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PDC 1Q Results a Mixed Bag Despite Production Increase

PDC Energy Inc. continued to deliver results in its core areas of Colorado's Wattenberg Field and Ohio's Utica Shale last quarter by nearly doubling production and once again boosting its liquids mix, but legal fees, commodity prices and processing constraints cut into profits and limited gains at the same time.         

The company reported a 44% year/year increase in production, reaching 26,700 boe/d in the first quarter to exceed the high end of its guidance. About 59% of its first quarter production consisted of liquids and fell in line with the company's broader goal of boosting its liquids mix to 60% of production this year (see Shale Daily, Dec. 12, 2013), which it hopes to achieve through a stronger focus on the Wattenberg and Utica.

Although 77% of first quarter production came from the Wattenberg, where it produced 20,544 boe/d, the company is finally beginning to establish a pattern of production in the Utica, where its first well was permitted in 2012 (see Shale Daily, Sept. 20, 2012). Last quarter, the play accounted for 8% of production.

COO Bart Brookman, though, said that number would have been higher if it had not been for severe weather and mechanical issues on a third party pipeline. Brookman said Blue Racer Midstream LLC is working to make a series of repairs on its mainline in an area that has forced PDC to hold back the pressure on the three-well Garvin pad in Washington County, OH, where two wells were turned in-line during the first quarter.

Meanwhile, even though processing and midstream constraints in the Wattenberg have improved in recent months, Brookman added that parts of the field, particularly the northeast, continue to experience "localized bottlenecks" that are expected to budge sometime in early 2015 as more plants come online.

In all, PDC turned in-line 13 wells in the Wattenberg, two wells in the Utica and four previously unfinished wells in the Marcellus where it has suspended drilling based on natural gas prices this year. Another 12 nonoperated wells in the Wattenberg field were turned in-line as well.

Processing constraints weren't the only problem for PDC in the first quarter, though. Although cash flow increased from oiler production, which had financial analysts optimistic about the company's 2014 budget, those numbers did not include lower realized prices on unsettled derivatives, on which the company took a loss.

A longstanding lawsuit, first filed in 2011 by former unit holders that alleged PDC's disclosures about a deal to merge five limited partnerships for which it served as the managing general partner were inadequate, cost the company nearly $4 million in legal and consulting fees, which helped drive up general and administrative costs last quarter.

"We're approaching a trial date on a longstanding lawsuit; costs begin to accumulate as you get close to that trial date, which was originally scheduled for May 21," said CFO Gysle Shellum. "The trial date is July 1, so there is ongoing legal work up to that trial date and probably beyond if we actually get to trial so you can expect to see some costs in the second quarter as well."

The company also took an impairment on the sale of its Upper Devonian assets in West Virginia that it completed late last year, while the wells it lost in that sale and sequential declines in the Marcellus Shale also cut into production.

As a result, PDC reported a first quarter net loss of $2.1 million (minus 6 cents/share), compared to a net loss of $39.4 million (minus $1.30/share) in 1Q2013.

The company's Utica program earned it several questions from financial analysts during its earnings call on Tuesday, especially after it issued conservative type curves for the play during its analyst day last month, which disappointed some (see Shale Daily, April 21).

"I caution you that when you're comparing our type curves to other operators in the Utica, to compare the wells that are in close proximity and compare lateral lengths," CEO James Trimble told analysts. "In our type curves, we used 5,000-foot laterals, although we're drilling wells in the 6,000- and 7,000-foot range."

PDC secured 6,000 acres in Washington County, OH, last quarter at the southern tip of the play's current sweet spot (see Shale Daily, Nov. 19, 2013). PDC, unlike other operators, believes its acreage there and farther to the west in Morgan County, OH, has tremendous production potential. The company plans to continue securing acreage in the area, Brookman said.

The company's nonoperated acreage in the Wattenberg Field, where it has a 20% working interest, was also a major boon for the company last quarter. Production volumes from that acreage came in 50% above what the company had expected and Brookman said that trend should persist and bolster the company's production base going forward.

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