Filing summary
Registrant discrepancy: The supplied filing is Centennial Resource Development, Inc.’s Form 10-Q, not a filing under the name Permian Resources Corp. It covers the quarter and six months ended June 30, 2018.
Business context and reporting period
Centennial was an independent oil and gas producer focused on unconventional oil and liquids-rich natural gas in the Delaware Basin, primarily in West Texas and New Mexico. Financial statements are unaudited. The company cautions that interim results are not necessarily indicative of full-year results.
Key financial and operating metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Oil and gas sales | $217.8 million | $91.1 million | $433.7 million | $152.2 million |
| Income from operations | $76.7 million | $23.3 million | $164.5 million | $30.4 million |
| Net income | $67.5 million | $23.2 million | $138.3 million | $33.9 million |
| Net income attributable to Class A | $63.5 million | $20.8 million | $129.6 million | $30.6 million |
| Diluted EPS | $0.24 | $0.09 | $0.49 | $0.14 |
| Operating cash flow | Not separately provided | Not separately provided | $323.9 million | $93.1 million |
Q2 average net production was 57,528 Boe/d, up 94% year over year; first-half average production was 55,808 Boe/d, up 132%. Q2 realized prices before hedge settlements were $61.21/Bbl for oil, $1.81/Mcf for natural gas and $26.52/Bbl for NGLs. Q2 operating margin, calculated as operating income divided by sales, was approximately 35%, compared with 26% a year earlier.
For the six months, operating cash flow of $323.9 million was below investing cash use of $433.4 million, including $469.0 million of drilling and development expenditures and $107.2 million of property acquisitions, partly offset by $146.1 million of property-sale proceeds. Financing activities provided $26.3 million. Cash and cash equivalents were $42.7 million at June 30, down from $117.3 million at year-end 2017.
At June 30, total liabilities were $680.7 million and total equity was $3.16 billion. Long-term debt, net, was $421.2 million, including $30.0 million drawn on the revolving facility and the net carrying value of senior notes. The notes have $400 million principal and a 5.375% coupon, due 2026. The amended revolving facility had a $800 million borrowing base, $600 million elected commitments and $569.1 million available capacity, net of letters of credit. The company reported compliance with debt covenants.
Material changes versus prior comparable periods
- Revenue and production rose sharply, reflecting Delaware Basin drilling, acquired production and higher oil and NGL prices. Q2 oil, natural gas and NGL volumes increased 79%, 73% and 193%, respectively, year over year.
- Oil and NGL prices improved, while realized natural gas prices fell: Q2 oil price before hedges increased 37%, NGL price increased 24%, and natural gas price declined 35%. Management cited wider Permian differentials and anticipated pipeline takeaway constraints.
- Operating expenses increased with the expanded well base and higher activity. First-half DD&A reached $141.0 million versus $60.5 million, while DD&A per Boe was relatively stable at $13.95 versus $13.86.
- Interest expense increased to $11.6 million for the first half from $1.1 million, primarily reflecting the senior notes issued in November 2017.
- In February, Centennial acquired approximately 4,000 net acres and producing properties in Lea County for a net $94.5 million. In March, it sold approximately 8,600 net acres and 12 producing wells in Reeves County for an unadjusted $140.7 million; no gain or loss was recorded.
- The May refinancing increased the borrowing base from $575 million to $800 million and elected commitments from $475 million to $600 million, while reducing stated interest margins and commitment fees.
Outlook, risks, contingencies and unusual items
- Management’s 2018 capital expenditure estimate was $885 million to $1.05 billion, including $710 million to $820 million for drilling and completion. The company expected to fund the program with operating cash flow and revolver borrowings, based on then-current commodity price expectations, while noting funding and execution risks.
- Centennial operated an average seven-rig program in the first half and completed 36 gross operated wells year to date. It said it could defer capital spending depending on prices, drilling results, equipment and infrastructure availability, permits, costs and partner participation.
- Commodity exposure remains significant. The filing estimates that a 10% price change would have moved first-half pretax income by approximately $34.9 million for oil, $5.2 million for NGLs and $3.3 million for natural gas. Derivatives reduce, but do not eliminate, price exposure and can limit gains from favorable price movements.
- Derivative gains were $24.5 million for the first half, including $19.0 million of non-cash mark-to-market gains. Thus, reported earnings included a material non-cash commodity-price component.
- New natural gas transportation agreements carried stated minimum commitments of $38.7 million; the filing lists 511.7 million MMBtu of total delivery commitments across the agreements. A three-year frac-sand agreement carried a $25.2 million minimum commitment. Actual expenditures may exceed stated minimums.
- After quarter-end, the company entered a six-year crude sales agreement beginning in January 2019 for 20,000 Bbl/d, increasing to 30,000 Bbl/d upon the specified pipeline milestone or by June 1, 2020. Failure to deliver could create a financial obligation whose amount was not determinable in the filing.
- Management said ordinary-course legal matters were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Key risks include commodity prices and differentials, reserve estimates, pipeline capacity, borrowing-base redeterminations and access to capital.
Important facts for investors to verify
- Confirm the intended issuer: the filing identifies Centennial Resource Development, Inc., not Permian Resources Corp.
- Reconcile reported earnings with operating cash flow and distinguish the $19.0 million non-cash derivative gain from cash hedge settlements.
- Review the pace and returns of the expanded drilling program against the $885 million to $1.05 billion capital budget and available liquidity.
- Assess exposure to widening Permian oil and gas differentials, takeaway constraints and the company’s ability to meet transportation and crude-delivery commitments.
- Check revolver availability, borrowing-base redeterminations, covenant headroom and senior-note obligations as capital spending continues.