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Centennial 1Q20: Suspends 2020 D&C Activity, Zero Rigs; Credit Facility Change

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   |    Tuesday,May 05,2020

Centennial Resource Development, Inc. announced first quarter 2020 financial and operational results and updated 2020 operational plans.

Recent Financial and Operational Highlights

  • Reduced current operated rig count from five to zero
  • Initiated plan to reduce annual G&A expenses by approximately 30% on an annualized basis
  • Decreased unit costs sequentially during the first quarter
  • Hedged significant amount of second and third quarter oil volumes to protect against downside risk
  • Amended credit facility to replace total leverage covenant with first lien leverage covenant
  • Launched debt exchange offer to reduce total debt and lower interest expense
  • Pro forma liquidity of $468 million with new $700 million borrowing base at March 31

Updated 2020 Financial and Operational Plan

  • Suspended all near-term drilling and completion activity
  • Expect to curtail up to 40% of production during May in response to weak realized prices
  • Revised total capital budget approximately 60% below original guidance
  • Plan flexible approach to future operational activity depending upon commodity prices
  • Maintain focus on balance sheet protection and liquidity

Credit Agreement Amendments

On May 1, 2020, as part of the borrowing base redetermination process, Centennial entered into amendments to its Credit Agreement which, among other changes, suspended the total leverage covenant through year-end 2021 and replaced it with a first lien leverage covenant that starts at 2.75 to 1.00 and steps down to 2.50 to 1.00 during 2022. The credit agreement amendments also permit the issuance of new senior secured notes in connection with the exchange offer described below and, to the extent that the exchange offer closes, will implement a minimum availability condition to borrowing in the amount of the lesser of $100 million and 25% of the aggregate principal amount of senior secured notes outstanding at the time of borrowing.

Financial Results

For the first quarter 2020, Centennial reported a net loss of $548.0 million, or $1.99 per diluted share. The net loss was driven by a $611.3 million non-cash impairment charge, primarily related to proved properties as a result of lower commodity prices in the futures curve. First quarter results compare to a net loss of $8.1 million, or $0.03 per diluted share, in the prior year period.

Average daily crude oil production increased two percent to 41,512 barrels of oil per day ("Bbls/d") compared to the prior year period. Average total equivalent production of 71,820 barrels of oil equivalent per day was flat compared to the prior year period.

"In the current commodity price environment, liquidity and balance sheet protection will continue to be our top priorities," said Sean R. Smith, Chief Executive Officer. "We have taken swift action to suspend our drilling and completion activity, while announcing significant cost reductions. We plan to remain flexible in terms of implementing production curtailments and future activity levels, continuing to monitor changes in commodity prices."

2020 Operational Plans

As a result of the current commodity price environment and uncertain macro outlook, Centennial recently suspended all drilling and completion activities. The Company was operating a five-rig program and two completion crews in early March. Centennial's updated fiscal year 2020 total capital budget is estimated to be approximately $240 million to $290 million, which represents an approximate 60% reduction compared to its original capital program. Drilling and completion ("D&C") costs are expected to be approximately 85% of the Company's total budget, with the remaining portion to be spent on facilities, infrastructure, land and other. Notably, the Company's updated guidance range provides flexibility to resume modest operational activity in the second half of the year, depending upon commodity prices.

Additionally, the Company expects to voluntarily curtail up to 40% of its production during the month of May, as a result of weak realized prices. Future curtailment decisions will be made on a month-to-month basis, subject to commodity prices and contractual obligations.

"In today's challenging environment, we are focused on making prudent operational and capital decisions. We proactively shut-in a significant portion of our production for the month of May," said Smith. "We will look for opportunities to further reduce costs and continue to manage our liquidity position."

Given ongoing commodity price uncertainty, continued market volatility and the potential for both voluntary and involuntary curtailments over the coming months, the Company cannot reasonably estimate its full year financial and operating results at this time. Further production and unit cost guidance will be suspended until the Company has more certainty regarding commodity prices and its future operational and financial plans.

In addition to the announced capital reductions, Centennial has taken several steps to significantly reduce general and administrative ("G&A") expenses. The Company recently implemented a reduction to its workforce and reduced salaries for remaining employees. Base salaries for the Company's Chief Executive Officer, Chief Financial Officer and Vice Presidents have been reduced by twenty-five, fifteen and ten percent, respectively. The Board of Directors have elected to reduce their cash retainer by twenty-five percent. The Company expects these cost saving items, combined with other non-payroll initiatives, to reduce its original 2020 cash G&A budget by approximately 30%, or $18 million to $20 million, on an annualized basis. Given timing and associated one-time costs, Centennial expects its 2020 cash G&A budget to be approximately 15% lower compared to its original guidance.

"The impacts of COVID-19 have caused unprecedented times for both the global economy and our industry. We have made the difficult but necessary decision to reduce the size of our workforce in an effort to better align the Company with anticipated activity levels," said Smith.

First Quarter Operational Results

Total capital expenditures incurred for the quarter were $175.4 million, inclusive of $146.8 million in D&C capital expenditures. Centennial's facilities, infrastructure and other capital expenditures totaled $25.2 million for the quarter, with an additional $3.4 million spent on land. As a result of the Company's five-rig drilling program, capital expenditures for the first quarter represent approximately 66% of its updated full year 2020 budget. The Company expects to significantly reduce activity during the remaining three quarters of the year.

"During the quarter, we delivered solid well results which were in-line with our expectations. However, quarterly production volumes were impacted by the timing of completions, as approximately half of our twenty-two completed wells were placed online in March with limited production impact to the quarter. Additionally, we experienced higher than anticipated volumes shut-in by offset completions," said Smith.

Capital Structure and Liquidity

As of March 31, 2020, Centennial had $4 million in cash on hand, $235 million of borrowings under its revolving credit facility and $900 million of senior unsecured notes. Subsequent to quarter-end, Centennial completed its spring redetermination process which resulted in a $700 million borrowing base compared to $1,200 million previously. At March 31, 2020 and after giving effect to the decrease in elected commitments, Centennial's pro forma total liquidity was $468 million, based on its balance sheet position and letters of credit outstanding.

Senior Notes Exchange Offer

On April 22, 2020, Centennial commenced an exchange offer whereby holders of the Company's outstanding senior notes may exchange their notes for up to $250 million aggregate principal amount of newly issued 8.00% Second Lien Senior Secured Notes due 2025 and up to $200 million aggregate principal amount of newly issued 8.00% Third Lien Senior Secured Notes due 2027.

Hedge Position

During the first quarter, the Company entered into fixed price oil swaps for 2020 to protect against the potential future decline in oil prices. For the remainder of 2020, Centennial has an average of approximately 19,400 Bbls/d of oil hedged at a weighted average fixed price of $26.79 per barrel. In addition, Centennial has in place crude oil basis swaps and natural gas hedges for 2020. The Company continues to explore adding additional crude oil and natural gas hedges in the future. (For a summary table of Centennial's derivative contracts as of May 1, 2020, please see the Appendix to this press release.)

Saltwater Disposal Infrastructure Divestiture Update

On February 24, 2020, Centennial entered into a purchase and sale agreement with a subsidiary of WaterBridge Resources LLC to divest its saltwater disposal wells and associated produced water infrastructure in Reeves County for $225 million, consisting of $150 million in cash at closing and an additional $75 million payable on a deferred basis upon meeting certain incentive thresholds. The transaction remains pending, and either party may terminate the transaction if closing does not occur on or before May 15, 2020.

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