PDC Energy Inc. agreed to sell Permian Basin midstream assets on May 1 as the Denver-based oil and gas company continues to face pressure from shareholder activist.

The sale included PDC Energy’s gas and water midstream assets in the Delaware Basin through two separate agreements worth roughly $310 million of total cash proceeds. The company also authorized a $200 million stock repurchase plan, which along with the divestitures helped PDC offset a first-quarter miss, said Gabriele Sorbara, principal and senior equity analyst at Williams Capital Group LP.

PDC reported a net loss for the first quarter of $120.2 million, or $1.82 per share. The company’s first-quarter production was 125,000 barrels of oil equivalent per day, an increase of 26% from first-quarter 2018. 

Capital investment for the quarter was roughly $282 million and included $21 million of Delaware Basin midstream related capital. The company said operating efficiencies have led to a “slightly accelerated capital pace,” but still maintained its 2019 capex of between $810 million and $870 million.

Sorbara called PDC’s first-quarter results “disappointing” with a miss across the board on higher activity and spending levels.

“In our view, the better-than-expected valuations on the midstream transactions, announced buyback program and upbeat operational update should be enough to offset the disappointing [first-quarter 2019] results and drive continued outperformance,” he said in a May 2 research note.

Midstream Sales

EagleClaw Midstream agreed to buy PDC’s gas-related midstream assets for $182 million, comprised of an initial $100 million payment at closing. The remaining $82 million will be allocated as an unconditional payment one-year post-closing.

Meanwhile, WaterBridge Resources LLC will pay $125 million for PDC’s water-related midstream assets. PDC said it retained operational control of its fresh water supply as part of the transaction.

Additionally, PDC entered into long-term commercial service agreements with EagleClaw for its gas gathering, compression, processing and transportation, and WaterBridge for its water gathering and disposal.

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In total, PDC will receive $225 million cash proceeds upfront from its midstream divestitures. The company plans on closing the transactions in mid-2019 and expects to use the majority of the upfront proceeds to pay down debt.

Kimmeridge Energy Management Co., a private-equity firm which owns about 5.1% of PDC’s shares, has campaigned for the producer to cut costs and return more cash to shareholders. Specifically, the firm called for the return of proceeds from asset sales to shareholders.

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On May 2, the firm commented on PDC’s first-quarter results, noting the company’s plans to fund its new buyback program using free cash flow.

“While Kimmeridge is pleased that the company has followed its recommendation by announcing a $200 million stock repurchase program, we remain disappointed that they have not committed to return 100% of the midstream proceeds to shareholders,” the firm said in a statement.

Jefferies LLC acted as PDC’s exclusive financial adviser in connection with the transactions. Vinson & Elkins advised EagleClaw Midstream on its transaction.

Emily Patsy can be reached at epatsy@hartenergy.com.