Quarterly / Earnings Reports | Second Quarter (2Q) Update | Financial Results | Hedging | Capital Markets | Capital Expenditure | 2020 Guidance

PDC Energy Second Quarter 2020 Results

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PDC Energy, Inc. reported its Q2 2020 results.

Q2 Highlights:

• Net cash from operating activities of approximately $103 million and adjusted cash flows from operations, a non-U.S. GAAP metric defined below, of approximately $182 million.
• Oil and gas capital investments of approximately $120 million.
• Approximately $62 million of free cash flow, a non-U.S. GAAP metric defined below as net cash flows from operating activities, before changes in working capital, less oil and gas capital investments.
• In June 2020, the Company received $82 million in relation to its previously divested Delaware Basin midstream assets. These proceeds were used to pay down a portion of the Company's revolver balance and are excluded from its second quarter free cash flow calculation.
• Lease operating expense ("LOE") of $36 million or $2.08 per barrel of oil equivalent ("Boe").
• Total production of 17.2 million Boe or nearly 190,000 Boe per day and oil production of 6.2 million barrels ("Bbls") or approximately 68,000 Bbls per day.

2020 Updated Guidance:

• Anticipate generating more than $300 million of free cash flow assuming $35 per Bbl WTI, $2 per Mcf NYMEX natural gas and NGL realizations of approximately $9 per barrel for the remainder of the year.
• Reduced anticipated oil and gas capital investments to a range of $500 to $550 million, from the prior range of $500 to $600 million.
• Increased anticipated oil production by five percent to a range of 64,000 to 68,000 Bbls per day while increasing total production to a range of 175,000 to 185,000 Boe per day.

President and Chief Executive Officer Bart Brookman commented, "The second quarter presented multiple challenges, but I am extremely proud of our ability to quickly adapt our business plan while never losing sight of our corporate values and strategy. Our operational excellence and ability to execute are more apparent than ever, and were clearly reflected in our results and updated guidance. As PDC stands today with our substantial projected free cash flow, I am proud of our differentiating outlook.

"From a risk perspective, we are experiencing a much improved midstream, operating and regulatory backdrop in Colorado that enhances our confidence in achieving our business objectives. I echo Governor Polis' recent remarks around the need for collaboration as we collectively strive to safely deliver clean, affordable energy in Colorado and I look forward to working with his administration on this mission."

2020 Capex and Financial Guidance

Planned 2020 capital investment of $500 million to $550 million represents a decrease of approximately 50 percent compared to the Company's original guidance of $1.0 to $1.1 billion provided in February, and a decrease of approximately five percent from previous guidance provided in May. The Company's second quarter capital investments were approximately $120 million and represent more than 70 percent of the revised full-year 2020 guidance when combined with first quarter investments of approximately $260 million. Investments for the third and fourth quarter are expected to be approximately $50 million and $100 million, respectively.

In Wattenberg, the Company plans to operate one drilling rig for the remainder of the year, while anticipating to resume completions late in the third quarter, assuming commodity pricing supports such a decision. The 2020 Delaware Basin capital program was largely completed for the year in the second quarter, with the expectation to spend less than $20 million on various leasing and other projects the remainder of the year.

In 2020, the Company projects to generate more than $300 million of free cash flow, assuming $35 per Bbl WTI, $2 per Mcf NYMEX natural gas and NGL realizations of approximately $9 per barrel for the remainder of the year. PDC anticipates generating material free cash flow in each the third and fourth quarters.

The Company increased its oil production range for 2020 by five percent to 64,000 to 68,000 barrels per day while increasing its total production to a range of 175,000 to 185,000 Boe per day. Each figure includes immaterial curtailments for the remainder of the year. PDC projects similar volumes in the third quarter as the second quarter before decreasing approximately ten percent on a sequential basis and averaging an estimated 170,000 Boe per day and 60,000 Bbls per day, respectively in the fourth quarter.

Finally, PDC decreased its expected 2020 LOE to a range of $170 million to $180 million, or approximately $2.65 per Boe while anticipated general and administrative expense ("G&A") remains unchanged at $135 million to $140 million, or approximately $2.05 per Boe for the full-year, and does not include approximately $20 million of deal costs associated with the SRC merger incurred in the first quarter. The Company projects G&A of less than $2.00 per Boe in the second half of the year.

The table below provides additional 2020 financial guidance:

2021 Preliminary Outlook

The Company's preliminary 2021 Outlook remains unchanged from an operational standpoint and contemplates total capital investment between $500 million and $600 million with approximately $250 million of projected free cash flow assuming $40 per Bbl WTI oil, $2.50 per Mcf NYMEX natural gas and NGL realizations of approximately $9 per barrel.

Similarly, PDC's 2021 production and oil production estimates remain unchanged from prior guidance on an absolute basis; however, due to an increase in projected 2020 volumes, 2021 volumes are now expected to be flat on an annual basis, or 175,000 to 185,000 Boe per day, compared to prior guidance of approximately five to ten percent annual growth. First quarter 2021 daily volumes are projected to decrease less than five percent compared to the fourth quarter of 2020, prior to increasing throughout the year. The Company projects its fourth quarter 2021 oil production and total production volumes to reflect approximately ten percent growth compared to the fourth quarter of 2020.

Finally, PDC projects to further improve its cost structure as it estimates 2021 G&A of approximately $120 million to $125 million, which includes approximately $25 million of non-cash stock-based compensation.

Hedging Overview

In the second half of 2020, the Company has approximately 8.2 million Bbls of oil hedges at a weighted-average floor price of approximately $58 per Bbl. The Company's remaining swaps and costless collars represent approximately 70 percent of its projected oil volumes through year-end. Approximately 40 percent of the Company's estimated gas production in the second half of 2020 is protected at approximately $2 per Mcf. PDC's 2021 hedge positions protect nearly 45 percent of its estimated oil volumes and 40 percent of its projected natural gas volumes at weighted-average floor prices of approximately $45 per barrel and $2.35 per Mcf, respectively.

The Company's hedging strategy is predicated on systematically layering in oil and natural gas swaps and costless collars, as well as evaluating basis swaps and physical hedges when appropriate.

Oil and Gas Production, Sales and Operating Cost Data

Crude oil, natural gas and NGLs sales, excluding net settlements on derivatives, decreased to $174 million in the second quarter 2020 compared to $339 million in the comparable 2019 period. The decrease in sales between periods was due to a 63 percent reduction in sales price to $10.08 per Boe from $27.28 per Boe offsetting a 39 percent increase in production. The decrease in sales price per Boe was driven by 67 percent, 29 percent and 49 percent decreases in weighted-average realized oil, natural gas and NGL prices, respectively; while the increase in production between periods was due to the merger with SRC Energy, Inc. ("SRC"). The combined revenue from crude oil, natural gas and NGLs sales and net settlements received on commodity derivative instruments decreased 11 percent between periods to $289 million from $326 million.

Production costs for the second quarter of 2020, which include LOE, production taxes and TGP, were $61 million, or $3.51 per Boe, compared to $69 million, or $5.57 per Boe, in the second quarter of 2019. LOE improved 25 percent between periods to $2.08 per Boe from $2.76 per Boe. The improvement in LOE per Boe is primarily due to reduced activity and delayed investments in an effort to maintain low costs to offset projected curtailment activity. The Company projects immaterial levels of curtailments for the remainder of the year and expects to subsequently return to a more normal course of LOE investment moving forward.

Financial Results

Net loss for the second quarter of 2020 was approximately $222 million, or $2.23 per diluted share, compared to net income of $69 million, or $1.04 per diluted share in 2019. The year-over-year change was due to the decrease in crude oil, natural gas and NGL sales and the commodity price risk management loss in the second quarter of 2020. Adjusted net income, a non-U.S. GAAP financial measure defined below, was $14 million in the second quarter of 2020 compared to adjusted net income of $23 million in the comparable 2019 period. The year-over-year change is due to the aforementioned decrease in sales being predominantly offset by realized settlements of derivatives in the quarter.

Net cash from operating activities for the second quarter of 2020 was approximately $103 million compared to $260 million in the comparable 2019 period. Adjusted cash flows from operations, a non-U.S. GAAP metric defined below, was approximately $182 million in the second quarter of 2020 compared to approximately $207 million in the comparable 2019 period. The year-over-year decrease in each metric was primarily due to the combined decrease in sales and the change in settled derivatives between periods. Additionally, the Company's adjusted cash flows do not include the changes in working capital for the period.

G&A, which includes cash and non-cash expense, was $35 million, or $2.05 per Boe, in the second quarter of 2020 compared to $43 million, or $3.45 per Boe, in 2019. Second quarter 2020 G&A includes approximately $4 million, or $0.22 per Boe, of costs associated with severance and SRC integration whereas the 2019 period included approximately $4 million, or $0.35 per Boe, of similar non-recurring expenses. Excluding these expenses would have resulted in a 41 percent improvement in G&A to approximately $1.83 per Boe in 2020 from $3.10 per Boe in 2019.