PDC Energy, Inc. announced its 2021 second quarter financial and operating results, updated its full-year guidance and multi-year outlook and provided an environmental, social and governance (“ESG”) update, including the establishment of new quantitative environmental performance targets.
2021 Second Quarter Highlights:
- Net cash from operating activities of approximately $225 million, adjusted cash flows from operations, a non-U.S. GAAP metric defined below, of approximately $345 million and oil and gas capital investments of approximately $180 million.
- Approximately $165 million of adjusted free cash flow (“FCF”), a non-U.S. GAAP metric defined below.
- Returned approximately $38 million of total capital to shareholders through the Company’s first quarterly dividend of $0.12 per share (~$12 million) and the repurchase of approximately 660,000 shares of common stock outstanding (~$26 million).
- Total production of 17.4 million barrels of oil equivalent (“MMBoe”) or approximately 190,000 Boe per day and oil production of 5.4 million barrels (“MMBbls”) or nearly 59,000 Bbls per day.
Full-Year 2021 Updated Guidance Highlights:
- Anticipate more than $800 million of FCF assuming $65 per Bbl WTI, $3.50 per Mcf NYMEX natural gas and NGL realizations of approximately $20 per Bbl for the remainder of the year.
- Expected oil and gas capital investments between $550 to $600 million, which incorporates anticipated cost inflation of approximately ten percent per well in the Wattenberg for the remainder of the year.
- Anticipated oil production of 64,000 to 66,000 Bbls per day and expected total production of 190,000 to 195,000 Boe per day.
- With 2020 serving as a benchmark, PDC is dedicated to achieving Scope 1 GHG and methane emission intensity reductions of 60 percent and 50 percent, respectively, by 2025.
- 2020 Scope 1 GHG emissions intensity of 15.2 metric tons of carbon dioxide equivalents (“MT CO2e”) per MBoe, a 26 percent decrease compared to 2019.
- 2020 Scope 1 methane emission intensity of 7.4 MT CO2e per MBoe, a 32 percent decrease compared to 2019.
- Formalize continued board-level oversight of ESG with plans for further board refreshment initiatives and additional ESG-related executive compensation metrics.
“The strength of our second quarter results and updated multi-year outlook accelerated PDC’s ability to achieve many of its long-term goals sooner than expected. We’ve once again expanded our free cash flow outlook, pace of debt reduction and magnitude of projected shareholder returns,” commented President and Chief Executive Officer Bart Brookman.
“Equally important, we are dedicated to the continued advancement of our ESG accountability and transparency. Our newly established environmental performance targets represent not only ambitious goals, but a major milestone for the Company on its ESG journey. Meanwhile, we remain committed to preserving our social license to operate through robust community involvement and further improving corporate governance. I’m also extremely proud of our stellar safety record and increased charitable giving budget. The continued evolution and progress related to ESG, combined with our financial performance and long-term strategy, are the keys to positioning PDC for ongoing success.”
Second Quarter Financial and Operating Results
In the second quarter of 2021, PDC generated approximately $165 million of FCF and reduced net debt by approximately $50 million, exiting the quarter with a trailing twelve-month leverage ratio, as defined by the Company’s credit facility, of 1.2x. Additionally, PDC returned approximately $38 million of capital to shareholders through the payment of its first quarterly dividend of $0.12 per share and the repurchase of approximately 660,000 shares of common stock outstanding.
The Company invested approximately $180 million in the development of crude oil and natural gas while delivering total production of 17.4 million Boe, or 190,000 Boe per day, and oil production of 5.4 million barrels, or 59,000 barrels per day. Total production and oil production represent approximately ten percent sequential increases from the first quarter of 2021 on a daily basis. Each increase is primarily attributable to recommencement of Delaware Basin completion activity.
In Wattenberg, the Company invested approximately $115 million to operate one drilling rig and one completion crew in the second quarter, resulting in 23 spuds and 22 turn-in-lines (“TILs”). PDC TIL’d approximately 35 percent fewer wells than the first quarter due to differences in pad size and lateral lengths between periods. Total production was 15.2 million Boe, or approximately 167,000 Boe per day, while oil production was 4.5 million Bbls, or approximately 49,500 Bbls per day. The increase in volumes between periods was attributable to the negative weather impact in the first quarter.
PDC exited the first quarter with approximately 200 drilled, uncompleted wells (“DUCs”) and approximately 260 approved permits in-hand. The Company submitted its eight well Spinney Oil and Gas Development Plan (“OGDP”) in mid-May and recently passed through the Completeness Determination stage of the permit process with a temporary Oil & Gas Commission Board hearing date of October 6. Further, the Company continues to progress towards the submittal of its Kenosha OGDP and Guanella Comprehensive Area Plan (“CAP”). PDC projects its current DUC and approved permit backlog to be sufficient for all completion activity through 2023 and anticipates steady permit flow under new rulemaking to begin in the coming months.
In the Delaware Basin, PDC invested approximately $65 million to operate one drilling rig and one completion crew, resulting in six spuds and 18 TILs. Total production was 2.2 million Boe, or approximately 24,000 Boe per day, while oil production was approximately 900,000 Bbls, or approximately 9,800 barrels per day. The Company released its completion crew late in the second quarter and expects to operate one drilling rig for the remainder of the year.
2021 Updated Capital Investment and Financial Guidance
In 2021, PDC projects to generate more than $800 million of FCF, including more than $200 million in each the third and fourth quarters, assuming $65 per Bbl WTI, $3.50 per Mcf NYMEX natural gas and NGL realizations of approximately $20 per Bbl for the remainder of the year. The Company’s top FCF allocation priority remains reaching its near-term net debt target of $1 billion, which it projects to reach by year-end in the current price environment. As such, the Company projects its third quarter and year-end trailing twelve-month leverage ratios to be below at or 1.0x. Further, the Company is increasing its target level of 2021 shareholder returns to at least $180 million from $150 million. In the six months ended June 30, the Company had generated $340 million of FCF, reduced net debt by approximately $275 million and returned approximately $60 million of capital to shareholders.
PDC’s updated 2021 capital investment guidance of $550 to $600 million reflects no change to its planned operating cadence compared to prior guidance; however, does include modest projected service cost inflation related to higher than anticipated commodity prices. In Wattenberg, the Company projects cost inflation primarily related to steel, cement and labor services to lead to an approximate ten percent increase in per well costs to nearly $4.0 million for an extended-reach lateral. Additionally, the Company expects cost inflation related to well services to result in quarterly lease operating expense (“LOE”) between $45 and $50 million in each the third and fourth quarter, resulting in full-year LOE between $175 and $180 million. Similarly, the Company expects full-year 2021 general and administrative expense (G&A) to be between $125 and $130 million.
Keeping percent realizations constant, the Company projects commodity price fluctuations to change its estimated adjusted cash flows from operations as follows:
The Company expects to produce between 190,000 and 195,000 Boe per day, with anticipated oil production of 64,000 to 66,000 Bbls per day. The slight decrease in anticipated total production and oil production is primarily attributable to changes in the Company’s Wattenberg completion schedule resulting in larger pads with longer laterals and slightly fewer TILs than prior guidance and delayed non-operated activity in each basin from the second quarter to late in the third quarter. The Company now projects fourth quarter year-over-year growth of approximately 15 percent compared to prior expectations of ten to 15 percent.
Third Quarter Commentary
Under its updated commodity price assumptions, the Company projects more than $200 million of FCF in the third quarter. PDC expects to invest nearly $150 million in the third quarter of 2021 to operate a full-time drilling rig in each basin and a Wattenberg completion crew. Third quarter capital investments are projected to be higher than the fourth quarter due to approximately $15 million related to the aforementioned shift in non-operated activity. Compared to the second quarter, total daily production is expected to grow five to ten percent while daily oil production is expected to grow 15 to 20 percent. The disproportionate increase in oil production is primarily related to the recent TIL activity in the oilier Delaware Basin.
The Company’s planned levels of operating activity through 2023 remain generally unchanged. Assuming the aforementioned 2021 pricing and $65 and $60 per Bbl WTI in 2022 and 2023, respectively, as well as $3.00 per Mcf NYMEX natural gas and $17.50 NGL realizations in each 2022 and 2023, PDC now expects to generate approximately $800 million of FCF in each of the next three years. Cumulative FCF of approximately $2.5 billion includes the projected impact of cash taxes and equates to more than 60 percent of PDC’s current market cap and more than 40 percent of the current enterprise value.
In the three-year period, PDC is committed to reducing net debt by more than $1 billion, exiting each year with a leverage ratio of less than 1.0x, while also returning more than $1 billion of capital to shareholders through its share repurchase program and growth of its quarterly base dividend with potential for additional forms of shareholder returns in future years. The Company’s debt reduction and return of capital targets of more than $1 billion represent increases from more than $850 million and more than $650 million, respectively.
Due to anticipated average service cost inflation of approximately ten percent associated with higher commodity prices, PDC expects capital investments between $600 and $650 million in each 2022 and 2023. PDC’s three-year cumulative capital investment of approximately $1.8 billion reflects an increase of approximately $100 million compared to the mid-point of its prior outlook whereas anticipated cumulative FCF increased approximately $600 million from an estimated $1.9 billion to $2.5 billion. Finally, PDC’s three-year cumulative re-investment rate is expected to average approximately 45 percent.
To demonstrate PDC’s advancement and further commitment to reducing its carbon footprint, the Company has established several long-term quantifiable environmental performance goals and changes in operations. By 2025, the Company is committed to further reducing its GHG and methane intensities by 60 percent and 50 percent, respectively. Further, the Company has significantly accelerated its commitment in aligning with the World Bank in achieving zero routine flaring by 2025 as opposed to its prior commitment of 2030. Additionally, the Company plans to invest nearly $75 million through its asset retirement obligations to plug and reclaim more than 1,000 high emission intensity legacy vertical wells by 2025. The Company’s reclamation efforts are aimed at nearly all of its vertical wells and are expected to meaningfully reduce its emission intensity and operating footprint.
PDC’s 2020 GHG and methane intensities of 15.2 and 7.4 MT CO2e per MBoe, respectively, represent improvements of 26 percent and 32 percent compared to 2019. The year-over-year improvements were largely attributable to reduced pneumatic emissions through new facility design with instrument air, reduced venting and flaring related to changes in operational best-practices and the reclamation of approximately 350 legacy vertical wells. Further, the Company’s corporate flaring intensity, which is more comprehensive than the World Bank definition of routine flaring as it includes flaring related to safety protocol and disrupt midstream conditions, averaged 0.3 percent of total gross production in 2020. Delaware Basin 2020 flaring intensity of 1.6 percent represents an improvement of approximately 70 percent compared to 2019. Through June 30, the Company’s corporate and Delaware Basin flaring intensities were approximately 0.1 percent and 0.9 percent, respectively.
The Company’s continued commitment to corporate social responsibility is also evident through its track record of safe operations and community engagement. In 2021, PDC surpassed 1,000 days without a lost time incident in each basin and plans to increase its investment towards responsible operations through expansion of its 24/7 field monitoring room, air monitoring programs and enhanced camera systems aimed at tracking tank levels, leak detection and security. Additionally, the Company nearly doubled its 2021 charitable giving budget with a strategic focus on organizations focused on education, diversity and inclusion and areas of need related to COVID.
Finally, from a corporate governance standpoint, by year-end 2021, PDC intends to formalize its continued board-level oversight of ESG through a standing ESG committee or embedded ESG oversight into each of the standing Board committee charters. Additionally, PDC looks to continue its board refreshment initiatives through the recruitment of an additional diverse board member in the coming months while also aiming to further improve the alignment of its executive compensation program with key stakeholders by including additional quantitative ESG performance metrics to its short-term incentive program. Currently, PDC has refreshed more than 60 percent of its board in the past two years and has more than 20 percent of executive compensation tied to quantitative and qualitative ESG performance.
Oil and Gas Production, Sales and Operating Cost Data
Crude oil, natural gas and NGLs sales, excluding net settlements on derivatives were $533 million, a 207 percent increase over 2020 levels of $174 million. The increase in sales between periods was due to a 204 percent increase in weighted-average realized sales price to $30.60 from $10.08. The increase in sales price per Boe was driven by 249 percent, 161 percent and 215 percent increases in weighted-average realized crude oil, natural gas and NGL prices, respectively. The combined revenue from crude oil, natural gas and NGLs sales and net settlements received on commodity derivative instruments was approximately $478 million in 2021 compared to approximately $288 million in 2020.
Production costs for the second quarter of 2021, which include LOE, production taxes and TGP, were $95 million, or $5.47 per Boe, compared to $61 million, or $3.51 per Boe, in 2020. LOE per Boe increased 17 percent compared to the second quarter of 2020 while TGP per Boe increased 52 percent over the comparable period due to certain contracts allocating deducts as TGP, resulting in improved gross realizations and project economics. The Company’s activity levels in the second quarter of 2020 were materially impacted by the COVID-19 pandemic and resulted in abnormally low LOE and TGP expense. Production taxes for the second quarter of 2021 were $27 million, or $1.55 per Boe, compared to $8 million, or $0.45 per Boe in the comparable 2020 period. The increase between periods is due to the aforementioned increase in commodity prices.
Net loss for the second quarter of 2021 was approximately $87 million, or $0.88 per diluted share, compared to a net loss of $222 million, or $2.23 per diluted share in 2020. The year-over-year change was primarily due to the change in total revenue between periods. Adjusted net income, a non-U.S. GAAP financial measure defined below, was $166 million in 2021 compared to $62 million in 2020. The difference between periods is primarily attributable to the change in sales offset by settled derivatives.
Net cash from operating activities for the second quarter of 2021 was approximately $224 million compared to $103 million in 2020. Adjusted cash flows from operations, a non-U.S. GAAP metric defined below, was approximately $343 million in the second quarter of 2021 compared to approximately $182 million in 2020. The year-over-year increase in each metric was primarily due to the increase in sales slightly offset by the increase in costs and change in derivative settlements.
G&A, which includes cash and non-cash expense, was $33 million, or $1.88 per Boe in the second quarter of 2021 compared to $35 million, or $2.05 per Boe, in 2020. Second quarter 2021 G&A included approximately $2 million in non-recurring expenses related to an allowance for uncollectible accounts.