Business context and reporting period
This is Centennial Resource Development, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2018—not a filing under the name Permian Resources Corp. Centennial was an independent oil and gas company focused on the Delaware Basin. Unless the company-name difference reflects the request metadata rather than the intended filing, verify that this is the filing to summarize.
Financial and operating results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Oil and gas sales | $215.9 million | $61.1 million |
| Operating income | $87.9 million | $7.2 million |
| Net income | $70.8 million | $10.7 million |
| Net income attributable to Class A | $66.1 million; $0.25 per share | $9.8 million; $0.04 per share |
| Cash from operations | $131.8 million | $19.2 million |
| Cash used in investing | $218.6 million | $98.4 million |
| Cash and cash equivalents at period end | $38.2 million | $54.9 million |
Sales grew 253%, driven by higher production and improved oil and NGL prices. Total net production rose 193% to 54,069 Boe/d. Oil sales averaged $61.53/Bbl, natural gas $2.42/Mcf and NGLs $30.21/Bbl. Calculated from reported figures, operating margin was approximately 40.7% versus 11.8%, and net margin approximately 32.8% versus 17.5%.
Operating expenses totaled $128.0 million, including $66.0 million of depreciation, depletion and amortization, $16.3 million of lease operating expense, $14.2 million of severance and ad valorem taxes, and $13.8 million of gathering, processing and transportation expense. Lease operating cost declined to $3.34/Boe from $4.38/Boe; DD&A declined to $13.57/Boe from $15.74/Boe. Q1 2018 net income included a $7.5 million noncash derivative gain and $19.1 million income tax expense.
Balance sheet, debt and liquidity
At March 31, 2018, total assets were $3.69 billion, total liabilities $606.8 million and total equity $3.09 billion. Long-term debt, net, was $390.9 million, principally the $400 million 5.375% senior notes due 2026. The company had no revolver borrowings and reported $474.1 million of available capacity under its then-existing facility, net of letters of credit. Cash declined from $117.3 million at year-end 2017 to $38.2 million, as operating cash and $135.5 million of asset-sale proceeds were more than offset by investment spending.
Q1 investing included $250.5 million of drilling and development expenditures and $101.8 million of oil and gas property acquisitions, partly offset by asset-sale proceeds. The filing’s capital-expenditure table reports $238.3 million for the quarter under its stated categories; amounts differ from cash-flow statement investing lines because the presentations and classifications differ.
Material changes, outlook and risks
- Production growth reflected drilling, acquisitions including the 2017 GMT transaction, and 75 gross operated wells placed on production since Q1 2017. Centennial averaged seven drilling rigs and completed 16 gross operated productive wells in Q1 2018.
- Centennial acquired about 4,000 undeveloped net acres and producing properties in Lea County, New Mexico, for a net purchase price of $94.5 million. It sold about 8,600 undeveloped net acres and 12 gross producing wells in Reeves County, Texas, for an unadjusted $140.7 million; no gain or loss was recorded. The divested properties represented about 1% of proved reserves at year-end 2017.
- Management estimated a 2018 capital budget of $885 million to $1.05 billion, including $710 million to $820 million for drilling and completion. It expected to fund the program with operating cash flow and revolver borrowings, while noting capital plans could change with prices, drilling results, costs, equipment, permits and capital availability. No production or earnings guidance was provided in the supplied filing text.
- After quarter-end, on May 4, 2018, the company amended its credit agreement: borrowing base increased to $800 million, elected commitments to $600 million, and the facility term to five years; stated interest margins and fees were reduced.
- Commodity-price volatility is a principal risk. Based on Q1 production, a 10% price change was estimated to move pretax income by $17.5 million for oil, $2.2 million for NGLs and $1.9 million for natural gas. Derivatives reduce, but do not eliminate, exposure and can limit gains. Gas realized pricing was down 17% year over year, partly due to wider differentials.
- A two-year gas transportation agreement requires delivery of approximately 18.5 million MMBtu or payment for deficiencies; minimum financial commitment was $11.0 million. Management said it was unaware of pending litigation requiring a reserve and did not expect ordinary-course proceedings to have a material adverse effect. The filing reported no material change in risk factors from the 2017 annual report.
Investor verification points
- Confirm that Centennial Resource Development, Inc.’s Q1 2018 filing—not a Permian Resources Corp. filing—is the intended source.
- Review production growth, realized commodity prices and differentials, and whether the planned 2018 capital budget remains financeable under changing prices and costs.
- Check cash use, spending commitments, revolver availability and compliance with debt covenants; note the subsequent May 2018 facility amendment.
- Assess the value and production implications of the acreage acquisition and divestiture, and the $11.0 million minimum gas-transport commitment.
- Distinguish reported earnings from derivative mark-to-market gains and the period’s income tax expense.