Following the Parsley/Jagged discussion on Technical Tuesday, it’s time for a very special Technical Thursday to talk about the other marriage that closed this week- PDC and SRC. Have I mentioned I love mergers? (PS, so does EVERY ENERGY INVESTOR!!)

Let’s start with some disclosures. I own PDC shares. I don’t give investment advice and I think by now everyone is aware that I write what I think. So today, I will openly pontificate on the PDC/SRC merger, tell you the reason that I own the shares and share with management what I think they need to do to get their stock up. Sound fun? I agree. I feel like I should write it as a love letter so that they know I’m different than other activists.

Dear PDC,

Thank you for allowing me to use some of my savings to buy your stock. I enjoy having 0 input on your business model and watching it go up and down every day, making me feel fits of joy and rage by the hour. It makes me far less stable and this is coming from a guy that gives presentations in a tiger suit.

First, the math part of the letter. I really like your purchase of SRC. SRC had a YE2018 SMOG valuation, net of debt, of $8.09/share and you closed when they traded at $3.64/share. They had an annualized (Q3) debt to cash flow from operations of 1.2 and managed the company well with only 12% of that cash flow going to G&A. I knew I liked Lynn Peterson when we worked closely together in 2010.

The fact that you, PDC, have a combined post merger YE2018 SMOG of $51.26/share means that the new company is bigger (more efficient), has a better debt / operating cash flow (more free cash flow) and can consolidate G&A (sorry SRC employees, it’s not personal) means that the company is mathematically stronger today than yesterday.

Now some softer points. You are as exposed to Colorado risk as you can get. If bat shit crazy stuff happens to regulations, you are screwed… BUT, said another way…. you are already pregnant- so you might as well paint the baby’s room and have a little fun!! Embrace it. And F anyone that tells you different. You are in charge (did I mention how good looking each and every one of you are as well?).

With thanks to my friends at ShaleProfile Analytics, let’s go to the map.

Lots of things to like. PDC has performed better on a per lateral foot basis than SRC so maybe there is some performance uplift that can be gained with you running the show (or, more likely, PDC has better rock…. can you imagine that geology matters anymore?!)

Production has been flat which reflects that growing just to keep your debt at bay isn’t actually required because you have a great balance sheet. Have I told you how sexy it is to have a nice balance sheet? Well, it is and you sirs and madams, are sexy!

Best of all, your acreage actually fits together. (queue music- imagine me and you, I do, I think about you day and night, it’s only right…). I told you! This is a love letter.

OK, but I do have one, small, tiny, little suggestion. You remember that purchase you did in the Delaware? Yeah. That one. It doesn’t fit. There is no logical reason to own it. It doesn’t make your portfolio better and it doesn’t de-risk your Colorado asset because it isn’t big enough. Don’t be mad at me, I’m not on your board. I didn’t approve it….

But I have a solution. You know Oxy? Yeah, the one with the CEO I have a major crush on? You should approach them and say “Hey, you bought APC for the Delaware and we have Delaware acreage. And you own Colorado but are ramping down and there is no reason you shouldn’t be shrinking that position. Let’s do a swap and get a win-win!! Our investors will love it!!”

So. That’s what I’d do.

And in the meantime, with leverage where it is and presuming you don’t really disappoint me with your YE2019 SMOG, you are actually one of the few companies that should ramp down even further and buy back as much stock as you possibly can, because in my view, you actually are undervalued.

But, don’t listen to me. I’m not on your board and I probably don’t know what I’m talking about. But wasn’t this fun?! It almost makes sense.

Love and hugs,

DRW, shareholder and advocate of smart and obvious business practices