Drilling & Completions | Quarterly / Earnings Reports | Third Quarter (3Q) Update | Financial Results | Hedging | Capital Markets | Drilled Uncomplete (DUC)

Centennial Resource Development Third Quarter 2020 Results

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Centennial Resource Development, Inc. reported its Q3 2020 results.

Highlights:

• Generated free cash flow during the quarter
• Reduced LOE per unit costs for the fourth consecutive quarter
• Lowered well cost targets and full-year unit cost guidance
• Increased full-year oil and total company production guidance
• Borrowing base reaffirmed at $700 million and repaid $15 million of credit facility borrowings
• Increased liquidity compared to the prior quarter
• Resumed drilling and completions activity with solid results
• Expect to be free cash flow positive in the fourth quarter at current strip pricing

Financial Results

For the third quarter 2020, Centennial reported a net loss of $51.5 million, or $0.19 per diluted share, compared to a net loss of $3.6 million, or $0.01 per diluted share, in the prior year period. Centennial's continued focus on cost reductions resulted in an improvement in several unit cost metrics. As a result of its lower cost structure, the Company generated net cash from operating activities of $45.7 million and free cash flow¹ of $10.5 million in the third quarter.

Total equivalent production during the third quarter 2020 averaged 68,934 barrels of oil equivalent per day ("Boe/d") compared to 76,312 Boe/d in the prior year period. Average daily crude oil production for the quarter was 35,292 barrels of oil per day ("Bbls/d") compared to 42,079 Bbls/d in the prior year period.

NGL volumes increased 21% to 14,885 Bbls/d compared to the second quarter 2020. The increase compared to the prior quarter was largely attributable to the Company's primary gas processor shifting to ethane recovery during the quarter, in addition to higher gas capture rates.

CEO Sean Smith said: "Centennial delivered a solid third quarter driven by lower operating expenses and well costs. Additionally, we increased our liquidity position organically by utilizing free cash flow to pay down debt. Underpinned by a significantly lower cost structure, we now expect to be free cash flow positive for the second half of 2020, assuming strip pricing and inclusive of our hedges."

Third Quarter Operational Results

During the quarter, Centennial resumed operational activity adding one drilling rig, while achieving lower well costs. Additionally, the Company continued its successful implementation of various field-level initiatives to lower lease operating expenses ("LOE"). In July, Centennial completed the second phase of its electric substation in Reeves County, Texas, enabling it to convert more well-sites from generator power to the electrical grid, significantly reducing field emissions and equipment rental costs. Upon the pending completion of phase three, Centennial expects to reduce the number of generators from 125 in the third quarter 2019 to approximately 10 at year-end 2020. Centennial also continued its transition from electric submersible pumps to more reliable and lower cost gas lift, converting fifteen units during the quarter. As a result of these ongoing initiatives, third quarter LOE per unit decreased seven percent compared to the prior quarter.

"Our recent field-level projects have positively impacted Centennial's economics in a number of ways. The electrification of the field and the transition to gas lift have dramatically lowered equipment rental costs, provided our well-sites with a more consistent power source and reduced the amount of workovers," said Smith. "Combined, these programs have improved cash flow by reducing LOE costs by 36% over the past year, in addition to providing a more stable production base with lower downtime."

Also during the quarter, Centennial completed five previously drilled but uncompleted ("DUC") wells in Lea County, New Mexico targeting the Third Bone Spring Sand interval. The two-well Pac-Man pad (89% WI) was drilled with approximate 10,100-foot laterals and achieved an average initial 30-day production rate of 2,132 Boe/d (82% oil) per well, producing over 164,000 cumulative barrels of oil during its first sixty days online. Drilled with an average lateral length of 7,300 feet, the two-well Donkey Kong pad (100% WI) achieved an average initial 30-day production rate of 1,715 Boe/d (82% oil) per well and averaged 192 Bbls/d of oil per 1,000 foot of lateral per well. The Chimichangas well (50% WI) was completed with an approximate 9,900-foot lateral and reported an initial 30-day average production rate of 1,736 Boe/d (82% oil).

"These wells highlight the quality of our asset base with strong 30-day initial production rates, as well as 60-day initial production rates exceeding 1,200 barrels of oil per day on average," Smith said. "Importantly, we were able to deliver these wells for an average cost of $858 per lateral foot. These results, combined with recent efficiencies and structural cost reductions, provide us with the confidence to further reduce our target well cost by 11% to approximately $800 per lateral foot."

Total capital expenditures incurred for the quarter were $21.5 million, of which drilling and completion capital expenditures totaled $19.7 million. Centennial's facilities, infrastructure and other totaled $1.5 million, which was down significantly from prior quarters. The remaining $0.3 million was spent on land during the quarter.

Updated 2020 Operational Plans and Targets

Centennial recommenced drilling activity during the quarter and plans to continue operating a one-rig program for the remainder of the year. Based on recent operational performance, Centennial increased its 2020 oil production target by one percent to 36,000 Bbls/d and total company production target by two percent to 67,000 Boe/d. The Company also slightly reduced its full-year capital expenditure budget, as a result of lower facilities and infrastructure capital. Due to recent cost reduction initiatives, Centennial lowered its full-year 2020 guidance range for LOE per unit, in addition to G&A, DD&A, and severance & ad valorem taxes. Furthermore, the Company adjusted its estimates for operated wells spud and completed during the full-year.

"Based on enhanced operating margins and structural well cost improvements, we expect to generate incremental free cash flow in the fourth quarter, assuming strip pricing," Smith said.

Capital Structure and Liquidity

As previously announced, the Company's $700.0 million borrowing base was reaffirmed by its bank group. During the quarter, the Company used a portion of its operating cash flow to pay down $15.0 million in borrowings under its credit facility. As of September 30, 2020, Centennial had approximately $5.2 million in cash on hand and $355.0 million of borrowings outstanding under its revolving credit facility. As a result, Centennial's pro forma total liquidity position increased by $16.9 million compared to the prior quarter to $314.1 million, based on its $700.0 million borrowing base, the availability blocker of $31.8 million and $4.3 million in current letters of credit outstanding, plus cash on hand. The Company's current letters of credit represent a $4.5 million reduction compared to $8.8 million outstanding, as of September 30, 2020.

Hedge Position

For the fourth quarter of 2020, Centennial has 16,000 Bbls/d of oil hedged, consisting of approximately 80% fixed price swaps, at a weighted average floor price of $38.97 per barrel WTI. Centennial recently entered into additional oil and natural gas hedges primarily for 2021 in order to further protect against potential volatility in commodity prices. For 2021, the Company currently has 5,718 Bbls/d of oil hedged at weighted average fixed prices of $42.59 per barrel WTI and $47.79 per barrel Brent. In addition, Centennial has certain crude oil basis swaps and natural gas hedges in place for the remainder of 2020 and in 2021. Subject to market conditions, the Company expects to implement additional oil and natural gas hedges for 2021 over time. (For a summary table of Centennial's derivative contracts as of October 31, 2020, please see the Appendix to this press release.)