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Why PDC Energy Inc.'s Stock Tumbled 15% in August

By Matthew DiLallo – Sep 5, 2018 at 4:56AM

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The oil and gas company disappointed investors last month.

What happened

Shares of PDC Energy Inc. (PDCE -3.82%) lost 15.2% of their value in August, due in part to the oil and gas company's disappointing second-quarter report.

So what

PDC Energy generated $36.8 million, or $0.56 per share, of adjusted net income in the second quarter, which missed analysts' expectations by $0.03 per share. The culprit was higher production expenses, which jumped more than 30% on a per barrel of oil equivalent (BOE) basis due to an increase in transportation and lease operating costs as well as higher production taxes.

An oil pump with the sun setting in the background.

Image source: Getty Images.

On a more positive note, PDC Energy's production averaged 103,000 BOE/D during the quarter, which was 20% higher than the year-ago period. Meanwhile, oil output increased even faster at 25% year over year thanks to strong results in both the Permian Basin in Texas and Wattenberg field in Colorado. That strong growth was one of the factors driving the company to increase the midpoint of its 2018 production guidance rate to 41 million BOE.

However, the company also noted that now it expects to spend between $950 million and $985 million on capital expenses this year, which is about 9% higher than its initial forecast. As a result, PDC Energy is on track to outspend cash flow in financing its budget by $75 million to $100 million. While some of that spending increase is due to higher service costs, PDC Energy is also boosting its budget to increase its well length, build new infrastructure in its two core regions, and tweak its drilling process.

Another weight on PDC Energy's stock last month was news that Initiative 97 will appear on the ballot in Colorado's upcoming November election. If voters approve this initiative, it would effectively ban drilling on 85% of the state's non-federal land, which could cause oil production to dive 50% within the next five years. That would have a big impact on PDC Energy's growth prospects.

Now what

Currently, PDC Energy is on pace to grow its oil and gas production up to more than 200,000 BOE/D by 2020, which represents a 30% compound annual growth rate. However, with pipeline problems slowing growth in the Permian Basin and a potential drilling ban looming in Colorado, it's unclear if the company will be able to achieve this ambitious plan. That's why investors might want to watch PDC Energy from the sidelines and consider buying one of these top oil stocks instead.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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