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Centennial Resource Development Second Quarter 2020 Results

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   |    Tuesday,August 04,2020

Centennial Resource Development, Inc. reported its Q2 2020 results.

Q2 Highlights:

  • Reduced capital expenditures by 84% from the first quarter 2020
  • Reduced year-to-date average well costs by over 20% compared to 2019
  • Reduced LOE per unit costs for the third consecutive quarter
  • Implemented plan to significantly reduce cash G&A expenses
  • Executed debt exchange, reducing total senior note debt by $127 million
  • Curtailed a portion of May production volumes as a result of weak pricing

Updated 2020 Plan

  • Currently stimulating five drilled, but uncompleted wells
  • Plan to resume drilling activity with one-rig in the fourth quarter
  • Reduced total capital budget to $255 million from previous guidance
  • Expect to be essentially cash flow neutral for the remainder of the year at current strip pricing

Financial Results

For the second quarter 2020, Centennial reported net income of $5.3 million, or $0.02 per diluted share, compared to $17.9 million, or $0.07 per diluted share, in the prior year period.

Total equivalent production during the second quarter 2020 averaged 68,245 BOEPD compared to 76,122 Boe/d in the prior year period. Average daily crude oil production for the quarter was 37,411 Bbls/d compared to 43,105 Bbls/d in the prior year period.

Sean R. Smith, Chief Executive Officer, said: "The second quarter was the most challenging crude oil price environment in recent history. To protect the balance sheet, Centennial drastically reduced capital expenditures. We also implemented a series of cost reduction initiatives that will continue to benefit the Company over time. Going forward, we remain focused on minimizing cash costs and have reduced both LOE and recurring cash G&A. As the oil market recovers, we plan to resume operational activity with a focus on enhancing our economics through a combination of lower well costs and higher operating margins."

Second Quarter Operational Results

Centennial voluntarily curtailed approximately 20% of its May production volumes in response to weak realized prices. In order to minimize shut-in volumes, the Company continued to produce crude oil to on-site tank batteries, ultimately selling these stocks at materially higher prices later in the quarter. The majority of shut-in production volumes were brought-back online during June at essentially no incremental cost.

"We made the prudent decision to voluntarily shut-in a portion of our production during May. Notably, we experienced virtually no artificial lift failures or additional workover expenses associated with returning volumes to pre-shut-in levels," Smith said.

Centennial has implemented numerous field-level projects targeting lower lease operating expenses ("LOE"), which have generated positive results. Second quarter LOE per Boe decreased 17% compared to the prior period, despite lower production volumes. Centennial recently completed the first phase of its electric substation in Reeves County, Texas, enabling it to convert more facilities from generator power to the electrical grid. Additionally, the Company continues its ongoing transition from electric submersible pumps to more reliable gas lift. Centennial remains focused on these types of cost reducing projects going forward.

"Our electrification project has reduced the number of generators in the field by 60%, resulting in lower equipment rental costs. Furthermore, we have significantly increased the usage of gas lift where feasible, lowering workover expenses," Smith said. "Combined, these projects have lowered LOE costs, while reducing production downtime."

As previously announced, Centennial took a series of actions during the quarter to lower cash general and administrative ("G&A") expenses, including a reduction to its workforce, employee and executive management salaries, Board of Director retainers and other non-payroll expenses. Excluding the effects of one-time severance costs paid to G&A employees of $2.9 million, Centennial's cash G&A expenses during the quarter were $1.75 per BOE, a reduction of 12% compared to the prior period.

Due to recent commodity price volatility, Centennial suspended all drilling and most completion activities in the second quarter. As a result, total capital expenditures incurred were $28.0 million, compared to $175.4 million in the prior quarter. Second quarter drilling and completion ("D&C") capital expenditures totaled $21.4 million and were primarily associated with the completion of four wells in early April. The remaining $6.6 million was spent on facilities, infrastructure and land.

2020 Operational Plans and Targets

Centennial's estimated fiscal year 2020 total capital budget is approximately $240 million to $270 million, a reduction of $10 million utilizing the mid-point compared to its previously updated guidance range. Total D&C costs are estimated to be $200 million to $220 million, with the remaining portion to be allocated to facilities, infrastructure and land. As a result of the Company's five-rig operated drilling program during the first quarter, capital expenditures for the first half of 2020 represent approximately 80% of its updated full year budget, implying a significant reduction in total capital to be incurred during the second half of the year.

During the third quarter, Centennial commenced the completion of five wells that were drilled but uncompleted in Lea County, New Mexico. Additionally, the Company intends to resume drilling activity with one-rig in the fourth quarter to conservatively resume field development.

"As the price of crude oil has recovered from record lows, we are pleased to resume D&C activity on our asset base. Importantly, we expect our future drilling program to be underpinned by significantly lower well costs, as a result of higher efficiencies and structural cost improvements," Smith said. "Year-to-date, our operations team has successfully reduced well costs by over 20% compared to last year, and we expect to deliver total well costs of approximately $900 per lateral foot when activity resumes."

"Based on our expected activity levels through year-end, we anticipate being cash flow neutral for the balance of the year, assuming strip pricing and inclusive of our oil hedges. This will enable us to prudently manage our liquidity while resuming activity," Smith said.

The Company expects the current operational plan to deliver full year total equivalent production volumes of 64,000 Boe/d to 68,000 Boe/d, including crude oil volumes of 34,500 Bbls/d to 36,500 Bbls/d.

Senior Notes Exchange Offer Results

On May 22, 2020, Centennial completed an exchange offer whereby holders of $254.2 million aggregate principal amount of the Company's $900.0 million outstanding senior unsecured notes exchanged their notes for $127.1 million principal amount of newly issued 8.00% second lien senior secured notes due 2025. As a result, $900.0 million in senior unsecured notes outstanding at March 31, 2020 was reduced by $254.2 million to $645.8 million. The debt exchange resulted in an overall reduction to the Company's total principal amount of notes outstanding by $127.1 million and lowered future interest expense.

Capital Structure and Liquidity

As of June 30, 2020, Centennial had $7.2 million in cash on hand and $370.0 million of borrowings under its revolving credit facility. During the quarter, the Company borrowed $135.0 million on its credit facility primarily due to changes in working capital associated with the slowdown in activity levels and lower commodity prices. At June 30, 2020 Centennial's total liquidity was $297.2 million, based on a $700.0 million borrowing base, the availability blocker of $31.8 million that was instituted to accommodate the new senior secured notes issued in connection with the debt exchange and $8.2 million in letters of credit outstanding, plus cash on hand. As of June 30, 2020, in addition to the revolver borrowings, the Company had $127.1 million of senior secured notes and $645.8 million of senior unsecured notes outstanding. The $135.0 million in credit facility borrowings for the quarter was largely offset by the debt exchange, resulting in only a $7.9 million increase in overall debt during the period.

Hedge Position

Centennial recently entered into additional oil hedges for the fourth quarter of 2020 in order to further protect against the potential future decline in oil prices. For the third quarter, the Company has 25,000 Bbls/d of oil hedged at a weighted average fixed price of $26.83 per barrel. For the fourth quarter, Centennial has 13,000 Bbls/d of oil hedged at a weighted average fixed price of $38.89 per barrel. Also for the fourth quarter, the Company has 2,000 Bbls/d of oil collars in place with a weighted average floor and ceiling price of $39.00 per barrel and $44.50 per barrel, respectively. In addition, Centennial has certain crude oil basis swaps and natural gas hedges for 2020. The Company has a minimal amount of oil and natural gas hedges in place for 2021 and expects to implement additional hedges for this period over time. (For a summary table of Centennial's derivative contracts as of July 31, 2020, please see the Appendix to this press release.)

"Going forward, we expect to become more systematic in regards to our hedging program, with the goal of limiting downside risk while preserving upside optionality," Smith said.

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