Business context and reporting period
Centennial Resource Development, Inc. (NASDAQ: CDEV) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The filing describes an independent oil and gas producer focused on the Delaware Basin of the Permian. The company name in the request, Permian Resources Corp, does not match the registrant named in this filing; verify the issuer before relying on this summary.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Oil and gas sales | $244.2 million | $217.8 million | $458.8 million | $433.7 million |
| Income from operations | $37.1 million | $76.5 million | $42.2 million | $164.4 million |
| Net income | $19.0 million | $67.5 million | $10.5 million | $138.3 million |
| Net income attributable to Class A | $17.9 million | $63.5 million | $9.8 million | $129.6 million |
| Diluted EPS | $0.07 | $0.24 | $0.04 | $0.49 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $280.2 million | $323.9 million |
Oil and gas sales increased 12% in Q2 and 6% in the first half year over year. Production rose: Q2 total net production was 76,122 Boe/d, up 32%; first-half production was 74,089 Boe/d, up 33%. Lower realized commodity prices, higher operating costs, increased DD&A and higher interest expense more than offset much of the volume growth. Q2 operating margin was approximately 15% of sales, versus 35% a year earlier; first-half margin was approximately 9%, versus 38%.
For the first half, investing cash outflow was $458.5 million and financing cash inflow was $188.6 million. Cash, cash equivalents and restricted cash ended at $31.7 million, including $3.3 million restricted. Capital expenditures incurred were $482.6 million; operating cash flow less this capex was approximately negative $202.4 million.
At June 30, total assets were $4.54 billion and total liabilities were $1.27 billion. Long-term debt, net, was $881.4 million, consisting of $400 million of 5.375% notes due 2026 and $500 million of 6.875% notes due 2027, net of discounts and issuance costs. The revolving facility had no balance and $799.2 million available, net of letters of credit; its borrowing base was $1.2 billion and elected commitments were $800 million. The company reported compliance with debt covenants. Current assets were $160.0 million against current liabilities of $301.6 million; the facility covenant’s current-ratio calculation includes unused commitments and excludes specified items, so it is not the same as the balance-sheet ratio.
Material changes versus prior comparable periods
- Lower realized prices weighed on revenue: Q2 oil price before hedge settlements fell 11%, natural gas 55%, and NGLs 39%; first-half declines were 16%, 49%, and 36%, respectively.
- Production growth from drilling partially offset weaker prices. The company operated a six-rig program in the first half and brought 40 gross operated wells online.
- Q2 lease operating expense rose 82% and DD&A rose 50% year over year. First-half lease operating expense increased 83%; DD&A increased 48%.
- First-half impairment and abandonment expense was $35.7 million, compared with $1.8 million a year earlier. It included $19.1 million for expired non-core acreage and $16.6 million for acreage identified as impaired.
- Interest expense rose to $24.6 million for the first half from $11.6 million, mainly reflecting the 2027 notes issued in March 2019 and increased first-half facility borrowings.
- First-half operating cash flow declined $43.7 million to $280.2 million, while net investing outflow increased to $458.5 million from $433.4 million.
- Adoption of lease accounting in January 2019 added operating lease right-of-use assets and liabilities; the company said adoption did not significantly affect earnings or cash flows.
Outlook, commentary, risks and unusual items
Management’s 2019 capital expenditure budget was $765 million to $925 million, including $625 million to $725 million for drilling and completion. The company said it expected to fund the program with operating cash flow and credit-facility borrowings, and believed available liquidity—including proceeds from the 2027 notes—was sufficient under its then-current price expectations. It could defer spending depending on commodity prices, drilling results, costs, infrastructure, permits and other factors. The filing does not provide production or earnings guidance.
Management cited Permian takeaway constraints as a cause of wider oil and gas differentials, particularly depressed West Texas gas prices. New pipelines were expected to begin service in the second half of 2019 and through 2021, which management expected to ease differentials. Reimbursements for third-party use of firm transportation capacity reduced gathering, processing and transportation costs by $10.4 million in the first half; management cautioned these amounts may not recur at similar levels.
Key exposures include volatile oil, gas and NGL prices, differential and pipeline constraints, reserve and impairment estimates, operating and development costs, and access to capital. The filing estimated that a 10% commodity-price change, based on first-half production, would move first-half pre-tax income by approximately $39.0 million for oil, $4.8 million for NGLs and $2.1 million for natural gas. Derivatives provide partial protection but can limit upside; net derivative liability was $14.2 million at June 30. Management reported no material change in previously disclosed risk factors and no pending litigation requiring recognition of a contingent liability.
Most important facts for investors to verify
- Confirm issuer identity: this filing is for Centennial Resource Development, Inc. (CDEV), not Permian Resources Corp.
- Check whether production growth can offset lower realized prices and elevated per-unit operating costs, especially lease operating expense.
- Assess the sustainability of cash flow relative to the $765 million–$925 million 2019 capex budget and the need for external financing.
- Review the 2027 notes’ 6.875% coupon, debt covenants and available borrowing capacity; lender redeterminations can change the borrowing base.
- Verify the extent and timing of pipeline capacity relief and whether transportation reimbursements continue after March 2020.
- Review the acreage impairment and abandonment charges, reserve assumptions, hedge positions and potential effects of future commodity-price changes.