Business context and reporting period
This is Centennial Resource Development, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company is an independent oil and gas producer focused on the Delaware Basin. The filing identifies Centennial—not Permian Resources Corp—as the registrant; confirm the intended issuer if this summary is being used for Permian Resources.
Financial and operating performance
Amounts below are in millions of dollars unless otherwise indicated.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Oil and gas sales | $90.5 | $244.2 | $283.3 | $458.8 |
| Net income (loss) attributable to Class A | $5.3 | $17.9 | $(542.7) | $9.8 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $84.5 | $280.2 |
| Capital expenditures (cash-flow statement: drilling and development) | Not provided for quarter | Not provided for quarter | $271.4 | $437.9 |
| Average daily production | 68,245 Boe/d | 76,122 Boe/d | 70,333 Boe/d | 74,089 Boe/d |
- Q2 oil and gas sales fell 63% year over year; first-half sales fell 38%. Lower commodity prices were the principal driver, alongside lower oil and NGL volumes.
- First-half loss included $630.7 million of impairment and abandonment expense, including a $591.8 million non-cash proved-property impairment recorded in Q1. Q2 earnings also included a $143.4 million debt-exchange gain; without it, the reported Q2 profit does not reflect the overall operating trend.
- First-half operating cash flow declined $195.7 million year over year. The filing does not provide a clear quarterly cash-flow figure.
- At June 30, cash and cash equivalents were $7.2 million; cash, cash equivalents and restricted cash totaled $12.6 million. Current assets were $77.6 million and current liabilities $157.9 million.
- Long-term debt, net, was $1.106 billion, compared with $1.057 billion at December 31, 2019. The company reported $370 million outstanding on its revolving facility and $290 million of available borrowing capacity, net of letters of credit and an availability blocker.
- Q2 lease operating expense was $4.16/Boe versus $5.04/Boe a year earlier; DD&A was $14.98/Boe versus $16.18/Boe. The filing does not provide a single overall operating-margin figure.
Material changes versus the prior comparable period
- Q2 average oil price before hedging decreased 61% to $21.47/Bbl; NGL price decreased 52% to $7.72/Bbl. Average daily production declined 10% to 68,245 Boe/d.
- First-half average daily production fell 5% to 70,333 Boe/d. Oil production decreased 6%, NGL production decreased 23%, while natural gas production increased 10%.
- Operating cash flow decreased from $280.2 million to $84.5 million for the first half. Investing cash use also declined, reflecting reduced drilling and development spending.
- In May, the company exchanged $254.2 million principal of unsecured notes for $127.1 million principal of 8% second-lien secured notes due 2025. It recognized a $143.4 million gain in the income statement. The exchange reduced principal due but introduced higher-coupon secured debt.
- The borrowing base and elected commitments under the revolving credit facility were reset to $700 million. The amendments added a first-lien leverage test and suspended the total leverage test until 2022.
- On April 2, legacy owners converted their remaining CRP units and Class C shares to Class A shares, eliminating the noncontrolling interest.
Outlook, commentary, risks and unusual items
- Management reduced its 2020 capital spending outlook to $240–$270 million, from the original $590–$690 million range. Drilling was reduced to zero rigs beginning April; management planned to resume with one rig in Q4 and complete previously drilled uncompleted wells in Q3.
- The company curtailed approximately 20% of production in May and brought most curtailed production back online in June. Future curtailments were to be assessed monthly based on prices, storage and transportation constraints, and contractual obligations.
- Management expected to fund remaining 2020 capital expenditures with operating cash flow and revolver borrowings, while cautioning that funding sources and acceptable capital-market terms could not be assured. It stated it expected to meet operations, planned capital spending and working-capital needs over the next 12 months, but warned prolonged price weakness could impair liquidity and covenant capacity.
- Key exposures include COVID-19-related demand weakness, commodity-price volatility, storage and takeaway constraints, additional asset impairments, reserve revisions, lease expirations, borrowing-base redeterminations, and compliance with debt covenants. The company reported covenant compliance at June 30 and through filing.
- The company recorded a $49.7 million valuation allowance against deferred tax assets. Derivative instruments produced a $38.4 million first-half loss, and derivative liabilities were $31.7 million at June 30.
- A proposed sale of water-disposal assets was terminated after the buyer failed to close. The company claims entitlement to a $10 million escrow deposit, which the buyer disputes; litigation over the deposit was ongoing.
- Centennial reported that its share price had again fallen below $1 after regaining Nasdaq minimum-bid compliance in June, creating potential delisting risk if compliance was not maintained.
- The filing contains an apparent accounting-description inconsistency: Note 4 says the debt exchange was accounted for as an extinguishment under ASC 470-50 because the company was not experiencing financial difficulty, while the MD&A states it was accounted for as a troubled debt restructuring under ASC 470-60. The filing also describes $51.1 million of future interest on the secured notes as included in long-term debt, with future interest expense expected to be below actual cash interest payments.
Important facts for investors to verify
- Confirm that Centennial Resource Development is the intended issuer, given the request’s Permian Resources Corp identification.
- Resolve the debt-exchange accounting discrepancy and verify the carrying value, principal obligations and cash-interest schedule for the 8% secured notes.
- Track commodity prices, realized differentials, hedge coverage and any further impairment or reserve revisions.
- Verify progress against the revised capital plan, planned restart of drilling, liquidity needs, borrowing-base capacity and covenant compliance.
- Monitor the $10 million escrow litigation and Nasdaq minimum-bid listing status.