Permian Resources Corp quarterly report, Q3 FY2017

Full document

Business context and reporting period

The supplied filing is Centennial Resource Development, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2017, focused on unconventional oil and associated liquids-rich gas in the Permian Basin, especially the Delaware Basin. The request metadata names Permian Resources Corp.; that does not match the registrant identified in this filing and should be verified.

Comparisons with 2016 require caution: the 2017 “Successor” period follows the October 2016 business combination and uses a new acquisition-accounting basis, while 2016 is presented as “Predecessor.” The periods are not fully comparable.

Financial performance and position

  • Third-quarter revenue: $111.6 million, up 309% from $27.3 million. Oil sales were $87.3 million; natural gas sales $12.9 million; NGL sales $11.5 million.
  • Third-quarter earnings: Operating income was $26.5 million versus an operating loss of $4.9 million. Net income was $16.3 million, including $8.2 million of income tax expense; net income attributable to common shareholders was $14.4 million, or $0.06 per basic and diluted share.
  • Nine-month results: Revenue was $263.8 million versus $65.8 million; operating income was $57.0 million versus an operating loss of $26.5 million. Net income was $50.2 million versus a net loss of $35.7 million; net income attributable to common shareholders was $45.0 million, or $0.20 basic and $0.19 diluted EPS.
  • Production and pricing: Third-quarter net production averaged 34,700 Boe/d, up 290%; oil averaged 21,108 Bbl/d. Realized oil price before hedge settlements was $44.95/Bbl, natural gas $2.72/Mcf, and NGLs $24.83/Bbl. Oil net of hedging was $45.16/Bbl.
  • Costs: Third-quarter lease operating expense was $3.56/Boe, down 20%; gathering, processing and transportation was $3.11/Boe, up 43%. DD&A was $42.4 million, or $13.28/Boe, versus $18.5 million, or $22.56/Boe.
  • Cash flow and investment: Nine-month operating cash flow was $137.2 million. Investing cash outflow was $766.8 million, including $419.5 million for property acquisitions and $354.5 million for drilling and development. Financing provided $498.1 million. Cash declined to $2.6 million from $134.1 million at year-end 2016.
  • Debt and liquidity: Revolver borrowings were $165.0 million at September 30; available borrowing capacity was $184.1 million after $0.9 million of letters of credit, under a $350 million borrowing base. On November 2, 2017, the borrowing base was increased to $575 million. The facility matures October 2019; the company reported covenant compliance.
  • Balance sheet: Total assets were $3.275 billion and total liabilities $328.6 million. Current assets were $59.3 million versus current liabilities of $136.9 million; the filing notes working capital deficits may occur during its drilling program.

Material changes versus the prior comparable period

  • Revenue and production rose substantially, driven by Delaware Basin drilling, the Silverback and GMT acquisitions, and higher realized prices for oil, gas and NGLs. Third-quarter average production was 34,700 Boe/d versus 8,891 Boe/d.
  • The company operated six rigs in the quarter, spudding 22 operated wells and completing 13. It reported 171 gross operated horizontal wells at quarter-end, versus 65 a year earlier.
  • Higher production and acquired well count increased total operating costs. Per-unit LOE and DD&A fell, while gathering, processing and transportation costs per Boe rose, partly reflecting a greater gas/NGL mix and new transportation commitments.
  • G&A increased to $13.3 million for the quarter from $4.8 million, reflecting higher staffing, stock-based compensation and public-company costs.
  • The June GMT acquisition added 36 producing horizontal wells and approximately 11,850 net undeveloped acres in Lea County, New Mexico; net purchase price was $349.1 million. The company sold 23.5 million Class A shares for gross proceeds of approximately $340.8 million, primarily to fund the acquisition.

Outlook, risks and unusual items

  • Management’s 2017 capital expenditure budget was $535 million to $625 million; $450.2 million had been incurred in the first nine months. Management expected operating cash flow and borrowings to support the current program, subject to commodity prices, production, costs and access to capital. No production or earnings guidance is stated in the supplied text.
  • A June 2017 transportation agreement requires delivery of 40,000 MMBtu/day for one year, tied to production in Reeves and Ward counties. Management cited the agreement as a contributor to higher gas-related unit costs.
  • Commodity prices are volatile. Lower prices could reduce revenue, economic reserves and the revolver borrowing base, potentially requiring repayment; higher prices can also produce non-cash derivative losses. Derivatives provide partial protection but limit some upside.
  • At September 30, derivative fair value was a net asset of approximately $0.2 million. The filing reports a third-quarter derivative loss of $0.9 million and a nine-month gain of $5.4 million. Instruments are not designated as accounting hedges.
  • Nine-month income included a $7.2 million gain on sale of oil and gas properties, primarily Pecos County acreage. The company recognized $17.3 million of income tax expense for the nine months; a $5.1 million release of deferred-tax-asset valuation allowance partially offset tax expense.
  • Management said it was unaware of pending litigation requiring a contingent liability reserve and did not believe ordinary-course legal matters would materially harm the company. It reported effective disclosure controls and no material change in internal control during the quarter.

Most important facts to verify

  1. Confirm the intended issuer: this filing names Centennial Resource Development, Inc., not Permian Resources Corp.
  2. Review the successor/predecessor accounting and acquisition effects before treating year-over-year growth or earnings as like-for-like.
  3. Validate the November 2 borrowing-base increase, actual post-redetermination availability, and liquidity needs given $2.6 million of quarter-end cash and the 2017 capital budget.
  4. Assess whether production growth and lower per-unit LOE/DD&A can be sustained, while monitoring rising gathering and transportation costs and the delivery commitment.
  5. Check commodity hedge volumes, settlement economics, and exposure to price and borrowing-base changes.