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Centennial Resource Development First Quarter 2021 Results

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   |    Thursday,May 06,2021

Centennial Resource Development, Inc. announced first quarter 2021 financial and operational results.

Recent Financial and Operational Highlights:

  • Generated free cash flow for the third consecutive quarter
  • Increased pro forma liquidity by 22% compared to year-end
  • Issued $170 million of 3.25% convertible senior notes due 2028
  • Redeemed at par $127 million of 8.00% second lien senior secured notes due 2025
  • Delivered first quarter average well costs below $800 per lateral foot

Financial Results

For the first quarter, Centennial generated net cash from operating activities of $72.3 million and free cash flow1 of $10.6 million. The Company reported a net loss during the quarter of $34.6 million, or $0.12 per diluted share, compared to a net loss of $548.0 million, or $1.99 per diluted share, in the prior year period.

Total equivalent production during the first quarter averaged 54,202 barrels of oil equivalent per day ("Boe/d") compared to 71,820 Boe/d in the prior year period. Average daily crude oil production for the quarter was 28,239 barrels of oil per day ("Bbls/d") compared to 41,512 Bbls/d in the prior year period. Impacted by Winter Storm Uri and related power outages, a majority of the Company's production was offline during a seven-day period in February.

CEO Sean Smith said: "Our team successfully resumed operational activity during the quarter, while delivering production and costs in-line with expectations in spite of the challenges posed by severe winter weather. Most importantly, Centennial has now transitioned to a sustainable free cash flow generating company. At current strip pricing, we expect to continue to repay borrowings on our credit facility and organically delever the balance sheet through year-end."

In addition to its impact on production, severe winter weather during the quarter also affected certain revenue and cost items. For the first quarter, revenue from natural gas sales increased 100% compared to the prior quarter, driven by higher natural gas prices due to extreme cold temperatures across the state of Texas and surrounding regions. Additionally, Centennial incurred higher than expected lease operating expense ("LOE") related to elevated electricity costs. LOE for the quarter totaled $25.9 million and, excluding one-time costs, was estimated to be $24.1 million, or $4.93 per Boe. Lastly, higher natural gas prices drove an increase in gathering, processing and transportation expense.

"Higher natural gas revenue more than offset increased operating costs during the quarter. We expect our unit cost metrics to return to normalized levels beginning in the second quarter and have reiterated our full-year production and cost targets," said Smith.

First Quarter Operational Results

Using multi-well pads and extended laterals, Centennial continues to efficiently develop its Delaware Basin acreage position. For the full quarter, the Company operated a two-rig drilling program with one completion crew and realized additional efficiencies. These continued improvements, combined with structural design changes, have resulted in lower drilling and completion costs.

"During the quarter, we reduced our spud to rig release times by 11% compared to the prior year period, while increasing our average lateral length by 17%," said Smith. "As a result, our operations team achieved an average gross well cost of $795 per lateral foot for the quarter. We are very pleased with these results and will remain focused on driving additional efficiencies throughout the year."

Total capital expenditures incurred for the quarter were $72.9 million. First quarter drilling, completion and facilities costs totaled $70.6 million, reflecting higher operational activity than originally expected. During the quarter, Centennial replaced its previous drilling rigs with more efficient walking rigs, which the Company expects to further reduce cycle times going forward. Infrastructure, land and other capital expenditures totaled $2.3 million.

Convertible Senior Notes Offering

In March, Centennial issued $170 million of 3.25% convertible senior notes due 2028 for net proceeds of $163.7 million. Net proceeds from the offering were used to redeem at par the $127.1 million 8.00% second lien senior secured notes due 2025 (the "senior secured notes") subsequent to quarter-end, to repay borrowings under the revolving credit facility and to fund the cost of entering into a capped call transaction to minimize potential future dilution. Upon maturity of the convertible senior notes, the Company has the flexibility to settle these notes through cash, stock or a combination thereof at Centennial's discretion. As a result of the redemption, the Company improved its liquidity position through the elimination of the $31.8 million credit facility availability blocker associated with the senior secured notes that had previously restricted access to the full borrowing base.

"This offering enabled Centennial to redeem our highest coupon and nearest note maturity at par. The transaction strengthens our maturity profile, reduces interest costs and improves liquidity," said Smith. "We now have a nearly five-year runway until our first senior unsecured note maturity in 2026, which provides significant financial flexibility."

Capital Structure and Liquidity

In April, Centennial's bank group reaffirmed its borrowing base at $700 million. At March 31, 2021, Centennial had approximately $11 million in cash on hand and $160 million of borrowings outstanding under its revolving credit facility which reflects a temporary repayment using the net proceeds from the convertible senior notes offering. Adjusted for the April redemption of its senior secured notes using credit facility borrowings, Centennial's pro forma liquidity position increased by approximately $76 million from year-end to $416 million, which is based on its $700 million borrowing base, $291 million in borrowings outstanding and $4 million in current letters of credit outstanding, plus cash on hand.

A comparison between recent periods of Centennial's liquidity, including the pro forma impact of the redemption of Centennial's senior secured notes in April, is provided below:

($'s in millions) December 31, 2020
  March 31, 2021
  March 31, 2021
(Pro Forma)1
Borrowing Base $ 700.0     $ 700.0     $ 700.0  
Facility Amount   668.2       668.2       700.0  
Less: RCF Borrowings   (330.0 )     (160.0 )     (290.8 )
Less: Letters of Credit   (4.3 )     (4.3 )     (4.3 )
Plus: Cash   5.8       10.9       10.9  
Liquidity $ 339.7     $ 514.8     $ 415.8  


(1) Amounts as of March 31, 2021 in this column have been adjusted to reflect the pro forma effects of (i) $130.8 million in borrowings under the revolving credit facility ("RCF") that were used to fund the April redemption at par of all the senior secured notes and accrued interest and (ii) the removal of the $31.8 million RCF availability blocker.

Hedge Position

For the remainder of 2021, Centennial has a total of 13,811 Bbls/d of oil hedged, consisting of approximately 88% fixed price swaps. For the second quarter 2021, the Company currently has 17,500 Bbls/d of oil hedged at weighted per barrel average fixed prices of $43.18 WTI and $54.98 Brent. Also for the second quarter, the Company has 2,500 Bbls/d of WTI oil collars in place with a weighted average floor and ceiling price of $42.00 per barrel and $51.14 per barrel, respectively. Notably, the Company has significantly less oil hedges during the third and fourth quarters of 2021. For the second half of 2021, the Company has 7,500 Bbls/d and 2,000 Bbls/d of oil hedged at weighted per barrel average fixed prices of $45.74 WTI and $48.38 Brent, respectively. Also during this time period, the Company has 1,250 Bbls/d of WTI oil collars in place with a weighted average floor and ceiling price of $44.60 per barrel and $53.28 per barrel, respectively. For 2022, Centennial has 500 Bbls/d of oil hedged during the first quarter at a fixed price of $60.72 per barrel WTI. In addition, Centennial has certain crude oil basis swaps in place for 2021 and certain natural gas hedges in place for 2021 and 2022. (For a summary table of Centennial's derivative contracts as of April 30, 2021, please see the Appendix to this press release.)

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