Penn Virginia Corporation
Q2 2019 Earnings Call Transcript

Published: 9 Aug 2019

[Operator:]

Good day, and welcome to the Penn Virginia Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded.I would now like to turn the conference over to Mr. Clay Jeansonne, Director of Investor Relations.

[Clay Jeansonne:]

Thank you, Sean, and good morning, everyone. We appreciate your participation in today's call. I'm Clay Jeansonne, Director of Investor Relations; and I'm joined this morning by John Brooks, Penn Virginia's President and CEO; Steve Hartman, our Chief Financial Officer; and Ben Mathis, our Senior Vice President of Operations and Engineering.We will discuss non-GAAP measures on the call. Definitions and reconciliations of those measures to the most comparable GAAP measures are provided in our second quarter earnings release and the presentation posted on our website this morning.Prior to getting started, I'd like to remind you the language in the forward-looking statements section of the press release, which was released yesterday afternoon. Our comments today will contain forward-looking statements within the meaning of the federal securities law. These statements, which include, but are not limited to, comment on our operational guidance and EUR, are subject to a number of risks and uncertainties that could cause actual results to be materially different from those forward-looking statements, including those identified in the risk factors in our most recent annual report on Form 10-K as they may be amended in subsequent Form 10-Qs. Cautionary language is also included on Slide 1 of the presentation. We will use the presentation to go through today's discussion. Finally, after our prepared remarks, we will answer any questions you may have.With that, I'll turn the call over to John.

[John Brooks:]

Thanks, Clay. We'll start on Page 3 with a quick company overview. Penn Virginia is a pure-play Eagle Ford Shale operator in Gonzales, Fayette, Lavaca and DeWitt Counties in South Texas. We have approximately 98,500 gross acres and 84,400 net acres in the Eagle Ford, which is approximately 92% held by production and 99% of which is operated by Penn Virginia. Our estimated drilling inventory at June 30, 2019, was 510 gross or 438 net locations. I should point out that this inventory count is only for the Lower Eagle Ford. One of our goals for our land and technical team is to continue replenishing that inventory through organic leasing, small acquisitions as well as acreage swaps with adjacent operators. We also hope to increase that count by identifying additional location inventory in the Upper Eagle Ford and Austin Chalk from our recently constructed earth model.Our product mix in the second quarter was 87% liquids, of which 72% was oil. Penn Virginia's oil production receives premium Louisiana Light Sweet, which we sometimes refer to as LLS, or Magellan East Houston also referred to as MEH pricing, which enhances our Adjusted EBITDAX margins. We're currently running 2 rigs and one dedicated frac spread. We are targeting year-over-year production growth for 2019 of 25% to 30%, and we are well on our way to achieving that target based on our first half results.Let's move on to Page 4 and take a closer look at our solid operational and financial performance for the second quarter. For the first half 2019, production averaged 26,278 barrels of oil equivalent per day, which is was a 37% increase from the same period last year. For the second quarter of 2019, we grew total production 13% over the first quarter.We continued to benefit from our close proximity to the LLS and MEH markets, which resulted in a first quarter realized oil price of $62.63. This was approximately $2.70 higher than or 105% of the average WTI price for the second quarter. Adjusted EBITDAX for the first half of the year was $168.7 million, which was 34% higher than the same period last year or $35.48 per barrel of oil equivalent. Looking specifically at the second quarter of 2019, adjusted EBITDAX was $85 million, slightly higher than the first quarter.We recorded adjusted direct operating expenses of $11.65 per barrel of oil equivalent for the first half of 2019, which is a 5% improvement year-over-year. Our growth in adjusted EBITDAX allowed us to improve our leverage ratio to 1.6x as compared to 1.7x at the end of 2018 and 2.4x at June 30 of 2018. Finally, increased production, lower cost and continued strong pricing drove adjusted net income per share for the first 6 months of the year up 8% to $4.23 per diluted share from the first half of last year.Looking at Page 5, we believe there are 5 keys to Penn Virginia's continued success. Starting with production growth. With a continuous 2-rig program, we expect production growth of 25% to 30% this year and to generate free cash flow in the fourth quarter. Looking beyond 2019, assuming we maintain a 2-rig program, we expect production growth will moderate as we begin to generate free cash flow. We have a focus on cost and in this volatile commodity price environment to remain profitable, you must maintain a lean cost structure. We believe Penn Virginia has one of the lowest cost structures for an oil-weighted E&P, and we need to maintain strong margins. As I mentioned previously, our close proximity to the Gulf Coast allows Penn Virginia to access premium-priced markets. This includes accessing Gulf Coast waterborne markets such as Corpus Christi by truck and the LLS and MEH markets through multiple pipeline access points, and ensure financial discipline.Given the current and expected continued volatility in the energy commodity markets, we remain laser-focused on maintaining financial discipline and a strong balance sheet. Growing production while drilling using cash flow is a great example of that.And finally, the most important measure is to generate free cash flow. Ultimately, you must live within your means, and we expect to generate free cash flow beginning in this year's fourth quarter. We believe this makes Penn Virginia unique. A proven small cap with solid production growth and a clear path to free cash flow generation in the near term.Turning to our capital budget for 2019 that is summarized on Page 6. Capital spending is currently estimated at $335 million to $355 million, all of it the Eagle Ford. This represents a slightly lower budget than we presented in the first quarter. 97% of total spending will be directed towards drilling and completion, with the balance focused on facilities, pipelines and grassroots acreage leasing. As I mentioned previously, our plan assumes continuation on the 2-rig program.For the full year 2019, we expect to drill approximately 44 gross or 39 net wells. In the second half of the year, we expect to drill 19 gross wells in Area 1 and 7 wells in Area 2. We have seen significant decreases in overall drilling and completion costs. Comparing the second quarter of 2019 to the second quarter of 2018, we saw drilling and completion cost reduced by approximately 10% to 15% after adjusting for completion designed differences. We also expect to benefit from additional service cost reductions beginning in the fourth quarter. The organization is hyper-focused on lowering cost by driving efficiencies throughout the organization and working with our service providers to control costs.Finally, I would note that we recently elected to defer capital expenditures related to our EOR project as we continue to focus our efforts of generating near-term free cash flow. We're still very encouraged by ongoing third-party EOR projects in the immediate vicinity of our acreage and plan to continue the necessary engineering studies to lay the groundwork for future development of enhanced oil recovery on our acreage position.Turning to the next slide. As I mentioned in my brief comments on the company overview slide, one of our goals for the Penn Virginia land and technical teams is to continue replenishing our drilled inventory and growing it further through organic acreage leasing, small acquisitions, equity swaps with adjacent operators and delineation drilling. We call this our focus on the ground game. We believe we can replenish inventory for a 2-rig program by adding between 3,000 to 4,000 net acres per year. In 2017 and '18, we added 3,366 and 4,336 net acres, respectively. We have completed several small acreage transactions so far this year. And we're currently working on several additional transactions, which gave us a confidence in our ability to accomplish our target for the year.Next, let's take a quick look at our inventory over time in the graph at bottom right. In 2017 and 2018, we were successful in not only replacing our net inventory of future drilling locations but also growing it. This year, we have set a target of increasing our location inventory to 486 net drilling locations by year-end 2019.Turning to the total length of lateral feet available in our drilling inventory, which is the solid black line plotted above the net location bars. We refer that as, total net treatable lateral feet. We've also been successful in increasing that number every year. We can increase net treatable lateral feet in several ways

[Operator:]

[Operator Instructions]. Our first question today will come from Dustin Tillman with Wells Fargo.

[Dustin Tillman:]

Can you talk about the balance sheet? And as you think about when you start to generate additional cash flow next year, where that goes to? And how you're thinking about the balance sheet longer term?

[John Brooks:]

Well, it's a high-class problem to have. I think we would probably look to reducing that as our first option and further strengthening the balance sheet is one of the many ways that we can return cash to our shareholders.

[Dustin Tillman:]

And does it make sense to, then, refinance the term loan to value some additional flexibility?

[John Brooks:]

I think, right now, we are not looking to do that in the near term, but we certainly have that option as time goes by.

[Clay Jeansonne:]

Dustin. We can pay down part of the term loan too as well with free cash flow.

[Operator:]

Our next question today will come from Ray Deacon with Petro Lotus Analytics.

[Raymond Deacon:]

I was wondering if you could convert that 8 million foot target of lateral to a year number?

[John Brooks:]

I think it was 3 million, was where we will planned to be at year-end.

[Raymond Deacon:]

Right. Got it. How many years of inventory would that be?

[John Brooks:]

Well we want to keep at least a minimum 10-year rolling.

[Operator:]

[Operator Instructions]. At this time, and there are no further questions in the question queue. And I would like from the conference back over to John Brooks for any closing remarks.

[John Brooks:]

Thank you for your time this morning and your interest in Penn Virginia. We look forward to talking to you again next quarter.

[Operator:]

Thank you. The conference is now concluded. We appreciate your today's attendance. And you may now disconnect.