Q1 2021 Centennial Resource Development Inc Earnings Call

Good morning, and welcome to Centennial Resource Development conference call to discuss its first quarter 'twenty 'twenty. One earnings today's call is being recorded a replay of the call will be accessible until may 12 for 2021 by dialing 8558592056.

And entering the conference I'd number 7578513 or by visiting Centennial's website at Www Dot C. P. E V. I N C. Dot com at this time I will turn the call over to Hays Mabry Centennial's director of Investor Relations for some of them.

If any remarks. Please go ahead sir.

Thank you for you and.

Thank you all for joining us on the company's first quarter earnings call for.

On the call today are of Sean Smith, our Chief Executive Officer.

George <unk>, our Chief Financial Officer.

And Matt garrison, our Chief operating officer.

Yesterday May force, we filed a form 8-K with an earnings release reporting first quarter earnings results for the company and operational results for our subsidiary Centennial resource production LLC.

We also posted an earnings presentation to our website that we will reference during today's call you can find the presentation on our website homepage or under presentations at Www Dot C that the ink dot com.

I would like to note. The many of the comments. During this earnings call are forward looking statements that involve risk and uncertainties.

Could affect our actual results and plans.

Many of these risks are beyond our control and are discussed in more detail in the risk factors and forward looking statements sections of our filings with the Securities and Exchange Commission.

Including our quarterly report on form 10-Q for the quarter ended March 31st.

Which will be filed with the SEC later this afternoon.

Although we believe the expectations expressed are based on reasonable assumptions. They are not guarantees of future performance and actual results or developments may differ materially.

We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers.

For any non-GAAP measure we use a reconciliation to the nearest corresponding GAAP measure can be found in our earnings presentation or earnings release, which are both available on our website.

With that I'll turn the call over to Sean Smith, our CEO.

Thank you Hey, good morning, and welcome to Centennial's first quarter earnings call.

This was another quarter of solid results and I'm extremely proud of our team's performance in the field, particularly in light of the challenging operating environment associated with winter storm here.

On today's call George will first discuss our quarterly financial results recent convertible note offering and capital structure that will then provide an operational update including recent initiatives and cost reductions and then I'll follow with capital efficiency and cost gains to date and provide a high level overview.

For the remainder of 2021 with that said I'll turn it over to George to review our financial results.

Thank you Sean I'll first review, our Q1 financial results and then discuss the March convertible notes offering and the benefits associated with the transaction.

Turning to our financials on slide 13 of the earnings presentation.

Net oil production for the first quarter averaged approximately 28240 barrels per day, which.

Which represents an approximate 6% decrease from Q4.

Average net equivalent production totaled approximately 54200 barrels per day, which was the 9% reduction from the fourth quarter.

One volumes were impacted by a lack of completion activity during the prior quarter as well as production downtime, resulting from winter storm Yuri.

We expect the Q1 levels will be a low point for the year as production rebounds in Q2.

While production declined quarter to quarter as expected.

Revenues increased significantly as a result of higher oil natural gas and NGL prices.

Revenues totaled $192 4 million, which was 30% higher than Q4.

Realized oil prices of $52 62 per barrel were approximately $12 per barrel higher than Q4.

And drove a 19% increase in oil revenues.

The realized NGL prices of $29 78 per barrel for nearly 70% higher than the prior quarter and finally natural gas revenues essentially doubled despite a 7% production decline coming in at $35 5 million compared to approximately $18 million during Q4 two.

The one gas realizations of $3 79 per Mcf were heavily impacted by higher pricing during the month of February due to colder temperatures associated with the winter storm.

Shifting to costs all unit costs for the quarter were impacted by lower total equivalent production and we expect to see notable improvements beginning in the second quarter.

LOE per barrel increased by 11% from Q4 to $5 30 per barrel, primarily due to production levels and higher electricity costs caused by the winter storm.

Even with approximately $2 million of incremental storm related costs notional low was actually essentially flat quarter to quarter at approximately $26 million.

Excluding these one time costs low was $4 of 93 per Boe.

Cash G&A on a notional basis was down modestly to $10 6 million, resulting in $2 18 per barrel for the quarter.

G P and T was $4 23 per barrel compared to $3 27 in Q4.

Because of our percentage of proceeds processing contracts are mainly tied to gas prices, which increased dramatically as I described earlier.

Lastly, DD&A decreased 4% quarter to quarter to $13.08 per barrel as a result result of lower finding costs and upward revisions to PDP and Pud reserves.

In Q1, we recorded a GAAP net loss attributable to our common stock of $34 6 million adjusted.

Adjusted EBITDAX totaled approximately $100 million up from $79 million in Q4 due to higher commodity prices.

And lastly, even with the resumption of drilling and completion activity that drove capex significantly higher we generated $10 6 million in free cash flow during the quarter.

Shifting to Capex centennial incurred approximately $73 million of total capital expenditures compared to $30 million in Q4.

We ran two rigs and one completion crew, which drove nine wells spud and 11 completions compared to essentially one rig seven wells spud in zero of completions during Q4.

Of the $73 million incurred approximately 97% was related to drilling completions and facilities.

Infrastructure and land capital totaled $2 3 million for the quarter.

It's worth mentioning that the vast majority of the company's infrastructure spending to support full field development was incurred during 2018 and 2019 and we don't anticipate any significant infrastructure spending going forward.

On slide eight we outline the key terms and corporate finance benefits of the convertible notes offering that was priced on March 16th.

Given that we had a one year window from issuance to redeem the $127 million second lien note at par. We are very pleased to have been able to access the capital markets to do so.

After the exercise of the Green shoe the company raised $170 million of seven year, 3.25% senior unsecured convertible notes, which generated net proceeds of approximately of $164 million.

The conversion premium was 30, 30%, resulting in a conversion price of $6 28 per share and importantly, the notes can be settled in cash stock or a combination thereof at the company's discretion.

The significant portion of the offering proceeds were utilized to redeem the second lien note in April and we also repaid approximately $18 million of credit facility borrowings.

Additionally, we utilized a portion of the proceeds to purchase a capped call, which synthetically increased the new note's conversion price to $8 45 per share to minimize the potential future dilution.

Overall, we're very happy with the offering and I wanted to highlight several key benefits to the company for.

First as illustrated on slide 10, we strengthened our maturity profile of our redeeming our 2025 note with the 2028 maturity.

This result results in our first senior unsecured note maturity occurring in early 2026.

Second as shown on slide eight we reduced cash interest cost by approximately $4 7 million per year because of the second lien notes carried an 8% coupon compared to three of the quarter percent coupon on the new convert.

Third by redeeming the second lien note, we removed some secured debt from our capital structure, which is a positive for our bank lenders and finally, we significantly increase liquidity because of the second lien redemption eliminated the $31 $8 million.

<unk> blocker that had restricted access to our full borrowing base and a portion of the offering proceeds reduced credit facility borrowings.

On slide nine we summarize our capital structure and liquidity position at March 31.

You will notice that we present, the 331 balance sheet in two ways first we show the actuals as they appear in our 10-Q filing with both the new convertible note as well as the second lien notes still outstanding However, because we redeemed the second lien note. After the quarter ended we also show of pro forma column that is.

<unk> of that April redemption.

Beginning with liquidity subsequent to the end of the quarter, our $700 million borrowing base was reaffirmed as of March 31, and pro forma for the second lien note redemption, we had approximately $291 million of credit facility borrowings approximately $11 million of cash and $4 3 million of outstanding letters of credit.

This results in total pro forma liquidity of approximately $415 million and represents a $75 million increase from year end.

Turning to credit Statistics, you may recall on our last earnings call.

That I introduced the net debt to last quarter annualized or L. QA EBIT tax calculation.

As an additional measure of centennial's leverage that we believe is more reflective of the current state of the company's credit profile, given our lower production base lower cost structure and recent product commodity price environment.

At March 31, Centennial's net debt to LTM EBITDAX metric was two seven times compared to three five times at year end as illustrated in the Red dotted box in the table on the right side of slide nine.

Additionally, as shown on the Bar chart on the bottom left of that slide Centennial's net debt to last 12 months EBITDAX was four three times at March 31, and.

And we expect to end the year well below two five times with our two rig program and assuming current strip prices.

Finally, I find it remarkable that.

After over a year of significant economic commodity price and the financial market dislocations.

We have repositioned centennial as the free cash flow generating entity with strong liquidity and a solid organic deleveraging path. It has taken a lot of focus and hard work in both the field and the corporate office and I wanted to take the opportunity to thank our employees for their efforts with that I will turn the call over to Matt to review operations.

Thank you George as.

As everyone is aware winter storm Yuri created some challenges in the field for operations across the Permian Basin.

While George touched on the impacts of the storm from a financial standpoint, I will touch on some of the notable highlights from the field.

All told we experienced minimal operational delays from the weather prior to the storm our team pre staged diesel fuel on our drilling sites empty tank batteries and prepared to the best of our ability for the coming storm.

Because of this we were able to maintain drilling operations for most of the weather related events.

Incurring only two to three days of delay in our D&C operations.

This is a testament to our team's resiliency and work ethic.

Moving on now for the quarter, we operated the two rig program with one Frac fleet.

Our engineers have been very focused on material improvements in our drilling completions and facilities costs and I'm happy to provide some color on that work today.

As you can see on slide six we reduced our spud to rig release times by 11% year over year to $17 three days, while increasing our average lateral length for the same period by 17%.

Our new three string casing program in Reeves County has been working very well and is the backbone for our cost reductions and Texas.

Our completions team has continued to drive efficiencies in their program, averaging seven stages, a day, while still pumping very large high density jobs in excess of 2000 pounds per foot.

As a result of these initiatives are well costs averaged $795 per lateral foot for the quarter just below the midpoint of our cost guidance range of 750 to $850 per lateral foot and.

And the material, 40% reduction from our 2019 numbers.

Additionally, we took the opportunity to upgrade our rig fleet to walking rigs, which we believe will further improve our cycle times.

We will remain focused on driving further efficiencies in our program.

And look forward to continuing to raise the bar <unk>.

Additionally, our facilities group has continued to focus on new designs.

Materially reduce our costs for multi well pads on.

While upholding our high quality.

The standards for for air emissions for.

For a multi well pad with the central tank battery our facility cost per well has decreased by roughly 30%.

We believe these costs since they can largely be attributable to the design of the facility are more structural in nature and are pleased with the overall reductions in cost.

Under Sean's leadership, the culture of ESG has taken hold across the entire company.

In Q1, we released our inaugural corporate sustainability report and we are very proud of it.

Employees at Centennial have taken ownership of the ESG initiatives and have worked collaboratively across multiple disciplines to bring this project across the finish line.

As a company, we strive to capture 99% or more of our produced gas volumes. Despite the weather challenges during the quarter I'm happy to report that we achieved that goal in Q1 and will remain focused on minimizing our flaring going forward.

Drilling one step further we've taken a hard look at areas that historically had been problematic and have sought additional gas takeaway options, thereby ensuring that we are doing all we can to improve gas capture field wide.

Additionally, both of our drilling rigs are equipped with the dual fuel capability.

This materially reduces emissions from the rig and positively impacts our cost structure.

Also in Q1, we began converting our frac fleet over the dual fuel as well by the end of May we expect to have 100% of our Frac fleet utilizing dual fuel.

We expect to see these reductions from both an emissions and the cost standpoint.

As the drilling and completion of the group's fully integrate <unk> into our program in.

In closing we are excited about our progress to date regarding our costs and efficiencies and we'll continue to look for ways to further drive these efficiencies in the program.

Now I'll turn it over to Sean for wrap up and closing remarks.

Thank you Matt.

Before we discuss our outlook for the remainder of the year I feel its important to recap some of our recent accomplishments as can be seen on slide five.

Last August I laid out of roadmap with certain goals associated with heightened capital efficiency and free cash flow generation spin.

Specifically these goals related to driving D&C structural improvements and efficiencies improving cash margins through low optimization and corporate cost control and proactively managing our balance sheet and liquidity.

Over a relatively short amount of time I am pleased to say that our team continues to meet or exceed all of the goals laid out last year.

Through higher efficiencies and design changes, we have lowered our year over year, well cost by almost 20%. Additionally, we've stripped out roughly $9 million of quarterly low compared to last year, primarily as a result of our electric substation and transition the gas lift.

The lowered cost and solid well results have positioned the company to have substantial sustainable free cash flow.

Through our recent convertible notes offering we reduced annual interest expense and increased liquidity.

While extending our debt maturity profile.

In essence, all of these actions and the attributes are the hallmarks of Centennial 2.0, and has helped transition centennial two of sustainable free cash flow generating company as evidenced by the past three quarters.

As a result of these operational and financial improvements our game plan for the remainder of the year is quite simple first we remain committed to our two rig program for 2021.

Having turned to this level of operations at the beginning of this year, we have now stabilized our production base and we will continue the efficient development of our acreage position, which will be underpinned by multi well pad co development with extended laterals.

We expect this to provide us with the steady base to continue our free cash flow generation, allowing us to further pay down debt and de lever organically.

More specifically, we anticipate a rather material reduction to our leverage ending the year well below two five times net debt to LTM EBITDAX, assuming current strip pricing.

Lastly, we will continue to evaluate potential opportunities to gain size and scale and further delever, but only if they are accretive to our financial metrics.

In closing on slide 11, we continue to have high quality assets and the Premier U S oil basin and an extremely capable of technical team. We look forward to continuing to execute on our game plan and building upon our improvements demonstrated over the past few quarters. Thanks for listening and now we'll go to Q&A.

Thank you the question and answer session will be conducted electronically. If you would like to ask a question. Please do so by pressing the star and the number one on your telephone keypad questions are limited to one question and one follow up question. If you would like to withdraw your question press the pound key and again, ladies and gentlemen that star one for any question.

Over the phone line.

For just a moment.

And your first question will come from Neal Dingmann with Jewish Securities. Please go ahead.

Good morning, I'll take for all of the details some of maybe my first question is just you guys continue to bring down your D. Do you see enough cost very nicely and I'm. Just wondering could you talk a bit about this let me specifically I'm just wondering what your primary of tribute to you to some of these improvements and you know why I asked that as well.

The others have done this but it's been done through smaller frac jobs, and Gil and the like so I'd just like the hear more on your details sure.

Sure in fact, I'll actually have Matt garrison tackle that he's been the champion for pushing down our D&C cost and increasing our efficiency. So maybe on that one should talk a little bit about how we're doing that share yeah.

Neil we've been really focused on.

Focusing on our flat time, and that's like one of the main things our guys have been.

Evaluating every element of our drilling profiles, we've actually in addition to the casing program.

With fewer strings of pipe in the hole. We've also been able to change some things with regard to bit size bit selection, we've gone very very far down that hole on.

On the drilling side on the completion side you know, it's just a it's just a steady continued effort to reduce our nonproductive time and to make sure that we've got good contracts in place for.

For sand pricing and and have all of the pieces. There for continued continued pressure downward on the on the cost side. So it's really it's a function of the team itself has a lot of our people are really just aggressively chasing after all of that flat time and all of them.

Little opportunities to do things, a little bit better and faster than we did before so I hope that kind of helps you.

No the great details and then just lastly, I don't know if you have too much going on but I'm, just wondering any thoughts on activity up and not the only area of Lea County area.

Well I mean, as we talked about before we plan to spend about 70% of our capital of this year in Lee.

And the remainder in Texas and part of that is just a function of timing or Texas asset. It is a bit more mature we had to spend some dollars last year of the previous two years getting iron of Mexico position up and running from the infrastructure perspective now all of that's in place and we feel like it's the right time to accelerate in the Mexico. So we're gonna MP.

The size of that a bit more of this year.

Very good thanks, guys. Thanks.

Thanks Neil.

The next question will come from Leo Mariani with Keybanc. Please go ahead.

Yeah, Hey, guys I wanted to just ask a quick one here on kind of production cadence for the year now there were significant downtime and the per.

This quarter I was hoping you guys could maybe quantify that and I guess I would expect the production with kind of move up quite a bit on second quarter, what the eliminated but then just kind of looking to the rest of the year are you expecting kind of some modest growth just appears to me high level, the kind of get to the midpoint of guide you kind of have to have a little bit of growth in the second half can you maybe speak to all of that.

Sure I'll I'll touch on that and see if I can cover that question Leo and then if we need to follow up we can but obviously the of the winter storm certainly impacted production. We did expect Q1 to be down to Q4, that's how we modeled it based on the timing of our rig activity as we mentioned we started.

The second rig up in December of last year, but it takes time to drill a pad and get those wells brought on line so fully expected.

Decrease in production Q over Q related to just timing of additional activity and then on top of that we had a winter storm here, which as Matt outlined we did a great job of minimizing that downtime, but a portion of that lower production was due to that.

If you think about how much we were down Q over Q of about half of that or so was due to the winter storm and the other half was.

Just normal decline based on our activity levels.

Okay. That's helpful for sure on.

And I guess, maybe just high level question for you guys here.

So for some broken the COVID-19 program.

Without the need for 'twenty one.

Maybe a little bit longer time, which is the need is high commodity prices with oil prices that you know in the.

These are all of them kind of look maybe it's the <unk>, which could be just the much more balanced market is okay.

The likelihood of kind of run a lot of their volumes back on I have so much of their capacity.

The year or would you potentially could put a little bit more growth of the business on maybe helps them of that on what did you kind of drive EBITDA all of that's true.

Sure and let me touch on the second portion of your first question because it ties into that as well you mentioned production cadence for the balance of the year Q1, as George mentioned in his portion will be our lowest producing quarter for the year.

We have reemphasize the midpoint of guidance for the year, which suggest a pretty material increase into Q2 from Q1 I would say as we are live in looking at well data.

Cited about what's coming up in the next quarter and quarters, So I think for.

Feel comfortable with our production going forward. If that's helpful relative to our activity for next year, obviously, you can't give too many forward looking comments, but I think we are very focused on generating free cash flow, even in a slightly elevated commodity price environment and so.

Bye bye keeping with our current two rig plan for this year, we think we're going to generate I think we'd previous released something in the order of $55 million to $75 million of free cash flow now, we think we're going to generate.

The substantially more than $100 million of free cash flow. This year based on current commodity prices. So.

Just a two rig program allows us to generate material free cash flow and the use of proceeds there is to pay down debt and organically delever. So feel good about the game plan for this year I, you know I'm not going to give too much a look ahead into 2022, we'll see how how the world looks thin, but feel good about how we're day.

Levering the company organically.

Okay. Thank you.

Thanks Neil.

And once again, if you would like to ask a question. Please press star followed by the number one on your telephone keypad now again Thats star one for any questions on pause for just a moment.

We do have a response from Chris <unk> with RBC capital markets. Please go ahead.

Hi, yes. Thank you.

You you commented a day your target for this year for luggage reductions of about 2.5 times and then long term, it's a one five times.

I guess that reduction kind of the only use of free cash flow for the foreseeable future I guess kind of a you know.

What target leverage level would you like to get to before you maybe do consider I guess increasing activity.

Sure Yeah I appreciate the question, Chris and I think you know as commodity prices have held in there and our efficiencies have continued to improve even.

Since the quarter I think that our deleveraging number is as we put in our prepared remarks is going to be well below two five times by year end based on current prices current strip prices. So feel good that we're heading in the right direction there organically.

The next phase of that we stated that we'd like to get below kind of one five times as we get towards the end of of 2022, and then sub blood times as we get into 2023. So that's what we're targeting so use of proceeds is the is for debt reduction and to lower our leverage right now.

We will be targeting some of those lower leverage metrics before we talk about.

Gross or or or distributions or anything like that so the the use of proceeds right now is really all towards the balance sheet.

Great. Thank you and then I guess just kind of following up on Neil's question from earlier.

In regards to D&C costs and efficiencies you recently upgraded to the needs walking rigs.

You mentioned that it's improving some cycle times can you kind of comment here on I guess on where you see well costs may be progressing or going through the balance of the year end and any I guess the additional operational benefits that you think the.

The upgrade to the walking rigs.

Uh huh.

Sure I'll go ahead and take that one there those those walking rigs.

They really allow us to do is move around on the pad a lot faster. So if we have of multi well pad.

Two to three to four wells per pad.

The increased mobility of that rig the allows us to just cut down on the amount of time.

Spent between moving from one one rig to another also like in oil.

In terms of just transporting it from one pad site to another as I move around not just on the pad, but the field.

It Mobilizes and demobilize as generally a lot faster than our historical wells and we estimate.

Somewhere around a day or so of time savings per.

Her well on.

On on those kinds of infield mobilization and demobilization and you know if everything is build on hourly and day rates you know those kinds of savings really add up and that allows you to really kind of trimmed things down but it also allows us to do is run simultaneous operations. While we are moving to the next well to continue drilling we're focusing on <unk>.

<unk> net flat time, we can be performing operations staging the next the previous well for the next stage of the job. So we're allowed to be working kind of simultaneous operations instead of in the past we had to wait for the rig to get out of the way before we could actually start something we can really kind of work more science same ops are at.

The drilling level in the field. So that's that's where we really anticipate seeing the savings as that plays out, particularly the with multi well pads.

It's kind of a compounding effect of continued savings.

Great that's very helpful. Thanks.

And once again, if you would like to ask a question. Please press star one again Thats star one for any questions over the phone line well pause for just for a moment.

And again, ladies and gentlemen that star one for any questions.

Okay, and I'm showing no questions at this time I would like to turn the conference over to Sean Smith for any closing comments.

I just wanted to thank everyone for listening to today's call hopefully what you heard out of met in Georgia myself was the we're very pleased with our Q1 performance I think across the board of our numbers are very solid I think we're all very excited for what's coming ahead in the second quarter and beyond and look forward to report.

Back on that so if there are follow up questions. I think of information has been provided the please reach out to us and we'll answer any questions that may come up in the future I appreciate your time everyone.

Ladies and gentlemen, thank you for participating on today's conference call. You may all disconnect at this time.

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