Centennial Resource Development, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for Centennial Resource Development, Inc. (NASDAQ: CDEV), not Permian Resources Corp. Reporting period: quarter and nine months ended September 30, 2020; filed November 3, 2020. Amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Centennial is an independent oil and gas producer focused on the Delaware Basin in the Permian. Results were shaped by COVID-19-related demand weakness, the oil price conflict between Saudi Arabia and Russia, low commodity prices, and reduced drilling activity.
Financial and operating performance
| Metric | Q3 2020 | Nine months 2020 |
|---|---|---|
| Oil and gas sales | $149.1 million, down 35% year over year | $432.4 million, down 37% |
| Net income (loss) | $(51.5) million; $(0.19) per share | $(596.5) million; $(2.14) per share |
| Operating income (loss) | $(31.9) million | $(733.2) million |
| Cash from operations | Not separately reported for the quarter | $130.2 million, versus $384.9 million |
| Cash used in investing | Not separately reported for the quarter | $308.0 million, versus $698.1 million |
| Capital expenditures incurred | Not separately reported for the quarter | $224.9 million |
| Cash and cash equivalents | $5.2 million at September 30 | $10.5 million including restricted cash |
| Long-term debt, net carrying value | $1,092.2 million at September 30 | $1,057.4 million at December 31, 2019 |
Q3 average net production was 68,934 Boe/d, down 10% year over year; oil production was 35,292 Bbl/d, down 16%. Q3 oil price before hedge settlements averaged $36.95/Bbl, versus $51.71; the reported hedge impact reduced the net oil price by $9.82/Bbl. Nine-month derivative losses were $40.3 million. The filing does not provide a clear consolidated operating cash flow or margin figure for Q3 alone.
Current assets were $64.5 million and current liabilities were $120.7 million. The company reported $355 million drawn on its revolving credit facility and $304.4 million of available capacity at September 30, net of letters of credit and an availability blocker.
Material changes versus comparable periods
- Nine-month revenue declined $255.6 million year over year, reflecting weaker commodity prices and lower oil and NGL volumes. Q3 oil and gas sales fell $80.0 million.
- Nine-month net loss included $650.6 million of impairment and abandonment expense, including a $591.8 million non-cash proved-property impairment recorded in Q1 and $58.8 million of unproved leasehold expiration amortization.
- A $143.4 million gain from a May debt exchange partially offset the nine-month loss. The exchange retired $254.2 million principal of unsecured notes for $127.1 million principal of 8% second-lien secured notes due 2025.
- Operating cash flow fell $254.6 million year over year. Cash capital investment also declined substantially from the prior-year period.
- Debt rose on a net carrying-value basis from year-end 2019. The company converted remaining legacy-owner interests into Class A shares in April, eliminating the noncontrolling interest.
Outlook, management commentary, and risks
- Centennial cut its 2020 capital budget to $240–$265 million, about 60% below the midpoint of its original guidance. It expected to fund remaining 2020 capital spending from operating cash flow, be free-cash-flow positive for the remainder of the year, and reduce revolver borrowings in Q4.
- Drilling was suspended from April until a one-rig program began at the end of Q3. The company completed five previously drilled wells in Q3. It had curtailed about 20% of production in May, brought most of it back online in June, and reported no further Q3 curtailments.
- Management cited volatile prices, COVID-19 demand uncertainty, storage and transportation constraints, reserve and impairment risk, and possible future production curtailments or lease expirations. Further price weakness could impair assets, constrain liquidity, and affect covenant compliance.
- The $700 million borrowing base and elected commitments were reaffirmed in the fall 2020 redetermination. The company reported compliance with debt covenants through filing; the total funded debt leverage covenant was suspended until March 2022. A subsequent October amendment reduced letters of credit to $4.3 million.
- A $58 million valuation allowance was recorded against deferred tax assets. The company also disclosed litigation with a purchaser over a disputed $10 million deposit related to a terminated water-disposal-asset sale; the outcome was unresolved.
- Nasdaq notified the company that its share price had remained below the $1 minimum bid requirement for 30 consecutive business days. The initial compliance period ran through February 6, 2021; delisting was a potential risk if compliance was not restored.
Important facts for investors to verify
- Whether actual 2020 capital spending, free cash flow, production, and revolver paydown matched management’s stated expectations.
- Subsequent commodity prices, hedge settlements, and the portion of production protected by hedges; hedging limits upside as well as downside.
- Borrowing-base availability, covenant headroom, debt maturities, and the implications of secured debt and pledged assets.
- Any further property impairments, reserve revisions, or acreage expirations following the 2020 drilling slowdown.
- Resolution of the disputed $10 million deposit and the outcome of the Nasdaq minimum-bid compliance process.