Permian Resources Corp. (registrant: Centennial Resource Development, Inc.) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The filing identifies the company as Centennial Resource Development, Inc. and describes operations focused on the Delaware Basin in the Permian. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Oil and gas revenue | $288.5 | $149.1 | $713.5 | $432.4 |
| Operating income (loss) | $96.2 | $(31.9) | $197.4 | $(733.2) |
| Net income (loss) | $37.1 | $(51.5) | $(22.6) | $(596.5) |
| Net income (loss) per share, diluted | $0.12 | $(0.19) | $(0.08) | $(2.14) |
- Q3 revenue increased 93% year over year, driven primarily by higher realized commodity prices. Total net production declined 6% to 65,121 Boe/d. Oil and NGL volumes fell 5% and 21%; natural gas volumes rose 6%.
- Q3 operating margin was approximately 33% of revenue, compared with an operating loss in the prior-year quarter. Net margin was approximately 13%. The filing does not present these margins as reported metrics; percentages are calculated from reported amounts.
- For the first nine months, revenue rose 65%, while total production declined 13% to 60,363 Boe/d. The company remained in a net loss, including a $150.7 million derivative loss and a $22.2 million loss on debt extinguishment.
- Nine-month operating cash flow was $333.1 million, versus $130.2 million. Investing cash outflow was $216.3 million; financing cash outflow was $117.6 million. Operating cash flow less cash drilling and development expenditures of $215.4 million was approximately $117.8 million, before other investing items and financing.
- At September 30, cash was $5.0 million; current assets were $109.5 million and current liabilities $228.5 million. Long-term debt, net, was $1.005 billion. The credit facility had $205.0 million drawn and $488.5 million of available capacity, net of letters of credit. Total liabilities were $1.298 billion.
- Derivative liabilities were $79.7 million net. Nine-month realized cash settlement losses were $89.2 million; noncash mark-to-market losses were $61.5 million.
Material changes and notable items
- Compared with Q3 2020, realized prices before hedging increased 77% for oil, 247% for natural gas and 219% for NGLs. Q3 2021 realized oil price after derivative settlements was $56.94/Bbl; natural gas was $3.72/Mcf.
- Production declines reflected natural well decline and lower drilling activity over the prior year. The company operated two rigs during the first nine months and brought 33 gross operated wells online.
- General and administrative expense rose to $35.7 million in Q3 from $17.6 million, mainly due to stock-based compensation. A stock-price maximum-return event accelerated vesting of employee restricted stock units, contributing substantial compensation expense; some awards were cash-settled and others settled in shares.
- In March 2021, the company issued $170 million of 3.25% convertible notes due 2028. It used proceeds in part for capped-call transactions and to redeem all $127.1 million of 8% senior secured notes in April. The redemption generated a $22.2 million extinguishment loss from writing off unamortized discount and issuance costs.
- The 2021 comparison with the prior year is affected by the 2020 period’s $591.8 million noncash proved-property impairment and $143.4 million gain on debt exchange.
Outlook, risks and contingencies
- Management expected 2021 capital expenditures of $300–$315 million, including $290–$305 million for drilling, completion and facilities. It planned to continue a two-rig program and expected to fund remaining 2021 spending from operating cash flow, based on anticipated production and hedges. Management reported free cash flow and approximately $105 million of credit-facility paydown, excluding refinancing transactions, during the first nine months.
- The fall 2021 borrowing-base redetermination reaffirmed a $700 million borrowing base and elected commitments. The company reported compliance with applicable debt covenants. The leverage-ratio covenant was suspended through March 31, 2022, then resumes subject to specified limits.
- Commodity prices, differentials and production remain key risks; lower prices could reduce cash flow and the borrowing base, constrain liquidity, or increase impairment risk. Hedges limit some downside but may also cap gains. Management also cited COVID-19 effects, weather, regulation, operational and transportation constraints, costs, and access to capital.
- Winter Storm Uri disrupted operations and caused temporary well shut-ins. A transportation provider lawsuit over reserved but unused capacity presents a reasonably possible loss estimated at $0–$7.6 million; management said no amount in that range was a better estimate than another.
- Subsequent to quarter-end, the company agreed to sell approximately 6,200 net acres for an unadjusted $101 million, with expected closing in December 2021. Management expected an approximately $36.5 million gain and planned to use net proceeds to repay credit-facility borrowings. Separately, 8 million private-placement warrants expired unexercised on October 11, 2021.
- Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Confirm the registrant identity and corporate name: this supplied 10-Q is filed by Centennial Resource Development, Inc., not under the name Permian Resources Corp.
- Review production trends and realized prices, including commodity differentials and the effects of hedges on realized revenue and cash flows.
- Reconcile liquidity, debt maturities, covenant requirements and the impact of the 2028 convertible notes, including potential share dilution and capped-call coverage.
- Check the assumptions supporting the 2021 capital budget and management’s expectation that operating cash flow would fund remaining spending.
- Monitor the acreage-sale closing, proceeds and debt repayment, and the outcome or settlement of the Winter Storm Uri transportation dispute.
- Assess the large stock-based compensation charges and derivative mark-to-market volatility when evaluating recurring earnings.