May 8, 2021
Operator
Good day, ladies and gentlemen, and welcome to the PDC Energy First Quarter 2021 Earnings conference call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Kyle Sourk, Investor Relations. You may begin, sir.
Kyle Sourk
Thank you, and good morning. On today's call, we have President and CEO, Bart Brookman; Executive Vice President, Lance Lauck; Chief Financial Officer, Scott Meyers; and Senior Vice President of Operations, Dave Lillo.
Yesterday afternoon, we issued our press release and posted a presentation that accompanies our remarks today. We also filed our Form 10-K.
The press release and presentation are available on the Investor Relations page of our website www.pdce.com. On today's call, we will reference both forward-looking statements and non-U.S.
GAAP financial measures. The appropriate disclosures and reconciliations can be found on Slide 2 in the appendix of that presentation.
With that, I'll turn the call over to our CEO, Bart Brookman.
Bart Brookman
Thank you, Kyle. Let me begin this call with the most sincere thank you to the PDC employees, our Board of Directors, investors, banks and service providers.
This has been 15 months of unprecedented risk and uncertainty. But today you will see the resiliency of the PDC story.
As we emerged from this crisis even stronger than we were pre-pandemic. The outlook we will provide today clearly demonstrates the company's top tier financial and operating strategy.
And I believe it provides one of the most compelling investment opportunities in the E&P sector. Now, some first quarter highlights, $175 million of free cash flow on a capital spend of $125 million and production of 15.7 million barrels of oil equivalent.
We achieved this free cash flow despite three outlier weather events, two in Colorado and one in the Permian Basin, which adversely impacted corporate production by approximately 500,000 BOE. Thank you to our operating teams for navigating these very hazardous conditions and always putting the safety first.
With the abundant free cash flow, our balance sheet and shareholder returns remain our primary focus. For the quarter, we reduced net debt by approximately $230 million, maintained 1.3 leverage ratio and we repurchased 600,000 shares of stock.
When we look back over the last 12 months, the company has generated $575 million of free cash flow achieved and 90% free cash flow margin and reduce net debt by approximately $600 million. All terrific accomplishments and numbers accelerated by the SRC merger.
Next, our outlook for the next three years, modeled at $55 oil and generating what I consider an extremely strong forecast. Expect the company to maintain discipline around our capital and operating plan.
We plan on generating $1.8 billion to $2 billion of free cash flow by year end 2023, which calculates the less than 50% reinvestment rate of our cash flow from operations. Over the three year period, we plan on reducing debt by less than – by at least $850 million and returning more than $650 million to our shareholders through dividends and our stock repurchase program.
All while generating modest production growth, and maintaining an industry-leading balance sheet. On the drilling permit side of our business tremendous effort right now by our land and regulatory teams.
We expect to submit our first OTD piece in the very near future. And by year end, we plan to submit over 500 drilling permits to the state of Colorado in the form of OTD piece and capital.
Now let's talk ESG. The company's commitment and actions in this arena are very real.
Some highlights, starting with the E or the environment. Through improved operating practices and midstream modifications, flaring in the Delaware is 1.2% year-to-date, a dramatic improvement from prior year levels.
And PDC’s corporate flaring rate is an impressive 0.2% year-to-date. This is achievable because no flaring is conducted in Colorado.
On the social side, or the S, we continue to focus on equitable representation. We maintain a strong gender and diversity presence in our leadership at PDC.
And we are proud, we have a completely gender balanced staff at our corporate offices. On the governance side or the G, we have placed intense focus on refreshment at the board level, with an emphasis on diversity of thought, gender, and background in nearly 60% refreshment rate over the past two years.
Before I turn the call over to Dave, I just want to reiterate how pleased I am with the overall results and the outlook of the company. I believe this is a direct reflection of PDC’s quality team in our premier assets.
With that, I'll turn the call over to Dave Lillo for an update on the operations.
Dave Lillo
Thanks, Bart. The incredible financial results you highlighted would not be possible without a tremendous work from our operating teams and our field staff throughout the quarter.
Weather is obviously something out of our control. But I'm extremely proud of our team's ability to quickly and safely handle the adverse conditions they faced over the last couple of months.
Looking at Slide 7, all-in we invested approximately $125 million in the first quarter, which is right in line with our expectations. As you can see, we generated approximately 175,000 BOE per day and 54,000 barrels of oil per day.
We've outlined the estimated weather-related impacts to these volumes, adding back in these volumes would have resulted in first quarter volumes closer to the midpoint of our previous guided range. More specifically, the first quarter weather caused us to pull forward a frac holiday, previously planned for second quarter into the first quarter, just had a couple of small impacts.
First, this caused a small amount of capital to be shifted from the first to the second quarter. And secondly, a handful of new completions were slightly delayed, which we expect to lead to a solid volume step change in the second quarter, but also a more pronounced step change in the third quarter.
On the bottom right of the slide, you can see breakdown of activity in the basin. Again, aside from the weather-related impact to production volumes, all operating metrics are right down the fairway in terms of expectations.
Importantly, we exited the quarter with approximately 200 DUCs and nearly 300 permits in Wattenberg, which we expect to cover all of our activity in the third year outlook, Scott will provide later. For the next few minutes on Slide 8, I want to discuss our progress we've made from a Wattenberg permit perspective.
As you can recall, we currently focused on two oil and gas development plans or OGDPs, named the Spinney and the Kenosha. The table at the top of Page 8 is intended to show a clear and precise update of the behind the scenes work the team is doing.
The green boxes are notating complete steps, yellow for steps that are in progress, and blank squares for the key next steps. At the bottom of the slide, we've outlined several key definitions.
As Bart mentioned, we are in the final stages of our prep work on the Spinney OGDP and anticipate submitting our completed application in the coming weeks. Once submitted, the next step is the completeness determination, in which the state will evaluate whether all forms and processes have been completed successfully.
And if the application is ready for staff review. As you suspect the Kenosha OGDP, which consists of approximately 70 wells, compared to the eight with the Spinney OGDP is a few steps behind.
We continue to make progress and turning yellow boxes to green and expect to submit the completed Kenosha application in the next couple of months. It is very important to recognize that this is a 30,000 foot view of a long detailed oriented process that our team is working tremendously on.
We will continue to stress that our track record of safe and responsible operations, best management practices and collaborative relationships with our communities, Well County and the COGCC should lead to a timely approval of future drilling permits. Look for us to provide updates to our pending applications on this slide throughout the remainder of the year.
On Slide 9, we give a similar update to our Guanella CAP. Similar to the OGDPs, we have a dedicated team assigned to the planning and execution of these projects for PDC.
They have done an amazing job to keep us on track for what we hope to be a submitted permit timeframe around the end of the year. As we highlighted on our year-end call the Guanella CAP has approximately 450 locations and accounts for three years of future turn in-line activity.
On the slide we also highlight our recent accomplishments, items in process and the next milestones. As you can see our positive and supportive meetings with local communities, regulatory bodies and offset operators have contributed to surpassing the protest deadline of our CAP boundary with no objections.
We are now set for the commission hearing for a stay. And once approved, the oil and gas commission will not grant a permit to any other operator within the Guanella CAP boundary until the completion of our permit process.
Meanwhile, our team continues to work on our infrastructure plans, cumulative impact analysis, execution of our surface use agreements and any other tasks and projects. While the most common questions we get relates to timing of our capsule middle one approval, it's important to recognize the tremendous effort and significant number of key internal checkpoints in this process.
Again, look forward to us providing a systematic update of our progress in this format in the upcoming months. With that, I will turn it over to Scott Meyers.
Scott Meyers
Thanks, Dave. And as Bart mentioned, one of our highlights of the first quarter was our significant free cash flow generation of approximately $175 million, which was driven by strong realized pricing of nearly $30 per boe.
This pricing represents an improvement of more than 50% compared to the first quarter of 2020, and was driven by significant year-over-year improvement and our weighted average realized sales price for each oil, gas and NGLs. Along those lines, we've updated our anticipated gross realizations for each commodity to 95% to 98% for oil, 70% to 80% for natural gas and $15 NGLs.
In terms of natural gas, the 70% to 80% full year range is partially due to the abnormally high realizations in the first quarter, which include February realizations well above 100% and above any level that we’d expect to receive on an ongoing basis. As Dave mentioned, we lost a fair bit of production at the same time, but we estimate that our natural gas revenues were artificially inflated somewhere in the tune of $25 million to $30 million in the quarter.
On the last slide, I'll point our G&A, just over $2 per boe for the quarter. In terms of absolute dollars, the first quarter G&A including cash and non-cash expenses was approximately $33 million.
We expect this to be in the neighborhood of our quarterly run rate moving forward. Next on slides, well, we highlight what I would consider the other significant achievements for the quarter, our debt reduction and shareholder returns.
Over the past year, we've been very clear of our intentions to focus on debt reduction, with total debt near approximately $1.4 billion, I'm proud to say that we've paid off all the debt we inherit with the SRC transaction in just one year. As you can see, we paid off over $200 million of net debt in the first quarter and currently sit with an undrawn revolver and $60 million cash balance.
Expect us to use the majority of our free cash flow to reduce debt as we continue to march toward a roll of $1 billion, just expect us to reach that debt goal much sooner than previously messaged. At that time, we will expect shareholder returns to become the primary use of our free cash flow while still reducing debt.
As a reminder, we reinstated our current buyback program in late February and invested $22 million to repurchase approximately 600,000 shares and remain active and systematically buy back our stock, what we feel is a significant discount. As we've disclosed last quarter, we expect to commence our dividend programs mid-year and are still targeting 1% to 2% annualized yield.
Finally in relation to our dividend, you can see that we've not only completed our base layer hedges for 2022, but it begun the layer in the few 2023 positions, whether dividend as part of PDCs future and as part of our risk mitigation strategy, look for us to extend the timeframe a couple of quarters from our previous strategy. Our detailed positions can be found in the 10-Q and appendix in Slide 18.
Moving to our multiyear outlook as Bart covered. We now expect to generate more than $600 million of free cash flow in each of the next three years.
We're between $1.8 billion to $2 billion. This compares to an estimate of $1.3 billion to $1.5 billion back in February.
It is important to note, we have made no material changes to our operating plans over the next three years. We simply updated our pricing assumptions from $45 to $250 and $12 to $55 oil, $250 gas and $15 NGLs.
As you'll notice our updated prices assumptions are still comfortably below strip prices, leaving us potential upside to generate even more meaningful free cash flow than these already lofty projections. To know our cumulative free cash flow projections equate to more than our entire debt balance, we're more than half of our current market cap or more than 40% of our enterprise value.
In a $55 world, our plan equates to a reinvestment rate of less than 50%. We are targeting debt reduction of at least $850 million over the three year period with returns to shareholders more than $650 million.
We feel confident in accomplishing these goals while we still have another $500 million of additional free cash flow to flex between these buckets, again at pricing below strips. Finally, our last slide outlines our free cash flow allocation for our 2021 year.
You know that we've enhanced several of our key targets. First debt reduction, in February, we were targeting reducing our net debt by at least $200 million, which we accomplished in the first quarter alone.
Now our plan is to reduce net debt by at least $350 million. Similarly, we had a goal of achieving a onetime leverage ratio by the end of our three year outlook, we now project that to happen by the end of the year.
Next, shareholder returns. In February, our goal was to return $120 million to our shareholders through share buybacks and our expected quarterly dividend, now with better pricing and more free cash flow we are targeting more than $150 million.
Finally, you'll notice no change to our expected flex bucket which is primarily used to increase the other two previously mentioned buckets, based on market conditions and to accommodate our working capital needs. Overall,, we're incredibly proud of the entire team's ability to execute, and once again excited to share our ever improving story with the market.
With that, I'll turn the call over to the operator for Q&A.
Operator
[Operator Instructions] Your first question comes from the line of Brian Downey from Citigroup. Your line is open.
Brian Downey
Good morning and thanks for taking my questions. And my first one when I look at your updated multiyear free cash flow and shareholder returns guidance on Slide 13, I noticed with the higher price deck your debt reduction target actually increased more than the buyback plus dividends bucket there.
Any updated thoughts around the right long-term capital structure? And at what point does the incremental cash flow start to accrue more to the shareholder return bucket?
Or I guess, asked in other way, has your mental accounting of the flex free cash flow bucket changed though?
Bart Brookman
Yes, I mean that’s a great question. I think number one, when you look at it right now, debt paid down store number one goal.
But we want to start and we have started meaningfully returning capital to shareholders. So, right now as we're headed toward that $1 billion target, I would say debt paydown is our larger focus.
However, once we hit that $1 billion target, I think you'll see that our returning capital to shareholders will start – it will increase and will be greater than what we are using to paydown debt. So when you look over the three year period, getting us down to paying down $850 million a debt will get us down to approximately $750 million of debt, which seems to be a pretty comfortable number for us.
And then even when you get to that number, I think the shareholder returns will continue to increase from there. So that's just the method to the madness.
We just want to make sure that paying down debt is good financial stability of the company. And so that's our number one priority now, but we do want to begin the shareholder return process and like you said you expect our first dividend payment sometime this summer.
Brian Downey
Great. And then maybe one on the operation front.
Can you talk through activity timing this year, it looks like based on your second quarter volume guidance, your 4Q year-over-year commentary, it seems to imply pretty healthy sequential oil growth in the third quarter to make all those guidance items square. How should we think about what's driving those sequential trends and could then give those incremental volumes fly forward in the 2Q depending on ultimate timing?
Bart Brookman
Yes, I mean, I'll start off and Dave you can go into the details. If you remember the first place to start is just with our Delaware cadence.
And our Delaware completion crews has just gotten under the way the last 60 days. And those turning lines are just starting to happen now.
So I think our Delaware production really is going to be increasing pretty significantly and we won't hit our peak probably sometime in the third quarter. Is that fair?
Dave?
Bart Brookman
Yes. Most of our spend will be in the second quarter as we run that completions group full time in Delaware with production really coming on started the second quarter, but really, ultimately, most of the production will hit in the third quarter.
Bart Brookman
And then with the Wattenberg, just a quick reminder, if you go back to our 10-K slide deck that we had, we showed you some of the economics and some of our other areas in the plains area has some of our best economics, and those wells were the focus area of our turning lines in late December and early January. So that does mute a little bit your oil growth in the first and second quarter.
However, when you look at the returns and the values that we're bringing forth to the shareholders, they're phenomenal project. So I do expect to see a big step between first and second quarter, but even a bigger step between second and third quarter.
And we are very comfortable with following our production, both oil production and our overall production within those annual guidance.
Brian Downey
Great. I appreciate the comments.
Operator
Your next question comes from the line of Neal Dingmann from Truist. Your line is open.
Bertrand Donnes
Hey, good morning, guys. This is actually Bertrand filling in.
Just wanted to maybe brush up on the multiyear outlook. When you're looking at your target is – are you going to do anything where you shift maybe where you're targeting, if oil prices go higher or if there is a gas price move anything like that, or is permitting and timing really kind of locks you in through the production mix that you're already seeing?
Bart Brookman
I mean, if you're talking about production mix, I mean, we're pretty well locked in what we're going to do for this year, as we said before, the first quarters is going to be our low – our percentage oil in the low-30s, and when the Delaware production starts coming on you're going to see the company wide oil production increase and get closer to that mid-30% range. So our Delaware production – the wells were turning on and those are all decks, we're just going through and executing the program.
And the Wattenberg program, again, we have a pretty steady cadence and we have the 200 docs out there, so those are what are going to be turned in like next, so there is not a lot of movement in the program.
Bertrand Donnes
Can you comment more for the multiyear outlook, is there any wiggle room two years out kind of situation? Or is it still steady as it goes for the plan that you have?
Bart Brookman
Yes, I mean, I would say for the multi it's still pretty much steady as you go. I mean, we're – what we're drilling this year in the Delaware will be completed next year in the Delaware and in the Wattenberg, I mean, all of our turning lines and are either spuds right now or permitted.
So the exact order they might move from quarter-to-quarter, but if you look the next three years, it's going to be stuff that's permanently right now or spud.
Bertrand Donnes
And then really just my last follow-up is, the OGDP and CAPs, do you – can you talk about the product mix between those three, and maybe if that determines timing or it's really more about when you get the permits in the door, you'll go ahead and develop them?
Bart Brookman
So starting out with our permitting philosophy, we took on a three pronged approach. So we had two OGDPs, one smaller one, one larger one, and then the Guanella CAP, which will be submitted later in the year.
The Spinney is in our planes, and it's a eight miles, three mile laterals, should be pretty gassy at that point. The Kenosha is over in our Kersey area, just south of our main focus area.
That'll be a little more oilier and we're hoping to submit that application here in a couple months. And then our big focus project is the Guanella CAP and that's really part of our Summit area.
And we're really excited about that, we're on target to submit that at the end of the year.
Dave Lillo
And I do believe if you're looking for the oil mix on the three different areas that was outlined on the last few calls, is that correct, Kyle?
Bertrand Donnes
Thank you.
Operator
Your next question comes from the line of Umang Choudhary from Goldman Sachs. Your line is open.
Umang Choudhary
Hi, thank you for taking my questions. Can you hear me?
Bart Brookman
Yes, we can.
Umang Choudhary
My first question is really around use of free cash flow, like you mentioned at current strip, you will likely generate more free cash flow than $600 million this year. And in terms of allocating that cash flow, reducing that to $1 billion is your number one priority.
But you also mentioned that your shares are under value today. So I guess, I'm just wanted to get your thoughts around if we actually do achieve a higher oil price, do you see the potential to actually deploy more toward share repurchase and how it will around user free cash flow?
Scott Meyers
Yes, I think that's a fair question. When we look at it, again – we laid out our targets here, in the $55 world, I would say that, we would, as we get closer to that $1 billion of total debt, you can see a slight percentage go a little bit more to the share repurchases.
But still, when I look at our free cash flow until we hit $1 billion, more of it will go towards the debt percentage wise compared to returning capital to shareholders. With that said, if strip prices, we have an extra $100 million, maybe $100 million-plus, both buckets could move north.
Umang Choudhary
Great, that's super helpful. Thank you.
And my follow up question is on CapEx. Just wanted to get your thoughts around your tariffs for this year.
You mentioned a frac holiday in first quarter is still on track for the tariffs which you’ve guided in fourth quarter for 2021. And then any thoughts around inflation and its impact your CapEx program?
Scott Meyers
Yes, so that frac holiday that I was alluding to, came with that storm, we decided to shut down our frac in Wattenberg for about five to six days. We had a frac holiday scheduled in the second quarter.
So we were just kind of shifting that we probably won't do that frac holiday, but we kind of shifted some of that cost from the – the capital costs from the first quarter to the second quarter there. We're not changing our long-term forecast for the year and feel very confident that we'll be able to meet those numbers.
I think the second part of your question was the cost creep or cost increases that we may be seen in the future. And I guess to summarize that we've seen some pressures from a few providers and contractors, which led to some small concessions, really it's the steel, the frac and the cement.
We've seen the most pressure, they can only account for about 5% to 10% of our AFEs. And through our formal bidding process earlier this year, we're pretty locked in for the second quarter.
We do see maybe a modest increase in cost creep, third and fourth quarter if these commodity prices do hold in.
Umang Choudhary
Got it. Super helpful.
Thank you.
Operator
[Operator Instructions] Your next question comes from the line of Michael Scialla from Stifel. Your line is open.
Bill Howell
Hey, guys. This is Bill Howell filling in for Mike.
If you are forecasting $15 for NGLs for 2021 and you realize 21.19 in the first quarter. Can you say where NGL prices are now and how you see the market fundamentals shaking out for the remainder of the year?
Bart Brookman
Lance, you want to jump on that?
Lance Lauck
Yes. Sure, great question.
From where we sit right now, Bill, I would say that $15 per barrel is conservative. We see 2021 being above the $15 per barrel mark.
If you look at 2022 and 2023 based on forward projections and our type of NGL barrel, we think is closer to the $15 per barrel. So if there is a bit of an uplift is going to happen here in 2021 versus the $15.
Bill Howell
Great, thanks. That's all for me.
Thanks for the color.
Operator
Your next question comes from line of Tom Hodge from Wells Fargo. Your line is open.
Tom Hodge
Hey guys, solid quarter. My question relates to the CAP.
I'm curious to what extent the almost direct overlap with the Mountain View CDP provided the tailwind to your pre-submission work and perhaps the pace at which the COGCC will parse the approval?
Lance Lauck
I think probably our CAP, the way it's outlined today, and it's about 32,500 acres, gross acres right now. I think it's probably about two-thirds of the Mountain View that SRC had was working on at the time and about one-third of our acreage that kind of fit like a glove into that.
So right now, it's similar – they weren't very far in the process. And we kind of pulled everything back out, and working the new oil and gas commission's new process, which we've been in constant communication with them on how we need to take steps forward.
So that's about where we stand. It's going to be about 450 wells and about 25 pads, but we're making really good progress.
And then we're very confident as a team, we're going to be able to execute on this.
Tom Hodge
Great. That's all for me.
Thanks, guys.
Operator
And there are no further questions over the phone line at this time. I would now like to turn the conference back to Bart Brookman, for closing remarks.
Bart Brookman
Thanks for hosting the call and just thank you to everyone your ongoing support. And we just appreciate you joining us today for what we think is a pretty terrific story.
So again, thank you.
Operator
This concludes today’s conference call. Thank you for participating.
You may now disconnect.