Permian Resources Corp annual report, FY2018

Filing identity and reporting period

The supplied filing is Centennial Resource Development, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed February 25, 2019 (ticker CDEV). It is not a filing by Permian Resources Corp.; the request’s company name does not match the registrant in the filing. This is an annual report, not a standalone fourth-quarter filing.

Business context

Centennial was an independent oil and gas producer focused exclusively on the Delaware Basin, principally Reeves County, Texas, and Lea County, New Mexico. At year-end it reported approximately 80,223 net leased acres, 263 operated horizontal producing wells, and seven operated drilling rigs. The company owned approximately 96% of its subsidiary Centennial Resource Production, LLC (CRP).

Financial and operating performance

Revenue increased 107%, reflecting higher production and higher realized oil and NGL prices, partly offset by weaker realized natural gas prices. Average net production rose 92% to 61,082 Boe/d; oil production increased 81%, natural gas 79%, and NGLs 158%. The company reported an operating margin of approximately 31.7% and common-shareholder net margin of approximately 22.4% of sales.

Average realized prices before derivative settlements were $55.98/Bbl for oil, $1.97/Mcf for natural gas, and $27.45/Bbl for NGLs. Oil and gas differentials widened as Permian takeaway capacity constraints weighed on local prices. Cash derivative settlements added $20.6 million in 2018; the total derivative gain was $15.3 million after a $5.3 million noncash mark-to-market loss.

Year-end cash and cash equivalents were $18.2 million ($21.4 million including restricted cash), down from $117.3 million of cash and cash equivalents at year-end 2017. Capital expenditures were approximately $997.2 million on the company’s reported incurred-capital basis; cash-flow statements show $998.2 million of drilling and development expenditures. Operating cash flow therefore fell short of drilling and development expenditures by approximately $328 million, before acquisitions, divestitures, and other investing items.

Long-term debt, net, was $691.6 million: $300.0 million outstanding on the revolving facility and $400.0 million principal of 5.375% senior notes due 2026, net of issuance costs. The revolver had $499.2 million of available borrowing capacity, net of letters of credit, against an $800 million elected commitment and a $1.0 billion borrowing base. The company reported compliance with debt covenants. Current assets were $130.2 million and current liabilities $247.7 million.

Proved reserves increased to 261.8 MMBoe from 186.5 MMBoe, with 56% classified as proved undeveloped. Standardized measure of discounted future net cash flows was $2.48 billion; pre-tax PV-10 was $2.98 billion. These reserve-value measures are estimates, not market value.

Material changes versus the prior year

• Production growth and higher realized oil and NGL prices more than doubled sales, while realized natural gas price fell 28% and the oil differential to NYMEX widened by $6.07/Bbl.
• Operating expenses rose with the larger producing base: LOE was $83.3 million, severance and ad valorem taxes $56.5 million, and gathering, processing and transportation $57.6 million. LOE per Boe rose to $3.74; GP&T per Boe decreased to $2.58, partly aided by $6.9 million of third-party transportation-capacity reimbursements.
• DD&A increased to $326.5 million from $161.6 million, and interest expense rose to $26.4 million from $5.7 million, including a full year of senior-note interest.
• Centennial acquired acreage and producing properties for an aggregate $182.3 million and sold acreage and wells for $140.7 million. The sale proceeds helped fund acquisitions.
• The borrowing base and elected commitments were increased during 2018, ending at $1.0 billion and $800 million, respectively. Revolver borrowings were $300 million at year-end versus none in 2017.
• Proved-reserve revisions were negative 24.1 MMBoe, mainly because certain PUD locations were removed from the active development plan; extensions and discoveries added 117.9 MMBoe.

Outlook, risks, contingencies, and unusual items

For 2019, management budgeted total capital expenditures of $765 million to $925 million, including $625 million to $725 million for drilling and completion, and planned to reduce activity from seven rigs to six. Management expected operating cash flow and credit-facility borrowings to fund the program, subject to commodity prices and other conditions; it cautioned that capital needs and access to funding could change.

Key risks include commodity-price volatility; Permian pipeline constraints and depressed local differentials; concentration of all reserves and operations in the Delaware Basin; dependence on third-party transport and processing; execution and cost risks in drilling and completions; and the large PUD development requirement. Firm oil and gas sales and transportation arrangements include volume commitments and potential deficiency payments. Long-term contractual obligations were reported at $1.08 billion, including debt principal and estimated interest; specified operating, drilling, purchase, water-disposal, and transportation commitments totaled $149.1 million, excluding debt obligations. Management said production and reserves were expected to support physical delivery commitments, but potential shortfall costs were not determinable.

Other notable items: the company recorded $11.1 million of abandonment expense for expired undeveloped acreage; reported no impairment of proved properties; and stated there were no off-balance-sheet arrangements. Ordinary-course legal matters were not expected by management to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also assessed disclosure controls and internal control over financial reporting as effective.

Important facts for investors to verify

• Confirm the registrant: this filing is for Centennial Resource Development, Inc. (CDEV), not Permian Resources Corp.
• Assess whether 2019 guidance could be funded from cash flow and borrowing capacity under lower commodity prices or wider Permian differentials.
• Review the terms, volumes, and potential deficiency costs in firm sales, gathering, and transportation agreements, especially as pipeline capacity changes.
• Examine the PUD reserve revisions, five-year development schedule, reserve assumptions, and sensitivity of PV-10 to prices and costs.
• Reconcile the reported capital-expenditure measures and monitor liquidity, debt, borrowing-base redeterminations, and covenant headroom.
• Determine whether third-party transportation reimbursements and the 2018 ethane-recovery benefit are sustainable.