PDC Energy – Utica Premium – Target $41

Halliburton Loopholes: Solving Challenges with...
Halliburton Loopholes: Solving Challenges with Crony Capitalism (g1a2d0044c1) (Photo credit: watchingfrogsboil)

PDC Energy

May 15,2012

PETD : NASDAQ : US$31.79  Buy , Target US$41.00 

Upgrading to BUY as Niobrara should drive guidance beat, Utica premium now appropriate  


Raising our rating on PETD from Hold to BUY as we believe strong Wattenberg field results should drive oil/cash flow growth, a guidance beat and equity performance. PDC shares present less upside to our target than the sector’s ~40% given a Utica premium that seems fair though is not included in our target.

Successful stacked Niobrara/Codell tests or Utica exploration/monetization would offer further upside potential.


 Niobrara: The latest 11 Wattenberg field horizontal Niobrara wells have averaged 435 Boepd (~60% oil, ~15% NGLs) over the first 30 days and should recover ~350 Mboe for $4+ million.

  • • Codell: PDC is completing its initial horizontal Codell test. Industry Codell wells have commenced at ~85% of the rate of offset Niobrara wells. PDC plans its first stacked Niobrara/Codell test this month.
  • • Utica premium appropriate: We believe investors have lowered the embedded Utica value in PETD from ~$6 to ~$3/share. Assuming PDC achieves its 45,000 net acre leasehold target, we believe investors are valuing the potential consideration received in a 50/50 joint venture at ~$3,000/acre versus ~$6,000/acre in late March. The company anticipates consummating a joint venture by autumn.

• Utica plan: PDC announced its first test was dry gas, yet this test was in Belmont County and the company has less than 1,000 net acres in Belmont and Monroe Counties. PDC is drilling a vertical Morgan County test with plans to drill two Guernsey County horizontal tests and a Morgan/Washington County horizontal test. An industry Utica test in Noble County should recover ~350 Mboe (~80% oil) for a targeted cost of ~$7 million while two Guernsey County wells should recover ~150 Mboe.


Five-year discounted cash flow analysis Our target price is based on the net present value of free cash flow over the life of a company using a reasonable discount rate. PETD’s valuation applies a 15% discount rate to determine the net present value of its free cash flow. Our reasoning for using a 15% equity return includes the long-term nominal performance of the broader equity market (10-12%), the greater inherent volatility of cyclical energy investments, and the company’s market capitalization below $2 billion (i.e. small-cap).

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s