Earnings Transcript for ROCC - Q3 Fiscal Year 2020

Operator: Good day, and welcome to the Penn Virginia Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Clay Jeansonne, Director of Investor Relations. Please go ahead.

Clay Jeansonne: Thank you, and good morning, everyone. We appreciate your participation in today’s call. I’m joined this morning by Darrin Henke, Penn Virginia’s President and CEO; Rusty Kelley, our Senior Vice President and CFO; and Ben Mathis, our Senior Vice President of Operations and Engineering. Prior to getting started, I’d like to remind you, we will discuss non-GAAP measures on this call. Definitions and reconciliations of these measures to the most comparable GAAP measure are provided in our third quarter earnings press release issued yesterday afternoon, which can be found on our website at www.pennvirginia.com. I would also point you to the language in the forward-looking section of the press release. 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, comments on our operational guidance, are subject to a number of risks and uncertainties that cause – 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 and our quarterly report on Form 10-Q. Finally, after our prepared remarks, we’ll be happy to take your questions. With that, I’ll turn the call over to Darrin.

Darrin Henke: Thanks, Clay. We very much appreciate everyone joining us for today’s call. Our team again, delivered solid performance in the third quarter. A steady execution has become par for the course at Penn Virginia. On the sales front, we beat on oil by selling 18,383 barrels per day, which was higher than the midpoint of guidance of 18,000 barrels of oil per day. Higher-than-expected sales were primarily a function of the positive results obtained from the five DUC wells return to sales in July, as well as our constant focus on optimizing our base production. Looking at expenses for the third quarter, we posted adjusted direct operating expenses of $10.88 per barrel. This low operating expense typifies our lean cost structure and culture of cost containment. Put simply, we leave no stone unturned to find ways to improve the operating performance of our business. The same holds true for capital spending, where we continue to do more with less. CapEx for the third quarter was $8 million, 27% below the low end of guidance. We also continue to benefit from our substantial hedge position. A clear example was in the third quarter, where we realized an oil price of $48.28 per barrel, including hedge settlements. The combination of increased operational efficiencies, reduced capital spending and protecting our best-in-class margins through prudent risk management supports one of Penn Virginia’s key priorities, generating free cash flow for the long-term benefit of our shareholders. I’m pleased to report that we generated free cash flow of $34 million during the third quarter, all of which was used to pay down debt. We continue to remain squarely focused on delivering value over volume, through disciplined spending, preservation of our strong balance sheet, driving strong cash on cash returns and further debt reduction. We believe we can maintain production within cash flow at an oil price of $40 per barrel and generate free cash flow to reduce debt at $45 per barrel. Next, I would like to spend a moment discussing our announcement earlier this week concerning the strategic investment in Penn Virginia by Juniper Capital Advisors, which is expected to close in the first quarter of 2021. We view this transaction as truly transformational for the company and one that will best position Penn Virginia for long-term success. The opportunity to immediately infuse $150 million in cash, coupled with the acquisition of oil and gas assets, located within and adjacent to our acreage is extremely attractive on multiple fronts. First, the transaction will substantially improve Penn Virginia’s balance sheet and financial position, as it would more than double the equity market cap of the company, while paying down well over $100 million of debt. In addition, it allows us to push out the maturity of our second-lien term loan by two years to September of 2024 and reduce annual interest expense by an estimated 20% equivalent to $6 million per year. Second, the transaction would add production and cash flow, and lower our cost structure through the inclusion of Juniper’s approximate 4,100 acres, with no expected increase to G&A. Third, the transaction will enhance our position in the Eagle Ford. Juniper’s assets like Penn Virginia are located on private fee lands and provide for multiple additional drilling locations on the Eagle Ford trends proven geology. Penn Virginia’s expanded footprint created by the transaction also affords the opportunity to drill longer laterals. And finally, this strategic transaction will provide Penn Virginia additional room to maneuver through a potential lower for longer oil priced environment. In summary, the Juniper transaction will materially strengthen our balance sheet, improve our liquidity profile, increase our maturity runway and add important scale to the business through the bolt-on assets acquired. We believe this transaction will prove to be a key milestone for the company. To wrap things up, Penn Virginia delivered on plan and posted solid results for the third quarter. The period also marked our fourth consecutive quarter of generating free cash flow. Looking at the remainder of this year and into the next, we believe we are in a strong position for continued success. Most important of all, I’m very proud of our team’s accomplishments. Given the challenging backdrop, they’re laser focused on operational excellence, continues to set the company apart from other small cap ANPs. I appreciate everyone’s hard work, dedication and efforts to promote the continued safety and wellbeing of our fellow employees, as well as our contractors and service providers. So with that, we will open up the call to questions. Operator?

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Dun McIntosh with Johnson Rice. Please go ahead.

Dun McIntosh: Good morning, Darrin.

Darrin Henke: Good morning, Dun. How you doing?

Dun McIntosh: Good. Welcome aboard the Penn Virginia ship. Look forward to working with you going forward. I just had a quick question on Juniper and kind of what that might mean. I know you haven’t given a ton of color around 2021, but obviously you get a big liquidity boost here. What does that mean for the 2021 program? If you think about a little more activity, I assume that you’ve talked about – company talks about a maintenance program going forward in the past. And just kind of what Juniper does mean for the 2021 from an activity standpoint?

Darrin Henke: Yes. So the transaction definitely improves our balance sheet, but it really doesn’t change our outlook relative to activity. We’re going to look at commodity prices and in a $40 environment, we feel like we can maintain production and – within cash flow. And if we see a $45 price environment, we feel like we can maintain production, maybe grow single-digit, but more importantly, continue to reduce debt with our free cash flow.

Dun McIntosh: Okay, great. Thanks. And then maybe just a little color, I mean, costs came in on the OpEx side lower again this quarter, and I have to imagine you’re seeing some pretty good reductions on the D&C side as well as you already put a rig back out there. Do you think these are pretty sticky? Is this something that you’d look to maybe lock in lower costs? Or do you think that just where the service market is you think you can continue to get kind of favorable costs in a spot scenario?

Darrin Henke: Yes, I think the service costs are definitely in a great time for an industry to-date. We – however, not only are we seeing improvements via service costs, but we’re also seeing continued improvements through our efficiency – efficiency gains. And I’ll have Ben maybe speak, just to touch about those gains relative to cycle times and completion times.

Ben Mathis: Sure. Comparing to 2019 to where we are now and where we see we’re going to be, we’ve seen roughly a 15% to 18% reduction in our cost per lateral foot, total well costs. And about 45% of that on the drilling side is just improvements in how we’re doing things, efficiency gains, 55% of that roughly is related to service cost. So there is some risk of that going away if or reducing, if we see a change in activity level in the U.S. On the completion side, about one-third of that is related to design changes that we’re making, that will be locked in and about two-thirds of that is related to service costs.

Dun McIntosh: All right. Thank you all very much.

Operator: And our next question today comes from Neal Dingmann with Truist. Please go ahead.

Neal Dingmann: One and all, and again congrats on this deal, it looks really good ahead of time. My question, Darrin, it looks like you guys – I’m just looking like what you guys are been able to do on the free cash flow side. And Darrin, you mentioned in last sort of comment about just efficiencies and I’m wondering is that what’s driving, I guess my question is, is it a better decline rate, is it efficiencies, lower costs? Maybe if you could just give a little light, because it does seem like – I don’t know that the market is fully appreciated, but it does seem like you’re getting better free cash flow with limited activity. I just want to see if you or Rusty can speak around that.

Darrin Henke: Yes, I’ll start off. And then I’ll turn over to Rusty to add some comments as well. Relative to the second and third quarter, DUCs have come on, they’re strong producers and certainly that’s helping us with our production. And then from – on the expense side, we are seeing reduction in our chemical costs. We’re seeing optimization on our gas lift, which lowers our operating expenses. And, we did for a period of time reduced some of our expense workovers and we’re back doing those and we’re picking up production volumes accordingly. So those are things that are improving the production and reducing our expenses. Now I’ll let Rusty add some color as well.

Rusty Kelley: Yes. I think Darren talked about the expense side. I’d also highlight on the top of the line, the Gulf Coast margins and our access to those markets as well as our hedge position has continued to make the top line a lot stronger than a lot of other folks that we’ve seen in the industry. So we continue to maintain a lot of those policies and manage that. But I think combined that with the efficiencies and the cost structure is what leads to some of those margins.

Neal Dingmann: And then given the benefits you all have, I guess my follow-up would just be, I know it would be nice to see all these consolidator taken over some of the people that aren’t operating as well. How do you balance either as you said, I know Darrin, you mentioned about free cash will still be in the priority paying down debt, but I’m just wondering when you look at growth on a go-forward here for the next year or two, how do you think about sort of internal versus external? What makes the most sense?

Darrin Henke: You want to think about our industry more generally, I definitely think we’re going to continue to see consolidation. We’ve seen dramatic consolidation here recently and that makes sense to most everyone, I think. The way Penn Virginia is going to approach consolidation, it’s all about value for our shareholders. So, we’re going to do – we’ll look at opportunities and we may be an acquirer down the road or we may get acquired where we’re pretty agnostic on that. It really is all about doing what’s right for the shareholder.

Neal Dingmann: That’s great answer. Thanks so much, guys.

Operator: And ladies and gentlemen, next question comes from Richard Tullis with Capital One. Please go ahead.

Richard Tullis: Hey, thanks. Good morning, everyone. Darrin and Rusty, if you could maybe provide a little history or the background on how the Juniper deal kind of came together and did PVAC look at any other potential options for achieving the same objectives?

Darrin Henke: Yes. So I’ll let Rusty address that question.

Rusty Kelley: Sure. So just from a highlight, we’ll give a lot more detail in the proxy itself. But Juniper has operated assets on the lease line boundary with us. We’ve known each other well, worked together as operating partners and over the past few months have had a number of conversations of how to work together. We did talk to a number of potential capital advisers or – sorry, providers and looked to add a number of different alternatives and we kept coming back to a potential partnership with Juniper, just given the operating synergies, knowledge of the asset base and frankly the relationship and viewpoint of a common strategy.

Richard Tullis: That’s helpful. Thank you, Rusty. And just as a follow-up I know this deal doesn’t change as Darrin said the go-forward activity clients, but within that activity set, do you perhaps start drilling on some of the Juniper acreage in 2021?

Darrin Henke: We will certainly consider that it’s a great acreage and it fits very well into our portfolio of opportunities, it allows us to drill longer laterals. It adds a number of new wells to our inventory. So we’re in the middle of the process thinking about 2021 activity levels as we speak and most likely that acreage will play a role in next year.

Richard Tullis: All right. Well, that’s all from me. Thank you.

Operator: [Operator Instructions] Today’s next question comes from Nicholas Pope with Seaport Global. Please go ahead.

Nicholas Pope: Good morning guys.

Darrin Henke: Good morning.

Nicholas Pope: I was hoping we could talk a little bit about the Juniper acquisition and kind of what things are going to look like once it’s completed. Obviously they have a lot of other assets in their portfolio, I’m just curious what kind of protections and governance we’re going to see for kind of the – what’s going to become the minority public shareholders in this go forward entity and looking at assets and kind of keeping some sort of separation between the two entities. Can you talk a little bit about that?

Darrin Henke: Yes, I’ll have Rusty address that.

Rusty Kelley: Sure. So the only anticipated overlap right now is the assets that we acquired in the transaction with regard to governance protections. We have standard protections in place for minority shareholder protections any affiliated transactions would have to be reviewed by those members of the board that are non-affiliated to Juniper. But again, what I would point to those as the protections that are very standard, but I think the real – the real benefit here is the common viewpoint on strategy with regard to paying down debts, living inside of free cash flow and developing with a good sense of capital discipline by somebody that’s now a majority shareholder and shares those same views.

Nicholas Pope: And what’s the board make-up going to be post – post the transaction. Like what’s the numbers on that?

Darrin Henke: Yeah. So it’ll be the existing four board members plus five new board members from Juniper. And so it’d be nine board members in total.

Nicholas Pope: Got it. Okay. That’s really all I had. Thanks guys.

Operator: And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to the management team for any final remarks.

Darrin Henke: We thank everyone for calling in today. And we look forward to delivering impressive results in the future. Take care.

Operator: Thank you. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.