit, I would love to have been able to buy back more shares and I just couldnt because my debt burden was too high. So as you heard, weve already raised the target again this year. Were going to have a very active share buyback program. And I think getting our overall interest down is just really, really important, so we can be super successful and thrive in any commodity price environment. So look for more returns, but look for us to get that debt to $1 billion first before you really see us put it into the next gear.

Umang Choudhary -- Goldman Sachs -- Analyst

Got it. Really helpful. So I guess my next question is on hedging. Like given your reinvestment rate is expected to be very low for the next three years, and your balance sheet is expected to be strong, wanted to get your thoughts on what level of oil and gas production do you plan to hedge going forward?

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

Yes. And again, I can give it to you for commodity. But we always start with cash flows, thats our number one thing. Im here to protect the cash flows of the company. So overall, how our thought process is migrating slightly is youre going to probably see less hedges in any one individual year because we can protect a little bit less cash flow with our debt coming down. And at the same time, were hedging out a little bit further than we have because we do have that dividend that were predicting. So I would say from a volume perspective, look us to be more unhedged than weve been in the past, but maybe a little bit longer out duration. And when you see this $2.5 billion number, when we lock in a little bit, some of these small hedges, we just do a little bit of a time, were able to lock in and were locking in that $2.5 billion to a degree on some of these prices. So look for us to continue the program, but a overall slightly lower level than youve seen us in the past. You will not see us go to 60% or 70% with our debt level the way it is now that we have done several times in the past when we had higher levels of debt.

Umang Choudhary -- Goldman Sachs -- Analyst

Great. Thank you so much.

Operator

Your next question comes from the line of Arun Jayaram of JPMorgan.

Arun Jayaram -- JPMorgan -- Analyst

Good morning, gentlemen. I was wondering if you could kind of help us with how you think the sequential progression of volumes could trend in kind of 3Q and 4Q. I know that maybe some non-op pads got shifted a little bit in terms of timing. But maybe you could help buy-siders out there who have been asking us kind of questions on that 3Q/4Q trajectory.

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

Yes. I think in the press release, we tried to outline some of this. But we see a nice step-up again in the third quarter. I think from an overall production standpoint, that 5% to 10% range, oil is going to be higher, and thats due to our Delaware turn-in line schedule. I mean, for -- even though we did turn in all the wells, as Dave has said, I think our last turn in was June 27, June 28, right toward the end of the month. And most of the wells, if you took the average, were on for about 30 days. So having that Delaware, Delaware being our oiler and, obviously, the beginning part of the well is going to help boost that production, so you can look for our oil growth to be quarter-over-quarter more to that 15% to 20% range. And then a little change from what we said in the second quarter with some of the schedules and the moving, and we had to move some of our shorter laterals, its going to cause our fourth quarter to now go up compared to what we were expecting prior. and youll see some modest growth from third quarter to fourth quarter as well. I think we put in the release about what, 15% Q4 over Q4 of the yearly. So we feel pretty good about those. We feel really good about those numbers. When we go through this, the stair-step youre going to see in the third quarter really going to help generate a lot of free cash flow. And so look us to print well over $200 million next quarter.

Arun Jayaram -- JPMorgan -- Analyst

Free cash flow next quarter, great. Great. And then just on the buyback. You guys mentioned that you could maybe step up the pace of the buyback. I know you have a 10(b)(5) plan. But what kind of latitude do you have to kind of supplement the buyback with the stock kind of coming off a little bit? Just thoughts on that, I know as you kind of look at both dealing with some debt reduction as well as returning cash via the buyback.

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

Yes. We like to have that program in place so that like every day we dont have to only worry about open windows, we just go in and follow the plan. So look for a steady state. There are some opportunities when windows are open to potentially get a few more shares, and we may or may not use that tool. Im just, I think where Im sitting at today, very confident that well be able to hit that total return of over $180 million at this point with the debt reduction. And my guess is well be able to do a little bit more. So yes, we think there are some opportunities here, so were going to keep executing the plan and keep buying the shares back.

Arun Jayaram -- JPMorgan -- Analyst

Great. Ill turn it over. Thanks.

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

Thank you.

Operator

Our next question comes from the line of Bertrand Donnes of Truist.

Bertrand Donnes -- Truist -- Analyst

Good morning guys. Im probably beating a dead horse here. But on the three-year outlook, the free cash flow percent of your market cap really sticks out. And Im probably conjecturing here a little bit. But I have to assume that its because some investors just maybe dont think its going to come back in share repurchases or something like that. Can you maybe talk about the balance? After you get debt to $1 billion, is it repurchases as a plug? Or if a good asset comes along, would you kind of replace it? Or does an asset -- if you purchase asset, do you also need to maintain that same level of repurchases? And then kind of maybe on the other side of that, how sticky is the repurchase preference if dividends become what everybody starts looking at? Do you switch over? Or is it kind of an internal NAV repurchase opportunity provides the highest return?

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

Yes. A lot of questions there. And let me start out is, again, when Bart says we want not only a bigger company, but it has to be a better company, that would encompass being able to do deals and still be able to execute on these various plans, paying down $1 billion of debt, thats very reasonable. Now we could have a situation where we do an acquisition that we add some debt, but thats still going to be then a focus to continue paying it down. Again, share repurchases. We agree with you, we think our stocks a little undervalued. Obviously, weve talked already on the call about the permit status; we really think were going to rerate when that does, so the share buybacks very attractive to us right now. As far as the variable to dividend and things -- I know theres other companies that have done it. Were going to sit here. Were going to study it. And if over the next year or two, when we rerate when we get the permits, as David said, then at that time, we might consider if thats what the markets rewarding. Right now, I think its just too early to tell. I understand why people are doing what theyre doing. But were in a little bit of a different situation with the permit issue, that we think that buying shares back is the right answer for our company. So we have a lot of faith in the program. We have a lot of faith in our numbers. Our teams are doing an excellent job delivering value for PDC every day. So we feel very confident in the three-year outlook.

Bertrand Donnes -- Truist -- Analyst

Absolutely. That makes sense and then really the only follow-up is, on the inflation topic, some of the other companies are kind of talking. Is there some wiggle room where maybe you can lock in a longer-term contract or a larger order with your vendors in the fourth quarter bid cycle? Or is that not available? Or is it just not worth it because you prefer to have the flexibility so that you can kind of adjust to market cycles?

David J. Lillo -- Senior Vice President of Operations

So just giving a little color around that. Like on our drilling rig in Delaware, we just locked in a 1-year contract with them basically at the same cost that we were at this last year, with a few incentives for them to work with us and drill faster. So were pretty confident that is going to stay really consistent. Our bidding process, its one of the top-notch processes that Ive seen working for several companies. We go out to -- I think there was probably 43 vendors with 43 different types of topics that we bid, and we try to lock in for best pricing, getting three quotes for each type of topic. So I think were just going to have to see how the commodity prices play out, and I think the activity level. And I think thats going to have a big influence on what we can lock in for next year and whats going to have to be a variable type cost from commodity prices. So well just have to see as we kick off our formal bidding process here in the fourth quarter.

Bertrand Donnes -- Truist -- Analyst

Thats perfect. Thanks guys.

Operator

At this time, I would now like to turn the call over to Mr. Bart Brookman for closing remarks.

Barton R. Brookman -- Chief Executive Officer, President & Director

Yes. Thank you, Alicia. Ill make it short. Thank you, everyone. Great quarter. More to come. And as always, thank you for the ongoing support.

Operator

[Operators Closing Remarks]

Duration: 42 minutes

Call participants:

Kyle Sourk -- Director Corporate Finance & Investor Relations

Barton R. Brookman -- Chief Executive Officer, President & Director

David J. Lillo -- Senior Vice President of Operations

R. Scott Meyers -- Senior Vice President & Chief Financial Officer

Lance A. Lauck -- Executive Vice President of Corporate Development & Strategy

Brian Downey -- Citigroup -- Analyst

Michael Scialla -- Stifel -- Analyst

Umang Choudhary -- Goldman Sachs -- Analyst

Arun Jayaram -- JPMorgan -- Analyst

Bertrand Donnes -- Truist -- Analyst

More PDCE analysis

All earnings call transcripts