PDC Energy, Inc. announced its 2020 fourth quarter and full-year operating and financial results. The Company also provided detailed 2021 guidance and a preliminary multi-year outlook.
2020 Fourth Quarter and Full-Year Highlights:
Net cash from operating activities of approximately $220 million and $870 million in the fourth quarter and full-year 2020, respectively. Adjusted cash flows from operations, a non-U.S. GAAP metric defined below, of approximately $270 million and $920 million for the comparable periods.
Oil and gas capital investments of approximately $110 million and $520 million for the fourth quarter and full-year 2020, respectively.
Approximately $160 million and $400 million of adjusted free cash flow (“FCF”), a non-U.S. GAAP metric defined as net cash flows from operating activities, excluding changes in working capital, less oil and gas capital investments.
Reduced total debt by approximately $300 million since closing the SRC Energy, Inc. ("SRC") acquisition, resulting in a year-end leverage ratio, as defined by the Company’s revolving credit facility, of approximately 1.7 times.
Implemented initiatives aimed at decreasing both total emissions and flaring intensity as the Company is aligned with the World Bank in achieving zero routine flaring by 2030, with aspirations to reach this goal sooner. In 2020, the Company flared approximately 0.2 percent of its total gross natural gas production, including approximately 1.6 percent of gross Delaware Basin natural gas production, an improvement of more than 50 percent compared to 2019.
2021 Guidance Highlights:
Oil and gas capital investments expected between $500 and $600 million.
Anticipate generating more than $400 million of FCF assuming $45 WTI crude oil, $2.50 NYMEX natural gas and NGL realizations of approximately $12 per barrel.
The Company plans to reinvest less than 60 percent of its adjusted cash flows from operations into oil and gas capital development with the remaining portion being allocated to reduce absolute debt by more than $200 million and to return more than $120 million to shareholders through its reinstated stock repurchase program and planned dividend program, which is anticipated to commence mid-year.
Total production and oil production expected between 190,000 and 200,000 barrels of oil equivalent (“Boe”) per day and 64,000 and 68,000 barrels (“Bbls”) of crude oil per day.
President and Chief Executive Officer Bart Brookman commented, “As is the case for many, Covid-19 has had a lasting impact on the way in which we live as individuals and operate as an organization and I'm incredibly proud of our team's ability to adapt, persevere and succeed in what was an incredibly unique and challenging year. Through it all, we continued to make meaningful strides in both our operating efficiencies and financial results, as evidenced by the significant improvements in our cost structure and the nearly $400 million of free cash flow in 2020.”
"Importantly, the successes of 2020 have positioned PDC to deliver an unmatched three-year outlook highlighted by the ability to generate well over $1 billion of free cash flow at prices below the current strip. Additionally, PDC's commitment to significantly reduce absolute debt levels, coupled with the stock repurchase program and planned quarterly dividend, offer an unrivaled shareholder-friendly, three-pronged approach to sustainable value-creation."
2020 Operations Update
In 2020, the Company invested approximately $520 million in the development of its crude oil and natural gas properties and produced 68.4 MMBoe, or approximately 187,000 Boe per day including oil production of 23.7 MMBbls or 65,000 Bbls per day. Both total production and oil production were significant increases compared to 2019 due to the merger with SRC in January 2020. In the fourth quarter, the Company’s oil and gas capital investments of approximately $110 million contributed to total production of 16.6 MMBoe and oil production of 5.6 MMBbls.
In Wattenberg, the Company invested approximately $425 million to spud 105 wells and turn-in-line (“TIL”) 124 wells, including 19 spuds and 23 TILs in the fourth quarter. Production for the year averaged 157,000 Boe per day with oil accounting for approximately 53,500 Bbls per day, while production in the fourth quarter averaged approximately 152,000 Boe per day and 50,000 Bbls per day, respectively. PDC exited 2020 with approximately 200 drilled but uncompleted wells (“DUC”) and 300 approved drilling permits. The combined total of DUCs and permits represents over three years of future TILs at the current and expected future pace.
In the Delaware Basin, PDC invested approximately $95 million to spud eight wells and TIL 13 wells. Production for the year averaged approximately 30,000 Boe per day and 11,500 Bbls per day, while fourth quarter production averaged approximately 28,000 Boe per day and 11,000 Bbls per day, respectively.
PDC’s estimated proved reserves as of year-end 2020 were 731 MMBoe, with proved developed reserves accounting for approximately 44 percent of the total. Year-end 2020 proved reserves reflect a decrease of approximately 19 percent compared to PDC and SRC pro forma year-end 2019 proved reserves of approximately 905 MMBoe. The year-over-year decrease is predominately due to the Company’s shift in emphasis to a FCF generation business model, which resulted in a slower development pace with reduced total proved reserves in accordance with the Securities and Exchange Commission’s five-year rule. The majority of the impacted reserves were re-classified as probable reserves; however, the Company anticipates they will be promoted to proved reserves in future years.
2021 Capital Investment and Financial Guidance
PDC anticipates 2021 capital investments of $500 to $600 million to generate between 190,000 and 200,000 Boe per day and 64,000 to 68,000 Bbls per day, reflecting approximately five percent total production growth and flat oil production on a year-over-year basis. The Company’s revised production ranges reflect an increase in expected total production and no change in expected oil production compared to prior guided ranges due to sooner than previously planned completions of large, gassier Plains wells in Wattenberg and the delayed completions of oilier Delaware basin wells from January to March.
PDC expects its capital program to generate more than $400 million of FCF, assuming $45 per Bbl WTI, $2.50 per Mcf NYMEX natural gas and NGL realizations of $12 per Bbl. In late February 2021, PDC reduced its debt balance to below its near-term target of $1.5 billion and subsequently reinstated its stock repurchase program. Also, in February, the Company’s Board of Directors approved the implementation of a quarterly dividend program expected to commence in mid-2021 with an initial target of a one to two percent yield. As part of PDC’s long-term strategy, it is targeting 2021 debt reduction of more than $200 million and shareholder returns, consisting of stock repurchases and dividend payments, of at least $120 million. The remaining projected FCF is expected to flex between further debt reduction, additional shareholder returns, working capital needs and business development initiatives as dictated by macro-level conditions such as commodity prices and PDC share price.
In Wattenberg, the Company expects to utilize one full-time completion crew, one full-time drilling rig and one intermittent spudder rig. Well costs are expected to average approximately $360 per lateral foot, a decrease of ten percent compared to approximately $400 per lateral foot in 2020. Updated projected well costs reflect multiple operating efficiencies realized in 2020, including average spud-to-spud extended-reach lateral (“XRL”) drill times of five days and more than 20 completions stages per day on average. Further, PDC plans to submit permit applications for more than 500 future drilling locations through two oil and gas development plans and one comprehensive area plan. If approved, these locations, combined with the Company’s current DUC and approved permit backlog, represent all projected TILs through 2026.
In the Delaware basin, XRL drilling, completion and facility costs are expected to average less than $800 per foot, an improvement of more than five percent compared to 2020 costs of approximately $850 per foot.
Environmental, Social and Governance (“ESG”) Highlights
In 2021, PDC plans to undertake several initiatives aimed at further improving its ESG best-practices. From an environmental standpoint, the Company expects plugging and reclamation of more than 350 legacy Wattenberg vertical wells, while in the Delaware basin, the Company plans to install hydrogen sulfide treatment earlier in the producing life of the well. These initiatives are aimed at decreasing both total emissions and flaring intensity as the Company is aligned with the World Bank in achieving zero routine flaring by 2030, with aspirations to reach this goal sooner.
As highlighted in a separate press release issued on February 22, PDC continued its board refreshment initiatives through the appointment of Diana L. Sands, effective February 18, and the nomination of Carlos A. Sabater at the Company’s 2021 Annual Meeting of Shareholders in May 2021. Also, in February, the Company’s Board of Directors approved executive compensation metrics tied to health and safety, increased alignment with Sustainability Accounting Standards Board (“SASB”) standards, establishment of reduced greenhouse gas and methane emission targets and Board diversity and refreshment initiatives.
PDC plans to invest approximately 60 percent of its full-year capital budget in the first half of the year, with anticipated first quarter investments of less than $150 million. The remaining 40 percent of full-year investments are expected to be split relatively evenly between the third and fourth quarters.
Total daily production in the first quarter is expected to decline zero to five percent compared to the fourth quarter of 2020, while daily oil production is expected to decline five to ten percent. Each anticipated decline includes the projected impact related to weather and associated downtime in mid-February. The disproportionate decrease in oil production compared to total production is primarily due to a lack of Delaware completions in the second half of 2020, delaying 2021 Delaware completions to March from January and a focus in the gassier Wattenberg Plains area at the end of 2020 and beginning of 2021. Daily volumes, for both total production and oil production, are expected to increase in the second and third quarters before flattening in the fourth quarter at levels ten to 15 percent greater than the fourth quarter of 2020.
Finally, PDC expects to generate meaningful FCF in each quarter, with more than $75 million expected in the first quarter and approximately 65 percent of the total 2021 FCF expected in the second half of the year.
Multi-Year Outlook and Return of Capital Initiatives
The Company’s outlook through 2023 is predicated on generating substantial levels of FCF through consistent capital investments expected between $500 and $600 million per year while delivering a mid-single digit compound annual growth rate in both total production and oil production. Assuming $45 per Bbl WTI, $2.50 per Mcf NYMEX natural gas and $12 NGL realizations, PDC projects to generate more than $400 million of FCF in each of the next three years and between $1.3 billion and $1.5 billion of cumulative FCF. The projected cumulative FCF represents approximately 50 percent of the Company’s market cap and nearly 33 percent of its enterprise value as of February 19, 2021. The Company has an immaterial Federal acreage position and projects the combination of its current DUCs and approved drilling permits to be sufficient in executing its anticipated Wattenberg development plan over the next three years.
Under the same price assumptions, PDC projects to reinvest less than 60 percent of its adjusted cash flows from operations in the development of crude oil and natural gas. More than 15 percent of its adjusted cash flows from operations is expected to be allocated to debt reduction as the Company targets a long-term sustainable leverage ratio below 1.0x. At least ten percent of its adjusted cash flows from operations is expected to be allocated to shareholder-friendly initiatives, including its stock repurchase program and recently approved dividend program expected to commence mid-2021. Similar to 2021 expectations, remaining cash flows are expected to flex between further debt reduction, additional shareholder returns, working capital needs and business development initiatives as dictated by macro-level conditions such as commodity prices and PDC share price.
2020 Oil and Gas Production, Sales and Operating Cost Data
Crude oil, natural gas and NGLs sales, excluding net settlements on derivatives, decreased to $1.2 billion in 2020 compared to sales of $1.3 billion in 2019. The decrease in sales between periods was due to a 36 percent reduction in sales price to $16.86 per Boe from $26.46 per Boe being partially offset by a 38 percent increase in production. The increase in production between periods was due to the merger with SRC in January 2020, while the decrease in sales price per Boe was driven by decreases of 35 percent, 17 percent and 26 percent decreases in weighted-average realized oil, natural gas and NGL prices, respectively. The combined revenue from crude oil, natural gas and NGLs sales and net settlements received on our commodity derivative instruments was $1.4 billion in 2020 and $1.3 billion in 2019.
In the fourth quarter, crude oil, natural gas and NGL sales increased one percent to $344 million from $340 million in the comparable 2019 period. The increase in sales between periods was primarily due to the 27 percent increase in production outweighing the 20 percent decrease in sales price per Boe. The combined revenue from crude oil, natural gas and NGLs sales and net settlements received on commodity derivative instruments increased 15 percent to $395 million in the fourth quarter of 2020 from $342 million in the comparable 2019 period.
Production costs for 2020, which include LOE, production taxes and TGP, were $299 million, or $4.37 per Boe, compared to $269 million, or $5.45 per Boe, in 2019. In the fourth quarter of 2020, production costs totaled $80 million, or $4.83 per Boe, compared to $71 million, or $5.42 per Boe in the comparable 2019 period. LOE per Boe improved 18 and 16 percent for the comparable full-year and fourth quarter periods, respectively, as the Company realized efficiency-gains through compressor management, reduced overtime and vendor price concessions. TGP per Boe increased 21 percent and 55 percent for the comparable full-year and fourth quarter periods, primarily due to the accounting treatment of new transportation agreements and amendments to existing crude oil sales contracts resulting in increases to both TGP and realized prices.
2020 Financial Results
Net loss for 2020 was approximately $724 million, or $7.37 per diluted share, compared to net loss of $57 million, or $0.89 per diluted share in 2019. The year-over-year change was primarily due to $882 million impairment charges recognized in 2020 compared to $39 million recognized in 2019, partially offset by increased commodity price risk management gains between periods. Adjusted net loss, a non-U.S. GAAP financial measure defined below, was $625 million in 2020 compared to adjusted net income of $53 million in 2019. The year-over-year change was primarily due to aforementioned impairment.
Net cash from operating activities for 2020 was approximately $870 million compared to $858 million in 2019. Adjusted cash flows from operations was approximately $920 million in 2020 compared to approximately $825 million in the comparable 2019 period. The year-over-year difference in each metric was primarily due to an increase in production volumes and an increase in realized settlements of our commodity derivatives partially offset by a decrease in realized sales price between periods.
G&A, which includes cash and non-cash expense, was $161 million, or $2.36 per Boe, in 2020 compared to $162 million, or $3.27 per Boe, in 2019. Approximately $30 million of transaction and transition expenses related to the SRC merger are included in 2020. Inclusive of these expenses, G&A per Boe improved 28 percent year-over-year, while excluding the deal-related costs would result in a 2020 G&A per Boe of $1.92, a 41 percent improvement from 2019.