Petroleum Development Corporation
2008 Earnings Teleconference
March 3, 2009
Richard W. McCullough, Chairman & CEO
Gysle R. Shellum, Chief Financial Officer
Barton R. Brookman, SVP Exploration & Production
NASDAQ:PETD
Disclaimer
The following information contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Management’s current expectations and beliefs, as well as a number of assumptions concerning future events.
These statements are based on certain assumptions and analyses made by Management in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with Management’s expectations and predictions is subject to a number of risks and uncertainties, general economic, market or business conditions; the opportunities (or lack thereof) that may be presented to and pursued by Petroleum Development Corporation; actions by competitors; changes in laws or regulations; and other factors, many of which are beyond the control of Petroleum Development Corporation.
You are cautioned not to put undue reliance on such forward-looking statements because actual results may vary materially from those expressed or implied, as more fully discussed in our safe harbor statements found in our SEC filings, including, without limitation, the discussion under the heading “Risk Factors” in the company’s annual report on Form 10-K and in subsequent Form 10-Qs. All forward-looking statements are based on information available to Management on this date and Petroleum Development Corporation assumes no obligation to, and expressly disclaims any obligation to, update or revise any forward looking statements, whether as a result of new information, future events or otherwise.
The SEC permits oil and gas companies to disclose in their filings with the SEC only proved reserves, which are reserve estimates that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. The Company uses in this presentation the terms “probable” and “possible” reserves, which SEC guidelines prohibit in filings of U.S. registrants. Probable reserves are unproved reserves that are more likely than not to be recoverable. Possible reserves are unproved reserves that are less likely to be recoverable than probable reserves. Estimates of probable and possible reserves which may potentially be recoverable through additional drilling or recovery techniques are by nature more uncertain than estimates of proved reserves and accordingly are subject to substantially greater risk of not actually being realized by the Company. In addition, the Company’s reserves and production forecasts and expectations for future periods are dependent upon many assumptions, including estimates of production decline rates from existing wells and the undertaking and outcome of future drilling activity, which may be affected by significant commodity price declines or drilling cost increases.
This material also contains certain non-GAAP financial measures as defined under the Securities and Exchange Commission rules.
Rick McCullough
Chairman & Chief Executive Officer
Fundamentals
| | 2008 | 2007 | 2006 |
| Production (Bcfe) | 38.7 | 28.0 | 17.0 |
| Proved Reserves (Bcfe) | 753 | 686 | 323 |
Realized Gas Prices (Mcfe)(1) | $8.66 | $6.52 | $6.91 |
Adj. EBITDA ($ millions)(2) | $192.5 | $104.2 | $80.3 |
Adj. Cash Flow32.12 from Operations ($ millions)(2) | $200.1 | $95.6 | $29.8 |
Adjusted Cash Flow from Operations, per diluted share (2) | $13.48 | $6.44 | $2.00 |
Stock Price(3) | $79.09 - $11.50 | $61.91 - $35.73 | $47.44 - $32.12 |
| (1) | Equivalent prices including oil sales, natural gas liquids and realized derivative gains and losses. Excludes non-realized derivative gains & losses |
| (2) | See slides 29 and 30 for GAAP reconciliation of Adjusted EBITDA and Adjusted Cash Flow, respectively. Gain on leasehold sales excluded. |
| (3) | Hi-low range, per year. |
See Slide 2 regarding Forward Looking Statement
2009 Will Be Challenging
| • | 2008 – solid growth year |
| • | 2009 will be challenging |
| – | Valuable hedges - $153.5 million at 12/31/08 |
| – | CAPEX reduced 50-60%, to $120 - $140 million |
| – | Current strong liquidity position; will monitor it closely |
| – | Substantial cost reduction/operational enhancement efforts underway |
See Slide 2 regarding Forward Looking Statement
Bart Brookman
Senior V.P. Exploration & Production
Core Operating Regions I{Graphic}
2008 Proved Reserves – 753 Bcfe
Appalachian Basin 15%
Rocky Mountains 82%
Michigan Basin 3%
2008 Production – 38.7 Bcfe
Appalachian Basin 10%
Rocky Mountains 86%
Michigan Basin 4%
Rocky Mountains
2007 Proved Reserves: 559 Bcfe
2007 Production: 23.5 Bcfe
2008 Proved Reserves: 620 Bcfe
2008 Production: 33.2 Bcfe
Michigan Basin
2007 Proved Reserves: 24 Bcfe
2007 Production: 1.7 Bcfe
2008 Proved Reserves: 20 Bcfe
2008 Production: 1.6 Bcfe
Appalachian Basin
2007 Proved Reserves: 103 Bcfe
2007 Production: 2.7 Bcfe
2008 Proved Reserves: 113 Bcfe
2008 Production: 3.9 Bcfe
See Slide 2 regarding Forward Looking Statement
Operating Highlights {graphic}
Historical Drilling
| | New Wells | Gross Wells |
| 2002 | 13 | 70 |
| 2003 | 30 | 111 |
| 2004 | 45 | 158 |
| 2005 | 111 | 242 |
| 2006 | 138 | 231 |
| 2007 | 278 | 349 |
| 2008 | 333 | 379 |
| 2009E | 139-150 | 155-166 |
Production increased 38% to 38.7 Bcfe
Proved reserves increased 10% to 753 Bcfe
2008 Drilling Activity
Total Wells Drilled Gross - 379
Total Wells Drilled Net - 333
Development - - 357
Exploratory - - 22
Planned 2009 Drilling Activity
Estimated Total Wells Gross - 155-166
Estimated Total Wells Net - 139-150
See Slide 2 regarding Forward Looking Statement
Net Production {graphic}
See Slide 2 regarding Forward Looking Statement
Production By Basin – Bcfe
| Area | 2007 | 2008 | % Increase/ (Decrease) | 2009E | % Increase/ (Decrease) |
| Eastern (App/MI) | 4.4 | 5.5 | 25% | 6.0 | 9% |
| Wattenberg | 11.1 | 15.4 | 39% | 15.4 | 0% |
| Piceance | 8.2 | 12.5 | 52% | 15.4-16.4* | 23%-31% |
| NECO | 3.6 | 5.0 | 39% | 5.8 | 16% |
| Other | 0.6 | 0.3 | -50% | 0.4 | 33% |
| TOTAL | 28.0 | 38.7 | 38% | 43-44 | 11%-14% |
This increase assumes further drilling in the Piceance in 2009. Currently no Piceance drilling rigs are operating. If future 2009 prices do not justify restarting the Piceance drilling program, the Company may deploy such budgeted capital expenditures to another basin.
Bcfe = One billion cubic feet of natural gas equivalent.
See Slide 2 regarding Forward Looking Statement
YE2008 Proved Reserves Summary
| • | Overall – Proved reserves improved 10% from 2007 levels |
| • | PDP improved 6% from 2007 levels |
| • | Downward revisions due to commodity pricing and increased costs of approximately 75 Bcfe |
| • | Upward performance revisions of 41 Bcfe |
| • | Extensions/additions of 139 Bcfe |
| • | Reclassified PDNP (Recompletions and Refracs) in Wattenberg to PUD |
Summary Reserve Data
| | Proved Reserves (Bcfe)(1) |
Area | 2007 YE | 2008 YE | % Growth | % Developed | % Natural Gas |
| Rockies | 559 | 620 | 11% | 38% | 86% |
| Appalachia | 103 | 113 | 10% | 65% | 100% |
| Michigan | 24 | 20 | (17)% | 100% | 99% |
| Total | 686 | 753 | 10% | 44% | 88% |
| (1) | Independent reserve engineer’s estimates |
See Slide 2 regarding Forward Looking Statement
YE2008 Proved Reserves By Basin – Bcfe
| | PDP | PDNP | PUD | Total Proved |
| Area | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 |
| Eastern (App/MI) | 83 | 73 | 22 | 21 | 22 | 39 | 127 | 133 |
| Wattenberg | 71 | 79 | 48 | 1 | 78 | 118 | 196 | 199 |
| Piceance | 84 | 107 | 8 | 6 | 202 | 260 | 294 | 373 |
| NECO | 43 | 40 | 8 | 3 | 16 | 5 | 67 | 47 |
| Other | 2 | 1 | 0 | 0 | 0 | 0 | 2 | 1 |
| TOTAL | 283 | 299 | 85 | 31 | 318 | 423 | 686 | 753 |
| % Total Proved | 41% | 40% | 12% | 4% | 46% | 56% | 100% | 100% |
Bcfe = One billion cubic feet of natural gas equivalent.
See Slide 2 regarding Forward Looking Statement
YE2008 3P Reserves By Basin – Bcfe
| | Total Proved | Proved + Probable | Proved + Probable + Possible |
Area | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 |
| Eastern (App/MI) | 127 | 133 | 127 | 146 | 127 | 156 |
| Wattenberg | 196 | 199 | 282 | 236 | 298 | 241 |
| Piceance | 294 | 373 | 444 | 485 | 499 | 538 |
| NECO | 67 | 47 | 94 | 57 | 119 | 74 |
| Other | 2 | 1 | 2 | 1 | 2 | 1 |
| TOTAL | 686 | 753 | 948 | 925 | 1,044 | 1,009 |
Bcfe = One billion cubic feet of natural gas equivalent.
See Slide 2 regarding Forward Looking Statement
F&D Costs
| | 2008 | 2007 | 2006 | 2005 |
| Acquisition of Properties | (in millions) | | | |
| Proved Properties | $13.0 | $257.3 | $0.8 | $1.6 |
| Unproved Properties | ― | 13.7 | 11.9 | 16.9 |
| Development Costs | 257.9 | 194.0 | 114.5 | 68.6 |
| Exploration Costs | | | | |
| Exploratory Drilling | 15.6 | 13.0 | 18.7 | 12.9 |
| Geological & Geophysical | 2.1 | 6.3 | 2.2 | 0.0 |
| Total Costs Incurred | $288.7 | $484.3 | $148.1 | $100.0 |
| | | | | |
| *Additions to Reserves (Bcfe) | 107.4 | 396.3 | 66.9 | 80.3 |
| F&D Cost ($/Mcfe) | 2.69 | 1.22 | 2.21 | 1.25 |
Additions to reserves = year-end proved reserves + production + dispositions to partnerships - beginning of year reserves
See Slide 2 regarding Forward Looking Statement
2009 Operations Guidance
| • | 43–44 Bcfe total production expected |
| • | Capex of $120–$140 MM planned |
| • | 155–166 wells currently planned |
| • | Significant Capex slowdown company wide |
| • | Strong efforts in drilling costs/LOE reduction underway |
| • | Capex expected to be in line with anticipated cash flow |
| • | Flexibility to adjust Capex to respond to the market |
See Slide 2 regarding Forward Looking Statement
2009 Operations Outlook
| • | Four Marcellus vertical tests drilled in West Virginia |
| – | Two wells recently turned in-line |
| – | One well waiting on completion |
| – | Nine total vertical tests planned in 2009 |
| • | Compression/curtailment issues in Piceance corrected early 2009 |
| • | One rig currently running in Wattenberg |
| • | Intermittent drilling planned for NECO, Appalachia through 2009 |
| • | One exploration Bakken test waiting on completion in North Dakota |
See Slide 2 regarding Forward Looking Statement
Gysle Shellum
Chief Financial Officer
Quarterly Highlights
| • | 33% production increase Q4 2008 over Q4 2007, and |
| | 11% production increase Q4 2008 over Q3 2008 |
| • | Unrealized hedging gains of $102.5 MM for Q4 2008 |
| • | Key financial metrics (comparison to Fourth Quarter 2007): |
| – | Average realized prices per Mcfe were $5.00 in Q4 2008 |
| | (including realized hedging gains) |
| • | Adjusted Cash Flow from Operations(1) increased 51% to $41.4 MM in Q4 2008 from $27.4 MM in Q4 2007 |
(1) See slide 30 for GAAP reconciliation of Adjusted Cash Flow from Operations.
See Slide 2 regarding Forward Looking Statement
Summary Financial Results
($ in millions, except for per share data)
| | Three Months Ended December 31, | Year Ended December 31, |
| | 2008 | 2007 | 2008 | 2007* |
| Income from Operations | $74.2 | $17.5 | $202.3 | $60.8 |
| Net Income | $41.1 | $8.2 | $113.3 | $33.2 |
| Diluted Earnings Per Share | $2.78 | $0.55 | $7.63 | $2.24 |
*2007 data includes $33 million for gain on sale of leaseholds related to the Marathon lease sale.
See Slide 2 regarding Forward Looking Statement
Summary Financial Results
($ in millions, except for per share data)
| | Three Months Ended December 31, | Year Ended December 31, |
| | 2008 | 2007 | 2008 | 2007 |
| O&G Revenues | $56.3 | $57.5 | $321.9 | $175.2 |
| O&G Production & Well Operating Costs | $17.1 | $16.0 | $78.2 | $49.3 |
O&G Operating Margins(1) | $39.2 | $41.5 | $243.7 | $125.9 |
Adjusted Net Income(2) | $5.6 | $11.6 | $44.6 | $37.5 |
Adjusted Cash Flow from Operations(2) | $41.4 | $27.4 | $200.1 | $95.6 |
Adjusted Cash Flow from Operations (per share) (2) | $2.80 | $1.98 | $13.48 | $6.44 |
| DD&A | $32.7 | $20.0 | $104.6 | $70.8 |
| G&A | $10.6 | $9.1 | $37.7 | $31.0 |
| (1) | O&G operating margins is defined as O&G sales less O&G production and well operations costs. |
| (2) | See slides 30 and 31 for GAAP reconciliation of Adjusted Cash Flow and Adjusted Net Income, respectively. |
See Slide 2 regarding Forward Looking Statement
Debt Maturity Schedule ($MM) {graphic}
| • | $375 million revolver matures November 4, 2010 |
| • | Maturity schedule reflects: |
| – | Mitigation of liquidity risk |
| – | Diversification of funding sources |
| • | As of December 31, 2008: |
| – | $180 MM available balance |
| • | April 2009 borrowing base redetermination |
See Slide 2 regarding Forward Looking Statement
Energy Market Exposure {graphic}
Percentage of Mcfe Sold by Market (for Twelve Months Ended December 31, 2008)
Mich-Con, 4%
Colorado Liquids, 2%
Other, 1%
San Juan Basin/Southern California, 16%
Mid Continent, 12%
NYMEX, 10%
Crude Oil, 16%
Colorado Interstate Gas (CIG), 39%
See Slide 2 regarding Forward Looking Statement
Oil and Gas Hedges in Place at December 31, 2008
| | 2009 | 2010 | 2011 |
| Weighted Average Hedge Price (Mcfe): |
| With Floors | $8.33 | $9.70 | $6.76 |
| With Ceilings | $10.52 | $11.73 | $9.85 |
| % of 12/31/08 Production | 59% | 29% | 5% |
Weighted Avg Forward Prices(1) | $5.33 | $6.49 | $6.97 |
| Blended Pricing @ 12/31/08 Production Levels | $7.10 | $7.42 | $6.96 |
| Blended Pricing @ 15% Increase in Production | $6.86 | $7.29 | $6.96 |
All data excludes CIG basis trades ($4.3MM).
(1) Assuming forward prices as of December 31, 2008 for unhedged production.
See Slide 2 regarding Forward Looking Statement
CAPEX Spending & Production Growth
| | 08 | 07 | 06 |
| CAPEX Total ($MM) | $323 | $239 | $147 |
| CAPEX Developmental ($MM) | $258 | $194 | $115 |
| |
Organic Production Growth(1) | 38% | 32% | 20% |
| · | See Slide 2 regarding Forward Looking Statement |
Adjusted Cash Flow from Operations {graphic}
2008, $200.1
2007, $95.6
2006, $29.8
Note: See slide 30 for GAAP reconciliation
• Adjusted cash flow from operations is defined as cash flow from operations before normal working capital.
• Increased despite lower prices in the second half of 2008
See Slide 2 regarding Forward Looking Statement
EBITDA {graphic}
2008, 4306.9
2007, 4131.7
2006, $415.5
| • | EBITDA is defined as Net Income + Interest Expense + Income Taxes + Depreciation, Depletion and Amortization |
| • | 30% higher average gas sales price (including realized gain (loss) on derivatives) in 2008 versus 2007 |
| • | Years 2007 and 2006 include a gain on sale of leaseholds of $33MM and $328MM, respectively. |
See Slide 2 regarding Forward Looking Statement
Average Annual Costs Related to Oil and Gas Drilling (per Mcfe)
| | Three Months Ended December 31, | Year Ended December 31, |
| | 2008 | 2007 | 2008 | 2007 |
| Average lifting costs | $1.09 | $0.94 | $1.07 | $0.90 |
| DD&A (O&G Properties Only) | $2.73 | $2.10 | $2.51 | $2.37 |
See Slide 2 regarding Forward Looking Statement
2008 Financial Results
A P P E N D I X
Adjusted EBITDA Reconciliation ($ in millions)
| | 2008 | 2007 | 2006 |
| Net income | $113.3 | $33.2 | $237.8 |
| Gain on sale of leaseholds | - | (33.3) | (328.0) |
| Unrealized derivative (gain) loss | (118.4) | 4.4 | (7.3) |
| Interest, net | 27.5 | 6.6 | (5.6) |
| Income taxes | 61.5 | 21.0 | 149.6 |
| Depreciation | 104.6 | 70.8 | 33.8 |
| Other | 4.0 | 1.5 | - |
| Adjusted EBITDA | $192.5 | $104.2 | $80.3 |
See Slide 2 regarding Forward Looking Statement
Adjusted Cash Flow Reconciliation ($ in millions)
Net Cash provided by Operating Activities | $139.1 | $60.3 | $67.4 |
Changes in Assets & Liabilities Related to Operations | 61.0 | 35.3 | (37.6) |
| Adjusted Cash Flow from Operations | $200.1 | $95.6 | $29.8 |
See Slide 2 regarding Forward Looking Statement
Adjusted Net Income Reconciliation ($ in millions)
| | 2008 | 2007 | 2006 |
| Net income | $113.3 | $33.2 | $237.8 |
| Unrealized derivative (gain) loss | (118.4) | 4.4 | (7.3) |
Tax effect(1) | 45.7 | (1.6) | 2.8 |
| Other | 4.0 | 1.5 | - |
| Adjusted net income | $44.6 | $37.5 | $233.3 |
| (1) | Tax rate exclusive of discrete items |
See Slide 2 regarding Forward Looking Statement
Petroleum Development Corporation
2008 Earnings Teleconference
March 3, 2009
NASDAQ:PETD
