Denver, CO-based PDC Energy Inc. (NASDAQ:PDCE) has reported its 2016 capital budget and production forecast, with a focus on its Wattenberg Field inventory.
PDC's 2016 capital budget, of $475 million at the mid-point, is expected to be weighted to the front half of 2016 as the company completes in-process wells spud in 2015.
PDC's 2016 production guidance of 20.0 to 22.0 million barrels of oil equivalent (MMBoe), or 54,650 to 60,100 boe/d, represents an increase of 35% to 40% over anticipated 2015 levels. The commodity mix is expected to be approximately 42% oil, 20% NGLs and 38% natural gas. The mix is slightly gassier than 2015 due to a number of higher GOR Inner Core Wattenberg wells being turned-in-line in the second half of 2015 and first half of 2016. The company's long-term commodity mix expectation remains approximately 45% oil and 65% liquids.
The majority of production growth in 2016 is expected to occur in the second and third quarters while the first and fourth quarters are expected to show relatively flat sequential quarter-over-quarter growth.
Bart Brookman, president and CEO, commented, "Our ability to execute our 2015 plan has positioned us to carry a lot of momentum into 2016. Our drilling program remains extremely flexible and we are committed to continue delivering shareholder value in these challenging times through the development of our best-in-class assets and continued focus on our cost structure.”
2016 financial positioning
PDC is projected to exit 2016 with a debt to EBITDA ratio of approximately 1.4 times and total liquidity of approximately $500 million. PDC's $115 million of convertible notes mature in May 2016 and the company has elected to redeem the face value of the notes in cash with excess value above the conversion price paid in PDC common stock.
Based on the mid-point of PDC's production guidance, nearly 50% of 2016 expected crude oil volumes are hedged at approximately $85 per barrel and approximately 62% of anticipated gas volumes are hedged at nearly $3.65 per thousand cubic foot, including CIG basis swaps. The mark-to-market value of future hedges exceeds $250 million, as of November 30, 2015.
Using internal weighted-average NYMEX pricing of $53 per barrel of oil, $2.60 per Mcf of natural gas and NGL realizations of approximately 18% of NYMEX oil, the company expects to outspend cash flow in the first half of the year and be cash flow positive in the second half. The company anticipates the Wattenberg well-head oil differential to NYMEX to be under $8 per barrel in 2016. Using the mid-point of production guidance, a $10 per barrel change in oil price results in an approximate $40 million change to anticipated cash flow.
Wattenberg operations details
In 2016, the company plans to spend approximately $440 million running a four-rig program in the Wattenberg Field after reducing its rig count from five in November 2015. The 2016 Wattenberg budget reflects a 13% reduction compared to 2015 and is comprised of nearly $380 million for drilling and completions and approximately $40 million for non-operated projects. The remainder of the budget is expected to be used for leasing, workover projects and capital improvements.
The company plans to drill standard reach lateral (SRL), mid-length lateral (ERL) and extended reach lateral (XRL) wells in 2016. Reduced drill times, from spud-to-spud, have led to an approximate 25% increase in lateral feet drilled per rig-year compared to 2015. In 2016, the company plans to spud and turn-in-line approximately 135 and 160 wells, respectively.
Due to successful testing of new completion technologies in 2015, projected well costs are now inclusive of plug-and-perf technology and production guidance now includes an associated uplift from plug-and-perf completions of up to 15%.
Utica operations update
Early in 2016, PDC plans to spend approximately $34 million in the Utica to drill, complete and turn-in-line five wells. The planned activity will focus on further delineation of its southern acreage, determining the impact of well-orientation on productivity and testing improved capital efficiency of 10,000 foot laterals. All wells in the 2016 budget are expected to provide a rate-of-return in excess of the company's cost-of-capital. Approximately 20% of the 2016 Utica budget is allocated for land and selective lease renewals.
Overall, say analysts with Seaport Global Securities, the news is a modest positive. “PDCE’s 2016 outlook is on par with prior commentary and fares well vs. Street expectations; the company is poised to deliver strong production growth (35%-40% YoY) on an ~11% lower budget, without compromising its healthy balance sheet – debt/EBITDA should remain well under 2x even at $40 oil per management’s estimates, with plenty of liquidity at YE16 ($445M under this scenario per management’s estimate). With continued efficiency gains in the Niobrara (enabling 25% more footage drilled per rig) and the prospect of improving well productivity, we think PDCE’s peer-leading capital efficiency profile should continue to show improvements going forward (link to our Q3 capital efficiency study).”