Business context and reporting period
The filing is a Form 10-Q for the quarter ended June 30, 2017. The registrant named in the filing is Centennial Resource Development, Inc., an independent oil and gas company focused on the Permian Basin; this does not match the request metadata naming Permian Resources Corp. Centennial acquired 36 producing horizontal wells and about 11,850 net acres in Lea County, New Mexico, in the GMT Acquisition, which closed June 8, 2017.
Comparisons with 2016 require care: the 2017 figures are for the “Successor,” while the 2016 figures are for the “Predecessor.” The Business Combination created a new accounting basis, so the periods are not fully comparable.
Financial and operating performance
- Second-quarter revenue: $91.1 million, up 290% from $23.3 million. Net income was $23.2 million, including $20.8 million attributable to common shareholders; diluted EPS was $0.09. Operating income was $23.3 million, about 25.5% of revenue.
- First-half revenue: $152.2 million, up 296% from $38.5 million. Net income was $33.9 million, including $30.6 million attributable to common shareholders; diluted EPS was $0.14. Operating income was $30.4 million, about 20.0% of revenue.
- Production: Second-quarter net production averaged 29,664 Boe/d, up 279%; first-half average production was 24,097 Boe/d, up 220%. Growth reflected drilling and the Silverback acquisition, partly offset by declines in existing wells.
- Pricing and costs: Second-quarter realized prices before hedging rose year over year for oil (7%), natural gas (36%) and NGLs (39%). Second-quarter LOE declined to $3.06/Boe from $3.64; gathering, processing and transportation costs rose to $2.74/Boe from $2.05, partly reflecting a higher gas/NGL production mix.
- Cash flow and investment: First-half operating cash flow was $93.1 million, compared with $35.6 million. Investing cash outflow was $595.3 million, including $405.2 million for property acquisitions and $198.3 million for drilling and development. Financing cash inflow was $368.1 million.
- Liquidity and debt: Cash was zero at June 30, versus $134.1 million at year-end 2016. Revolver debt was $35.0 million, with $314.1 million of available borrowing capacity and a $350.0 million borrowing base. The company reported compliance with credit covenants.
- Balance sheet: Total assets were $3.10 billion; total liabilities were $172.6 million and total equity was $2.93 billion. The figures include the effects of acquisitions and equity financing.
Material changes, outlook and risks
- Centennial acquired the GMT properties for a net purchase price of $349.1 million. It issued 23.5 million Class A shares at $14.50 per share, raising approximately $340.8 million gross to fund most of the acquisition.
- The company converted 104,400 Series B preferred shares into 26.1 million Class A shares in May. Class A shares outstanding increased substantially during the period.
- Management’s 2017 capital expenditure budget was $535 million to $625 million. First-half capital expenditures were $270.4 million. Management expected operating cash flow and revolver availability to fund the current program, based on its then-current commodity price expectations; it noted that spending could be deferred depending on prices, drilling results, infrastructure, permits and capital availability.
- Operations ran five rigs for most of the second quarter, adding a sixth operated rig in late May. The company spudded and completed 20 operated wells during the quarter.
- Key risks include volatile oil, gas and NGL prices, production declines, differentials and infrastructure constraints, reserve-estimation uncertainty, and possible borrowing-base reductions. Hedges reduce downside exposure but may limit gains; derivative fair-value changes also affect reported earnings. At June 30, the company had oil and gas swaps extending through 2018.
- The filing reports a one-year natural gas transportation commitment of 40,000 MMBtu per day. 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.
Investor verification priorities
- Confirm the issuer and security: the supplied filing is Centennial Resource Development, Inc. (ticker CDEV), not Permian Resources Corp.
- Review the Successor/Predecessor accounting break before relying on year-over-year growth comparisons.
- Assess whether the $535–$625 million capital budget can be funded given zero cash at quarter-end, the acquisition program, and commodity-price and borrowing-base sensitivity.
- Verify post-acquisition production, well performance, pipeline connections and realized differentials, including whether the reported production growth is sustainable.
- Monitor share-count dilution, revolver availability and covenant compliance, hedge coverage and the effect of derivatives on cash flow versus reported earnings.