Business context and reporting period
The supplied filing is Centennial Resource Development, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017—not a filing identified as Permian Resources Corp. Centennial is an independent oil and gas producer focused on the Permian Basin, particularly the Delaware Basin. Its 2017 results are reported as “Successor” following the October 2016 business combination; the 2016 comparison is “Predecessor,” prepared on a different accounting basis, so year-over-year comparisons are not fully like-for-like.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $61.1 million | $15.1 million |
| Operating income (loss) | $7.2 million | $(14.7) million |
| Net income (loss), consolidated | $10.7 million | $(14.5) million |
| Net income (loss) attributable to Centennial | $9.8 million | $(14.5) million |
| Operating cash flow | $19.2 million | $18.6 million |
| Investing cash flow | $(98.4) million | $(22.4) million |
- Revenue increased 304%; net production rose 153% to 1.662 million Boe, or 18,469 Boe/d. Growth reflected drilling, the Silverback acquisition, and higher realized commodity prices.
- Average realized prices before derivative settlements increased 76% for oil to $49.45/Bbl, 55% for natural gas to $2.91/Mcf, and 202% for NGLs to $25.10/Bbl. Oil net of hedging was $49.73/Bbl.
- Operating margin was approximately 11.8% of revenue. DD&A was $26.2 million, or $15.74/Boe, down from $32.47/Boe; lease operating expense was $4.38/Boe, down 29%, while transportation, processing and gathering expense increased to $3.16/Boe.
- Cash and cash equivalents were $54.9 million at quarter-end, down from $134.1 million at year-end 2016. Current assets were $81.1 million and current liabilities $79.9 million. The company reported no revolver borrowings, $0.4 million of letters of credit, and $249.6 million of remaining availability under the $250 million borrowing base then in effect.
- Total liabilities were $87.5 million, including $7.6 million of asset-retirement obligations; there was no revolving-credit debt. Net cash used in investing exceeded operating cash flow by about $79.2 million, broadly consistent with the reported decline in cash.
Material changes versus the prior comparable period
Revenue growth reflected both higher output and improved prices. Total net production increased 153%, including oil production up 101%; the Silverback properties contributed 201 MBbl of net oil production, while 20 wells placed on production since Q1 2016 contributed 433 MBbl. Product mix shifted toward gas and NGLs, which represented 43% of production versus 28% a year earlier. Cash operating costs increased alongside activity and volumes; G&A rose to $12.1 million from $2.5 million, including stock compensation, higher staffing and public-company costs, and one-time items.
Outlook, risks and unusual items
- Management set a 2017 capital-expenditure budget of $535 million to $625 million, expected to be funded with operating cash flow, cash on hand and revolver availability. It anticipated near- to medium-term deficit spending to support production growth and said spending could be deferred depending on prices, drilling results, equipment, permits and capital availability.
- The company added a fifth operated rig in February and expected to add a sixth in June. In Q1 it spud 15 operated wells and completed 11, with average effective lateral length of about 6,250 feet.
- After quarter-end, the revolver borrowing base was increased from $250 million to $350 million on April 28. Centennial also agreed to acquire GMT assets for approximately $350 million, expected to close around June 8, 2017; it subsequently raised approximately $341 million gross through a private placement of 23.5 million Class A shares to fund the cash consideration.
- Commodity-price volatility is a central risk: lower prices could reduce revenue, reserves, liquidity and the borrowing base, or lead to impairments; higher prices can create noncash derivative losses. At March 31, derivatives had a net fair-value liability of $0.8 million. A 10% move in the oil forward curve was estimated to change that liability by $2.9 million; the equivalent gas-curve move by $0.1 million.
- Reported derivative gains were $3.8 million, and other income included $3.5 million; results therefore include non-operating and potentially volatile items. Income-tax expense was zero because a $3.5 million deferred-tax valuation-allowance release offset the provision.
- The filing reports compliance with credit-agreement covenants, effective disclosure controls, no material off-balance-sheet arrangements, and no known litigation requiring a reserve. Management said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the issuer: this source is Centennial Resource Development, Inc., not Permian Resources Corp.
- Review the successor/predecessor accounting distinction before treating year-over-year changes as directly comparable.
- Verify the closing, final purchase price and funding of the GMT acquisition, and the effect of the share issuance and increased borrowing base.
- Assess whether planned capital spending and production growth can be funded under changing commodity prices, differentials and working-capital needs.
- Review hedge volumes, settlement exposure and derivative valuation effects, as well as acquisition-related and other unusual items in reported earnings.