Filing summary
Entity and period: The supplied filing is Centennial Resource Development, Inc. (NASDAQ: CDEV), not Permian Resources Corp. It is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. Centennial focused on developing oil and associated liquids-rich natural gas assets in the Delaware Basin.
Financial and operating results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Oil and gas sales | $229.1 million | $234.9 million | $687.9 million | $668.5 million |
| Operating income | $11.3 million | $69.4 million | $53.6 million | $233.8 million |
| Net income (loss) | $(3.7) million | $41.7 million | $6.8 million | $179.9 million |
| Net income (loss) attributable to Class A | $(3.6) million | $39.3 million | $6.2 million | $168.9 million |
| Operating cash flow | Not separately presented | Not separately presented | $384.9 million | $494.7 million |
| Cash and cash equivalents at period-end | — | $10.9 million | $18.2 million at December 31, 2018 |
- Q3 net production rose 21% to 76,312 Boe/d; nine-month production rose 29% to 74,839 Boe/d.
- For the nine months, production growth lifted sales despite lower realized prices: oil sales rose 11%, while natural gas sales fell 32% and NGL sales fell 25%. Oil, natural gas, and NGL realized prices before hedging declined 13%, 49%, and 42%, respectively.
- Operating expenses increased substantially. Nine-month lease operating expense rose 81% to $107.1 million, DD&A rose 43% to $321.4 million, and impairment and abandonment expense rose to $42.4 million from $10.4 million.
- Debt at September 30 was $1.0 billion net carrying value: $120 million under the revolving facility and $900 million principal of senior notes. The company had $679.2 million of available revolver capacity, net of letters of credit. The $800 million elected commitments and $1.2 billion borrowing base were reaffirmed in the fall redetermination.
- Current assets were $161.2 million versus current liabilities of $287.5 million. The company reported compliance with credit-agreement covenants and financial ratios; the covenant current-ratio calculation includes unused revolver availability and differs from the balance-sheet ratio.
Changes and notable items
- Nine-month operating cash flow declined $109.8 million year over year. Investing cash outflow was $698.1 million and financing cash inflow was $308.1 million. Drilling and development expenditures were $644.9 million; total capital expenditures incurred were $694.7 million.
- Centennial issued $500 million of 6.875% senior notes due 2027 in March 2019. Net proceeds after discount and issuance costs were approximately $489 million. Interest expense for the first nine months increased to $39.8 million from $18.1 million.
- Q3 included a $3.7 million net loss attributable to Class A shareholders, compared with $39.3 million income a year earlier. Nine-month attributable income fell to $6.2 million from $168.9 million.
- Management attributed weak gas realizations partly to Permian takeaway constraints and said a new pipeline entered service late in Q3, with additional pipeline construction planned through 2021. A gas processor’s temporary switch to ethane rejection increased gas volumes and limited NGL volume growth.
- The $42.4 million nine-month impairment and abandonment charge included expired non-core acreage, acreage impairment following a sale process, and lease-expiration amortization. The company also received third-party reimbursements for firm transportation capacity; management cautioned that comparable amounts may not recur.
Outlook, risks and contingencies
- The 2019 capital budget was $765 million to $925 million, including $625 million to $725 million for drilling and completion. Management expected operating cash flow, 2027 note proceeds, and revolver borrowings to fund the current program under then-current commodity-price expectations, while retaining discretion to defer spending.
- Key risks include volatile oil, gas, and NGL prices; low Permian gas prices and takeaway constraints; production declines; drilling and operating costs; reserve and impairment estimates; and potential reductions in the borrowing base. Management warned that lower prices could impair properties, reduce liquidity, and require spending cuts or additional financing.
- Commodity derivatives provided partial price protection but could limit gains from favorable price movements. At September 30, net derivative liabilities were $4.4 million. The company reported no material change in risk factors and no pending litigation requiring a recognized contingency; management did not expect ordinary-course proceedings to have a material adverse effect.
- Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for Q3. After quarter-end, the board approved an amended severance plan that increased specified change-of-control severance benefits.
Important facts for investors to verify
- Confirm the issuer: this filing is for Centennial Resource Development, Inc. (CDEV), not Permian Resources Corp.
- Review the sustainability and economics of production growth against sharply lower realized gas and NGL prices, higher lease operating costs, and increased DD&A.
- Check the 2019 capital-spending range against actual spending and operating cash flow, and assess reliance on additional revolver borrowing.
- Review debt maturity, interest costs, covenant headroom, borrowing-base sensitivity, and the distinction between reported current liabilities and the covenant current-ratio calculation.
- Assess whether pipeline additions, third-party transportation reimbursements, and acreage-sale activity deliver the benefits management anticipated; these outcomes are not assured.