Friday, July 12, 2013

Tide Turns for Regional Energy Developer

The sixth largest holding of the exchange traded fund Power Shares S&P Smallcap Energy (PSCE: Nasdaq) is PDC Energy, a natural gas producer based in Colorado.  The company has 1.2 trillion cubic feet equivalent in proven reserves, as well as an interest in 7,200 gross wells located in the Wattenberg Field, Utica Shale, Appalachian Basin, northeast Colorado, and Piceance Basin.  PDC Energy (PDCE: Nasdaq) is short for Petroleum Development Corporation.  About a year ago the company decided on the shorter, less environmentally questionable moniker.

Petroleum Development Corp. replaced Evergreen Resources Inc. in September 2004, when the latter was acquired by an S&P mid-cap index member, Pioneer Natural Resources Co.   Back then the company traded on Nasdaq under the symbol PETC and at $715 million in market capitalization was a mere shadow of its current $1.6 billion size.

The last three quarters have been losing periods for PDC Energy.  The company has taken significant charges for impairment of natural gas properties that have resulted in net losses.  The assets were determined to be impaired when the assets became held for sale and third-party bids led to estimated cash flows that suggested the assets were worth less than shown on the balance sheet.  The noise of these non-cash write-offs is filtered out of cash flow from operations.  PDC Energy converted 45% of sales to operating cash flow.  That is an impressive rate, but it is still not enough to keep up with capital investments, which totaled $1.5 billion in the last three fiscal years.

The short-fall in internally generated cash for capital investments has sent PDC Energy to Wall Street.  The company has over $700 million in long-term debt on its balance sheet.  The company recently filed an offer to exchange up to $500 million worth of its privately placed senior notes with registered notes of like terms.

The dozen or so analyst who follow PDC Energy seem to think asset impairment charges are done and over with and have forecast positive earnings going forward.  Nonetheless, the year 2013 will still be a net loss at the bottom line.  That optimism appears to have seeped into trading patterns for PDCE.  A review of historic trading patterns suggest the stock has developed sufficient momentum to rise to the $70.00 to $75.00 price level, which represents a 35% price increase from the current price.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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