Centennial Resource Development, Inc. announced 2020 financial and operational results and 2021 operational plans and targets.
Financial and Operational Highlights
? Generated free cash flow and reduced total debt for the second consecutive quarter
? Reported 2020 production volumes, capital expenditures and total unit costs within full year guidance ranges
? Achieved record spud-to-total depth time for a two-mile lateral
? Increased year-over-year acreage position primarily through cost-free swaps and trades
2021 Financial and Operational Plan
? Expect to be free cash flow positive in 2021 using current strip pricing
? Anticipate significant reduction in leverage by year-end 2021
? Plan to operate two-rig drilling program
? Expect to average full year oil production consistent with fourth quarter 2020 levels
? Operational plan supported by structurally lower well costs and increased lateral lengths
Financial Results
For the full year, Centennial reported a net loss of $682.8 million, or $2.46 per diluted share, driven primarily by a non-cash impairment charge incurred during the first quarter in addition to historically low oil prices during a portion of the year as a result of the COVID-19 pandemic. Full year results compare to net income of $15.8 million, or $0.06 per diluted share, in the prior year. For the fourth quarter, the Company reported a net loss of $88.7 million, or $0.32 per diluted share, compared to net income of $9.6 million, or $0.03 per diluted share, in the prior year period. As a result of higher realized commodity prices and continued cost discipline, the Company generated net cash from operating activities of $41.1 million and free cash flow1 of $29.0 million in the fourth quarter of 2020.
Full year total equivalent production averaged 67,161 barrels of oil equivalent per day (“Boe/d”) compared to 76,072 Boe/d in the prior year. Average daily crude oil production during the full year was 36,084 barrels of oil per day (“Bbls/d”) compared to 42,692 Bbls/d in the prior year. For the fourth quarter, crude oil production averaged 30,196 Bbls/d, in-line with Company expectations as no new wells were placed on production during the quarter.
“We added a second rig in December and are excited to resume operational activity. Importantly, our team continues to drive higher efficiencies in the field which will remain a key focus for us in 2021,” said Sean R. Smith, Chief Executive Officer. “Coupled with current strip pricing, our reduced cost structure, lower well costs and shallower base decline rate set us up for free cash flow generation this year. We expect to organically de-lever the balance sheet and end the year in a stronger financial position.”
2021 Operational Plans and Targets
Centennial plans to operate a two-rig drilling program in 2021. Assuming planned activity levels and current commodity prices, the Company expects its full year average oil production to remain largely consistent with fourth quarter 2020 levels. During 2021, Centennial will continue to focus on managing its balance sheet and improving liquidity.
“Our capital plan will position Centennial to be free cash flow positive, while improving our leverage metrics during 2021,” said Smith. “Ultimately, we expect to end the year with a net debt-to-LTM EBITDAX2 ratio below 2.5x, assuming current strip pricing.”
The estimated fiscal year 2021 total capital budget is approximately $260 million to $310 million. Total drilling, completion and facilities (“DC&F”) costs are estimated to be $250 million to $290 million, of which essentially all is associated with operated activity. The Company’s capital budget is underpinned by a 33% reduction in well costs compared to year-end 2019. Lastly, Centennial has allocated approximately $10 million to $20 million to infrastructure, land and other capital expenditures.
During 2021, Centennial anticipates that approximately 70% of its completions will occur in Lea County, New Mexico, with the remaining portion allocated to its Reeves County, Texas position. Additionally, the Company expects its average completed lateral length for the full year to increase 17% to approximately 8,800 feet compared to the prior year, driving further capital efficiency improvements.
v
Recent Winter Weather Impacts
The severe winter weather which recently affected millions of Americans across Texas and other states also impacted Centennial's employees and operations. While the Company continues to assess developments in the field, Centennial recently regained full electric power to its operations and is in the process of placing wells back on production. As a result of these events and the expected timing of operational activity, Centennial expects its first quarter 2021 production levels to decline compared to the previous quarter. The Company expects a modestly increasing quarterly production profile for the remainder of the year.
“Our employees and their families’ well-being remain our top priority, and I would like to personally thank our team members in the field for their hard work and dedication over the past two weeks,” said Smith. “While the recent winter weather and associated power outages significantly impacted our operations, we now have the majority of our production back online and expect to restore the remaining portion by the end of this week.”
Fourth Quarter Operational Results
Centennial operated one drilling rig for a majority of the fourth quarter and added a second drilling rig and commenced completion activity in late December. The Company spud seven wells during the quarter, which was higher than anticipated due to drilling efficiencies.
“Our operations team continues to build upon the efficiencies gained last year. During the fourth quarter, we set a new Company drilling record, reaching spud-to-total depth on a two-mile lateral in just under eight days,” said Smith. “These reduced cycle times and structural cost reductions have driven a material reduction in well costs and are evidenced by our year-to-date 2021 completions, which consist of six wells with an average gross cost of approximately $790 per lateral foot.”
Additionally, Centennial has placed a heightened focus on reducing the volume of natural gas flared at its production locations. During the fourth quarter, Centennial’s flaring rate was 0.5% of total gross operated gas production. “Gas capture will continue to be an ongoing priority, and for 2021, we have set a flaring target of 1%,” said Smith.
Total capital expenditures incurred for the quarter were $29.9 million. Fourth quarter drilling and completion capital expenditures totaled $24.1 million and included higher activity than originally anticipated due to continued drilling efficiencies. The remaining $5.8 million was primarily spent on facilities and infrastructure. For the full year, total capital expenditures were $254.8 million, of which nearly 70% was incurred in the first quarter.
Acreage Position Update
In 2020, Centennial increased its acreage position by approximately 3,500 net acres primarily through cost-free acreage swaps and trades, further adding high-quality inventory to its portfolio. As of December 31, 2020, Centennial’s Delaware Basin position totaled 81,657 net acres, which is allocated between Texas (71%) and New Mexico (29%). During the year, the Company increased its New Mexico position by 27% to approximately 23,900 net acres. Notably, these additions were comprised almost entirely of state and fee acreage. As a result, the Company’s net acreage located on Federal lands is now approximately 4% of its overall Delaware Basin position, representing a slight reduction from the prior year.
Year-End 2020 Proved Reserves
Centennial reported year-end 2020 total proved reserves of 299 MMBoe compared to 301 MMBoe in the prior year. The modest decrease from the prior year was primarily attributable to lower SEC pricing, which was largely offset by the Company’s lower DC&F and operating costs that resulted in significant reserve additions during the year. At year-end 2020, proved reserves consisted of 50% oil, 30% natural gas and 20% natural gas liquids. Proved developed reserves were 149 MMBoe (50% of total proved reserves) as of December 31, 2020. For 2020, Centennial’s organic reserve replacement ratio was 91%. The Company’s 2020 proved developed finding and development cost totaled $11.48 per Boe. Centennial’s drill-bit finding and development cost was $13.53 per Boe for 2020. Centennial had a standardized measure of discounted future net cash flows of $1.2 billion at December 31, 2020. The present value at 10% (“PV 10%”, a non-GAAP financial measure reconciled within the Appendix) of Centennial’s total proved reserves was also $1.2 billion at year-end.
Netherland Sewell & Associates, Inc., an independent reserve engineering firm, prepared Centennial’s year-end reserves estimates as of December 31, 2020.
Capital Structure and Liquidity
During the quarter, the Company used a portion of its operating cash flow to pay down $25 million in borrowings under its credit facility. As of December 31, 2020, Centennial had approximately $6 million in cash on hand and $330 million of borrowings outstanding under its revolving credit facility. As a result, Centennial’s total liquidity position increased by approximately $25 million from the prior quarter to end the year at $340 million, which is based on its $700 million borrowing base, borrowings outstanding, the availability blocker of $32 million and $4 million in current letters of credit outstanding, plus cash on hand.
Hedge Position
For the full year 2021, Centennial has a total of 14,595 Bbls/d of oil hedged, consisting of approximately 85% fixed price swaps. For 2021, the Company currently has 9,734 Bbls/d and 2,870 Bbls/d of oil hedged at weighted average fixed prices of $43.70 per barrel WTI and $50.57 per barrel Brent, respectively. Also for 2021, the Company has 1,990 Bbls/d of WTI oil collars in place with a weighted average floor and ceiling price of $41.13 per barrel and $49.58 per barrel, respectively. Notably, a majority of the Company’s oil hedges is weighted towards the first half of 2021. Centennial’s oil production is currently unhedged in 2022 and beyond.
