Petroleum Development Corporation
2009 First Quarter Teleconference
May 11, 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
| | Three Months Ended | Year Ended |
| | March 31, | December 31, |
| | 2009 | 2008 | 2008 | 2007 |
| Production (Bcfe) | 11.2 | 8.5 | 38.7 | 28.0 |
| Proved Reserves (Bcfe) | N/A | N/A | 753 | 686 |
Realized Gas and Oil Prices (Mcfe)(1) | $7.08 | $8.16 | $8.66 | $6.52 |
Adjusted EBITDA ($ millions)(2) | $48.9 | $43.6 | $192.5 | $104.2 |
Adjusted Cash Flow from Operations ($ millions)(2) | $39.8 | $40.4 | $200.1 | $95.6 |
Adjusted Net Income ($ millions)(2) | $4.1 | $10.9 | $44.6 | $37.5 |
Adjusted Cash Flow from Operations, per diluted share (2) | $2.62 | $2.72 | $13.48 | $6.44 |
Stock Price(3) | $18.70 | $74.47 | $79 - $12 | $62 - $36 |
| (1) | Equivalent prices including oil sales, natural gas liquids and realized derivative gains and losses. Excludes non-realized derivative gains & losses |
| (2) | See appendix for reconciliation to GAAP. Gain on leasehold sales excluded. |
| (3) | Hi-low range, per year. First quarter 2009 is the May 4, 2009 closing price. First quarter 2008 is the May 5, 2008 closing price. |
See Slide 2 regarding Forward Looking Statements
2009 First Quarter Highlights
| – | Continued focus on cost control and judicious spending of CAPEX |
| • | 14% reduction in unit lifting costs |
| • | 28% reduction in production and well operations costs |
| – | Production in line with forecast, up 32% quarter over quarter |
| – | Ramping up focus and activities in Marcellus |
See Slide 2 regarding Forward Looking Statements
2009 First Quarter Highlights
| – | Realized prices increased by over $3.25/Mcfe due to realized hedging gains of $36.6 million |
| – | Quarterly results greatly impacted by unrealized hedging results and is compounded by basis trade (which encompasses 22 Bcf, almost two times quarterly volumes) |
| – | Adjusted net income excluding unrealized derivative bases, |
| • | After tax impact of non-recurring charges, $9.8 million |
| – | Continued strong cash flow per share |
| – | DD&A rates increased largely due to 2008 year-end reserve revisions |
| – | Recurring G&A rate declining |
| – | Liquidity at just under $200 million at 3/31/09 |
See Slide 2 regarding Forward Looking Statements
Continued Focus on Liquidity
| • | 1st Quarter 2009 Update |
| – | Valuable hedges - $130.1 million at 3/31/09 |
| – | 2009 CAPEX reduced 60-70%, to $108 - $120 million |
| – | Current strong liquidity position; $41 million available cash, will monitor closely |
| • | 3/31/09 liquidity of $194 million |
| – | Substantial cost reduction/operational enhancement efforts underway |
| – | Bank redetermination and extension of line expected to be completed by month end |
See Slide 2 regarding Forward Looking Statements
Summary
| • | We have made great progress in controllable side of our business |
| – | We are completing our internal strategic assessment work |
| • | While pricing remains challenging, we are well hedged for 2009 – 2010 and driving down costs and enhancing operational efficiencies |
| – | We believe we will be well positioned when market turns |
See Slide 2 regarding Forward Looking Statements
Bart Brookman
Senior V.P. Exploration & Production
Core Operating Regions
1st Quarter 2009 Production Summary {graphic}
1st Quarter 2009 Production: 11.2 Bcfe
Rocky Mountains:
2008 Production: 33.2 Bcfe
1st Q 2009 Production: 9.9 Bcfe
Appalachian Basin
2008 Production: 3.9 Bcfe
1st Q 2009 Production: 1.0 Bcfe
Michigan Basin
2008 Production: 1.6 Bcfe
1st Q 2009 Production: 0.3 Bcfe
32% increase over prior year quarter
124 Mmcfe daily production rate
See Slide 2 regarding Forward Looking Statements
2009 Production Forecast {graphic}
| • | Estimated 2009 production of 42.5 - 44 Bcfe |
| • | Current production in line with forecast |
| • | Forecast includes curtailment in Appalachian Basin |
| • | Strong production optimization efforts underway |
See Slide 2 regarding Forward Looking Statements
Drilling Activity {graphic}
See Slide 2 regarding Forward Looking Statements
2009 Cost Management
| | Capital | Lease Operating Expense |
| | Projected Cost Reduction Per Well by July 2009 | Projected % Savings by July 2009 | Projected Cost Savings Per Month by July 2009 | Projected % Savings Per Month by July 2009 |
| Piceance | $590,000 | 22 | $176,000 | 15 |
| Wattenberg | 168,000 | 20 | 210,000 | 14 |
| NECO | 51,000 | 21 | 62,000 | 13 |
| East | 37,050 | 9 | 98,000 | 10 |
Current Capital and LOE improvements are equal to, or exceeding, projected levels.
See Slide 2 regarding Forward Looking Statements
Lease Operating Expenses
| Lifting Cost Improvements (per Mcfe) |
| | Twelve Months Ended December 31, 2008 | Three Months Ended March 31, 2009 | Q1 2009 % Variance |
| Direct Well Expenses | $0.84 | $0.69 | -18% |
| Indirect Well Expenses | $0.23 | $0.24 | 0% |
| Lifting Cost ($ per Mcfe) | $1.07 | $0.93 | -14% |
| | | | |
| Production Taxes | $0.48 | $0.17 | -64% |
| Well Operations Segment | $0.15 | $0.14 | -7% |
Overhead and Other Production Expenses | $0.32 | $0.21 | -34% |
Oil & Gas Production and Well Operations Costs | $2.02 | $1.45 | -28% |
See Slide 2 regarding Forward Looking Statements
1st Quarter Operating Highlights
| • | Ongoing Marcellus development |
| – | Four wells drilled, two in line |
| – | Five wells scheduled beginning June |
| – | 1st seismic shoot being planned |
| – | 1st horizontal well in planning |
| • | 10 of 17 completions conducted in Piceance |
| • | One drilling rig running in Wattenberg |
| • | Continued focus on capital cost and LOE reductions |
| • | North Dakota Bakken exploration well placed in line early May |
See Slide 2 regarding Forward Looking Statements
Gysle Shellum
Chief Financial Officer
Quarterly Highlights
| • | 32% production increase Q1 2009 over Q1 2008, |
| | relatively flat volumes Q1 2009 over Q4 2008 |
| • | Realized hedging gains of $36.6 MM for Q1 2009 |
| • | Key financial metrics (comparison to Fourth Quarter 2008): |
| – | Average realized prices per Mcfe were $7.08 in Q1 2009 (including $3.29 impact of realized hedging gains), an 8% decrease from $7.65 per Mcfe in Q4 2008 |
| – | Adjusted Cash Flow from Operations(1) decreased 3% to $39.8 MM in Q1 2009 from $41.1 MM in Q4 2008 |
| – | Lifting Costs per Mcfe decreased 14% to $0.93 in Q1 2009 from $1.09 in Q4 2008 |
| – | G&A flat on a Mcfe basis, excluding write-off of deal related expenses |
(1) See appendix for reconciliation to GAAP.
See Slide 2 regarding Forward Looking Statements
Summary Financial Results
($ in millions, except for per share data)
| | Three Months Ended March 31, |
| | 2009 | 2008 |
| Loss from Operations | ($1.4) | ($17.5) |
| Net Income | ($5.7) | ($13.9) |
| Diluted Earnings Per Share | ($0.39) | ($0.95) |
See Slide 2 regarding Forward Looking Statements
Summary Financial Results
($ in millions, except for per share data)
| | Three Months Ended March 31, |
| | 2009 | 2008 |
| O&G Revenues | $39.7 | $71.6 |
| O&G Production & Well Operating Costs | $16.2 | $18.1 |
O&G Operating Margins(1) | $23.5 | $53.5 |
Adjusted Net Income(2) | $4.1 | $10.9 |
Adjusted Cash Flow from Operations(2) | $39.8 | $40.4 |
Adjusted Cash Flow from Operations (per share) (2) | $2.69 | $2.74 |
| DD&A | $34.3 | $21.1 |
| G&A | $12.1 | $9.8 |
| (1) | O&G operating margins is defined as O&G sales less O&G production and well operations costs. |
| (2) | See appendix for reconciliation to GAAP. |
See Slide 2 regarding Forward Looking Statements
Debt Maturity Schedule ($MM) {graphic}
| • | $375 million revolver matures November 4, 2010 |
| • | Maturity schedule reflects: |
| – | Mitigation of liquidity risk |
| – | Diversification of funding sources |
| – | $153 MM available balance |
| • | Borrowing base redetermination should be finalized in May |
See Slide 2 regarding Forward Looking Statements
Energy Market Exposure {graphic}
Percentage of Mcfe Sold by Market (for Three Months Ended March 31, 2009)
Colorado Interstate Gas (CIG), 37%
Crude Oil, 18%
NYMEX, 9%
Mid Continent, 12%
San Juan Basin / Southern California, 16%
Mich-Con, 3%
Colorado Liquids, 4%
Other, 1%
See Slide 2 regarding Forward Looking Statements
Open Derivative Positions (as of May 8, 2009)1
| | Floors | Ceilings | Swap |
| | Period | Period | Period |
| Index | Qty (Gas - MMBtu Oil - Bbls) | Price | Qty (Gas - MMBtu Oil - Bbls) | Price | Qty (Gas - MMBtu Oil - Bbls) | Price |
| CIG | 04/2009 – 03/2011 | 04/2009 – 03/2011 | 11/2009 – 03/2010 |
| | 13,806,550 | $6.08 | 13,806,550 | $9.62 | 2,522,347 | $9.20 |
| CIG - Basis | | | | | 4/2010 – 12/2013 |
| | | | | | 29,185,490 | $1.88 |
| NYMEX - Gas | 04/2009 – 03/2011 | 04/2009 – 03/2011 | 04/2009 – 03/2012 |
| | 5,450,438 | $7.46 | 5,450,438 | $12.81 | 10,135,795 | $7.01 |
| PEPL - Gas | 04/2009 – 03/2011 | 04/2009 – 03/2011 | 11/2009 – 10/2010 |
| | 3,880,000 | $6.49 | 3,880,000 | $10.95 | 1,300,000 | $8.53 |
| NYMEX – Oil | | | | | 04/2009 – 12/2010 |
| | | | | | 1,000,722 | $91.81 |
| | | | | | | |
| (1) | Includes positions which matured subsequent to March 31, 2009. |
See Slide 2 regarding Forward Looking Statements
Oil and Gas Hedges in Place at May 8, 2009
| | 2009 | 2010 | 2011 |
Weighted Average Hedge Price (Mcfe)(1) |
| With Floors | $8.00 | $8.33 | $6.50 |
| With Ceilings | $10.90 | $9.74 | $9.49 |
% of Forecasted Production(2) | 71% | 69% | 12% |
Weighted Avg Forward Price(3) | $4.26 | $5.89 | $6.69 |
Weighted Avg Price of Forecasted Production(4) | $6.92 | $7.58 | $6.67 |
Weighted Avg Price of Forecasted Production Assuming 15% increase in Production | $6.57 | $7.36 | $6.67 |
| (1) | Excludes basis swaps from 4/2010 through 12/2013. |
| (2) | Based on 12/31/2008 PDP adjusted for Q1 2009 turn ins. |
| (3) | Based on forward curves as of 3/31/2009. |
| (4) | Represents a blended price for forecasted production at hedged prices and at forward prices. |
See Slide 2 regarding Forward Looking Statements
CAPEX Spending & Production Growth
| | | Year Ended December 31, |
| | Q1 2009 | 2008 | 2007 |
| CAPEX Total ($MM) | $73.7 | $323 | $239 |
| CAPEX Developmental ($MM) | $64.9 | $258 | $194 |
Organic Production Growth(1) | 31% | 38% | 32% |
See Slide 2 regarding Forward Looking Statements
Adjusted Cash Flow from Operations {graphic}
Adjusted cash flow from operations is defined as cash flow from operations before normal working capital.
($ in Millions)
2009, by quarter
Q1; $38.8
2008, by quarter
Q1, $40.4
Q2; $59.2
Q3, $59.1
Q4, $41.4
Full Year 2007, $95.6
Note: See appendix for reconciliation to GAAP.
See Slide 2 regarding Forward Looking Statements
EBITDA {graphic}
| • | 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 |
| • | 2007 includes a gain on sale of leaseholds of $33MM. |
2009, by quarter
Q1; $33.0
2008, by quarter
Q1, $3.7
Q2; $(35.1)
Q3, $231.4
Q4, $106.9
Full Year 2007, $131.7
See Slide 2 regarding Forward Looking Statements
Average Unit Costs Related to Oil and Gas Drilling (per Mcfe)
| | Three Months Ended March 31, |
| | 2009 | 2008 |
| Average lifting costs | $0.93 | $1.13 |
| DD&A (O&G Properties Only) | $2.90 | $2.33 |
See Slide 2 regarding Forward Looking Statements
2009 Financial Results
Appendix
Adjusted EBITDA Reconciliation ($ in millions)
| | Three Months Ended March 31, | Year Ended December 31, |
| | 2009 | 2008 | 2008 | 2007 |
| Net income (loss) | ($5.7) | ($13.9) | $113.3 | $33.2 |
| Gain on sale of leaseholds | .1 | - | - | (33.3) |
| Unrealized derivative (gain) loss | 13.2 | 39.9 | (118.4) | 4.4 |
| Interest, net | 8.4 | 4.7 | 27.5 | 6.6 |
| Income taxes (benefit) | (4.0) | (8.2) | 61.5 | 21.0 |
| DD&A | 34.3 | 21.1 | 104.6 | 70.8 |
| Other | 2.6 | - | 4.0 | 1.5 |
| Adjusted EBITDA | $48.9 | $43.6 | $192.5 | $104.2 |
See Slide 2 regarding Forward Looking Statements
Adjusted Cash Flow Reconciliation ($ in millions)
| | Three Months Ended March 31, | Year Ended December 31, |
| | 2009 | 2008 | 2008 | 2007 |
| Net Cash provided by Operating Activities | $35.9 | $48.8 | $139.1 | $60.3 |
| Changes in Assets & Liabilities Related to Operations | 3.9 | (8.4) | 61.0 | 35.3 |
| Adjusted Cash Flow from Operations | $39.8 | $40.4 | $200.1 | $95.6 |
See Slide 2 regarding Forward Looking Statements
Adjusted Net Income Reconciliation ($ in millions)
| | Three Months Ended March 31, | Year Ended December 31, |
| | 2009 | 2008 | 2008 | 2007 |
| Net income (loss) | ($5.7) | ($13.9) | $113.3 | $33.2 |
| Unrealized derivative (gain) loss | 13.2 | 39.9 | (118.4) | 4.4 |
| Tax effect | (6.0) | (15.0) | 45.7 | (1.6) |
| Other | 2.6 | - | 4.0 | 1.5 |
| Adjusted net income | $4.1 | $11.0 | $44.6 | $37.5 |
See Slide 2 regarding Forward Looking Statements
Petroleum Development Corporation
2009 First Quarter Teleconference
May 11, 2009
NASDAQ:PETD
