PDC Energy may be able to reduce its net debt by more than $500 million in 2021 (NASDAQ: PDCE)

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Debt reduction prospects for PDC Energy (PDCE) now look quite strong in 2021, with improving oil and NGL prices indicating it could generate over $500 million in positive cash flow in 2021. This would allow it to reduce its net debt to around $1.1 billion by the end of 2021 and its leverage to less than 1.0x.

PDC currently looks fairly valued for a long-term WTI $50 oil environment. There remains some uncertainty as to how new Colorado regulations and the possibility of extended freezes/bans on federal land drilling will affect its ability to fully develop its Wattenberg assets.

2021 outlook at current band

The current band for 2021 has improved to around $52 WTI oil. As a result, PDC generates expected revenue of $1.621 billion after hedging.

Source: PDC Energy

PDC’s hedges for 2021 have a negative estimated value of approximately $69 million, primarily due to its 2H 2021 oil swaps. It has approximately 5 million barrels of 2H 2021 oil swaps at an average price of $41.89 per barrel.

Barrels/Mcf

$ per barrel/Mcf (realized)

millions of dollars

Oil (Barrels)

24,090,000

$49.00

$1,180

NGL (barrels)

16,644,000

$14.00

$233

Natural gas [MCF]

149,796,000

$1.85

$277

Coverage value

-$69

Total income

$1,621

PDC is expected to end up with $1.089 billion in cash outlays with its maintenance capital budget of $550 million. This translates to a projection of $532 million of positive cash flow for 2021 at the price of the strips.

millions of dollars

Rental operating expenses

$160

Transport, collection and treatment

$89

Production taxes

$93

G&A in cash

$110

Cash interest

$87

Capital expenditure

$550

Total expenses

$1,089

These calculations are consistent with PDC’s estimates for 2021 cash flow. It projected $300 million of positive cash flow at $40 WTI oil and a realized price of $10 for NGLs. Rising oil prices add approximately $170 million to PDC’s cash flow, while expected increases in realized NGL prices add another $60 million to its projected cash flow for 2021.

Source: PDC Energy

takeaway location

The regulatory environment for long-distance pipelines appears challenging, which could hamper PDC’s Wattenberg assets in the future. For example, the Jordan Cove Pipeline has had recent problems, although this would primarily affect gas producers in western Colorado (such as in the Piceance Basin) rather than producers in the DJ Basin.

DJ Basin’s takeout capacity looks good for a while, due to lower production in 2020 combined with recent expansion projects such as the Cheyenne Connector and the Saddlehorn pipeline expansion.

permit

PDC also faces a dual threat in Colorado with state changes to required setbacks and freezing new drilling permits and leases on federal lands. It’s unclear how much of the setback changes will affect PDC on the road, as much depends on its ability to gain unanimous consent from tenants and/or landlords within 2,000 feet. The success rate on this is currently unknown.

The federal land issue appears to have a more limited effect on PDC as it primarily affects gas-producing areas of Colorado. PDC reportedly had 32 well permit applications for federal lands in Colorado. This is a relatively small proportion of the approximately 275 well permits it had accumulated at the end of 2020. PDC also owns approximately 200 DUCs in Colorado and combined with the permits, that would give it approximately four years of inventory during its development in 2020. rate.

Debt reduction and valuation

PDC is now expected to end 2021 with $1.1 billion in net debt if it does not increase its capital budget from the maintenance level of $550 million. This would only represent 0.9x of PDC’s projected EBITDAX for 2021 at current strip prices.

PDC’s value at $52 of WTI oil is estimated at around $26.25 per share using an EV/EBITDAX multiple of 3.0x, although this is a little higher than long-term prices. At $50 of WTI oil, $2.60 of NYMEX gas and a realized price of $12 per barrel for NGLs, the value of PDC would be around $23.30 per share.

A $5 change in long-term oil price expectations changes the estimated value of PDC by approximately $3.40 per share.

Conclusion

PDC Energy is capable of generating more than $500 million in cash flow positive in 2021 at current strip prices, which would reduce its leverage to less than 1.0x. PDC is in good financial shape and a scenario of WTI oil at $50 is quite positive for it. The value of PDC is however limited by regulatory uncertainty. It has permits and DUCs to continue developing its Wattenberg assets for a few years, but beyond that the combination of prolonged Colorado setbacks and restrictions on federal land drilling could narrow its development options there. .

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