This post has been excerpted from a letter by Chip Rewey, Lead Portfolio Manager of the Third Avenue Small-Cap Value Fund.

As touched on earlier in the letter, PDCE is a $2.7 billion independent Exploration and Production company. PDCE has core acreage positions in the Delaware Basin, specifically in Reeves County, Texas and in the Wattenberg Field (Niobrara Shale), in Colorado. Both acreage positions contain prolific high-quality oil and gas rich deposits that have allowed PDCE to grow production levels rapidly (44% growth in 2016) at high return levels. As PDCE ramps up its drilling activities in the Permian Basin, PDCE should be able to continue this growth trajectory, targeting a 25%-40% range over the next several years.

As we have come to understand, with Energy E&P companies: i) you get the quality you pay for and ii) big fields get bigger. Both are proving true in PDCE’s early drilling results from the Delaware basin. Three recent wells targeting the Wolfcamp interval are producing at a 25% higher rate than their acquisition economics of a year ago. With more productivity initiatives of downspacing well placement intervals, longer lateral drilling of wells and the continued progression of technology and science, we think PDCE’s economics will continue to surprise to the upside.

Despite having made recent acquisitions, notably the $1.6 billion acquisition of 57,000 acres in Reeves County in 2016, PDCE maintains a strong balance sheet, with Debt-to-EBITDA of 2.0x, and targeted to fall to 1.7x by year end. If PDCE is successful at selling its non-core Utica shale assets which are currently being marketed, this leverage ratio would improve further. More importantly, PDCE’s revolving credit agreement was just increased to $750 million and remains undrawn, and when combined with over $250 million of cash on the balance sheet, leaves PDCE with almost a $1 billion of liquidity. This liquidity is more than enough to cover the capital expenditure outspend of about $175 million in 2017, with PDCE targeting cash flow neutrality in 2018, or 2019 in an adverse oil price scenario. With its revolver being the first maturity from its credit stack in the year 2020, PDCE has plenty of breathing room.

As PDCE sold off late in the quarter, with the swoon of the broader oil group, we were able to initiate our position close to multi-year low price levels, and with a conservative upside of more than 30% to our price target. Lastly, PDCE could present conversion potential to a larger E&P looking to expand into these prolific regions, a factor that should offer some downside protection and provide upside optionality not in our valuation calculations.


This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed.

The information in this portfolio manager letter represents the opinions of the portfolio manager(s) and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio manager(s) and may differ from those of other portfolio managers or of the firm as a whole. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio manager(s) views are as of June 30, 2017 (except as otherwise stated), and are subject to change without notice. Certain information contained in this letter constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of any fund may differ materially from those reflected or contemplated in any such forward-looking statement. Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.

Date of first use of portfolio manager commentary: July 17, 2017.

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Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.