Filing summary
Issuer discrepancy: The supplied filing is Centennial Resource Development, Inc.’s Form 10-Q for the quarter ended March 31, 2019. It does not identify Permian Resources Corp. as the registrant; verify that this is the intended filing.
Business context and reporting period
Centennial is an independent oil and natural gas company focused on the Delaware Basin, part of the Permian Basin. The unaudited results cover the three months ended March 31, 2019, compared with the same period in 2018. The company operated a six-rig drilling program and brought 20 gross operated wells online during the quarter.
Key financial and operating metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Oil and gas sales | $214.6 million | $215.9 million |
| Operating income | $5.1 million | $87.9 million |
| Net income (loss) | $(8.5) million | $70.8 million |
| Net loss attributable to Class A common stock | $(8.1) million; $(0.03) per share | $66.1 million; $0.25 per share |
| Cash from operating activities | $101.0 million | $131.8 million |
| Cash used in investing activities | $218.9 million | $218.6 million |
| Cash and cash equivalents at quarter-end | $89.5 million | — |
| Long-term debt, net | $880.9 million | $691.6 million at Dec. 31, 2018 |
| Average net production | 72,035 Boe/d | 54,069 Boe/d |
Production rose 33% year over year, while sales declined 1%. Average realized prices before hedging fell for oil (22%), natural gas (43%) and NGLs (35%). Oil differentials widened to $6.75 per barrel below NYMEX from $1.38 below; gas differentials widened to $1.49 per Mcf below NYMEX from $0.66 below. Operating expenses rose to $209.5 million from $128.0 million. The quarter included $31.3 million of impairment and abandonment expense, and interest expense increased to $10.2 million from $5.8 million.
Material changes, liquidity and outlook
- In March, subsidiary CRP issued $500 million of 6.875% senior notes due 2027. Net proceeds were $489 million; proceeds were used to repay revolving-credit borrowings and for general corporate purposes. At quarter-end, the company reported no revolving-facility borrowings and $799.2 million of available capacity, net of letters of credit.
- After quarter-end, the borrowing base was increased from $1.0 billion to $1.2 billion; elected commitments remained $800 million. The lenders also reduced borrowing margins by 25 basis points, subject to a total leverage ratio at or below 3.0 to 1.0. The company reported compliance with its credit and note covenants.
- Management’s 2019 capital expenditure budget was $765 million to $925 million, including $625 million to $725 million for drilling and completion. Management expected to fund the program with operating cash flow, the note proceeds and credit-facility borrowings, and said these sources were expected to provide sufficient liquidity under its current price expectations. The budget was lower than 2018 drilling and completion spending, reflecting a shift from seven rigs to six.
- Management cited Permian takeaway constraints as a cause of wider oil and gas differentials. It also warned that lower commodity prices could reduce cash flow, impair properties and reserves, reduce borrowing capacity, and constrain planned drilling or require repayment if borrowing capacity were redetermined downward.
Risks, contingencies and unusual items
Cash from operations fell 23% year over year, with management citing lower realized prices, higher operating and administrative costs, interest expense and supplier-payment timing. The $31.3 million acreage charge included $14.7 million for non-core leases that expired after unsuccessful efforts to extend, sell or trade them, and $16.6 million of acreage impairment. A $7.5 million reimbursement for third-party use of firm transportation capacity helped reduce gathering, processing and transportation costs; the company noted similar reimbursements may not recur. Derivative instruments produced a $5.9 million net loss in Q1 2019, versus a $7.8 million gain in Q1 2018. 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. The filing also reports adoption of lease accounting requirements in 2019, recognizing $29.3 million of operating lease liabilities at quarter-end, without a significant effect on earnings or cash flows.
Important facts for investors to verify
- Confirm issuer identity and filing relevance: the document is for Centennial Resource Development, Inc., not Permian Resources Corp.
- Reconcile reported cash capital spending with the $245.2 million of capital expenditures incurred in the quarter; the filing separately reports $217.2 million of drilling and development cash outflows.
- Monitor realized prices and differentials, particularly Permian takeaway capacity, and whether the company’s hedges meaningfully offset those exposures.
- Assess whether the $765 million to $925 million capital budget can be funded by operating cash flow and available borrowing capacity if prices or production disappoint.
- Track the 2027 notes’ 6.875% coupon, total debt, covenant headroom and borrowing-base availability; the stated $799.2 million availability was under $800 million of elected commitments.
- Evaluate recurring well costs, higher workover expense, acreage impairment and whether transportation reimbursements continue beyond their stated agreement period.