PDC Energy Update - Feb 14

[dan_s]

There is a new presentation for PDCE on their website. The CEO goes over their 2019 plan of 20% production growth and free cash flow generation this year. Their guidance is very close to what I have in my forecast/valuation model. Most of PDC's production is in Colorado where there is "political risk", but IMO the fear is over-blown. The state gets a lot of revenue from the oil & gas industry and even the democrats know the state will go bankrupt without it. There are several new natural gas gathering & processing systems coming on-line in 2019 & 2020 that will significantly improve netback prices in the DJ Basin for both gas and NGLs. SRC Energy (SRCI) is a small-cap that will benefit from the improved takeaway capacity. - Dan

DENVER, Feb. 11, 2019 (GLOBE NEWSWIRE) -- PDC Energy, Inc. ("PDC" or the "Company") (PDCE) today reported its 2018 full-year production and year-end SEC proved reserves, as well as its production and capital investment guidance for 2019.

2018 Highlights:

•Full-year 2018 oil and gas capital investment of approximately $985 million, generating a year-over-year production increase of 26% to 40.2 million barrels of oil equivalent (“MMBoe”).

•Full-year 2018 oil production increased 32% year-over-year to approximately 17.0 million barrels.

•Fourth quarter 2018 production of approximately 11.8 MMBoe with a December exit rate of approximately 130,000 Boe per day.

•Year-end 2018 proved reserves of 545 MMBoe, an approximate 20% increase over year-end 2017 levels with an estimated all-sources reserve replacement of 330%(1).

•Before-tax SEC PV10 of year-end 2018 reserves of $5.3 billion, an increase of approximately 66% compared to year-end 2017.

2019 Guidance Highlights:

•Operating plan designed around the prioritization of delivering strong debt-adjusted per-share metrics and free cash flow generation utilizing a flat $50 WTI oil and $3 NYMEX gas price deck.

•Anticipated capital investments of $810 to $870 million, a reduction of approximately $150 million compared to 2018. Approximately $40 million of capital associated with Delaware midstream is included in the full-year capital range; however, a portion of this investment is expected to be recouped through the ongoing divestiture process, which is expected to be executed in the first half of 2019.

•Project generating free cash flow from oil and gas operations, excluding corporate capital, of approximately $25 million at $50 oil.

•Year-over-year production growth of approximately 20% to an estimated 46 to 50 MMBoe.

CEO Commentary

“Our team performed extremely well in 2018, overcoming several hurdles that were largely out of our direct control while maintaining our high standard of safe, reliable operations,” said President and Chief Executive Officer, Bart Brookman.

Brookman added, “The industry is clearly faced with a new set of operational and financial expectations and I applaud our team’s resolve in creating a plan that mirrors our strategic priorities and commitment to generating free cash flow at $50 WTI oil prices. I’m extremely pleased that our 2019 plan is focused on capital discipline as seen through an approximate $150 million reduction in our capital investments as well as an expected 15 percent reduction in our combined LOE and G&A costs per Boe compared to 2018. These achievements highlight the strength of our portfolio and ability to drive value for our shareholders.”

2019 Capital Budget and Operating Overview

PDC’s investment decisions are currently based on $50 WTI oil and $3 NYMEX gas for both 2019 and 2020 as it strives to deliver sustainable financial results over the next several years, with an added emphasis on organic free cash flow generation and more moderate growth in cash flows and production. As a result, anticipated capital investments for 2019 has decreased by an estimated $150 million compared to 2018 to a range of $810 to $870 million, which can be categorized into two primary uses.

First, the Company plans to invest $770 to $830 million of capital towards continued development of the Wattenberg Field and Delaware Basin. This operational plan is expected to generate $840 to $890 million in adjusted cash flows from operations through utilization of three drilling rigs in Wattenberg and a two and a half drilling rig pace in the Delaware. The Company has approximately 50% of its expected oil volumes hedged in 2019 at approximately $54.50 per barrel weighted average floor price. For every $5 increase or decrease in NYMEX oil pricing off the assumed $50 per barrel price, the Company expects its adjusted cash flows to be impacted by approximately $40 million, holding gas prices and all commodity differentials constant. The 2019 plan includes modest Delaware basin well cost reductions to reflect a new completion design featuring increased stage spacing.

Second, approximately $40 million of capital is planned to be invested in the further build-out of Delaware Basin midstream infrastructure throughout 2019. The Company continues to work towards the potential monetization of these assets and anticipates that a portion of the invested capital in 2019 will be recouped in the net proceeds upon divestiture.

The Company also plans to invest approximately $20 million of corporate capital towards implementation of an Enterprise Resource Planning system to replace its existing operating and financial systems. Similar to 2018, this investment has been excluded from the Company’s capital investment range.

Production in 2019 is expected to increase approximately 20% over 2018 to a range of 46 to 50 MMBoe. Due to the timing of expected turn-in-lines in the Delaware, as well as the timing of planned third party gas processing expansions in Wattenberg, the Company expects its first quarter 2019 production to decrease slightly compared to the fourth quarter of 2018 before showing steady sequential growth through the rest of the year. Similarly, the Company expects to outspend cash flows in the first half of 2019 before generating its expected free cash flow in the latter half of the year. Oil production for 2019 is expected to grow approximately 20% compared to 2018 volumes while accounting for 41 to 45% of total production.

Additional details, including 2019 spuds and turn-in-lines for each basin, detailed financial guidance and operating cost structure and a preliminary 2020 outlook will be provided in the Company’s 2018 year-end earnings release on Wednesday, February 27, 2019.

2018 SEC Proved Reserves

PDC’s total proved reserves as of December 31, 2018 increased 20% to 544.9 MMBoe compared to 452.9 MMBoe reported at year-end 2017. The composition of the reserves at the end of 2018 was 59% liquids and 41% natural gas, with 33% of the reserves classified as proved developed. Year-end 2017 reserves were 58% liquid, 41% natural gas, and 32% proved developed. Proved reserves in the Wattenberg Field increased 21% to 425.4 MMBoe, while proved reserves in the Delaware Basin increased 22% to 119.5 MMBoe.

The value of the Company’s proved reserves, utilizing the SEC price guidelines, discounted at ten percent and before tax (“PV10”), increased to $5.3 billion (~$80/share) as of December 31, 2018, compared to $3.2 billion as of year-end 2017. The increase in PV10 is primarily the result of an increase in the average NYMEX price of oil by more than 25%, along with an increase of approximately 20% in year-end proved reserves.

[dan_s]

I got a call from Viper Energy right after lunch and it sidetracked me, but I am now back focused on PDCE.

I highly recommend that any of you that own PDCE or SRCI spend the time to listen to the replay of PDC's presentation on Feb 12th that the Credit Suisse Energy Summit. It will help you understand why I remain high on these two DJ Basin companies. For the "newbees" here, the DJ Basin (primarily in NE Colorado) is one of the five highest oil producing regions in the U.S. It does not get the attention that it deserves because of so much activity in the Permian Basin. However, well level economics are outstanding at today's oil price in the DJ Basin.

After PDC's presentation on Feb 12th, two analysts submitted new forecasts to Reuters:
> Gabriele Sorbara at Williams Capital rates it a BUY with a price target of $55.00
> Irene Haas at Imperial Capital rates it a BUY with a price target of $61.00
PDCE is trading at $36.75 at the time of this post.

My valuation is $74.00/share and I saw nothing in the Credit Suisse presentation that changes my forecast/valuation model. If anything, I probably should increase the production volumes in 2019 and 2020.

PDCE and SRCI both trade at a discount because of the "perceived" political risk in Colorado. As long as the sane voters outnumber the "wackos" in Colorado, these companies have a lot of upside for us. Over the next 18 months enough gas gathering, processing and takeaway capacity will be added in the DJ Basin to allow upstream companies to sell all of their natural gas and NGL to markets at much better prices.

In Q3 2018 PDCE realized the following prices for their sales volumes, net of $48.1 million cash payments they made on their hedges.
$1.82/mcf for natural gas
$54.25/bbl for crude oil
$23.75/bbl for natural gas
Q3 production mix was 35.9% natural gas, 42.5% crude oil and 21.6% NGLs (109,788 BOE per day of production in Q3 2018)

PDCE is publicly forecasting 18% to 22% YOY production growth in 2019 after 26% YOY production growth in 2018 even with bottlenecks in the DJ Basin. I think 2019 production will be at the high end of their production forecast, but for now I am using the midpoint of their guidance in my forecast model. If PDCE receives the following realized prices in 2019, their cash flow from operations should be $14.00/share this year (compares to $12.00 CFPS in 2018).
IMO any upstream company with 20% annual production growth locked in s/b trading for AT LEAST 6x operating CFPS.
Realized prices I'm using in the 2019 forecast for PDCE:
$2.20/mcf for natural gas
$50.00/bbl for crude oil (PDC has 11.0 million bbls of 2019 oil hedged at ~$55/bbl)
$21.00/bbl for NGLs