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PDC Energy, Inc.
(Name of Registrant as Specified In Its Charter)
Kimmeridge Energy Management Company, LLC
Kimmeridge Active Investments, LLC
Kimmeridge Chelsea, LLC
James F. Adelson
Alice E. Gould
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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On May 14, 2019, Kimmeridge Energy Management Company, LLC issued a press release (the “Press Release”) and made available a presentation (the “Presentation”) to stockholders of PDC Energy, Inc. Copies of the Press Release and Presentation are attached herewith as Exhibit 1 and Exhibit 2, respectively.
Kimmeridge: Setting the Record Straight on PDC’s Underperformance
PDC’s portrayal of its operating performance is not what it appears to be; Kimmeridge refutes PDC’s performance data
New York, NY and Denver, CO, May 14, 2019 – Kimmeridge Energy Management Company, LLC ("Kimmeridge" or the "Firm") today released a presentation setting the record straight on PDC Energy, Inc. ("PDC" or the "Company") operating performance and refuting data presented by PDC. A copy of the Kimmeridge presentation can be found here: http://kimmeridge.com/pdc_part5
Setting the record straight: The facts.
Since Bart Brookman has been appointed CEO of PDC (January 1, 2015), the Company has reported1
|·||Cumulative Net Income (loss): ($560) million|
|·||Cumulative Impairments: $924 million|
|·||Cumulative Net cash flow: negative $1.63 billion|
|·||Board Metrics Achieved: 10 of 21|
|·||Cumulative Executive Compensation2: $55.7 million|
|·||Average Bonus Pay vs. Target: 150%|
|·||Cumulative SG&A: $553 million|
|·||Changes to Internally set Peer Group: 30|
|·||Absolute Share Price Performance: negative 11%|
|·||Average ROACE: <0%|
|·||Cash Returned to Shareholders: $0|
From January 1, 2015 to date, WTI oil prices have increased from $53/bbl to $62/bbl.
Kimmeridge is disappointed that PDC continues to manipulate data to give shareholders a false impression of their operating performance, and that management appear unwilling to commit to delivering a return on capital, paying a dividend, returning cash to shareholders, and aligning their pay with total shareholder return.
Ben Dell, Founder and Managing Partner of Kimmeridge, said, “PDC’s shareholders have before them a critical decision. They can choose to support the Company’s proposed nominees to the Board, and in turn maintain PDC’s status quo, or they can vote for the Kimmeridge minority slate, and give their fellow shareholders the opportunity to effect change at PDC, with a refreshed Board who will commit to thinking and acting like owners”
1 Source: PDC’s public filing data (financial and proxy statements) data for fiscal years ended December 31, 2015, 2016, 2017 and 2018 (the Period).
2 Total compensation awarded in each year during the Period to the top 5 highest paid PDC executives.
A vote for the existing PDC nominees is a vote for continued value destruction, underperformance, failure to meet internally-set targets, poor financial controls, bloated executive compensation and high SG&A. Kimmeridge’s nominees are highly qualified, experienced industry professionals who are focused on creating sustained value for all shareholders, while aligning management compensation with absolute performance and placing the Company on a path to profitability.”
For ease of reference, links to Kimmeridge’s press releases can be found below:
|-||Kimmeridge Highlights Why PDC's Self-Selected Peer Group is Not Appropriate – 5.10.19|
|-||The Need for Change: Performance, Pay and Putting PDC on a Path to Profitability – 5.6.19|
|-||Kimmeridge Comments on PDC's Q1 Operating and Financial Results – 5.2.19|
|-||PDC Energy: A Company in Denial and a Board Asleep at the Wheel – 4.23.19|
|-||Kimmeridge Files Preliminary Proxy Statement for Election of Directors at PDC Energy's Annual Meeting – 4.9.19|
|-||Kimmeridge Energy Nominates Three Highly Qualified Directors for the Board of PDC Energy, Inc. – 4.7.19|
WE URGE SHAREHOLDERS TO VOTE THE GOLD PROXY CARD and give the Kimmeridge Nominees the chance to serve as a catalyst for change at PDC. The Kimmeridge Nominees stand ready to represent the voice of stockholders who deserve to have a Board and management who are willing to lead through the lens of ownership, setting the tone at the top for the Board and management to think and act like owners.
VOTING GOLD IS A VOTE FOR STOCKHOLDERS AND A FUTURE FOR PDC WITH THE POTENTIAL TO RETURN TO A PATH OF PROFITABILITY.
Shareholders can vote electronically via the Internet, by telephone or by signing and dating the GOLD Proxy Card or Voting Instruction Form and mailing it in the postage paid envelope provided. If you have questions about the voting process or need help in voting your shares, please feel free to reach out to our proxy solicitor, Innisfree M&A Incorporated (“Innisfree”) toll free at (877) 750-8338 or collect at (212) 750-5833.
We urge shareholders NOT to vote using any WHITE proxy card or voting instruction forms you receive from PDC. If you return the WHITE proxy card – even by simply indicating “withhold” on the Company’s slate – you will revoke any vote you had previously submitted for the Kimmeridge Nominees on the GOLD proxy card.
About Kimmeridge Energy
Kimmeridge is a private equity firm, and direct operator, focused on the development of unconventional oil and gas assets at the front-end of the cost curve in the US upstream energy sector. We are also deeply familiar with PDC’s core assets in the Permian basin, having owned and operated those assets prior to selling them to PDC in 2016. We are stockholders who believe that public company boards should have meaningful equity ownership and must hold management accountable for performance. We are currently invested in only one public E&P, that being PDC.
Scott Winter / Jonathan Salzberger
Innisfree M&A Incorporated
Daniel Yunger / Cathryn Vaulman
Kimmeridge Energy Management Company, LLC ("Kimmeridge"), Kimmeridge Active Investments, LLC, Kimmeridge Chelsea, LLC, Benjamin Dell, Alice E. Gould, James F. Adelson, Alexander Inkster, Noam Lockshin, Henry Makansi and Neil McMahon (collectively, the "Participants") have filed a definitive proxy statement with the Securities and Exchange Commission (the "SEC"), along with an accompanying GOLD proxy card to be used in connection with the Participants' solicitation of proxies from the stockholders of PDC Energy, Inc. (the "Company") for use at the Company's 2019 annual meeting of stockholders. All stockholders of the Company are advised to read the foregoing proxy materials because they contain important information, including additional information related to the Participants. The definitive proxy statement and an accompanying proxy card will be furnished to some or all of the Company's stockholders and are, along with other relevant documents, available at no charge on the SEC's website at http://www.sec.gov/.
Information about the Participants and a description of their direct or indirect interests by security holdings are contained in the definitive proxy statement on Schedule 14A filed by Kimmeridge with the SEC on April 18, 2019. This document can be obtained free of charge from the source indicated above.
Setting the Record Straight on PDC’s Underperformance May 14, 2019
2 Since Bart Brookman’s Appointment to CEO in January of 2015: • Cumulative net income (loss): ($560) million • Cumulative impairments: $924 million • Cumulative net cash flow: negative $1.63 billion • Board metrics achieved: 10 of 21 • Cumulative executive compensation 2 : $55.7 million • Average bonus pay vs. target: 150% • Cumulative SG&A: $533 million • Changes to internally set peer group: 30 • Absolute share price performance 3 : negative 11% • Average ROACE: < 0% • Cash returned to shareholders: $0 Setting the Record Straight on PDC’s Underperformance 1) Source: PDC’s public filing data (financial and proxy statements) for fiscal years ended December 31, 2015, 2016, 2017 and 20 18 (the Period). 2) Total compensation awarded in each year during the Period to the top 5 highest paid PDC executives . 3) Share price data from January 2, 2015 through May 13, 2019. WTI 01/01/2015: $53/ bbl WTI Today $62/ bbl
3 PDC’s well performance has been above average in a maturing basin, driven largely by quality of acreage. Wattenberg: PDC is a Peer Performer in a Mature Basin 0 10 20 30 40 50 60 70 NBL COP EOG PDCE XOG SRCI APC BCEI HPR WLL IP90 boe /d per 1,000ft IP90 boe/d per 1,000ft (20:1 gas oil ratio) Source: RS Energy data based on publicly listed Niobrara operators and wells that began production after 6/1/2017.
4 PDC claims it has driven material efficiencies in its Delaware Basin operations. However, well costs have escalated and remain materially above peers. Actual Well Costs 2 PDC Presentation 1 Delaware: Well Costs Don’t Correlate to PDC Claims 1) From PDC’s presentation filed on 5/14/19. 2) Based on PDC’s public presentations. $9.1 $10.5 $12.5 $15.0 $15.0 $13.0 $6.0 $7.0 $8.0 $9.0 $10.0 $11.0 $12.0 $13.0 $14.0 $15.0 $16.0 Feb-17 Jun-17 Aug-18 Sep-18 Feb-19 2019E 10,000ft Well Cost $M
5 PDC claims it “has significantly improved upon Kimmeridge's Delaware operations.” These claims are ‘substantiated’ by one well. A comparison using the full dataset tells a completely different story. Kimmeridge Analysis: All Wells 2 PDC Analysis: Cherry Picked Well 1 Delaware: PDC Well Underperformance v Kimmeridge Well Performance 1) From PDC’s presentation published on May 14, 2019. 2) RS Energy data. 0 50 100 150 200 250 300 First 3 Months Boe/d per 1,000ft Spud Date PDC’s well performance shows little to no improvement post August 2016, when PDC acquired the asset Lost Saddle 45 - 1H was spud in 12/31/2015 and was a science test of a SLB completion, with fiber diversion, 260ft spacing and rate per perf of 1.11bbl/min. All other Kimmeridge wells were completed with HAL, 100 - 200ft stage spacing and higher rates. PDC have access to this data and are aware of the unique design.
6 PDC claims that its “wells perform favorably relative to other Delaware Basin operators”. PDC’s data reflects a 6:1 gas oil ratio. Adjusting this ratio to 20:1 properly reflects the relative economics between oil and gas production and shows that PDC’s wells have been performing below the basin average. Delaware: PDC Well Performance v Peers 161 146 140 134 132 127 124 123 120 117 116 116 115 111 105 99 98 96 92 90 87 86 78 72 72 68 68 64 59 46 44 0 20 40 60 80 100 120 140 160 180 First 3 Months Boe /d per 1,000ft (20:1 gas oil ratio) Source: RS Energy data based on all wells that started production after 6/1/2017.
7 A recent RS Energy report suggests that PDC’s average (Delaware - only) NPV/well in 2018 was $3M, materially less than offset wells which averaged nearly $7M. This equates to $124M of lost value in 2018 based on the 31 wells PDC drilled during the year. It also represents 5% of PDC’s current market cap. Delaware: Third Party Data Confirms PDC has an Underperforming Asset Team Source: RS Energy report “Supermajor Consolidation: The Permian Circle of Life” published 4/30/2019. PDC performance Offset operator performance
8 • As of 2017 PDC claimed to have 540 locations on a MRL lateral basis. • Taking into account 2017 TILs and the write down of 40 Culberson locations, this was revised to 490 (YE 2017 inventory), or 690 including the “additional inventory” which was subject “to a higher degree of uncertainty as they are based on downspacing tests”. • As of the current presentation, PDC had written off all additional inventory (200 locations). • Accounting for 31 wells drilled in 2018, current YE inventory should be 459 (490 - 31) on a MRL basis. Today they indicate it is 430 including drilled wells of 65, or 365 net. This represents a net reduction of 40 (Culberson), 200 (Additional Inventory) and 94 other (representing 459 less 365) or a 334 Net location reduction on a MRL equivalent basis. Disappearing Delaware Locations: Net - 334 on a MRL Basis PDC 4Q2017 Presentation 02/27/2018
9 PDC claims that “impairments do not reflect value destruction”. Kimmeridge believes impairments reflect real cash losses to investors as is reflected in equity performance. Impairments Do Represent Value Destruction $162 $172 $457 $916 $924 ($2,000) ($1,500) ($1,000) ($500) $0 $500 $1,000 $1,500 2015 2016 2017 2018 Q1'19 Cumulative Impairments $M 1 ($193) ($1,216) ($1,344) ($1,543) ($1,633) ($2,000) ($1,500) ($1,000) ($500) $0 $500 $1,000 $1,500 2015 2016 2017 2018 Q1'19 Cumulative Net Cash Flow $M 1 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 PDC share price 2 11% decline 1) Data based on PDC’s public filings. 2) Share price data from 1/2/15 to 5/13/19.
10 PDC’s interpretation of recycle ratio includes proven undeveloped (“PUD”) reserves. Kimmeridge excludes PUD reserves because the capital to develop these reserves has not yet been deployed. Kimmeridge Recycle Ratio – PD reserves only 2 PDC Recycle Ratio - includes PUD reserves 1 Recycle Ratio: Flattering Numbers with Inflated PUDs 2016 - 2018 Recycle Ratio # Company Recycle Ratio 1 PE 247% 2 LPI 225% 3 CDEV 222% 4 SRCI 222% 5 CPE 207% 6 XOG 192% 7 JAG 181% 8 XEC 176% 9 MTDR 159% 10 CRZO 135% 11 WPX 122% 12 PDCE 117% 13 OAS 110% 14 SM 88% 15 QEP 24% 1) Based on PDC’s presentation filed on 5/14/19. 2) Source: public company filings and Kimmeridge analysis.
11 PDC books PUD reserves aggressively compared to its internally defined peer group. This has the effect of increasing PDC’s recycle ratio projection. Kimmeridge’s recycle ratio utilizing PD reserves serves as a better apples - to - apples comparison, and a reflection of the real cost of reserve additions. Overstating PUD Reserves v Peers to Flatter Metrics 67% 65% 63% 60% 58% 56% 56% 51% 46% 45% 40% 40% 37% 35% 15% 9% 0% 10% 20% 30% 40% 50% 60% 70% 80% PDCE QEP XOG CRZO SRCI MTDR CDEV SM CPE WPX PE JAG OAS FANG XEC LPI Proved Undeveloped Reserves as a % of Total Proved Reserves (YE18) Overbooking PUDs Conservative PUD Booking Source: Public Company Filings.
12 Source: PDC’s proxy statements filed during the Period. PDC has a history of adjusting its peer group and comparing itself to companies that end up filing for bankruptcy. PDC’s Ever Changing Peer Group – 30 in 5 Years = delisted and/or entered Chapter 11 bankruptcy = new peer FANG removal due to outperformance? All Peers 2015 Peers 2016 Peers 2017 Peers 2018 Peers 2019 Peers BBG BBG BCEI BCEI BCEI CDEV CDEV CPE CPE CPE CPE CPE CRK CRK CRZO CRZO CRZO CRZO CRZO CRZO EGN EGN EGN EGN EXCO EXCO FANG FANG FANG GPOR GPOR GPOR GPOR HPR HPR JAG JAG LPI LPI LPI LPI LPI LPI MHR MHR MTDR MTDR MTDR MTDR MTDR NFX NFX NFX NFX OAS OAS OAS OAS OAS PE PE PE PE PE PVAC PVAC QEP QEP QEP QEP REXX REXX ROSE ROSE RSP RSP RSP SGY SGY SM SM SM SM SM SRCI SRCI SRCI SRCI SRCI UPL UPL WPX WPX WPX WPX WPX XEC XEC XOG XOG SRCI removal due to outperformance? = removed for no stated reason
13 CDEV and SRCI, the most direct peers to PDC, are both materially below trend on employees and costs. Benchmarking to these peers in 2018 implied an $80M reduction in SG&A. Kimmeridge Proposed G&A Based on Peers 2 PDC Chart 1 PDC Key assumptions 2018 DJ Production 84.0 2018 Implied DJ G&A $64.2 Using SRCI's 2018 G&A/ boe of $2.09 2018 Permian Production 25.6 2018 Implied Permian G&A $26.6 Using CDEV's 2018 G&A/ boe of $2.84 Total Implied G&A $90.7 Actual G&A $170.5 Savings $79.8 SG&A: Kimmeridge Proposed Reductions are in line With Peers 1) Based on PDC’s presentation filed on 5/14/19. 2) Source: public company filings and Kimmeridge analysis.
14 PDC’s ever - changing metrics, inability to meet targets and lack of accountability, have been factors in the company’s underperformance. No Accountability 1 PDC Metrics: Board and Presentations 1 • Production growth • Cost structure vs budget • Drilling feet per day • Average completion costs • FCF as a percentage of capex • Debt adjusted cash flow per share growth • Production per share growth • Cash return on capital employed • G&A/ boe PDC’s Constantly Changing Metrics to Justify Performance Did PDC Exceed Target? Metric: 2016 2017 2018 Production Production, Exploration and G&A Expense per Boe Adjusted Cash Flow from Operations per Share Debt to Adjusted EBITDAX Capital Efficiency NA Liquidity NA NA Bonus as a % of Target 165% 120 - 130% 115% 1) Based on PDC’s public filings and proxy statements.
15 Kimmeridge is more aligned with current shareholders than PDC’s management team and board of directors. Kimmeridge Alignment PDC Alignment • Management and the Board own approximately 1% of PDC’s equity • Management continues to benefit irrespective of share price performance and operational underperformance, with tens of millions of annual compensation • Job preservation appears to be more important than share price performance • Kimmeridge owns a 5.1% stake in PDC, or ~$125M worth of PDC equity • Kimmeridge does not own shares in any other public energy company • Kimmeridge stands to benefit only from PDC’s share price appreciation and/or return of capital, and is directly aligned with shareholders PDC’s Self Serving Claim is Misguided
16 • Kimmeridge is nominating three directors for PDC’s eight - person board at the Company’s 2019 annual shareholder meeting. • Kimmeridge’s candidates have extensive experience as investors and asset owners. • Kimmeridge currently owns 5.1% of PDC. Kimmeridge’s position is unhedged and does not use options. • According to the Company’s 2019 proxy statement, the entire management team and board combined own just 1% of the outstanding shares. • By refreshing the Board with directors focused on creating value for all shareholders and aligning management compensation with absolute performance, Kimmeridge believes it can work with PDC to deliver a path to profitability. A New Board for a New Business Model
17 Kimmeridge’s Director Nominees: GOLD
18 The views expressed in this presentation represent the opinions of Kimmeridge Energy Management Company, LLC and its principa ls and affiliates (Kimmeridge) including certain privately offered investment funds sponsored or advised by Kimmeridge that own shares of common stock of PD C E nergy, Inc. (PDC). All of the information and data included in this presentation is based on publicly available information such as financial statements, pro xy statements, presentations and other publicly available information, and reports and data prepared by third parties. Kimmeridge principals and employees have per for med the analysis and reviews of the PDC data and information independently. However, it is possible that others, including PDC, could disagree and conduct analys is that leads to different results. We reserve the right to change any of the opinions and views set out in this presentation as we deem appropriate and without any ob ligation to make market updates or notifications either through public filings or on its website. Certain data and analysis presented here is based on or derive d f rom filings made by PDC with the US Securities and Exchange Commission (SEC) or other regulatory agencies or from third party reports or analysis and Kimmeridge is not responsible or liable for any information obtained from SEC filings or third parties. The information set out in this presentation has not been prepared or ca lculated in accordance with US generally accepted accounting principles (GAAP) and has not been audited by an independent registered public accounting firm. There can be no assurance that any of the recommendations proposed by Kimmeridge will actually yield the planned results if implemented either in whole or in part. Thi s p resentation and the information set out herein is not intended to predict any particular financial result, trading price or market value of the equity securities of any company including PDC. The ideas and analysis in this presentation are for informational purposes only and are designed to be suggestions in how PDC can improve r esu lts and increase shareholder value. They are in no way a guarantee that any particular financial result or performance will be obtained and this information shou ld not be relied upon to indicate as such. This presentation contains ideas, analysis and proposals that are the result of reasonable assumptions used by Kimmeridge as of the date of this presentation. PDC’s performance, including financial results and share price performance, may differ materially from the estimates and analysis s et out in this presentation. The information contained herein reflects projections, market outlooks, assumptions, opinions and estimates made by Kimmeridg e a s of the date hereof and therefore such information may be deemed to constitute forward - looking statements which are subject to change without notice at any time. Such forward - looking statements may be based on certain assumptions and may involve certain risks and uncertainties, including risks and changes affecting in dus tries generally and PDC specifically. Given the inherent uncertainty of projections and forward - looking statements, investors should be aware that actual results may differ materially from the projections and other forward - looking statements contained herein due to reasons that may or may not be foreseeable. While the information p resented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented, the information or views conta ine d herein, nor concerning any forward - looking statements. Legend Kimmeridge Energy Management Company, LLC ("Kimmeridge"), Kimmeridge Active Investments, LLC, Kimmeridge Chelsea, LLC, Benjamin Dell, Alice E . Gould, James F . Adelson, Alexander Inkster, Noam Lockshin , Henry Makansi and Neil McMahon (collectively, the "Participants") have filed a definitive proxy statement with the Securities and Exchange Commission (the "SEC"), along with an accompanying GOLD proxy card to be used in connection with the Participants' solicitation of proxies from the stockholders of PDC Energy, Inc . (the "Company") for use at the Company's 2019 annual meeting of stockholders . All stockholders of the Company are advised to read the foregoing proxy materials because they contain important information, including additional information related to the Participants . The definitive proxy statement and an accompanying proxy card will be furnished to some or all of the Company's stockholders and are, along with other relevant documents, available at no charge on the SEC's website at http : //www . sec . gov/ . Information about the Participants and a description of their direct or indirect interests by security holdings are contained in the definitive proxy statement on Schedule 14 A filed by Kimmeridge with the SEC on April 18 , 2019 . This document can be obtained free of charge from the source indicated above . Disclosures