PDCE: NASDAQ

The views expressed below are those of Anchor Capital Advisors, LLC (‘‘Anchor’’) as of the date written and are subject to change at any time. They are based on our proprietary research of the stated company and the following is a summary of the primary factors that support our beliefs and rationale for investing in the company. Please see additional disclosures at the end of this publication.

PDCE: NASDAQ

PDC Energy, Inc. (PDCE) is an exploration and production company with operations in the Wattenberg Field in Colorado and the Delaware Basin in Texas. In the Wattenberg field, PDCE has approximately 180,000 net acres. The Wattenberg field is approximately 85% of total company production. In the Delaware Basin, PDCE has approximately 29,500 net acres. The Delaware Basin is approximately 15% of total company production. Overall company production is 33% oil, 40% gas, and 27% Natural Gas Liquids (NGLs).[1]

Investment Thesis

Today we are seeing many E&Ps focusing on free cash and better returns, a trend some investors have labeled, “Shale 3.0”.[2]  In 2019 an activist investor brought the need for better capital discipline and allocation to the forefront for PDCE management by claiming that PDCE pursued growth over profits and that misaligned executive compensation played a part in its growth strategy.[3] Although unsuccessful in gaining Board seats, we believe the activist ignited positive changes at PDCE that have improved the company’s capital deployment strategy. We believe PDCE now offers a strong balance sheet, a cash flow and returns focused strategy, and a commitment to returning cash to shareholders via buybacks and dividends. We also believe that that company has better aligned management compensation with shareholders.

Confirmation through Research

Given PDCE’s focus on capital discipline we believe PDC should generate strong free cash flow (FCF), potentially over $1.5 billion cumulative, over the next two years while growing production at the mid-single digit range per year. We expect FCF to be used for debt reduction, and also to be returned to shareholders. PDCE has a quarterly base dividend, which we expect to be increased over time, but it also paid a special dividend in December 2021 to meet its shareholder return commitments following better than expected FCF generation.

Over the past two years, PDCE has updated its board and its executive compensation package. For example, it decreased the average board tenure by retiring four “legacy” board members, and it began incorporating ESG oversight. [4]. Additionally, executive compensation is more aligned with the strategy investors’ favor. For example, compensation is based on FCF generation, cost controls, and leverage levels for example as opposed to absolute production levels and adjusted cash flow per share metrics[5]

Finally, while increased oil and gas regulations in Colorado are a concern, we believe PDCE’s acreage in the more rural areas of Colorado (Weld County) should offset some of the risks to potential regulations on drilling.[6]

Variant Perception

We believe the market underappreciates PDCE’s shift toward a more shareholder friendly capital allocation policy and toward more appropriate capital discipline. We believe that the company, having engaged in proxy battle with an activist, is more aware of investors’ beliefs regarding capital allocation than some of its peers.