PDC Energy Inc. has reached a settlement on a long-standing class action lawsuit with a group of investors, which should allow the company to get out from under legal fees and focus on its nascent core areas in Colorado and Ohio.
The settlement will find PDC paying up to $35 million in a case that was first filed in the U.S. District Court for the Central District of California in 2011 [Schulein v. Petroleum Development Corp. No. SACV 11-1891 AG ANx]. That payment, though, is far below the $175 million that plaintiffs were seeking if the case went to trial.
The complaint was filed against PDC by former unit holders that alleged the company's disclosures about the acquisitions of certain partnerships in 2010 and 2011 were inadequate. A trial date had been set for this month, but in a filing with the U.S. Securities and Exchange Commission in August, PDC revealed that it had proposed a settlement to resolve the case, which was certified as a class action in January, during mediation meetings.
Although PDC has maintained that the investors' claims are bogus, it has spent more than $20 million on legal and consulting fees since the beginning of this year, according to its quarterly earnings reports. Under the agreement, the lawsuit will be dismissed and settled by two obligations. PDC will make a cash payment of $11.5 million and then transfer net profit interests from an undisclosed number of Wattenberg wells to be drilled in 2015 and 2016.
Beginning in 2027, the plaintiffs have the right to require PDC to repurchase those interests as well. Combined, the company said its obligations could cost $30-35 million.
The settlement remains dependent upon a formal agreement, court approval and funding to the plaintiffs by PDC's insurance carriers of $6 million, which is in addition to its cash payment. The company added that the settlement would not have a negative impact on its operations and cash flow after this year.
"We view this as a tremendous positive, as it is significantly below the plaintiffs’ claim of $175 million and relieves the litigation overhang that has weighed on shares," said Topeka Capital Markets analyst Gabriele Sorbara.
Wells Fargo Securities analyst David Tameron agreed and said the settlement was positive news for PDC's business, noting that the market had also greeted the deal favorably. After the agreement was announced on Friday, when PDC's shares opened at $53.86; they finished the day up at $54.34.
The settlement comes at a crucial time for PDC. Developments in the case have recently underscored the company's quarterly earnings calls, as it's been realigning its strategy and targeting more liquids production in Ohio's Utica Shale and Colorado's Wattenberg (see Shale Daily, June 20, 2013; Dec. 12, 2013; July 30).
Although it beat quarterly guidance through the first half of this year, PDC has been forced to confront severe weather issues, high-line pressures on its gathering systems and sand procurement issues that have curtailed its volumes (see Shale Daily, May 7; Aug. 11).