PRER14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  ☒

Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

Preliminary Proxy Statement

 

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

Definitive Proxy Statement

 

Definitive Additional Materials

 

Soliciting Material under Rule 14a-12

 

LOGO

CENTENNIAL RESOURCE DEVELOPMENT, INC.

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check all boxes that apply):

 

No fee required

 

Fee paid previously with preliminary materials

 

Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a-6(i)(1) and 0-11

 

 

 


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PRELIMINARY PROXY STATEMENT

SUBJECT TO COMPLETION DATED JULY 12, 2022

Notice of Special Meeting of Shareholders

            , 2022

To our Shareholders:

You are cordially invited to attend a special meeting of shareholders (the “Special Meeting”) of Centennial Resource Development, Inc. (“Centennial,” “we,” “us” or “our”), which will be held on                 , 2022 at                  Mountain Time at                 . Although we are currently planning to hold the Special Meeting in person, we are actively monitoring the health and safety concerns and government restrictions and recommendations relating to the COVID-19 pandemic. In the event it is not possible or advisable to hold the Special Meeting in person, we will announce alternative arrangements for the Special Meeting as promptly as practicable, which may include holding a virtual-only or hybrid Special Meeting rather than an in-person Special Meeting. If we take this step, details on how to participate will be issued by press release, posted on our website and filed with the Securities and Exchange Commission (the “SEC”) as additional proxy material. If the Special Meeting occurs in person, health and safety protocols will be followed, and attendees will be required to comply with any then-applicable governmental or facility requirements or recommendations, which we will outline on our website in advance of the meeting date. Therefore, if you are planning to attend our Special Meeting, please monitor our website prior to the meeting date.

On May 19, 2022, we entered into a Business Combination Agreement (the “Business Combination Agreement”) with Centennial Resource Production, LLC (“CRP”), a wholly-owned subsidiary of ours, Colgate Energy Partners III, LLC (“Colgate”), and, solely for purposes of the specified provisions therein, Colgate Energy Partners III MidCo, LLC (the “Colgate Unitholder”), pursuant to which, subject to the satisfaction or waiver of certain conditions in the Business Combination Agreement, CRP will merge with and into Colgate (the “Merger”), with CRP surviving the Merger (the “Surviving Company”) and continuing as a subsidiary of Centennial.

Pursuant to the terms of the Business Combination Agreement and subject to the conditions therein, at the effective time of the Merger (the “Effective Time”), (a) all membership interests of CRP, issued and outstanding immediately prior to the Effective Time, will be converted into a number of validly issued, fully paid and nonassessable (except as limited by the Delaware Limited Liability Company Act) units in the Surviving Company (“Surviving Company Units”) equal to the number of shares of our Class A common stock, par value $0.0001 per share (“Class A Common Stock”), that are outstanding immediately after the Effective Time after giving effect to the transactions contemplated by the Business Combination Agreement, including the Merger (the “Transactions”) and Centennial will remain as the manager of the Surviving Company, and (b) all of the Colgate Unitholder’s sole membership interest in Colgate will be exchanged for 269,300,000 shares of our Class C common stock, par value $0.0001 per share (“Class C Common Stock” and, together with the Class A Common Stock, “Common Stock”) (the “Centennial Stock Consideration”), 269,300,000 additional Surviving Company Units (the “Surviving Company Unit Consideration” and, together with the Centennial Stock Consideration, the “Share Consideration”) and $525,000,000 (the “Cash Consideration,” and, together with the Share Consideration, the “Merger Consideration”). At the closing of the Transactions (the “Closing”), the Merger Consideration may be adjusted downward pursuant to customary title and environmental defect considerations set forth in the Business Combination Agreement.

The Merger is structured to utilize an “Up-C” structure. The Colgate Unitholder will own Surviving Company Units, which are economic and voting limited liability company interests in the Surviving Company, and corresponding Class C Common Stock in us, which has voting (but no economic) rights. We will continue to be the sole managing member of the Surviving Company, will be responsible for all operational, management and administrative decisions relating to the Surviving Company’s business and will consolidate the financial results of the Surviving Company and its subsidiaries.


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As a result of these transactions, (a) our current shareholders will own 100% of our outstanding Class A Common Stock and approximately 51% of our total outstanding Class A Common Stock and Class C Common Stock taken together (or approximately 53% on a fully diluted basis), (b) we will own approximately 51% of the Surviving Company, and (c) the Colgate Unitholder will own approximately 49% of the Surviving Company, 100% of our outstanding Class C Common Stock and approximately 49% of our total outstanding Class A Common Stock and Class C Common Stock taken together (or approximately 47% on a fully diluted basis).

Our Class A Common Stock is listed on Nasdaq under the ticker symbol “CDEV.” As a result, we are subject to Rule 5635(a) of the Nasdaq Stock Market Rules (“Rule 5635(a)”), pursuant to which shareholder approval is required prior to the issuance of securities in connection with certain acquisitions of stock or assets of another company where the issuance equals 20% or more of the common stock or voting power outstanding before such issuance. We expect that the shares of Class C Common Stock to be issued to the Colgate Unitholder pursuant to the Business Combination Agreement will represent approximately 49% of our outstanding Common Stock upon issuance (or approximately 47% on a fully diluted basis).

Accordingly, we are holding the Special Meeting for shareholders to consider and vote upon the following:

 

  1.

a proposal to approve, for purposes of complying with Rule 5635(a), the issuance of the Centennial Stock Consideration pursuant to the Business Combination Agreement, a copy of which is attached to this proxy statement as Annex A (the “Stock Issuance Proposal”);

 

  2.

separate proposals to approve and adopt the proposed Fourth Amended and Restated Certificate of Incorporation of Centennial Resource Development, Inc. (the “Proposed Charter”) in the form attached hereto as Annex B, as follows: (i) a proposal to increase the authorized number of shares of (A) Class A common stock for issuance from 600,000,000 to 1,000,000,000 and (B) Class C common stock for issuance from 20,000,000 to 500,000,000 (“Charter Proposal A”); (ii) a proposal to allow shareholders of the Company to act by written consent, subject to certain limitations (“Charter Proposal B”); (iii) a proposal to designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for substantially all actions and proceedings that may be initiated by shareholders (“Charter Proposal C”); and (iv) a proposal to approve and adopt the Proposed Charter (“Charter Proposal D,” and, together with Charter Proposal A, Charter Proposal B and Charter Proposal C, the “A&R Charter Proposals”);

 

  3.

a proposal to approve, on an advisory, non-binding basis, specified compensation that may be received by our named executive officers in connection with the Merger (the “Merger Compensation Proposal”); and

 

  4.

a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Stock Issuance Proposal and the A&R Charter Proposals (the “Adjournment Proposal”).

These items are fully described in the proxy statement, which is part of this notice.

All shareholders of record as of                 , 2022, the record date for the Special Meeting (the “Record Date”), are entitled to vote at the Special Meeting.

We are providing the accompanying proxy statement and accompanying proxy card to our shareholders in connection with the solicitation of proxies to be voted at the Special Meeting (including following any adjournments or postponements of the Special Meeting). Information about the Special Meeting, the Transactions and other related business to be considered by our shareholders at the Special Meeting is included in this proxy statement. Whether or not you plan to attend the Special Meeting, we urge all shareholders to read this proxy statement, including the annexes and the accompanying financial statements of Colgate and the pro forma financial information included herein, carefully and in their entirety. In particular, we urge you to read carefully the section entitled “Risk Factors” in this proxy statement.

After careful consideration, our Board of Directors (the “Board”) has unanimously approved the Business Combination Agreement and the transactions contemplated therein, including the issuance of the Merger Consideration to the Colgate Unitholder and the adoption of the Proposed Charter, and unanimously recommends


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that our shareholders vote “FOR” the approval of the Stock Issuance Proposal, the A&R Charter Proposals, the Merger Compensation Proposal and the Adjournment Proposal. When you consider the Board’s recommendation of these proposals, you should keep in mind that our directors and officers have interests in the Transactions that may conflict with your interests as a shareholder. Please see the section entitled “Proposal 1—The Stock Issuance Proposal—Interests of Centennial’s Directors and Executive Officers in the Transactions” for additional information.

The Stock Issuance Proposal, the Merger Compensation Proposal and the Adjournment Proposal each require the affirmative vote of a majority of the votes cast by holders of outstanding shares of our Class A Common Stock present in person or represented by proxy, assuming a quorum is present. The A&R Charter Proposals require the affirmative vote of the holders of a majority of our shares of Class A Common Stock outstanding on the Record Date.

Your vote is very important. Whether or not you plan to attend the Special Meeting, please vote as soon as possible by following the instructions in this proxy statement to make sure that your shares are represented at the Special Meeting. If you hold your shares in “street name” through a bank, broker or other nominee, you will need to follow the instructions provided to you by your bank, broker or other nominee to ensure that your shares are represented and voted at the Special Meeting. The Transactions will be consummated only if the Stock Issuance Proposal and the A&R Charter Proposals are approved at the Special Meeting. It is important for you to note that if any of the Stock Issuance Proposal or the A&R Charter Proposals does not receive the requisite vote for approval, we will not be able to consummate the Transactions. The Merger Compensation Proposal and the Adjournment Proposal are not conditioned on the approval of any other proposal set forth in this proxy statement and no proposal is conditioned on the approval of the Merger Compensation Proposal and the Adjournment Proposal.

If you sign, date and return your proxy card without indicating how you wish to vote, your proxy will be voted “FOR” each of the proposals presented at the Special Meeting. If you fail to return your proxy card or fail to instruct your bank, broker or other nominee how to vote, and do not attend the Special Meeting virtually, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the Special Meeting. In addition, your failure to vote by proxy or to vote in person at the Special Meeting (or failure to instruct your bank, broker or other nominee how to vote) will have the same effect as a vote “AGAINST” the A&R Charter Proposals.

Your vote is very important. Whether or not you expect to attend the Special Meeting, please vote as soon as possible to ensure that your shares are represented at the Special Meeting.

 

By Order of the Board of Directors
Davis O. O’Connor

EVP, General Counsel and Secretary

YOUR VOTE IS IMPORTANT.

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,

PLEASE SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD.


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SUMMARY TERM SHEET

     1  

FREQUENTLY USED TERMS

     4  

QUESTIONS AND ANSWERS ABOUT THE PROPOSALS FOR SHAREHOLDERS

     5  

PROXY STATEMENT SUMMARY

     16  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     24  

RISK FACTORS

     25  

Risks Relating to the Transactions

     25  

Risks Relating to Our Business

     34  

Risks Relating to Colgate’s Business

     34  

PROPOSAL 1: STOCK ISSUANCE PROPOSAL

     62  

Overview

     62  

The Business Combination Agreement

     62  

Related Agreements

     77  

Why We Need Shareholder Approval

     106  

Effect of Proposal on Current Shareholder

     106  

Vote Required for Approval

     107  

Recommendation of Our Board

     107  

PROPOSAL 2: A&R CHARTER PROPOSAL

     108  

Overview

     108  

Vote Required for Approval

     111  

Recommendation of Our Board

     112  

PROPOSAL 3: MERGER COMPENSATION PROPOSAL

     113  

Overview

     113  

Vote Required for Approval

     113  

Recommendation of Our Board

     113  

PROPOSAL 4: ADJOURNMENT PROPOSAL

     114  

Overview

     114  

Consequences if the Adjournment Proposal is Not Approved

     114  

Vote Required for Approval

     114  

Recommendation of Our Board

     114  

INFORMATION ABOUT CENTENNIAL

     115  

Overview

     115  

Description of our Properties

     115  

Competition

     115  

Transportation

     116  

Regulation of the Oil and Natural Gas Industry

     116  

Human Capital Resources

     117  

Offices

     117  

Available Information

     117  

INFORMATION ABOUT COLGATE

     118  

Overview

     118  

Operations

     121  

COLGATE MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     125  

MANAGEMENT AFTER THE TRANSACTIONS

     147  

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

     150  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     163  

APPRAISAL RIGHTS

     166  

HOUSEHOLDING INFORMATION

     167  

TRANSFER AGENT AND REGISTRAR

     168  

SUBMISSION OF SHAREHOLDER PROPOSALS

     169  

OTHER MATTERS

     170  

WHERE YOU CAN FIND ADDITIONAL INFORMATION; INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

     171  

INDEX TO CONSOLIDATED FINANCIAL INFORMATION

     F-1  

ANNEX A: Agreement and Plan of Merger

     A-1  

ANNEX B: Fourth Amended and Restated Certificate of Incorporation of Centennial Resource Development, Inc.

     B-1  

ANNEX C: Sixth Amended and Restated Limited Liability Company Agreement of the Surviving Company

     C-1  

ANNEX D: Registration Rights Agreement

     D-1  

ANNEX E: Voting and Support Agreement

     E-1  

ANNEX F: Opinion of Centennial’s Financial Advisor

     F-1  
 


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SUMMARY TERM SHEET

This summary term sheet highlights information contained elsewhere in this proxy statement. This summary term sheet does not contain all of the information you should consider before voting. You should read carefully this entire proxy statement, including the attached annexes, for a more complete understanding of the matters to be considered at the Special Meeting (as defined herein).

This proxy statement includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Please refer to the sections entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in this proxy statement for a description of the substantial risks and uncertainties related to any forward-looking statements that are included in this proxy statement.

All references in this proxy statement to “we,” “our,” “us,” “Centennial” or the “Company” refer to Centennial Resource Development, Inc. and its subsidiaries.

Our board of directors (the “Board”) is soliciting the enclosed proxy for use at the special meeting of shareholders (the “Special Meeting”) to be held on                 , 2022 at                 Mountain Time at                 , and at any adjournments or postponements of the Special Meeting, for the purposes set forth in the notice of Special Meeting. Although we are currently planning to hold the Special Meeting in person, we are actively monitoring the health and safety concerns and government restrictions and recommendations relating to the COVID-19 pandemic. In the event it is not possible or advisable to hold the Special Meeting in person, we will announce alternative arrangements for the Special Meeting as promptly as practicable, which may include holding a virtual-only or hybrid Special Meeting rather than an in-person Special Meeting. If we take this step, details on how to participate will be issued by press release, posted on our website and filed with the SEC as additional proxy material. If the Special Meeting occurs in person, health and safety protocols will be followed, and attendees will be required to comply with any then-applicable governmental or facility requirements or recommendations, which we will outline on our website in advance of the meeting date. Therefore, if you are planning to attend our Special Meeting, please monitor our website prior to the meeting date.

We are holding the Special Meeting for shareholders to consider and vote upon the following:

 

  1.

a proposal to approve, for purposes of complying with Rule 5635(a), the issuance of shares of Centennial Class C common stock in connection with the Transactions that equal more than 20% of the issued and outstanding Common Stock (the “Stock Issuance Proposal”);

 

  2.

separate proposals to approve and adopt the proposed Fourth Amended and Restated Certificate of Incorporation of Centennial Resource Development, Inc. (the “Proposed Charter”) in the form attached hereto as Annex B, as follows: (i) a proposal to increase the authorized number of shares of (A) Class A common stock for issuance from 600,000,000 to 1,000,000,000 and (B) Class C common stock for issuance from 20,000,000 to 500,000,000 (“Charter Proposal A”); (ii) a proposal to allow shareholders of the Company to act by written consent, subject to certain limitations (“Charter Proposal B”); (iii) a proposal to designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for substantially all actions and proceedings that may be initiated by shareholders (“Charter Proposal C”); and (iv) a proposal to approve and adopt the Proposed Charter (“Charter Proposal D,” and, together with Charter Proposal A, Charter Proposal B and Charter Proposal C, the “A&R Charter Proposals”);

 

  3.

a proposal to approve, on an advisory, non-binding, basis specified compensation that may be received by our named executive officers in connection with the Merger (the “Merger Compensation Proposal”); and

 

  4.

a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal (the “Adjournment Proposal”).

 

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Centennial is an independent oil and natural gas company focused on the development of crude oil and associated liquids-rich natural gas reserves in the Permian Basin. Our assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin. Our capital programs are focused on projects that we believe provide the highest return on capital. Our principal business objective is to increase shareholder value by efficiently developing our oil and natural gas assets in the Delaware Basin in an environmentally and socially responsible way. We intend to drive disciplined free cash flow growth through an increased focus on optimizing drilling and completion results, by drilling extended laterals, and by managing our costs, with an overall objective of improving our rates of return and generating sustainable free cash flow. We believe that the successful execution of these objectives will allow us to fund our drilling and development capex entirely from cash flows from operations, to lower our leverage profile and to return capital to our shareholders. We also look for opportunities to accretively increase scale and grow production and reserves through selective acquisitions that meet our strategic and financial objectives. For more information about us, please see the section entitled “Information About Centennial.”

Colgate Energy Partners III, LLC (“Colgate”) is an independent oil and natural gas company headquartered in Midland, Texas focused on generating robust equity returns through the responsible acquisition, optimization and development of oil and liquids-rich natural gas assets. Colgate’s operations are focused in the core of the Delaware Basin. Colgate’s assets are concentrated in Reeves, Ward and Eddy Counties, consisting of approximately 102,000 net leasehold acres and 25,000 net royalty acres as of March 31, 2022. For information about Colgate, please see the section entitled “Information About Colgate.”

On May 19, 2022, we entered into a Business Combination Agreement (the “Business Combination Agreement”) with Centennial Resource Production, LLC (“CRP”), Colgate and, solely for purposes of the specified provisions therein, Colgate Energy Partners III MidCo, LLC (the “Colgate Unitholder”), pursuant to which, subject to the satisfaction or waiver of certain conditions in the Business Combination Agreement, CRP will merge with and into Colgate (the “Merger” and, together with the other transactions contemplated by the Business Combination Agreement, the “Transactions”), with CRP surviving the Merger (the “Surviving Company”) and continuing as a subsidiary of Centennial.

Pursuant to the terms of the Business Combination Agreement and subject to the conditions therein, at the effective time of the Merger (the “Effective Time”), (a) all membership interests of CRP, issued and outstanding immediately prior to the Effective Time, will be converted into a number of validly issued, fully paid and nonassessable (except as limited by the Delaware Limited Liability Company Act) units in the Surviving Company (“Surviving Company Units”) equal to the number of shares of our Class A common stock, par value $0.0001 per share (“Class A Common Stock”), that are outstanding immediately after the Effective Time after giving effect to the Transactions and Centennial will remain as the manager of the Surviving Company, and (b) all of the Colgate Unitholder’s sole membership interest in Colgate will be exchanged for 269,300,000 shares of our Class C common stock, par value $0.0001 per share, which has voting (but no economic rights) in us (“Class C Common Stock” and, together with the Class A Common Stock, the “Common Stock”) (the “Centennial Stock Consideration”), 269,300,000 additional Surviving Company Units, which represent economic and voting limited liability company interests in the Surviving Company (the “Surviving Company Unit Consideration” and, together with the Centennial Stock Consideration, the “Share Consideration”) and $525,000,000 (the “Cash Consideration,” and, together with the Share Consideration, the “Merger Consideration”). At the closing of the Transactions (the “Closing”), the Merger Consideration may be adjusted downward pursuant to customary title and environmental defect considerations set forth in the Business Combination Agreement. For more information about the Business Combination Agreement, please see the section entitled “Proposal 1—The Stock Issuance Proposal—The Business Combination Agreement.”

It is anticipated that immediately after the consummation of the Transactions (a) our current shareholders will own 100% of our outstanding Class A Common Stock and approximately 51% of our total outstanding Class A Common Stock and Class C Common Stock taken together (or approximately 53% on a fully diluted basis), (b) we will own approximately 51% of the Surviving Company, and (c) the Colgate Unitholder will own approximately 49% of the Surviving Company, 100% of our outstanding Class C Common Stock and

 

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approximately 49% of our total outstanding Class A Common Stock and Class C Common Stock taken together (or approximately 47% on a fully diluted basis). Our management and Board considered various factors in determining whether to approve the Business Combination Agreement and the Transactions, including the Merger. For more information about the Board’s reasons for approving the Transactions, see the section entitled “Proposal 1—The Stock Issuance Proposal—Our Board of Directors’ Reasons for the Approval of the Transactions.”

Unless waived by the parties to the Business Combination Agreement, and subject to applicable law, the Closing is subject to a number of conditions set forth in the Business Combination Agreement, including, among others, expiration of the waiting period under the HSR Act, no agreement shall be in effect between Colgate, Centennial or any of their respective subsidiaries, on the one hand, and the Antitrust Division or FTC, on the other hand, not to consummate the Transactions, and shareholder approval of the Stock Issuance Proposal and the A&R Charter Proposals by our shareholders. For more information about the closing conditions to the Transactions, please see the section entitled “Proposal 1—The Stock Issuance Proposal—The Business Combination Agreement—Conditions to Closing of the Transactions.”

The Business Combination Agreement may be terminated at any time prior to the consummation of the Transactions upon agreement of the parties thereto, or by us or Colgate in specified circumstances. For more information about the termination rights under the Business Combination Agreement, please see the section entitled “Proposal 1—The Stock Issuance Proposal—The Business Combination Agreement—Termination.”

The proposed Transactions involves numerous risks. For more information about these risks, please see the section entitled “Risk Factors.”

In considering the recommendation of our Board to vote for the proposals presented at the Special Meeting, including the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal, you should be aware that aside from their interests as shareholders, certain members of our management have interests in the Transactions that are different from, or in addition to (and which may conflict with), the interests of our shareholders generally. Our Board was aware of and considered these interests, among other matters, in evaluating the Business Combination Agreement, the Related Agreements and the Transactions, and in recommending to our shareholders that they vote in favor of the proposals presented at the Special Meeting, including the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal. Shareholders should take these interests into account in deciding whether to approve the proposals presented at the Special Meeting, including the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal. Please see the section entitled “Proposal 1—The Stock Issuance Proposal—Interests of Centennial’s Directors and Executive Officers in the Transactions” for additional information.

 

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FREQUENTLY USED TERMS

Throughout this proxy statement, except as otherwise indicated:

“A&R LLC Agreement” means the Sixth Amended and Restated Limited Liability Company Agreement of the Surviving Company, to be adopted in connection with the Closing.

“Board” or “Board of Directors” means the board of directors of Centennial.

“Centennial Corporation” or “Centennial” means Centennial Resource Development, Inc., a Delaware corporation.

“Centennial Parties,” “we,” “us,” “our” or the “Company” means Centennial and its consolidated subsidiaries.

“Citi” means Citigroup Global Markets Inc., financial advisor to Centennial with respect to the Merger.

“Continental” means Continental Stock Transfer & Trust Company, Centennial’s transfer agent.

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“Existing Charter” means the Third Amended and Restated Certificate of Incorporation of Centennial.

“GAAP” means accounting principles generally accepted in the United States as in effect from time to time.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Kirkland & Ellis” means Kirkland & Ellis LLP, counsel to Colgate with respect to the Transactions.

“KPMG” means KPMG LLP, Centennial’s independent registered public accounting firm.

“Latham & Watkins” means Latham & Watkins LLP, counsel to Centennial with respect to the Transactions.

“Morrow Sodali” means Morrow Sodali LLC, Centennial’s proxy solicitor.

“Nasdaq” means the Nasdaq Capital Market LLC.

“Related Agreements” means the Proposed Charter, the A&R LLC Agreement, the Registration Rights Agreement, and the Voting Agreement, copies of which are included as Annexes B, C, D, and E, respectively, hereto, and any other agreement, instrument or certificate required by, or contemplated in connection with, the Business Agreement to be executed by any of the parties thereto, the Colgate Unitholder or any designee of Colgate as contemplated by the Business Combination Agreement, in each case, only as is applicable to the relevant party or parties to such Related Agreement, as indicated by the context in which such term is used in the Business Combination Agreement.

“SEC” means the Securities and Exchange Commission.

“Transactions” means the transactions contemplated by the Business Combination Agreement.

 

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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS FOR SHAREHOLDERS

Why am I receiving this proxy statement?

We are sending you this proxy statement and the enclosed proxy card because our Board is soliciting your proxy to vote on proposals in connection with the proposed business combination with Colgate. This proxy statement summarizes the information you need to know to vote at the Special Meeting. All shareholders who find it convenient to do so are cordially invited to attend the Special Meeting. However, you do not need to attend the Special Meeting to vote your shares. Instead, you may simply sign, date and return the enclosed proxy card or voting instruction form provided by your bank or broker, or follow the instructions specified in your proxy card or voting instruction form to vote by telephone or via the internet.

We intend to begin delivering this proxy statement, the attached notice of our Special Meeting and the enclosed proxy card on or about                 , 2022 to all shareholders who own Class A Common Stock as of the Record Date and are thus entitled to vote at the Special Meeting. As of the Record Date, there were approximately                  shares of Class A Common Stock issued and entitled to vote at the Special Meeting. Our Class A Common Stock is our only class of stock entitled to vote at the Special Meeting.

What will the Colgate Unitholder receive for its limited liability company interest in Colgate in the Merger?

In connection with the Merger, the Colgate Unitholder will be entitled to receive $525,000,000 in cash, 269,300,000 Surviving Company Units and the same number of shares of our Class C Common Stock. As a result, the Colgate Unitholder will own Surviving Company Units, which will have both economic and voting rights with respect to the Surviving Company, and a corresponding number of shares of Class C Common Stock, which have voting (but no economic) rights with respect to Centennial. The Colgate Unitholder will own approximately 49% of the Surviving Company, 100% of our outstanding Class C Common Stock and approximately 49% of our total outstanding Class A Common Stock and Class C Common Stock taken together (or approximately 47% on a fully diluted basis).

Pursuant to the A&R LLC Agreement, each member of the Surviving Company (other than Centennial) will have the right to cause the Surviving Company to redeem all or a portion of its Surviving Company Units in exchange for, at the Surviving Company’s option, (i) an equal number of shares of Class A Common Stock or (ii) a cash amount, to be determined based on the volume weighted average price of a share of Class A Common Stock on Nasdaq for the five trading days ending on, and including, the date on which such redeeming shareholder delivers notice to the Surviving Company of such member’s intention to redeem all or a portion of its Surviving Company Units, equal to the market value of an equal number of shares of Class A Common Stock. Upon completion of any such redemption, the Surviving Company will cancel such redeemed Surviving Company Units and we will cancel a corresponding number of shares of Class C Common Stock. Pursuant to the A&R LLC Agreement, we have agreed to contribute to the Surviving Company the consideration to which any redeeming member is entitled in connection with such a redemption pursuant to the A&R LLC Agreement. Alternatively, we may, in our sole discretion, effect a direct exchange with such redeeming member of the Surviving Company, whereby we will pay the applicable cash consideration, or issue the applicable number of shares of Class A Common Stock, to which the redeeming member of the Surviving Company is entitled directly to such redeeming member in exchange for its Surviving Company Units. In such case, we will (i) cancel such Class C Common Stock, (ii) acquire such Surviving Company Units from such redeeming member and (iii) be treated for all purposes of the A&R LLC Agreement as the owner of such Surviving Company Units following such exchange.

Additionally, pursuant to the A&R LLC Agreement, we will have the right, in connection with certain transactions resulting in a change of control of the Company and upon prior written notice to the members of the Surviving Company, to require each member of the Surviving Company (other than Centennial) to effect a redemption of all or a portion of such member’s Surviving Company Units. Such notice will specify, among

 

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other things, a description of the applicable change of control transaction, including the date of execution of such agreement or such proposed effective date, as applicable, the amount and types of consideration to be paid for shares of Class A Common Stock in the change of control transaction, any election with respect to types of consideration that a holder of shares of Class A Common Stock, as applicable, shall be entitled to make in connection with such change of control transaction, and the number of Surviving Company Units and shares of Class C Common Stock held by such member of the Surviving Company that we intend to require to be subject to such redemption. Such redemption will be effective immediately prior to such change of control transaction, at which time the redeemed Surviving Company Units and shares of Class C Common Stock will be deemed to be transferred to the Company.

What am I voting on?

The items of business scheduled to be voted on at the Special Meeting are:

 

  1.

a proposal to approve, for purposes of complying with Rule 5635(a), the issuance of shares of Centennial Class C common stock in connection with the Transactions that equal more than 20% of the issued and outstanding Common Stock;

 

  2.

separate proposals to approve and adopt the Proposed Charter in the form attached hereto as Annex B, as follows: (i) a proposal to increase the authorized number of shares of (A) Class A common stock for issuance from 600,000,000 to 1,000,000,000 and (B) Class C common stock for issuance from 20,000,000 to 500,000,000; (ii) a proposal to allow shareholders of the Company to act by written consent, subject to certain limitations; (iii) a proposal to designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for substantially all actions and proceedings that may be initiated by shareholders; and (iv) a proposal to approve and adopt the Proposed Charter;

 

  3.

a proposal to approve, on an advisory, non-binding, basis specified compensation that may be received by our named executive officers in connection with the Merger; and

 

  4.

a proposal to adjourn the special meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal.

How does the Board recommend that I vote?

Our Board unanimously recommends that you vote:

 

   

“FOR” the approval of the Stock Issuance Proposal (Proposal 1);

 

   

“FOR” the approval of the A&R Charter Proposals (Proposals 2A-2D);

 

   

“FOR” the approval of the Merger Compensation Proposal (Proposal 3); and

 

   

“FOR” the approval of the Adjournment Proposal (Proposal 4).

Who can vote?

You can vote your shares of Common Stock if our records show that you were the owner of the shares as of the close of business on                 , 2022, the Record Date. As of the Record Date, there were a total of                  shares of Class A Common Stock issued and entitled to vote at the Special Meeting. You get one vote for each share of Class A Common Stock that you own as of the Record Date.

How is a quorum determined?

We will hold the Special Meeting if shareholders representing the required quorum of shares of Common Stock entitled to vote authorize their proxy online or telephonically, sign and return their proxy cards or attend the

 

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Special Meeting. The presence in person or by proxy of a majority of the shares of Common Stock entitled to vote at the Special Meeting constitutes a quorum. If you authorize your proxy online or telephonically or sign and return your proxy card, your shares will be counted to determine whether we have a quorum even if you abstain or fail to indicate your vote on the proxy card.

What is the required vote for approval?

The Stock Issuance Proposal, the Merger Compensation Proposal and the Adjournment Proposal each require the affirmative vote of a majority of the votes cast by holders of outstanding shares of Common Stock present in person or represented by proxy, assuming a quorum is present. The A&R Charter Proposals require the affirmative vote of a majority of the outstanding shares of Common Stock entitled to vote thereon, assuming a quorum is present. Accordingly, a shareholder’s failure to vote by proxy or to vote in person at the Special Meeting or an abstention will have no effect on the Stock Issuance Proposal, the Merger Compensation Proposal or the Adjournment Proposal (except that abstentions are counted for purposes of determining if a quorum is present), but will have the same effect as a vote “AGAINST” the A&R Charter Proposals.

The Transactions are conditioned on, among other things, the approval of the Stock Issuance Proposal and the A&R Charter Proposals by our shareholders. It is important for you to note that if any of the Stock Issuance Proposal or the A&R Charter Proposals does not receive the requisite vote for approval, we will not be able to consummate the Transactions.

What will happen in the Transactions?

Pursuant to the Business Combination Agreement, and subject to the satisfaction or waiver of certain conditions therein, at the Effective Time, (a) CRP will merge with and into Colgate, with CRP surviving the Merger and continuing as a subsidiary of Centennial, (b) all membership interests of CRP, issued and outstanding immediately prior to the Effective Time, will be converted into a number of validly issued, fully paid and nonassessable (except as limited by the Delaware Limited Liability Company Act) Surviving Company Units equal to the number of shares of our Class A Common Stock that are outstanding immediately after the Effective Time after giving effect to the Transactions and Centennial will remain as the manager of the Surviving Company, and (c) all of the Colgate Unitholder’s sole membership interest in Colgate will be exchanged for 269,300,000 shares of our Class C Common Stock, 269,300,000 additional Surviving Company Units and $525,000,000 in cash. At the Closing, the Merger Consideration may be adjusted downward pursuant to customary title and environmental defect considerations set forth in the Business Combination Agreement. For more information about the Business Combination Agreement, please see the section entitled “Proposal 1—The Stock Issuance Proposal—The Business Combination Agreement.”

How will the Transactions impact the shares of Common Stock outstanding after the Transactions?

As a result of the Transactions, the amount of Common Stock outstanding will increase by approximately 94% to approximately 554.29 million shares of Common Stock outstanding, consisting of 284.99 million shares of Class A Common Stock and 269.3 million shares of Class C Common Stock. It is anticipated that immediately after the consummation of the Transactions our current shareholders will own approximately 51% of our outstanding Common Stock (or approximately 53% on a fully diluted basis) and the Colgate Unitholder will own approximately 49% of our outstanding Common Stock (or approximately 47% on a fully diluted basis).

Will the Class C Common Stock received at the time of completion of the Transactions be traded on an exchange?

No. The Class C Common Stock will not be traded on a nationally recognized stock exchange.

 

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Will the Class A Common Stock continue to be traded on an exchange?

Yes, following the Closing, our Class A Common Stock will continue to be listed on NASDAQ, but will trade under a new ticker to be announced prior to Closing.

How will Centennial be structured following the Transactions?

Our corporate structure following the consummation of the Transactions will be what is commonly referred to as an “Up-C” structure. Under the “Up-C” structure, Centennial will continue to be a holding company, the sole material asset of which will consist of Surviving Company Units, and Centennial’s business will continue to be operated through the Surviving Company and its subsidiaries, one or more of which will be treated as partnerships or other “pass-through” entities for U.S. federal (and certain state and local) income tax purposes. Generally, following the consummation of the Transactions, the Surviving Company will not pay U.S. federal income tax on any income earned from its business but will instead allocate items of income or loss to the holders of the Surviving Company Units, including the Colgate Unitholder, to report on such holders’ tax returns. Centennial will (i) continue to be the sole managing member of the Surviving Company, (ii) be responsible for all operational, management and administrative decisions relating to the Surviving Company’s business, and (iii) consolidate the financial results of the Surviving Company and its subsidiaries.

Following the consummation of the Transactions, Centennial’s existing shareholders will continue to own shares of Class A Common Stock, which have both voting and economic rights with respect to Centennial, and the Colgate Unitholder will own Surviving Company Units, which will have both economic and voting rights with respect to the Surviving Company, and a corresponding number of shares of Class C Common Stock, which will have voting (but no economic) rights with respect to Centennial. See “—What will the Colgate Unitholder receive for its limited liability company interest in Colgate in the Merger?”

After Colgate proposed the “Up-C” structure on April 21, 2022 (See the section entitled “Proposal 1: The Stock Issuance ProposalBackground of the Transactions”) and following multiple discussions regarding the potential benefits of the structure, Centennial and Colgate selected the “Up-C” structure in order to allow the Colgate Unitholder the option to continue to hold its economic ownership in Centennial in “pass-through” form for U.S. federal income tax purposes through its ownership of Surviving Company Units. The parties also selected the “Up-C” structure because Centennial may, upon the redemption of Surviving Company Units together with the cancellation of a corresponding number of shares of Class C Common Stock for Class A common stock or cash pursuant to the A&R LLC Agreement, receive an increase in the tax basis of the assets of the Surviving Company attributable to the Surviving Company Units that Centennial holds, potentially resulting in certain tax benefits, such as additional depreciation and amortization deductions, that may reduce the income allocable to Centennial. It is unknown whether the foregoing perceived benefits of the “Up-C” structure will be achieved, and if so, the timing and amount of any such benefits.

What conditions must be satisfied to complete the Transactions?

There are a number of closing conditions in the Business Combination Agreement, including the expiration of the waiting period under the HSR Act, no agreement shall be in effect between Colgate, Centennial or any of their respective subsidiaries, on the one hand, and the Antitrust Division or FTC, on the other hand, not to consummate the Transactions and the approval by our shareholders of the Stock Issuance Proposal and the A&R Charter Proposals. For a summary of the conditions that must be satisfied or waived prior to completion of the Transactions, please see the section entitled “Proposal 1—The Stock Issuance Proposal—The Business Combination Agreement—Conditions to Closing of the Transactions.”

Why is Centennial proposing the Stock Issuance Proposal?

We are proposing the Stock Issuance Proposal in order to comply with Rule 5635(a) of the Nasdaq Stock Market Rules, which requires shareholder approval prior to the issuance of securities in connection with the acquisition of the stock or assets of another company (other than a public offering for cash) where the issuance equals 20% or more of the common stock or 20% of the voting power outstanding before such issuance.

 

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In connection with the Transactions, we expect to issue 269,300,000 shares of Class C Common Stock, which we expect will represent approximately 49% of the outstanding Common Stock immediately after giving effect to the Transactions (or approximately 47% on a fully diluted basis). Because we are issuing 20% or more of the outstanding Common Stock in connection with the Transactions, we are required to obtain shareholder approval of such issuance pursuant to Rule 5635(a). For more information, please see the section entitled “Proposal 1—The Stock Issuance Proposal.”

Why is Centennial proposing the A&R Charter Proposals?

Our shareholders will also be asked to vote on separate proposals to approve and adopt the Proposed Charter in the form attached hereto as Annex B, as follows: (i) a proposal to increase the authorized number of shares of (A) Class A common stock for issuance from 600,000,000 to 1,000,000,000 and (B) Class C common stock for issuance from 20,000,000 to 500,000,000, (ii) a proposal to allow shareholders of the Company to act by written consent, subject to certain limitations, (iii) a proposal to designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for substantially all actions and proceedings that may be initiated by shareholders, and (iv) a proposal to approve and adopt the Proposed Charter. For more information, please see the section entitled “Proposals 2A – 2D—Approval of the A&R Charter Proposals.

A portion of the consideration to be paid in connection with the Transactions will consist of approximately 269,300,000 shares of Class C Common Stock. We are also reserving 269,300,000 shares of Class A Common Stock for issuance upon the redemption or exchange of the Surviving Company Units and corresponding shares of Class C Common Stock. Our Certificate of Incorporation currently authorizes 600,000,000 shares of Class A Common Stock, 20,000,000 shares of Class C Common Stock and 1,000,000 shares of preferred stock, par value $0.0001 per share. The Proposed Charter increases the authorized number of shares necessary to issue the Share Consideration. Our Board also believes that it is important for us to have available for issuance a number of authorized shares of Common Stock and preferred stock sufficient to support our growth and to provide flexibility for future corporate needs (including, if needed, as part of financing for future growth acquisitions). In addition, the increase in the total number of authorized shares of capital stock provides us adequate authorized capital to provide flexibility for future issuances of Common Stock if determined by our Board to be in our best interests, without incurring the risk, delay and potential expense incident to obtaining shareholder approval for a particular issuance. Although there is no present intention to issue any shares of Common Stock beyond those contemplated by the Transactions or otherwise in the ordinary course of business, the additional authorized shares of Common Stock would be issuable for any proper corporate purpose, including, without limitation, stock splits, stock dividends, future acquisitions, investment opportunities, capital raising transactions of equity or convertible debt securities, issuances under current or future equity compensation plans or for other corporate purposes. Our authorized but unissued shares of capital stock will be available for future issuances without shareholder approval (except to the extent otherwise required by law or Nasdaq rules) and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital, acquisitions and employee benefit plans.

The Proposed Charter also provides that, except as otherwise provided for therein or relating to the rights of holders of preferred stock, any action required or permitted to be taken by shareholders must be effected by a duly called annual or special meeting of such shareholders and may not be effected by written consent of the shareholders; provided, however, that prior to the first date following the consummation of the transactions contemplated by the Business Combination Agreement on which investment funds affiliated with Riverstone Holdings LLC, Pearl Energy Investments and NGP Energy Capital cease to collectively have beneficial ownership (directly or indirectly) of more than 50% of our outstanding Common Stock, any action required or permitted to be taken by the shareholders that is approved in advance by the Board may be effected without a meeting, without prior notice and without a vote of shareholders, if a consent or consents in writing, setting forth the action so taken, is or are signed by the holders of outstanding Common Stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, in accordance with Section 228 of the Delaware General

 

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Corporation Law. Our Board believes that providing for the ability of such shareholders to act by written consent will enable the combined company to act without the burden, delay and expense that may be incurred by the calling of an annual or special meeting of the shareholders and will allow such shareholders to raise important matters outside of the normal annual meeting cycle. In addition, the proposed change to the Existing Charter related to the delivery of written consents is intended to refer specifically to the Delaware General Corporation Law to ensure that the combined company complies with the most recent Delaware General Corporation Law statutory language. Once less than 50% of our Common Stock ceases to be owned by Riverstone Holdings LLC, Pearl Energy Investments and NGP Energy Capital and their respective affiliated investment funds, successors and affiliates, our shareholders will no longer be able to effect any action by written consent.

The Proposed Charter will also provide that, unless the combined company consents in writing to the selection of an alternative forum, the (i) Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (A) any derivative action or proceeding brought on behalf of the combined company, (B) any action asserting a claim of breach of a fiduciary duty owed by any of the directors, officers, employees or agents of the combined company to the combined company or its shareholders, (C) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, the Proposed Charter or the combined company’s bylaws or (D) any action asserting a claim against the combined company that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein; and (ii) subject to the foregoing, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, including all causes of action asserted against any defendant to such complaint. In the event the Delaware Court of Chancery lacks subject matter jurisdiction, then the sole and exclusive forum for such action or proceeding shall be the federal district court for the District of Delaware. Any person or entity purchasing or otherwise acquiring any interest in shares of the capital stock of the combined company will be deemed to have notice of, and consented to, the provisions of the Proposed Charter described in the preceding sentences.

Notwithstanding the foregoing, this provision would not apply to claims brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.

Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As noted above, the Proposed Charter will provide that the federal district courts of the United States of America shall have exclusive jurisdiction over any action arising under the Securities Act. Accordingly, there is uncertainty as to whether a court would enforce this provision. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or the directors, officers, employees or agents of the combined company, which may discourage such lawsuits against the combined company and such persons. Alternatively, if a court were to find these provisions of the Proposed Charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, the combined company may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect the business, financial condition or results of operations of the combined company. Our Board believes that establishing an exclusive forum for substantially all actions and proceedings that may be initiated by shareholders will provide increased consistency in the application of Delaware and federal securities law in the types of lawsuits to which such laws apply.

For more information, please see the section entitled “Proposals 2A – 2D—Approval of the A&R Charter Proposals.”

 

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Why is Centennial proposing the Merger Compensation Proposal?

We are proposing the Merger Compensation Proposal to seek shareholder approval, on an advisory, non-binding basis, of specified compensation that may be payable to the Centennial named executive officers in connection with the Transactions. For more information, please see the section entitled “Proposal 3—Approval of the Merger Compensation Proposal.”

Why is Centennial proposing the Adjournment Proposal?

We are proposing the Adjournment Proposal to allow our Board to adjourn the special meeting to a later date or dates to permit further solicitation of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Stock Issuance Proposal and the A&R Charter Proposals. For more information, please see the section entitled “Proposal 4—Approval of the Adjournment Proposal.”

What interests do Centennial’s current officers and directors have in the Transactions?

Our officers and directors may have interests in the Transactions that are different from or in addition to (and which may conflict with) your interests. You should take these interests into account in deciding whether to approve the Transactions. These interests include, among other things, the expected continued employment of George S. Glyphis and Matthew R. Garrison as chief financial officer and chief operating officer, respectively, by the combined company, and the expected service of Sean R. Smith as the executive chairman of the board of directors of the combined company until September 30, 2023. Our Board was aware of and considered these interests, among other matters, in evaluating the Business Combination Agreement, the Related Agreements and the Transactions and in recommending to our shareholders that they vote in favor of the proposals presented at the Special Meeting, including the Stock Issuance Proposal, the A&R Charter Proposals, the Merger Compensation Proposal and the Adjournment Proposal. Please see the section entitled “Proposal 1—The Stock Issuance Proposal—Interests of Centennial’s Directors and Executive Officers in the Transactions” for additional information.

What are the material U.S. federal income tax consequences of the Transactions to me?

Because our shareholders will continue to own and hold their existing shares of Common Stock following the Transactions, the Transactions generally will not result in U.S. federal income tax consequences to our current shareholders.

Do I have appraisal rights if I object to the proposed Transactions?

No. Appraisal rights are not available to holders of Common Stock in connection with the Transactions.

What happens if the Business Combination Agreement is terminated and the Transactions are not consummated?

There are certain circumstances under which the Business Combination Agreement may be terminated prior to the consummation of the Transactions. If the Business Combination Agreement is terminated under specified circumstances, we may be obligated to pay a termination fee of $72.0 million or to reimburse certain transaction expenses of Colgate up to $20.0 million. Please see the sections entitled “Proposal 1—The Stock Issuance Proposal—The Business Combination Agreement—Termination” and “Proposal 1—The Stock Issuance Proposal—The Business Combination Agreement—Termination Fees” for information regarding the parties’ termination rights and the termination fees.

When are the Transactions expected to be completed?

The Transactions are currently expected to close in the second half of calendar year 2022, subject to the approval of our shareholders of the Stock Issuance Proposal and the A&R Charter Proposals, the expiration of the waiting

 

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period under the HSR Act, no agreement shall be in effect between Colgate, Centennial or any of their respective subsidiaries, on the one hand, and the Antitrust Division or FTC, on the other hand, not to consummate the Transactions and the satisfaction of other customary closing conditions. The Business Combination Agreement may be terminated and the Transactions abandoned by either us or Colgate in certain circumstances if the Closing has not occurred by February 19, 2023 (subject to an automatic extension of such date to May 19, 2023 in certain circumstances if additional time is needed to satisfy regulatory conditions). For a description of the conditions to the completion of the Transactions, see the section entitled “Proposal 1—The Stock Issuance Proposal—The Business Combination Agreement—Conditions to Closing of the Transactions.”

How do I vote by proxy?

Follow the instructions on the proxy card to authorize a proxy to vote your shares of Common Stock at the Special Meeting. We urge you to sign, date and return the enclosed proxy card or voting instruction form provided by your bank or broker as soon as possible to ensure that your vote is recorded promptly. The individuals named and designated as proxies will vote your shares of Common Stock as you instruct. You have the following choices in voting your shares of Common Stock:

 

   

You may vote on each proposal, in which case your shares of Common Stock will be voted in accordance with your choices.

 

   

You may abstain from voting on (1) the Stock Issuance Proposal, (2) the A&R Charter Proposals, (3) the Merger Compensation Proposal and/or (4) the Adjournment Proposal, in which case no vote will be recorded with respect to the proposal. Such abstention will be the equivalent of a vote “AGAINST” the A&R Charter Proposals, but will have no effect on the vote count for the Stock Issuance Proposal, the Merger Compensation Proposal or the Adjournment Proposal.

How can I authorize my proxy online or via telephone?

You may vote your shares via the internet or by telephone by following the instructions provided on your proxy card or voting instruction form. If your shares are registered in the name of a broker, bank or other financial institution, you may also be eligible to vote your shares electronically over the internet or by telephone if your financial institution makes such options available.

What if other matters come up at the Special Meeting?

As of the date of this proxy statement, the only matters we know of that will be voted on at the Special Meeting are the proposals we have described herein: (1) the Stock Issuance Proposal, (2) the A&R Charter Proposals, and/or (3) the Merger Compensation Proposal. If other matters are properly presented at the Special Meeting, the designated proxies will vote your shares of Common Stock at their discretion.

Can I change my previously authorized vote?

Yes, you can change your vote at any time before the vote on a proposal either by executing or authorizing, dating and delivering to us a new proxy electronically via the internet, by telephone or by mail at any time prior to 11:59 p.m., Eastern Time, on                , 2022, the day before the Special Meeting, by giving us a written notice revoking your proxy card or by attending the Special Meeting and voting your shares of Common Stock during the Special Meeting. Your attendance at the Special Meeting will not, by itself, revoke a proxy previously given by you. We will honor the latest dated proxy.

Proxy revocation notices or new proxy cards should be sent to Centennial Resource Development, Inc., 1001 17th Street, Suite 1800, Denver, Colorado, 80202, Attention: General Counsel.

 

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Can I vote during the Special Meeting rather than by authorizing a proxy?

You can attend the Special Meeting and vote your shares of Common Stock during the Special Meeting; however, we encourage you to authorize your proxy to ensure that your vote is counted. Authorizing your proxy electronically or telephonically, or submitting a proxy card, will not prevent you from later attending the Special Meeting and voting your shares of Common Stock during the Special Meeting.

Will my shares of Common Stock be voted if I do not provide my proxy?

If your shares of Common Stock are held in “street name” in a stock brokerage account or by a broker, bank, or other nominee, you must provide the record holder of your shares of Common Stock with instructions on how to vote such shares. Please follow the voting instructions provided by your broker, bank, or other nominee. Please note that you may not vote shares of Common Stock held in “street name” by returning a proxy card directly to us or by voting in person (which would include presence at a meeting) at the Special Meeting unless you provide a “legal proxy,” which you must obtain from your broker, bank or other nominee.

Under Nasdaq rules, brokers who hold shares in “street name” for a beneficial owner of those shares typically have the authority to vote in their discretion on “routine” proposals when they have not received instructions from beneficial owners. However, brokers are not permitted to exercise their voting discretion with respect to the approval of matters that Nasdaq determines to be “non-routine” without specific instructions from the beneficial owner. It is expected that all proposals to be voted on at the Special Meeting are “non-routine” matters. Broker non-votes occur when a broker or nominee is not instructed by the beneficial owner of shares to vote on a particular proposal for which the broker does not have discretionary voting power.

If you are a Centennial shareholder holding your shares of Common Stock in “street name” and you do not instruct your broker, bank or other nominee on how to vote your shares of Common Stock, your broker, bank or other nominee will not vote your shares on the Stock Issuance Proposal, the A&R Charter Proposals or the Merger Compensation Proposal. Such broker non-votes will be the equivalent of a vote “AGAINST” the A&R Charter Proposals, but will have no effect on the vote count for the Stock Issuance Proposal, the Merger Compensation Proposal or the Adjournment Proposal.

What do I do if my shares are held in “street name”?

If your shares of Common Stock are held in the name of your broker, a bank or other nominee in “street name,” that party will give you instructions for voting your shares of Common Stock. If your shares of Common Stock are held in “street name” and you would like to vote your shares of Common Stock in person at the Special Meeting, you must contact your broker, bank or other nominee to obtain a proxy form from the record holder of your shares of Common Stock.

What happens if the Special Meeting is postponed or adjourned?

If the Special Meeting is postponed or adjourned, your proxy will still be valid and may be voted at the postponed or adjourned meeting. You will still be able to change or revoke your proxy until it is voted. See “Can I change my previously authorized vote?” above.

Who will count the votes?

A representative of Continental Stock Transfer & Trust Company will count the votes and will serve as the independent inspector of election.

 

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Who pays for this proxy solicitation?

We do. We have engaged Morrow Sodali, to assist in the solicitation of proxies for the Special Meeting. We have agreed to pay Morrow Sodali a fee of $20,000, plus disbursements. We will also reimburse Morrow Sodali for reasonable out-of-pocket expenses and will indemnify Morrow Sodali and its affiliates against certain claims, liabilities, losses, damages and expenses. In addition, we will reimburse banks, brokers and other custodians, nominees and fiduciaries representing beneficial owners of shares of Common Stock for their expenses in forwarding soliciting materials to beneficial owners of shares of Common Stock and in obtaining voting instructions from those owners. In addition to sending you these materials, some of our employees or agents may contact you by telephone, by mail or in person. None of our employees will receive any extra compensation for providing those services.

When and where will the Special Meeting be held?

The Special Meeting will take place on                , 2022 at                  Mountain Time at                 . Although we are currently planning to hold the Special Meeting in person, we are actively monitoring the health and safety concerns and government restrictions and recommendations relating to the COVID-19 pandemic. In the event it is not possible or advisable to hold the Special Meeting in person, we will announce alternative arrangements for the Special Meeting as promptly as practicable, which may include holding a virtual-only or hybrid Special Meeting rather than an in-person Special Meeting. If we take this step, details on how to participate will be issued by press release, posted on our website and filed with the SEC as additional proxy material. Therefore, if you are planning to attend our Special Meeting, please monitor our website prior to the meeting date.

Will COVID-19 Health and Safety Protocols be followed at the Special Meeting?

If the Special Meeting occurs in person, as currently planned, health and safety protocols will be followed, and attendees will be required to comply with any then-applicable governmental or facility requirements or recommendations. We will describe these requirements, if any, and the related protocols we plan to take at the Special Meeting on our website in advance of the meeting date. Therefore, if you are planning to attend our Special Meeting, please monitor our website prior to the meeting date.

Where can I find the voting results of the Special Meeting?

We will file the final voting results of the Special Meeting with the SEC in a Current Report on Form 8-K within four business days after the date of the Special Meeting, following any adjournments or postponements thereof.

I share an address with another shareholder, but we received only one paper copy of the proxy materials. How may I obtain an additional copy of the proxy materials?

If you share an address with another shareholder, you may receive only one set of proxy materials unless you have provided contrary instructions. The rules promulgated by the SEC permit companies, brokers, banks or other financial institutions to deliver a single copy of proxy statements and annual reports to households at which two or more shareholders reside. This practice, known as “householding,” is designed to reduce duplicate mailings, save significant printing and postage costs, and conserve natural resources. Shareholders will receive only one copy of our proxy statements and annual reports if they share an address with another shareholder, have been previously notified of householding by their broker, bank or other financial institution, and have consented to householding, either affirmatively or implicitly by not objecting to householding. If you would like to opt out of householding for future mailings, or if you currently receive multiple copies of our annual reports and proxy statements and would prefer to receive a single copy in the future, please contact your broker, bank or financial institution. You may also obtain a separate proxy statement or annual report without charge by sending a written request to Centennial Resource Development, Inc., Attention: General Counsel, 1001 17th Street, Suite 1800, Denver, Colorado, 80202, by email at ir@cdevinc.com or by telephone at (720) 499-1400. We will promptly send additional copies of this proxy statement upon receipt of such request.

 

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What if I receive more than one proxy card?

This means that you have multiple accounts holding shares of our Common Stock. These may include accounts with our transfer agent and/or accounts with a broker, bank or other holder of record. In order to vote all of the shares held by you in multiple accounts, you will need to vote separately the shares held in each account. Please follow the voting instructions provided on each proxy card to ensure that all of your shares are voted.

You are encouraged to have all accounts registered in the same name and address whenever possible. You can do this by contacting our transfer agent, Continental Stock Transfer & Trust Company, at dividend@continentalstock.com or cstmail@continentalstock.com, at its toll-free number (866)-509-5584 or on its website at https://continentalstock.com.

What do I need to do now?

You are urged to read carefully and consider the information contained in this proxy statement, including the annexes hereto. You should then vote as soon as possible in accordance with the instructions provided in this proxy statement and on the enclosed proxy card or, if you hold your shares of Common Stock through a brokerage firm, bank or other nominee, on the voting instruction form provided by the broker, bank or nominee.

Who can help answer my questions?

If you have questions about the proposals or if you need additional copies of this proxy statement or the enclosed proxy card you should contact:

Centennial Resource Development, Inc.

Hays Mabry

Sr. Director, Investor Relations

(832) 240-3265

ir@cdevinc.com

To help ensure timely delivery, please request any such additional copies no later than five business days prior to the Special Meeting. You may also obtain additional information about us from documents filed with the SEC by following the instructions in the section entitled “Where You Can Find Additional Information; Incorporation of Certain Documents by Reference.”

The SEC has an informational website that provides shareholders with general information about how to cast their vote and why voting should be an important consideration for shareholders. You may access that information at www.sec.gov/spotlight/proxymatters.shtml or at www.investor.gov.

If you have any questions or need assistance voting your shares of Common Stock you may also contact our proxy solicitor at:

Morrow Sodali LLC

333 Ludlow Street, 5th Floor, South Tower

Stamford, CT 06902

Banks and Brokerage Firms, please call (203) 658-9400

Shareholders, please call toll free (800) 662-5200

 

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PROXY STATEMENT SUMMARY

This summary highlights selected information contained elsewhere in this proxy statement. This summary does not contain all of the information that may be important to you. You should read carefully this entire proxy statement, including the annexes and accompanying financial statements of Colgate and pro forma financial information included herein, to fully understand the proposed Transactions before voting on the proposals to be considered at the Special Meeting. Please see the section entitled “Where You Can Find Additional Information; Incorporation of Certain Documents by Reference” of this proxy statement.

The Companies

Centennial Resource Development, Inc.

We are an independent oil and natural gas company focused on the development of crude oil and associated liquids-rich natural gas reserves in the Permian Basin. Our assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin. Our capital programs are focused on projects that we believe provide the highest return on capital. Our principal business objective is to increase shareholder value by efficiently developing our oil and natural gas assets in the Delaware Basin in an environmentally and socially responsible way. We intend to drive disciplined free cash flow growth through an increased focus on optimizing drilling and completion results, by drilling extended laterals, and by managing our costs, with an overall objective of improving our rates of return and generating sustainable free cash flow. We believe that the successful execution of these objectives will allow us to fund our drilling and development capex entirely from cash flows from operations, to lower our leverage profile and to return capital to our shareholders. We also look for opportunities to accretively increase scale and grow production and reserves through selective acquisitions that meet our strategic and financial objectives.

Our securities are currently traded on Nasdaq under the ticker symbol “CDEV.” Following the closing of the Transactions, our Class A Common Stock will trade on Nasdaq under a new ticker to be announced prior to Closing.

The mailing address of our principal executive office is 1001 17th Street, Suite 1800, Denver, Colorado, 80202 and our telephone number is (720) 499-1400.

For more information about us, please see the section entitled “Information About Centennial.”

Centennial Resource Production, LLC

CRP is a wholly owned subsidiary of Centennial and owns, directly or indirectly, substantially all of Centennial’s operating assets.

The mailing address of CRP’s principal executive office is 1001 17th Street, Suite 1800, Denver, Colorado, 80202 and CRP’s telephone number is (720) 499-1400.

Colgate Energy Partners III, LLC

Colgate is an independent oil and natural gas company headquartered in Midland, Texas focused on generating robust equity returns through the responsible acquisition, optimization and development of oil and liquids-rich natural gas assets. Colgate’s operations are focused in the core of the Delaware Basin. Colgate’s assets are concentrated in Reeves, Ward and Eddy Counties, consisting of approximately 102,000 net leasehold acres and 25,000 net royalty acres as of March 31, 2022.

The mailing address of Colgate’s principal executive office is 300 N Marienfeld St., Suite 1000, Midland, TX 79701 and its telephone number is (432) 695-4222.

 

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For more information about Colgate, please see the section entitled “Information About Colgate” and “Colgate Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Business Combination Agreement

On May 19, 2022, we entered into the Business Combination Agreement with CRP, Colgate, and, solely for purposes of the specified provisions therein, the Colgate Unitholder, pursuant to which, at the Effective Time, and subject to the satisfaction or waiver of certain conditions in the Business Combination Agreement, (a) CRP will merge with and into Colgate, with CRP surviving the Merger and continuing as a subsidiary of Centennial, (b) all membership interests of CRP, issued and outstanding immediately prior to the Effective Time, will be converted into a number of validly issued, fully paid and nonassessable (except as limited by the Delaware Limited Liability Company Act) Surviving Company Units equal to the number of shares of our Class A Common Stock that are outstanding immediately after the Effective Time after giving effect to the Transactions and Centennial will remain as the manager of the Surviving Company, and (c) all of the Colgate Unitholder’s sole membership interest in Colgate will be exchanged for 269,300,000 shares of our Class C Common Stock, 269,300,000 additional Surviving Company Units and $525,000,000 in cash. At the Closing, the Merger Consideration may be adjusted downward pursuant to customary title and environmental defect considerations set forth in the Business Combination Agreement.

Related Agreements

This section describes the material provisions of certain additional agreements entered into, or to be entered into, in connection with the Business Combination Agreement, which we refer to as the Related Agreements, but does not purport to describe all of the terms thereof. The following summary is qualified in its entirety by reference to the complete text of each of the Related Agreements. Shareholders and other interested parties are urged to read the Related Agreements in their entirety prior to voting on the proposals presented at the Special Meeting. Please see the section entitled “Proposal 1—The Stock Issuance Proposal—Related Agreements” for additional information.

Registration Rights Agreement

Contemporaneously with the Closing, in connection with the Transactions, Centennial, the Colgate Unitholder, and each of the parties designated by the Colgate Unitholder and listed on the signature pages thereto (each such party, as well as the Colgate Unitholder, a “Holder” and collectively, the “Holders”) will enter into a Registration Rights Agreement substantially in the form included as Annex D (the “Registration Rights Agreement”) to be effective as of the Closing, pursuant to which Centennial will agree to register for resale, pursuant to Rule 415 under the Securities Act, (a) shares of Class A Common Stock issuable upon the redemption or exchange of the Surviving Company Units and corresponding shares of Class C Common Stock in accordance with the A&R LLC Agreement, (b) any outstanding shares of Class A Common Stock or any other equity security (including the shares of Class A Common Stock issued or issuable upon the exercise of any other equity security) of Centennial held by a Holder as of the date of the Registration Rights Agreement, and (c) any other equity security of Centennial issued or issuable with respect to any such share of Class A Common Stock by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or reorganization (collectively, the “Registrable Securities”). At Closing, it is anticipated that 269.3 million shares of Class A Common Stock, which is the same number of shares of Class C Common Stock that will be issued to the Colgate Unitholder as a portion of the Merger Consideration, will have registration rights under the Registration Rights Agreement. At any time that the registration statement is effective, subject to the lock-up described below, any Holder may, subject to certain customary exceptions and limitations on number of requests, request to sell all or a portion of its Registrable Securities in an underwritten offering pursuant to the registration statement. In addition, the Holders will have, subject to certain customary exceptions, certain “piggyback” rights with respect to underwritten offerings.

 

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Pursuant to the Registration Rights Agreement, the Holders have, subject to limited exceptions, agreed to a lock-up on their respective shares of Class A Common Stock and Class C Common Stock following consummation of the Merger, pursuant to which such parties will not transfer such shares of Class A Common Stock or Class C Common Stock for a period of six months following the Closing.

Voting Agreement

On May 19, 2022, in connection with the execution of the Business Combination Agreement, Centennial, Colgate, and certain shareholders of Centennial named therein (the “Centennial Holders”) entered into a Voting and Support Agreement (the “Voting Agreement”), pursuant to which and subject to the terms and conditions thereof, the Centennial Holders agreed to vote all of the shares of Class A Common Stock beneficially owned by the Centennial Holders in favor of the approval of each of the proposals presented at the Special Meeting.

As of the Record Date, the Centennial Holders beneficially owned an aggregate of approximately                 % of the outstanding shares of Common Stock. The Voting Agreement entered into by the foregoing parties is included as Annex E.

Sixth Amended and Restated Limited Liability Company Agreement of the Surviving Company

In connection with the Transactions, at the Effective Time, the Fifth Amended and Restated Limited Liability Company Agreement of CRP, dated as of October 11, 2016 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, together with all schedules, exhibits and annexes thereto) will be amended and restated in its entirety to, among other things, recapitalize the authorized equity securities of the Surviving Company (including the reclassification of all membership interests of CRP into Surviving Company Units, with the rights, preferences and obligations set forth therein), permit the issuance and ownership of the Surviving Company Units as contemplated by the Transactions, with the rights, preferences, and obligations set forth therein and admit the Colgate Unitholder as a member of the Surviving Company (as amended and restated, the “A&R LLC Agreement”).

Pursuant to the A&R LLC Agreement, each member of the Surviving Company (other than Centennial) will have the right to cause the Surviving Company to redeem all or a portion of its Surviving Company Units in exchange for, at the Surviving Company’s option, (i) an equal number of shares of Class A Common Stock or (ii) an amount of cash equal to the market value of an equal number of shares of Class A Common Stock to be determined based on the volume weighted average price of a share of Class A Common Stock on Nasdaq for the five trading days ending on, and including, the date on which such redeeming shareholder delivers notice to the Surviving Company of such member’s intention to redeem all or a portion of its Surviving Company Units. Upon completion of any such redemption, the Surviving Company will cancel such redeemed Surviving Company Units and we will cancel a corresponding number of shares of Class C Common Stock. Pursuant to the A&R LLC Agreement, we have agreed to contribute to the Surviving Company the consideration to which any redeeming member is entitled in connection with such a redemption pursuant to the A&R LLC Agreement. Alternatively, we may, in our sole discretion, effect a direct exchange with such redeeming member of the Surviving Company, whereby we will pay the applicable cash consideration, or issue the applicable number of shares of Class A Common Stock, to which the redeeming member of the Surviving Company is entitled directly to such redeeming member in exchange for its Surviving Company Units. In such case, we will acquire such Surviving Company Units from such redeeming member and we will be treated for all purposes of the A&R LLC Agreement as the owner of such Surviving Company Units thereafter.

Fourth Amended and Restated Certificate of Incorporation of Centennial

In connection with the Transactions, at the Effective Time and subject to obtaining the approval of the A&R Charter Proposals, the Third Amended and Restated Certificate of Incorporation of Centennial will be amended

 

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and restated in its entirety to, among other things, (i) increase the authorized number of shares of (A) Class A common stock for issuance from 600,000,000 to 1,000,000,000 and (B) Class C common stock for issuance from 20,000,000 to 500,000,000, (ii) allow shareholders of the Company to act by written consent, subject to certain limitations, and (iii) designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for substantially all actions and proceedings that may be initiated by shareholders.

Our Board Following the Transactions

If the Transactions are consummated, we will take all necessary action (but solely to the extent such actions are permitted by law) to cause the Board to consist of 11 members, including: (i) an executive chairman, which will be Sean R. Smith, our current Chief Executive Officer; (ii) four directors designated by Centennial, which will include Robert M. Tichio and three independent directors; (iii) five directors designated by Colgate, which will include William M. Hickey III, James H. Walter, William J. Quinn and two independent directors; and (iv) one independent director mutually agreed to by Centennial and Colgate. For more information, please see the section entitled “Management After the Transactions.”

The Stock Issuance Proposal

Pursuant to the Business Combination Agreement, our shareholders will be asked to vote on a proposal to approve, for purposes of complying with Rule 5635(a), the issuance of shares of Centennial Class C common stock in connection with the Transactions that equal more than 20% of the issued and outstanding Common Stock. For more information about the issuance contemplated by the Business Combination Agreement, please see the section entitled “Proposal 1—The Stock Issuance Proposal.”

The A&R Charter Proposals

Our shareholders will also be asked to vote on separate proposals to approve and adopt the Proposed Charter in the form attached hereto as Annex B, as follows: (i) a proposal to increase the authorized number of shares of (A) Class A common stock for issuance from 600,000,000 to 1,000,000,000 and (B) Class C common stock for issuance from 20,000,000 to 500,000,000, (ii) a proposal to allow shareholders of the Company to act by written consent, subject to certain limitations, (iii) a proposal to designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for substantially all actions and proceedings that may be initiated by shareholders, and (iv) a proposal to approve and adopt the Proposed Charter. For more information, please see the section entitled “Proposals 2A – 2D—Approval of the A&R Charter Proposals.”

The Merger Compensation Proposal

Our shareholders will also be asked to vote on a proposal to approve, on an advisory, non-binding, basis specified compensation that may be received by our named executive officers in connection with the Merger. For more information, please see the section entitled “Proposal 3—Approval of the Merger Compensation Proposal.”

The Adjournment Proposal

In addition, our shareholders will be asked to vote on a proposal to adjourn the Special Meeting to a later date or dates, if necessary, to permit further solicitation and vote of proxies in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Stock Issuance Proposal and the A&R Charter Proposals. For more information, please see the section entitled “Proposal 4—Approval of the Adjournment Proposal.”

Date, Time and Place of Special Meeting

The Special Meeting will take place on                , 2022 at                Mountain Time at                . Although we are currently planning to hold the Special Meeting in person, we are actively monitoring the health and safety

 

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concerns and government restrictions and recommendations relating to the COVID-19 pandemic. In the event it is not possible or advisable to hold the Special Meeting in person, we will announce alternative arrangements for the Special Meeting as promptly as practicable, which may include holding a virtual-only or hybrid Special Meeting rather than an in-person Special Meeting. If we take this step, details on how to participate will be issued by press release, posted on our website and filed with the SEC as additional proxy material. Therefore, if you are planning to attend our Special Meeting, please monitor our website prior to the meeting date.

Voting Power; Record Date

Only shareholders of record at the close of business on                 , 2022, the Record Date, will be entitled to vote at the Special Meeting. You are entitled to one vote for each share of Common Stock that you owned as of the close of business on the Record Date. If your shares are held in “street name” or are in a margin or similar account, you should contact your broker, bank or other nominee to ensure that votes related to the shares you beneficially own are properly counted. As of the Record Date, there were                  shares of Common Stock outstanding and entitled to vote.

Accounting and Tax Treatment

The Transactions will be accounted for using the acquisition method of accounting for business combinations. The allocation of the preliminary estimated purchase price is based upon management’s estimates and assumptions related to the fair value of assets acquired and liabilities assumed on the closing date of the Transactions. The initial accounting for the business combination is therefore preliminary, and adjustments to provisional amounts, or the recognition of additional assets acquired or liabilities assumed, may occur as additional information is obtained. We expect to finalize the allocation of the purchase consideration as soon as practicable after completion of the Transactions and are required to do so within one year from the closing date of the Transactions.

For U.S. federal income tax purposes, we expect to treat the Merger as a contribution by the Colgate Unitholder of the assets of Colgate in a contribution governed, in part, by Section 721 of the Code, and we do not expect the Merger to result in the recognition of taxable gain or loss for Centennial or CRP.

Proxy Solicitation

We are soliciting proxies on behalf of our Board. Proxies may be solicited by mail. We have also engaged Morrow Sodali to assist in the solicitation of proxies.

Conditions to Closing of the Transactions

Conditions to Each Party’s Obligations

The respective obligations of us and Colgate to consummate and effect the Transactions are subject to the satisfaction, at or prior to the Closing, of each of the following conditions:

 

   

no governmental authority or competent jurisdiction having enacted, issued or promulgated any order or law after the date of the Business Combination Agreement that has the effect of making the Transactions illegal or otherwise prohibiting the consummation thereof;

 

   

the expiration of the waiting period under the HSR Act and no agreement shall be in effect between Colgate, Centennial or any of their respective subsidiaries, on the one hand, and the Antitrust Division or FTC, on the other hand, not to consummate the Transactions, the required vote of our shareholders to approve the Stock Issuance Proposal and the A&R Charter Proposals; and

 

   

the shares of Class A Common Stock (including shares of Class A Common Stock issuable upon exchange of the Surviving Company Units) having been approved for listing on Nasdaq, subject to official notice of issuance.

 

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Conditions to Colgate’s Obligations

The obligations of Colgate to consummate the Transactions are subject to the satisfaction (or waiver by Colgate in writing) on or prior to Closing of each of the following conditions precedent:

 

   

(a) the fundamental representations and warranties of Centennial and CRP (i.e., representations related to existence and qualification, organizational power, authorization and enforceability, capitalization and brokerage arrangements) shall be true and correct in all material respects, except for any de minimis inaccuracies, as of the date of the Business Combination Agreement and the closing date of the Transactions (except to the extent such representations and warranties speak to an earlier date, in which case such representations and warranties shall be true and correct in all respects as of such earlier date); and (b) all other representations and warranties of Centennial and CRP (other than the fundamental representations of Centennial and CRP) shall be true and correct without giving effect to any materiality or Parent Material Adverse Effect (as defined in the Business Combination Agreement) qualifiers contained therein as of the closing date of the Transactions as though made on and as of the closing date of the Transactions (except for representations and warranties that refer to a specified date which need only be true and correct on and as of such specified date), except for breaches, if any, of such representations and warranties as would not individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect;

 

   

Each of Centennial and CRP must have performed and observed, in all material respects, all covenants and agreements to be performed or observed by them under the Business Combination Agreement prior to or on the date of the Closing;

 

   

Colgate must have received a certificate of Centennial signed by an executive officer of Centennial, dated as of the closing date of the Transactions, confirming that the conditions in the two bullets above have been satisfied; and

 

   

Centennial must have delivered to Colgate executed counterparts to all of the Related Agreements to which it is a party.

Conditions to Centennial’s Obligations

The obligations of Centennial and CRP to consummate the Transactions are subject to the satisfaction (or waiver by Centennial in writing) on or prior to the closing date of the Transactions of each of the following conditions precedent:

 

   

(a) the fundamental representations and warranties of Colgate (i.e., representations related to existence and qualification, organizational power, authorization and enforceability, capitalization and brokerage arrangements) shall be true and correct in all material respects, except for any de minimis inaccuracies, as of the date of the Business Combination Agreement and the closing date of the Transactions (except to the extent such representations and warranties speak to an earlier date, in which case such representations and warranties shall be true and correct in all respects as of such earlier date); and (b) all other representations and warranties of Colgate (other than the fundamental representations of Colgate) shall be true and correct without giving effect to any materiality or Company Material Adverse Effect (as defined in the Business Combination Agreement) qualifiers contained therein as of the closing date of the Transactions as though made on and as of the closing date of the Transactions (except for representations and warranties that refer to a specified date which need only be true and correct on and as of such specified date), except for breaches, if any, of such representations and warranties as would not individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect;

 

   

Each of Colgate, and solely with respect to certain specified provisions, the Colgate Unitholder, must have performed and observed, in all material respects, all covenants and agreements to be performed or observed by them under the Business Combination Agreement prior to or on the closing date of the Transactions;

 

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Centennial must have received a certificate of Colgate signed by an executive officer of Colgate, dated as of the closing date of the Transactions, confirming that the conditions in the two bullets above have been satisfied;

 

   

Colgate must have delivered to Centennial executed counterparts to all of the Related Agreements to which it, the Colgate Unitholder or any Colgate designee is a party; and

 

   

The Colgate Unitholder must have delivered to Centennial a properly executed Internal Revenue Service Form W-9.

Regulatory Matters

Under the HSR Act and the rules that have been promulgated thereunder by the U.S. Federal Trade Commission (“FTC”), certain transactions may not be consummated unless information has been furnished to the Antitrust Division of the Department of Justice (“Antitrust Division”) and the FTC and certain waiting period requirements have been satisfied. The Transactions are subject to these requirements and may not be completed until the expiration of a 30-day waiting period following the filing of the required Notification and Report Forms with the Antitrust Division and the FTC. If the FTC or the Antitrust Division makes a request for additional information or documentary material related to the Transactions (a “Second Request”), the waiting period with respect to the Transactions will be extended for an additional period of 30 calendar days, which will begin on the date on which Centennial and Colgate each certify compliance with the Second Request. Complying with a Second Request can take a significant period of time. On June 2, 2022, Centennial and Colgate filed the required forms under the HSR Act with the Antitrust Division and the FTC. The 30-day waiting period with respect to the Transactions, which cannot expire on a Saturday, Sunday or a U.S. federal holiday, expired at 11:59 p.m. Eastern Time on July 5, 2022.

At any time before or after consummation of the Transactions, notwithstanding expiration of the waiting period under the HSR Act, the applicable competition authorities could take such action under applicable antitrust laws as each deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Transactions. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. We cannot assure you that the Antitrust Division, the FTC, any state attorney general or any other government authority will not attempt to challenge the Transactions on antitrust grounds, and, if such a challenge is made, we cannot assure you as to its result. We are not aware of any material regulatory approvals or actions that are required for completion of the Transactions other than the expiration of the waiting period under the HSR Act. It is presently contemplated that if any such additional regulatory approvals or actions are required, those approvals or actions will be sought. There can be no assurance, however, that any additional approvals or actions will be obtained.

Quorum and Required Vote for Proposals for the Special Meeting

We will hold the Special Meeting if shareholders representing the required quorum of shares of Common Stock entitled to vote authorize their proxy online or telephonically, sign and return their proxy cards or attend the Special Meeting. The presence in person or by proxy of a majority of the shares of Common Stock entitled to vote at the Special Meeting constitutes a quorum. If you authorize your proxy online or telephonically or sign and return your proxy card, your shares will be counted to determine whether we have a quorum even if you abstain or fail to indicate your vote on the proxy card.

The Stock Issuance Proposal, the Adjournment Proposal and the Merger Compensation Proposal each require the affirmative vote of a majority of the votes cast by holders of outstanding shares of Common Stock present in person or represented by proxy, assuming a quorum is present. Each of the A&R Charter Proposals requires the affirmative vote of a majority of the outstanding shares of Common Stock entitled to vote thereon, assuming a quorum is present. Accordingly, a shareholder’s failure to vote by proxy or to vote in person at the Special Meeting or an abstention will have no effect on the Stock Issuance Proposal, the Merger Compensation Proposal

 

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or the Adjournment Proposal (except that abstentions are counted for purposes of determining if a quorum is present), but will have the same effect as a vote “AGAINST” the A&R Charter Proposals.

The Transactions are conditioned on, among other things, the approval of the Stock Issuance Proposal and the A&R Charter Proposals by our shareholders. The Merger Compensation Proposal and the Adjournment Proposal are not conditioned on the approval of any other proposal set forth in this proxy statement, and no proposal is conditioned on the approval of the Adjournment Proposal. It is important for you to note that if any of the Stock Issuance Proposal and the A&R Charter Proposals does not receive the requisite vote for approval, we will not be able to consummate the Transactions.

Opinion of Centennial’s Financial Advisor

Centennial has engaged Citi as its financial advisor in connection with the proposed Merger. In connection with this engagement, Citi delivered a written opinion, dated May 18, 2022, to the Board as to the fairness, from a financial point of view and as of the date of the opinion, to Centennial of the Merger Consideration to be paid pursuant to the Business Combination Agreement. The full text of Citi’s written opinion, dated May 18, 2022, which describes the assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Citi, is attached as Annex F to this proxy statement and is incorporated into this proxy statement by reference. The description of Citi’s opinion set forth herein is qualified in its entirety by reference to the full text of Citi’s opinion. Citi’s opinion was provided for the information of the Board (in its capacity as such) in connection with its evaluation of the Merger Consideration from a financial point of view to Centennial and did not address any other terms, aspects or implications of the Merger expressed no view as to, and its opinion did not address, the underlying business decision of Centennial to effect or enter into the Merger not constitute a recommendation as to how the Board or any securityholder should vote or act on any matters relating to the proposed Merger or otherwise.

Recommendation to Our Shareholders; Reasons for the Transactions

The Board unanimously recommends that our shareholders vote “FOR” each of the Stock Issuance Proposal, the A&R Charter Proposals, the Merger Compensation Proposal and the Adjournment Proposal. In making its determination, the Board considered a number of factors, which are described in greater detail in the section entitled “Proposal 1—The Stock Issuance Proposal—Our Board of Directors’ Reasons for the Approval of the Transactions.”

When you consider the recommendation of our Board in favor of approval of the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Consideration Proposal you should keep in mind that certain members of our Board and officers have interests in the Transactions that are different from or in addition to (and which may conflict with) your interests as a shareholder. Shareholders should take these interests into account in deciding whether to approve the proposals presented at the Special Meeting, including the Stock Issuance Proposal, the A&R Charter Proposals, the Merger Consideration Proposal and the Adjournment Proposal. Please see the section entitled “Proposal 1—The Stock Issuance Proposal—Interests of Centennial’s Directors and Executive Officers in the Transactions” for more information.

Risk Factors

In evaluating the Transactions and the proposals to be considered and voted on at the Special Meeting, you should carefully review and consider the risk factors set forth under the section entitled “Risk Factors of this proxy statement. The occurrence of one or more of the events or circumstances described in that section, alone or in combination with other events or circumstances, may have a material adverse effect on (i) the ability of us or Colgate to complete the Transactions and (ii) the business, cash flows, financial condition and results of operations of Centennial or Colgate or their respective subsidiaries prior to the consummation of the Transactions and the combined company following consummation of the Transactions.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These statements are based on current expectations, estimates, forecasts and projections about the industries in which we and Colgate operate and the beliefs and assumptions of our respective management. We use words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” variations of such words and similar expressions to identify forward-looking statements. In addition, statements that refer to the Transactions and any statements regarding the expected timing, benefits, synergies, growth opportunities and other financial and operating benefits thereof, the Closing and timing or satisfaction of regulatory and other closing conditions, or the anticipated operations, financial position, liquidity, performance, prospects or growth and scale opportunities of the combined company; integration activities; the anticipated value of the combined business to us and our stakeholders; the expected impact of the Transactions on our results of operations and financial condition; anticipated growth and trends in the business or key markets; and other characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that actual results could differ materially from those expressed in any forward-looking statements. While forward-looking statements are based on assumptions and analyses that management of Centennial and Colgate believe to be reasonable under the circumstances, whether actual results and developments will meet such expectations and predictions depends on a number of risks and uncertainties that could cause actual results, performance, and financial condition to differ materially from such expectations. Any forward-looking statements speak only as of the date on which it is made. Factors or events that could cause actual results to differ may emerge from time to time, and it is not possible to predict all of them. Please consider the foregoing factors and the other risk factors in the section entitled “Risk Factors,” as well as the risk factors contained in our SEC filings available at www.sec.gov, including our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q and such reports that are subsequently filed with the SEC. These filings identify and address other important risks and uncertainties that could cause actual events and results to differ materially from those contained in the forward-looking statements. These risks and uncertainties may be amplified by the COVID-19 pandemic and the current military conflict in Ukraine, which have caused significant economic uncertainty. Readers are cautioned not to put undue reliance on forward-looking statements, and Centennial and Colgate assume no obligation and do not intend to update or revise these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by securities and other applicable laws. Neither Centennial nor Colgate gives any assurance that any of Centennial, Colgate or the combined company will achieve its expectations.

 

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RISK FACTORS

You should carefully review and consider the following risk factors and the other information contained in this proxy statement, including the financial statements and notes to the financial statements included herein, in evaluating the Transactions and the proposals to be voted on at the Special Meeting. The following risk factors apply to the business and operations of Centennial and Colgate and will also apply to the business and operations of the combined company following the completion of the Transactions. The occurrence of one or more of the events or circumstances described in these risk factors, alone or in combination with other events or circumstances, may adversely affect the ability to complete or realize the anticipated benefits of the Transactions, and may have an adverse effect on the business, cash flows, financial condition and results of operations of the combined company. You should also carefully consider the following risk factors in addition to the other information included in this proxy statement, including matters addressed in the section entitled “Cautionary Note Regarding Forward-Looking Statements.” We or Colgate may face additional risks and uncertainties that are not presently known to us or Colgate, or that we or Colgate currently deem immaterial, which may also impair our or Colgate’s business or financial condition. The following discussion should be read in conjunction with the financial statements and notes to the financial statements included herein.

We have grouped the risks into three categories for ease of reading, and without any reflection on the importance of, or likelihood of, any particular category.

Risks Relating to the Transactions

The Transactions are subject to closing conditions and may not be completed, the Business Combination Agreement may be terminated in accordance with its terms, and we may be required to pay a termination fee upon termination.

The Transactions are subject to customary closing conditions that must be satisfied or waived prior to the completion of the Transactions, including the expiration of the waiting period under the HSR Act, no agreement shall be in effect between Colgate, Centennial or any of their respective subsidiaries, on the one hand, and the Antitrust Division or FTC, on the other hand, not to consummate the Transactions, and approval by our shareholders of both the Stock Issuance Proposal and the A&R Charter Proposals. Many of the closing conditions are not within our control. No assurance can be given that the required expiration of the waiting period under the HSR Act will occur without objections or comments, that no agreement will be in effect between Colgate, Centennial or any of their respective subsidiaries, on the one hand, and the Antitrust Division or FTC, on the other hand, not to consummate the Transactions and clearances and shareholder approvals will be obtained or that the required conditions to closing will be satisfied in a timely manner or at all. Any delay in completing the Transactions could cause the combined company not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve if the Transactions are successfully completed within its expected time frame.

Additionally, either party may terminate the Business Combination Agreement under certain circumstances, including, among other reasons, if the Transactions are not completed by February 19, 2023 (subject to an automatic extension of such date to May 19, 2023 in certain circumstances if additional time is needed to satisfy regulatory conditions). In addition, if the Business Combination Agreement is terminated under specified circumstances, we may be obligated to pay a termination fee of $72.0 million or to reimburse Colgate for certain of its transaction expenses in an amount of up to $20.0 million.

Moreover, if the Transactions are not completed for any reason, including because the required expiration of the waiting period under the HSR Act did not occur, an agreement is in effect between Colgate, Centennial or any of their respective subsidiaries, on the one hand, and the Antitrust Division or FTC, on the other hand, not to consummate the Transactions or shareholder approval of the Stock Issuance Proposal and the A&R Charter Proposals are not obtained, our ongoing businesses may be adversely affected and, without realizing any of the

 

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expected benefits of having completed the Transactions, we would be subject to a number of risks, including the following:

 

   

we may experience negative reactions from the financial markets, including negative impacts on our stock price;

 

   

we may experience negative reactions from our customers, suppliers, distributors and employees;

 

   

we will be required to pay our costs relating to the Transactions, such as financial advisory, legal, financing and accounting costs and associated fees and expenses, whether or not the Transactions are completed;

 

   

the market price of our Class A Common Stock could decline to the extent that the current market price reflects a market assumption that the Transactions will not be completed;

 

   

the Business Combination Agreement places certain restrictions on the conduct of our business prior to completion of the Transactions and such restrictions, the waiver of which are subject to the consent of Colgate, may prevent us from taking actions during the pendency of the Transactions that would be beneficial; and

 

   

matters relating to the Transactions (including integration planning) will require substantial commitments of time and resources by management, which could otherwise have been devoted to day-to-day operations or to other opportunities that may have been beneficial to us as an independent company.

We must obtain clearance under the HSR Act to consummate the Transactions, which, if delayed, not granted or granted with burdensome or unacceptable conditions, could prevent, substantially delay or impair consummation of the Transactions, result in additional expenditures of money and resources or reduce the anticipated benefits of the Transactions.

The completion of the Transactions are subject to customary closing conditions, including the expiration of the waiting period under the HSR Act (as more fully described in the section entitled “Proposal 1—The Stock Issuance Proposal—Regulatory Matters” of this proxy statement). Governmental and regulatory authorities may impose conditions on approvals and clearances as they deem necessary or desirable, including, but not limited to, seeking to enjoin the completion of the Transactions. Any conditions imposed in connection with clearance under the HSR Act could jeopardize or delay the completion of the Transactions, have a material adverse effect on the combined company or reduce the anticipated benefits of the Transactions. There is no assurance that we and Colgate will obtain the required clearance on a timely or acceptable basis, or at all. Failure to obtain the necessary clearance could substantially delay or prevent the consummation of the Transactions, which could have a material adverse effect on us.

The consideration payable under the Business Combination Agreement is fixed and will not be adjusted based on our performance.

Under the Business Combination Agreement, the total consideration payable by us consists of (i) 269,300,000 shares of Class C Common Stock, (ii) 269,300,000 additional Surviving Company Units, (iii) $525,000,000 in cash, subject to adjustments for certain Colgate title and environmental defect considerations set forth in the Business Combination Agreement. The purchase price will not be adjusted for changes in the market price of our Class A Common Stock or the economic performance of Centennial or Colgate. If the market price of our Class A Common Stock increases or the economic performance of Colgate relative to us declines (or the economic performance of Colgate relative to us improves), the consideration will not be adjusted to account for any such changes or any effective increase or decrease in the value of the Merger Consideration issued or paid to the Colgate Unitholder under the Business Combination Agreement.

We will be subject to business uncertainties and contractual restrictions, including the risk of litigation, while the Transactions are pending that may cause disruption and may make it more difficult to maintain relationships with employees, suppliers or customers.

Uncertainty about the effect of the Transactions on employees, suppliers and customers may have an adverse effect on Centennial and/or Colgate, which uncertainties may impair our or Colgate’s ability to attract, retain and

 

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motivate key personnel until the Transactions are completed and for a period of time thereafter, and could cause customers, suppliers and others that deal with Centennial or Colgate to seek to change existing business relationships with either of us.

Employee retention and recruitment may be challenging before the completion of the Transactions, as employees and prospective employees may experience uncertainty about their future roles following the Transactions. Key employees may depart or prospective key employees may fail to accept employment with us or Colgate because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company following the Transactions, any of which could have a material adverse effect on our business, financial condition and results of operations.

The pursuit of the Transactions and the preparation for the integration may place a significant burden on management and internal resources. The diversion of management’s attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on our business, financial condition and results of operations.

Until the completion of the Transactions or the termination of the Business Combination Agreement in accordance with its terms, we are prohibited from entering into certain transactions and taking certain actions that might otherwise be beneficial to us and our shareholders.

During the period between the date of the Business Combination Agreement and completion of the Transactions which, under the Business Combination Agreement, could take until February 19, 2023 (or until May 19, 2023 upon the automatic extension of such date in certain circumstances if additional time is needed to satisfy regulatory conditions), the Business Combination Agreement restricts us from taking specified actions or from pursuing what might otherwise be attractive business opportunities or making other changes to our business, in each case without the consent of Colgate. These restrictions may prevent us from taking actions during the pendency of the Transactions that would have been beneficial. Adverse effects arising from these restrictions during the pendency of the Transactions could be exacerbated by any delays in consummation of the Transactions or termination of the Business Combination Agreement.

The Business Combination Agreement limits our ability to pursue alternatives to the Transactions and may discourage a potential competing acquirer of Centennial, including the payment by Centennial of a termination fee.

The Business Combination Agreement contains provisions that, subject to limited exceptions, restrict our ability to (i) directly or indirectly initiate or solicit, or encourage or facilitate any inquiry or the making or submission of any proposal that constitutes, or would reasonably be expected to lead to, a Parent Acquisition Proposal (as defined in the Business Combination Agreement), (ii) other than clarifying terms of the Parent Acquisition Proposal so that Parent may inform itself about such Parent Acquisition Proposal or to inform a third party or its representatives of the restrictions imposed in accordance with the applicable terms of the Business Combination Agreement, participate or engage in discussions or negotiations with, or disclose any information or data related to Centennial or its subsidiaries or afford access to the properties, books or records of Centennial or its subsidiaries to any person that has made a Parent Acquisition Proposal or to any person in contemplation of making a Parent Acquisition Proposal, or (iii) accept a Parent Acquisition Proposal or enter into any agreement, including any letter of intent, memorandum of understanding, agreement in principal, merger agreement, acquisition agreement, option agreement, joint venture agreement, partnership agreement or other similar agreement, arrangement or understanding, (A) constituting or related to, or that is intended to or would reasonably be expected to lead to, any Parent Acquisition Proposal (other than a confidentiality agreement as provided in the Business Combination Agreement) or (B) requiring, intending to cause, or which could reasonably be expected to cause Centennial to abandon, terminate or fail to consummate the Transactions (each, a “Parent Acquisition Agreement”). In addition, before the Board withdraws, qualifies or modifies its recommendation of the proposed Transactions or terminates the Business Combination Agreement to enter into a

 

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definitive agreement with respect to a competing transaction, Colgate generally has an opportunity to offer to modify the terms of the proposed Transactions or Business Combination Agreement. In some circumstances, upon termination of the Business Combination Agreement, we will be required to pay Colgate a termination fee equal to $72.0 million.

These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of us from considering or proposing that acquisition, even if it were prepared to pay above market value, or might otherwise result in a potential third-party acquirer proposing to pay a lower price to Centennial shareholders than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.

If the Business Combination Agreement is terminated and we decide to seek another merger transaction, we may not be able to negotiate or consummate a transaction with another party on terms comparable to, or better than, the terms of the Business Combination Agreement.

The Transactions will involve substantial costs.

We have incurred and expect to incur non-recurring costs associated with the Transactions and combining the operations of the two companies, as well as transaction fees and other costs related to the Transactions. These costs and expenses include fees paid to legal, financial and accounting advisors, regulatory and public relations advisors, filing fees, printing costs and other costs and expenses. A significant portion of these transaction costs is contingent upon the Closing occurring, although some have been and will be incurred regardless of whether the Transactions are consummated.

In addition, the combined company will also incur significant restructuring and integration costs in connection with the integration of Centennial and Colgate and the execution of our business plan, including costs relating to formulating and implementing integration plans and eliminating duplicative costs, as well as potential employment-related costs. The costs related to restructuring will be expensed as a cost of the ongoing results of operations of either us or the combined company. There are processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the Transactions and the integration of Colgate’s business. While we have assumed a certain level of expenses would be incurred to integrate Centennial and Colgate and achieve synergies and efficiencies and we continue to assess the magnitude of these costs, many of these expenses are, by their nature, difficult to estimate accurately and there are many factors beyond our control that could affect the total amount or timing of these costs. Although we expect that the elimination of duplicative costs, as well as the realization of strategic benefits, additional income, synergies and other efficiencies should allow the combined company to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.

Securities class action and derivative lawsuits may be filed against us, or against our directors, challenging the Transactions, and an adverse ruling in any such lawsuit may prevent the Transactions from becoming effective or from becoming effective within the expected time frame.

Securities class action lawsuits and derivative lawsuits are often brought against public companies that have entered into acquisition, merger or other business combination agreements. Transactions like the Transactions are frequently subject to litigation or other legal proceedings, including actions alleging that our Board breached their fiduciary duties to our shareholders by entering into the Business Combination Agreement. We cannot provide assurance that such litigation or other legal proceedings will not be brought. If litigation or other legal proceedings are in fact brought against us, or against our Board, we will defend against it, but might not be successful in doing so. An adverse outcome in such matters, as well as the costs and efforts of a defense even if successful, could have a material adverse effect on the business, results of operation or financial position of us or the combined company, including through the possible diversion of company resources or distraction of key personnel.

 

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Lawsuits that may be brought against us, Colgate or our or its directors could also seek, among other things, injunctive relief or other equitable relief, including a request to enjoin us from consummating the Transactions. One of the conditions to the Closing are that no order, award or judgment by any court or other tribunal of competent jurisdiction has been entered and continues to be in effect and no law has been adopted or is effective, in either case, that prohibits or makes illegal the Closing. Consequently, if a plaintiff is successful in obtaining an order, award or judgment prohibiting completion of the Transactions, that order, award or judgment may delay or prevent the Transactions from being completed within the expected time frame or at all, which may adversely affect our business, financial position and results of operations.

We will incur additional indebtedness in connection with the Transactions, and the combined company’s debt may impose certain financial and operational limitations.

In addition to our existing indebtedness under our credit facilities and indentures, we plan to (i) incur additional debt under CRP’s revolving credit facility in order to fund the $525 million of Cash Consideration and (ii) assume approximately $1.4 billion in principal amount of Colgate’s outstanding net debt, as part of the Transactions. The amount of debt to be borrowed under CRP’s revolving credit facility as part of the Transactions will be dependent upon the amount of our cash and cash equivalents as of the closing date of the Merger.

While we expect to generate material free cash flow prior to the Closing to offset a portion of this debt, the combined company’s level of indebtedness following completion of the Transactions could have important consequences. For example, it could:

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

impair our ability to obtain additional debt or equity financing in the future for working capital, capital expenditures development of estimated PUDs, development and acquisition projects, acquisitions or general corporate or other purposes;

 

   

require us to dedicate a material portion of our cash flows to the payment of principal and interest on our indebtedness, thereby reducing the availability of our cash flows to fund working capital needs, capital expenditures, development of estimated PUDs, development and acquisition projects, acquisitions and other general corporate purposes;

 

   

expose us to variable interest rate risk to the extent we make borrowings under CRP’s revolving credit facility;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

place us at a disadvantage compared to our competitors that have less indebtedness; and

 

   

limit our ability to adjust to changing market conditions.

Any of these risks could materially impact our ability to fund our operations or limit our ability to expand the combined business, which could have a material adverse effect on the combined business, financial condition and results of operations.

Combining the businesses of Centennial and Colgate may be more difficult, costly or time-consuming than expected and the combined company may fail to realize the anticipated synergies and other benefits of the Transactions, which may adversely affect the combined company’s business results and negatively affect the value of our Common Stock following the consummation of the Transactions.

Centennial and Colgate have operated and, until the completion of the Transactions will continue to operate, independently. The success of the Transactions will depend on, among other things, the ability of Centennial and

 

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Colgate to combine their businesses in a manner that facilitates growth opportunities and realizes expected cost savings. We have entered into the Business Combination Agreement because we believe that the transactions contemplated by the Business Combination Agreement are fair to and in the best interests of our shareholders and that combining the businesses of Centennial and Colgate will produce benefits as well as cost savings and other cost and capital expenditure synergies.

Following the Closing, Centennial and Colgate must successfully combine their respective businesses in a manner that permits these benefits to be realized. For example, the following issues, among others, must be addressed in integrating the operations of the two companies in order to realize the anticipated benefits of the Transactions:

 

   

combining the companies’ operations and corporate functions;

 

   

combining the businesses of Centennial and Colgate and meeting the capital requirements of the combined company, in a manner that permits the combined company to achieve any cost savings or other synergies anticipated to result from the Transactions, the failure of which would result in the anticipated benefits of the Transactions not being realized in the time frame currently anticipated or at all;

 

   

integrating personnel from the two companies;

 

   

integrating and unifying our reserves and the development of our new PUDs;

 

   

identifying and eliminating underperforming or uncertain wells;

 

   

harmonizing the companies’ operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;

 

   

maintaining existing agreements with customers, suppliers, distributors and vendors, avoiding delays in entering into new agreements with prospective customers, suppliers, distributors and vendors, and leveraging relationships with such third parties for the benefit of the combined company;

 

   

addressing possible differences in business backgrounds, corporate cultures and management philosophies;

 

   

consolidating the companies’ administrative and information technology infrastructure;

 

   

coordinating distribution and marketing efforts;

 

   

managing the movement of certain positions to the new proposed headquarters in Midland, Texas; and

 

   

effecting actions that may be required in connection with obtaining regulatory or other governmental approvals.

It is possible that the integration process could result in the loss of key Centennial or Colgate employees, the loss of customers, the disruption of either company’s or both companies’ ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. In addition, the actual integration may result in additional and unforeseen expenses. If the combined company is not able to adequately address integration challenges, we may be unable to successfully integrate operations and the anticipated benefits of the integration plan may not be realized.

In addition, the combined company must achieve the anticipated growth and cost savings without adversely affecting current revenues and investments in future growth. If the combined company is not able to successfully achieve these objectives, the anticipated synergies and other benefits of the Transactions may not be realized fully, or at all, or may take longer to realize than expected. Additionally, we may inherit from Colgate legal, regulatory, and other risks that occurred prior to the Transactions, whether known or unknown to us, which may be material to the combined company. Actual growth, cost and capital expenditure synergies and other cost

 

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savings, if achieved, may be lower than what we expect and may take longer to achieve than anticipated. Moreover, at times the attention of the combined company’s management and resources may be focused on the integration of the businesses of the two companies and diverted from day-to-day business operations or other opportunities that may have been beneficial to such company, which may disrupt the combined company’s ongoing business.

An inability to realize the full extent of the anticipated benefits of the Transactions, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, level of expenses and operating results of the combined company, which may adversely affect the value of our Common Stock following the consummation of the Transactions. Moreover, if the combined company is unable to realize the full strategic and financial benefits currently anticipated from the Transactions, Centennial shareholders will have experienced substantial dilution of their ownership interests without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the Transactions.

The combined company may not be able to retain customers, suppliers or distributors, or customers, suppliers or distributors may seek to modify contractual relationships with the combined company, which could have an adverse effect on the combined company’s business and operations. Third parties may terminate or alter existing contracts or relationships with the combined company.

As a result of the Transactions, the combined company may experience impacts on relationships with customers, suppliers and distributors that may harm the combined company’s business and results of operations. Certain customers, suppliers or distributors may seek to terminate or modify contractual obligations following the Transactions whether or not contractual rights are triggered as a result of the Transactions. There can be no guarantee that customers, suppliers and distributors will remain with or continue to have a relationship with the combined company or do so on the same or similar contractual terms following the Transactions. If any customers, suppliers or distributors seek to terminate or modify contractual obligations or discontinue the relationship with the combined company, then the combined company’s business and results of operations may be harmed. If the combined company’s suppliers were to seek to terminate or modify an arrangement with the combined company, then the combined company may be unable to procure necessary supplies from other suppliers in a timely and efficient manner and on acceptable terms, or at all.

We and Colgate also have contracts with third parties which may require consent from these parties in connection with the Transactions, or which may otherwise contain limitations applicable to such contracts following the Transactions. If these consents cannot be obtained, the combined company may suffer a loss of potential future revenue, incur costs and lose rights that may be material to the combined company’s business. In addition, third parties with whom we or Colgate currently have relationships may terminate or otherwise reduce the scope of their relationship in anticipation of the Transactions. Any such disruptions could limit the combined company’s ability to achieve the anticipated benefits of the Transactions. The adverse effect of any such disruptions could also be exacerbated by a delay in the completion of the Transactions or by a termination of the Business Combination Agreement.

The unaudited pro forma combined financial information and Centennial’s and Colgate’s respective unaudited forecasted financial information included in this proxy statement may not be indicative of what the actual financial position or results of operations would have been or will be. Our future results following the Transactions may differ, possibly materially, from the unaudited pro forma combined financial information and Centennial’s and Colgate’s respective unaudited forecasted financial information presented in this proxy statement.

The unaudited pro forma combined financial information and Centennial’s and Colgate’s respective unaudited forecasted financial information are presented for illustrative purposes only, contain a variety of adjustments, assumptions, and preliminary estimates and do not represent the actual financial position or results of operations

 

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of Centennial and Colgate prior to the transaction or that of the combined company following the Transactions. Specifically, the transaction and post-transaction integration process may give rise to unexpected liabilities and costs, including costs associated with the defense and resolution of Transactions-related litigation or other claims. In addition, the assumptions used in preparing the unaudited pro forma combined financial information and Centennial’s and Colgate’s respective unaudited forecasted financial information in this proxy statement may not prove to be accurate and may be affected by other factors. Any significant changes in the market price of the Class A Common Stock may cause a significant change in the purchase price used for Centennial’s accounting purposes and the unaudited pro forma combined financial information and Centennial’s and Colgate’s respective unaudited forecasted financial information contained in this proxy statement. Because the unaudited pro forma combined financial information and Centennial’s and Colgate’s respective unaudited forecasted financial information in this proxy statement is presented for illustrative purposes only and is not necessarily indicative of what the actual financial position or results of operations would have been had the Transactions been completed on the dates indicated, our future results following the Transactions may differ, possibly materially, from such unaudited pro forma combined financial information and Centennial’s and Colgate’s respective unaudited forecasted financial information. See the section entitled “Unaudited Pro Forma Combined Financial Information” and the historical financial statements of Colgate included elsewhere in this proxy statement for more information.

The historical financial results of Colgate and the unaudited pro forma combined financial information included elsewhere in this proxy statement may not be indicative of Colgate’s actual financial position or results of operations if it were a public company.

The historical financial results of Colgate included in this proxy statement do not reflect the financial condition, results of operations or cash flows it would have achieved as a public company during the periods presented or those the combined company will achieve in the future. The combined company’s future financial condition, results of operations and cash flows could be materially different from amounts reflected in Colgate’s historical financial statements included elsewhere in this proxy statement. As such, it may be difficult for investors to compare the combined company’s future results to historical results or to evaluate its relative performance or trends in its business.

Similarly, the unaudited pro forma combined financial information in this proxy statement is presented for illustrative purposes only and has been prepared based on a number of assumptions including, but not limited to, those assumptions described in the accompanying unaudited pro forma combined financial statements. Accordingly, such pro forma financial information may not be indicative of the combined company’s future operating or financial performance and the combined company’s actual financial condition and results of operations may vary materially from the pro forma results of operations and balance sheet contained elsewhere in this proxy statement, including as a result of such assumptions not being accurate. See the section entitled “Unaudited Pro Forma Combined Financial Information.”

Colgate is currently not a U.S. public reporting company and the obligations associated with integrating into a public company may require significant resources and management attention.

Colgate is, and prior to the consummation of the Transactions will remain, a private company that is not subject to reporting requirements and does not have accounting personnel specifically employed to review internal controls over financial reporting. Upon completion of the Transactions, the Colgate business will become subject to the rules and regulations established from time to time by the SEC and Nasdaq. In addition, as a public company, we are required to document and test our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, so that our management can certify as to the effectiveness of our internal control over financial reporting in connection with the annual report. Colgate is required to be included in the scope of our internal control over financial reporting in the annual report to be filed with the SEC for the fiscal year following the fiscal year in which the Transactions are consummated and thereafter, which requires us to make and document significant changes to our internal controls over financial reporting. Bringing

 

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Colgate into compliance with these rules and regulations and integrating Colgate into our current compliance and accounting system may increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. Furthermore, the need to establish the necessary corporate infrastructure to integrate Colgate may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition and results of operations. However, the measures we take may not be sufficient to satisfy our obligations as a public company. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise upon the Transactions and maintain our culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition and results of operations. In addition, we cannot predict or estimate the amount of additional costs we may incur to bring Colgate into compliance with these requirements. We anticipate that these costs will materially increase our selling, general and administration expenses. In addition, bringing Colgate into compliance with these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. These additional obligations could have a material adverse effect on our business, financial condition, results of operations and cash flow.

The Proposed Charter will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for substantially all actions and proceedings that may be initiated by shareholders, which could limit shareholders’ ability to obtain a favorable judicial forum for disputes with the combined company or its directors, officers, employees or agents.

The Proposed Charter will provide that, unless the combined company consents in writing to the selection of an alternative forum, the (i) Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (A) any derivative action or proceeding brought on behalf of the combined company, (B) any action asserting a claim of breach of a fiduciary duty owed by any of the directors, officers, employees or agents of the combined company to the combined company or its shareholders, (C) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, the Proposed Charter or the combined company’s bylaws or (D) any action asserting a claim against the combined company that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein; and (ii) subject to the foregoing, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, including all causes of action asserted against any defendant to such complaint. In the event the Delaware Court of Chancery lacks subject matter jurisdiction, then the sole and exclusive forum for such action or proceeding shall be the federal district court for the District of Delaware. Any person or entity purchasing or otherwise acquiring any interest in shares of the capital stock of the combined company will be deemed to have notice of, and consented to, the provisions of the Proposed Charter described in the preceding sentences.

Notwithstanding the foregoing, this provision would not apply to claims brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.

Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As noted above, the Proposed Charter will provide that the federal district courts of the United States of America shall have exclusive jurisdiction over any action arising under the Securities Act. Accordingly, there is uncertainty as to whether a court would enforce this provision. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or the directors, officers, employees or agents of the combined company, which may discourage such lawsuits against the combined company and such persons. Alternatively, if a court were to find these provisions

 

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of the Proposed Charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, the combined company may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect the business, financial condition or results of operations of the combined company.

Risks Relating to Our Business

You should read and consider risk factors specific to our businesses that will also affect the combined company after the completion of the Transactions. These risks are described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and subsequent Quarterly Reports on Form 10-Q, which are incorporated by reference herein. For the location of information incorporated by reference in this proxy statement, see the section entitled “Where You Can Find Additional Information; Incorporation of Certain Documents by Reference.

Risks Relating to Colgate’s Business

The businesses of Colgate and Centennial are subject to similar risks and uncertainties. Accordingly, Colgate’s business is and will be subject to risks similar to those described above and in Centennial’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (taking into account the differences in their respective business activities). In addition, Colgate and its business are and will continue to be subject to the following risks specific to Colgate. For purposes of this section, references to “we,” “our,” “us,” the “Company” or “Colgate” refer to Colgate Energy Partners III, LLC and its consolidated subsidiaries.

Risks Related to Our Business and the Oil, Natural Gas and NGL Industry

Oil, natural gas and NGL prices are highly volatile. An extended decline in commodity prices may adversely affect our business, financial condition or results of operations and our ability to meet our capital expenditure obligations and financial commitments.

Our revenues, profitability and cash flows depend upon the prices for oil, natural gas and NGL. The prices we receive for oil, natural gas and NGL production are volatile and a decrease in prices can materially and adversely affect our financial results and impede our growth, including our ability to maintain or increase our borrowing capacity, to repay current or future indebtedness and to obtain additional capital on attractive terms. Changes in oil, natural gas and NGL prices have a significant impact on the amount of oil, natural gas and NGL that we can produce economically, the value of our reserves and on our cash flows. Historically, world-wide oil, natural gas and NGL prices and markets have been subject to significant change and may continue to change in the future. In particular, oil prices fluctuated during 2018 and 2019, and declined dramatically during 2020. During the year ended December 31, 2021, the NYMEX daily oil price reached a high of $85.64 per Bbl in October 2021 and a low of $47.47 in January 2021, and the NYMEX daily natural gas price reached a high of $23.86 per MMBtu in February 2021 and a low of $2.43 in April 2021, and prices have remained volatile. In response to the conflict in Ukraine, the NYMEX daily oil price reached a high of $123.70 on March 8, 2022, and the NYMEX daily natural gas price reached $4.61 on March 8, 2022. Prices for oil, natural gas and NGLs may fluctuate widely in response to relatively minor changes in supply and demand, market uncertainty and a variety of additional factors that are beyond our control, such as:

 

   

the domestic and foreign supply of and demand for oil, natural gas and NGL;

 

   

the price and quantity of foreign imports of oil, natural gas and NGL;

 

   

political and economic conditions and events in foreign oil and natural gas producing countries, including embargoes, continued hostilities in the Middle East, Ukraine and other sustained military campaigns, the armed conflict in Ukraine and associated economic sanctions on Russia, conditions in South America, Central America, China and Russia, and acts of terrorism or sabotage;

 

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the ability of and actions taken by members of Organization of the Petroleum Exporting Countries (“OPEC”) and other oil-producing nations in connection with their arrangements to maintain oil prices and production controls;

 

   

the impact on worldwide economic activity of an epidemic, outbreak or other public health events, such as COVID-19;

 

   

the proximity of our production to and capacity of oil, natural gas and NGL pipelines and other transportation and storage facilities;

 

   

federal regulations applicable to exports of liquefied natural gas (“LNG”), including the export of the first quantities of LNG liquefied from natural gas produced in the lower 48 states of the United States;

 

   

the level of consumer product demand;

 

   

weather conditions;

 

   

U.S. and non-U.S. governmental regulations, including environmental initiatives and taxation;

 

   

overall domestic and global economic conditions;

 

   

the value of the dollar relative to the currencies of other countries;

 

   

stockholder activism or activities by non-governmental organizations to restrict the exploration, development and production of oil, natural gas and NGL to minimize emissions of carbon dioxide, a GHG;

 

   

technological advances affecting energy consumption and energy supply;

 

   

the price and availability of alternative fuels; and

 

   

the impact of energy conservation efforts.

The COVID-19 pandemic and related economic repercussions have had, and are expected to continue to have, a significant impact on our business, and depending on the duration of the pandemic and its effect on the oil and natural gas industry, could have a material adverse effect on our business, liquidity, consolidated results of operations and consolidated financial condition.

As a result of the COVID-19 pandemic, we may be exposed to additional liabilities and risks created by this unprecedented crisis. The COVID-19 pandemic has resulted in governmental actions ordering citizens in the United States and countries around the world to shelter in place, which curtails travel and commerce and overall demand for petroleum products.

The forced shutdown of economic activity has directly affected our business and has exacerbated the potential negative impact from many of the risks described herein, including those relating to reduced oil, natural gas and NGL prices.

The nature, scale and scope of the above-described events combined with the uncertain duration and extent of governmental actions prevent us from identifying all potential risks to our business. We believe that the known and potential impacts of the COVID-19 pandemic and related events include, but are not limited to, the following:

 

   

Disruption in the demand for oil, natural gas and NGL;

 

   

A need to preserve liquidity, which could result in a delay or change in capital investments;

 

   

Reduction of our workforce to adjust to market conditions, including severance payments, retention issues and difficulty recruiting our workforce when market conditions improve;

 

   

Liabilities resulting from operational delays due to decreased productivity resulting from stay-at-home orders affecting our workforce or facility closures resulting from the COVID-19 pandemic;

 

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Future asset impairments, including impairment of our oil and natural gas properties and other property and equipment; and

 

   

Infections and quarantining of our employees and the personnel of vendors, suppliers and other third parties.

Drilling for and producing oil and gas wells is a high-risk activity with many uncertainties that could adversely affect our business, financial condition or results of operations.

Drilling oil and gas wells, including development wells, involves numerous risks, including the risk that we may not encounter commercially productive oil, natural gas and NGL reserves (including “dry holes”). We must incur significant expenditures to drill and complete wells, the costs of which are often uncertain. It is possible that we will make substantial expenditures on drilling and not discover reserves in commercially viable quantities.

Specifically, we often are uncertain as to the future cost or timing of drilling, completing and operating wells, and our drilling operations and those of our third-party operators may be curtailed, delayed or canceled. The cost of our drilling, completing and operating wells may increase and our results of operations and cash flows from such operations may be impacted, as a result of a variety of factors, including:

 

   

unexpected drilling conditions;

 

   

title problems;

 

   

pressure or irregularities in formations;

 

   

equipment failures or accidents;

 

   

adverse weather conditions, such as winter storms, flooding and hurricanes, and changes in weather patterns;

 

   

compliance with, or changes in, environmental laws and regulations relating to air emissions, hydraulic fracturing and disposal of produced water, drilling fluids and other wastes, laws and regulations imposing conditions and restrictions on drilling and completion operations and other laws and regulations, such as tax laws and regulations;

 

   

the availability and timely issuance of required governmental permits and licenses; and

 

   

the availability of, costs associated with and terms of contractual arrangements for properties, including mineral licenses and leases, pipelines, rail cars, crude oil hauling trucks and qualified drivers and related services, facilities and equipment to gather, process, compress, store, transport and market crude oil, natural gas and related commodities.

Our failure to recover our investment in wells, increases in the costs of our drilling operations or those of our third-party operators, and/or curtailments, delays or cancellations of our drilling operations or those of our third-party operators in each case due to any of the above factors or other factors, may materially and adversely affect our business, financial condition and results of operations.

Our exploration and development projects require substantial capital expenditures. We may be unable to obtain required capital or financing on satisfactory terms, which could lead to a decline in our reserves.

The oil and natural gas industry is capital intensive. We have made and expect to continue to make substantial capital expenditures in our business for the exploration and development of oil, natural gas and NGL reserves. We currently believe that we will be able to fully fund our 2021 capital budget with cash on hand, cash flows from operations and borrowings under our revolving credit facility. If necessary, we may also access capital through proceeds from additional potential asset dispositions and the future issuance of debt and/or equity securities. Our cash flow from operations and access to capital are subject to a number of variables, including:

 

   

the estimated quantities of our oil, natural gas and NGL reserves;

 

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the amount of oil, natural gas and NGL we produce from existing wells;

 

   

the prices at which we sell our production;

 

   

take-away and storage capacity; and

 

   

our ability to acquire, locate and produce new reserves.

If our revenues or the borrowing base under our revolving credit facility decrease as a result of lower commodity prices, operating difficulties, declines in reserves or for any other reason, we may have limited ability to obtain the capital necessary to conduct our operations at expected levels. Our revolving credit facility, and the Indentures that govern our senior notes may restrict our ability to obtain new debt financing. If additional capital is required, we may not be able to obtain debt and/or equity financing on terms favorable to us, or at all. If cash generated by operations or available under our revolving credit facility is not sufficient to meet our capital requirements, the failure to obtain additional financing could result in a curtailment of our operations relating to development of our prospects, which in turn could lead to a decline in our reserves and production, and could adversely affect our business, results of operation, financial conditions and ability to make payments on our outstanding indebtedness.

The development of our estimated PUD, probable and possible reserves may take longer and may require higher levels of capital expenditures than we currently anticipate. Therefore, our estimated PUD, probable and possible reserves may not be ultimately developed or produced.

Recovery of PUD reserves requires significant capital expenditures and successful drilling operations. At December 31, 2021, approximately 110.8 MMBoe of our SEC Pricing proved reserves, and all of our probable and possible reserves, were undeveloped. The reserve data included in our reserve report assumes that, over the next five years, approximately $1.0 billion in capital will be spent to develop our PUDs, approximately $0.5 billion in capital will be spent to develop our probable reserves and approximately $0.4 billion in capital will be spent to develop our possible reserves. Although cost and reserve estimates attributable to our oil, natural gas and NGL reserves have been prepared in accordance with industry standards, we cannot be sure that the estimated costs are accurate. We may need to raise additional capital to develop our estimated PUD reserves over the next five years and we cannot be certain that additional financing will be available to us on acceptable terms, if at all. Further, the development of our probable and possible reserves will require additional capital expenditures and are less certain to be recovered than proved reserves. Additionally, sustained or further declines in commodity prices will reduce the future net revenues of our estimated PUD, probable and possible reserves and may result in some projects becoming uneconomical. Further, our drilling efforts may be delayed or unsuccessful and actual reserves may prove to be less than current reserve estimates, which could have a material adverse effect on our financial condition, future cash flows and results of operations.

As part of our exploration and development operations, we have expanded, and expect to further expand, the application of horizontal drilling and multi-stage hydraulic fracture stimulation techniques. The utilization of these techniques requires substantially greater capital expenditures as compared to the completion cost of a vertical well and therefore may result in fewer wells being completed in any given year. The incremental capital expenditures are the result of greater measured depths and additional hydraulic fracture stages in horizontal wellbores.

We may experience difficulty in achieving and managing future growth.

Future growth may place strains on our resources and cause us to rely more on project partners and independent contractors, possibly negatively affecting our financial condition and results of operations. Our ability to grow will depend on a number of factors, including:

 

   

the results of our drilling program;

 

   

hydrocarbon prices;

 

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our ability to develop existing prospects;

 

   

our ability to obtain leases or options on properties for which we have seismic data;

 

   

our ability to acquire additional seismic data;

 

   

our ability to identify and acquire new exploratory prospects;

 

   

our ability to continue to retain and attract skilled personnel;

 

   

our ability to hire new skilled personnel to manage recently acquired assets;

 

   

our ability to maintain or enter into new relationships with project partners and independent contractors; and

 

   

our access to capital.

We may also be unable to make attractive acquisitions or asset exchanges, which could inhibit our ability to grow, or could experience difficulty integrating any acquired assets and operations. It may be difficult to identify attractive acquisition opportunities and, even if such opportunities are identified, our debt agreements contain limitations on our ability to enter into certain transactions, which could limit our future growth.

Our identified drilling locations are scheduled to be drilled over many years, making them susceptible to uncertainties that could materially alter the occurrence or timing of their drilling.

Our management team has identified drilling locations as an estimation of our future development activities on our existing acreage. These identified drilling locations represent a significant part of our growth strategy. Our ability to drill and develop these identified drilling locations depends on a number of uncertainties, including oil, natural gas and NGL prices, the availability and cost of capital, drilling and production costs, availability of drilling services and equipment, drilling results, lease expirations, gathering systems, marketing and transportation constraints, regulatory approvals and other factors. If commodity prices decline, a number of our drilling locations may become uneconomic. Even to the extent any locations remain capable of economic production, we may determine not to drill such locations until commodity prices recover. Because of these uncertain factors, we do not know if the identified drilling locations will ever be drilled or if we will be able to produce oil, natural gas or NGL from these drilling locations. In addition, unless production is established within the spacing units covering the undeveloped acres on which some of the identified locations are located, the leases for such acreage will expire. Therefore, our actual drilling activities may materially differ from those presently identified.

Our hedging activities could result in financial losses or could reduce our net income.

We employ a hedging strategy involving opportunistically placing incremental hedges as new wells come online. Even so, the remainder of our production is exposed to the continuing and prolonged volatility in the prices of oil, natural gas and NGLs. Our results of operations and financial condition would be negatively impacted if the prices of oil, natural gas or NGLs were to decline materially from current levels. To achieve more predictable cash flows and to reduce our exposure to fluctuations in the prices of oil, natural gas and NGLs, we may enter into additional hedging arrangements for a significant portion of our production. For more information on our hedging activities, please see “Colgate’s Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk and Related Production Risks.”

Our derivative contracts may result in substantial gains or losses. For example, as part of the ongoing assessment of our hedge portfolio, we executed multiple transactions related to our hedge portfolio between June 30, 2021 and October 31, 2021. These transactions covered approximately 5.9 million barrels of oil, with the two most significant impacts being an increase to our 2022 WTI swap strike price from $47.87 per barrel to $68.01 per barrel and the use of $132 million in cash that we had on the balance sheet in conjunction with the hedge

 

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transaction. In addition, if we enter into any derivative contracts and experience a sustained material interruption in our production, we might be forced to satisfy all or a portion of our hedging obligations without the benefit of the cash flows from our sale of the underlying physical commodity, resulting in a substantial diminution of our liquidity. Lastly, an attendant risk exists in hedging activities that the counterparty in any derivative transaction cannot or will not perform under the instrument and that we will not realize the benefit of the hedge.

Our ability to use hedging transactions to protect us from future oil, natural gas and NGL price declines will be dependent upon oil, natural gas and NGL prices at the time we enter into future hedging transactions and our future levels of hedging and, as a result, our future net cash flows may be more sensitive to commodity price changes. In addition, if commodity prices remain low, we will not be able to replace our hedges or enter into new hedges at favorable prices.

Our price hedging strategy and future hedging transactions will be determined at our discretion. We are not under an obligation to hedge a specific portion of our production. The prices at which we hedge our production in the future will be dependent upon commodities prices at the time we enter into these transactions, which may be substantially higher or lower than current prices. Accordingly, our price hedging strategy may not protect us from significant declines in prices received for our future production. Conversely, our hedging strategy may limit our ability to realize cash flows from commodity price increases. It is also possible that a substantially larger percentage of our future production will not be hedged as compared with the next few years, which would result in our oil, natural gas and NGL revenues becoming more sensitive to commodity price fluctuations.

Our hedging transactions could expose us to counterparty credit risk.

Our hedging transactions expose us to risk of financial loss if a counterparty fails to perform under a derivative contract. The majority of our counterparties are lenders under our revolving credit facility and have investment grade credit ratings. However, the risk of counterparty nonperformance is of particular concern given the disruptions that have occurred in the financial markets and the significant decline in oil, natural gas and NGL prices which could lead to sudden changes in a counterparty’s liquidity, and impair their ability to perform under the terms of the derivative contract. We are unable to predict sudden changes in a counterparty’s creditworthiness or ability to perform. Even if we do accurately predict sudden changes, our ability to negate the risk may be limited depending upon market conditions.

Furthermore, the bankruptcy of one or more of our hedge providers or some other similar proceeding or liquidity constraint, might make it unlikely that we would be able to collect all or a significant portion of amounts owed to us by the distressed entity or entities.

During periods of falling commodity prices, our hedge receivable positions increase, which increases our exposure. If the creditworthiness of our counterparties deteriorates and results in their nonperformance, we could incur a significant loss.

Inflation could adversely impact our ability to control our costs, including our operating expenses and capital costs.

Although inflation in the United States has been relatively low in recent years, it rose significantly in the second half of 2021 and the first half of 2022, as a result of the economic impact from the COVID-19 pandemic, including the global supply chain disruptions, government stimulus packages, rising costs of commodities and geopolitical conflicts. In addition, global and industry-wide supply chain disruptions caused by the COVID-19 pandemic have resulted in shortages in labor, materials and services. Such shortages have resulted in inflationary cost increases for labor, materials and services and could continue to cause costs to increase, as well as a scarcity of certain products and raw materials. Although inflation has not had a material impact on our business to date, to the extent elevated inflation remains, we may experience further cost increases for our operations, including oilfield services and equipment as increasing oil, natural gas and NGL prices increase drilling activity in our areas of operations, as well as increased labor costs. An increase in oil, natural gas and NGL prices may cause the

 

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costs of materials and services to rise. We cannot predict any future trends in the rate of inflation, and a significant increase in inflation, to the extent we are unable to recover higher costs through higher commodity prices and revenues, could negatively impact our business, financial condition and results of operation.

The prices we realize on sales of our oil, natural gas and NGL production is reduced by the value of applicable price differentials, and any increase in such differentials could adversely affect our business, financial condition, results of operations and cash flows.

Substantially all of our production is sold to purchasers under contracts with market-based prices. All of our oil contracts are impacted by the Midland-Cushing price differential, which reflects the difference between the price of crude at Midland, Texas (Midland West Texas Intermediate (“WTI”)), versus the price of crude at Cushing, Oklahoma, a major hub where production from Midland is often transported via pipeline. The price we currently realize on barrels of oil we sell is reduced or increased by the value of the Midland-Cushing differential, which, during the period from January 1, 2018 to December 31, 2021 reached as high as $(17.43) per Bbl and averaged $(1.92) per Bbl. As of March 31, 2022, the Midland-Cushing differential was $1.04 per Bbl. A majority of our natural gas and NGL contracts are also impacted by the Waha-Henry Hub price differential. The price we currently realize on natural gas we sell is reduced or increased by the value of the Waha-Henry Hub differential, which, during the period from January 1, 2018 to December 31, 2021, reached as high as $(4.14) per MMBtu and averaged $(0.98) per MMBtu. As of March 31, 2022, the Waha-Henry Hub differential was $(1.0 1) per MMBtu. We may experience differentials to NYMEX in the future, which may be material. If the Midland-Cushing differential, the Waha-Henry Hub differential or other price differentials to which our production is subject were to widen due to oversupply or other factors, our business, financial condition, results of operations and cash flows could be negatively impacted.

Our estimated oil, natural gas and NGL reserve quantities and future production rates are based on many assumptions that may prove to be inaccurate. Any material inaccuracies in these reserve estimates or the underlying assumptions will materially affect the quantities and present value of our reserves.

Numerous uncertainties are inherent in estimating quantities of oil, natural gas and NGL reserves. The process of estimating oil, natural gas and NGL reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, engineering and economic data for each reservoir, and these reports rely upon various assumptions, including assumptions regarding future oil, natural gas and NGL prices, production levels, and operating and development costs. For example, our estimates of our SEC reserve quantities are based on the unweighted first day of the month arithmetic average commodity prices over the prior twelve months. Our estimated NYMEX reserves were prepared on the same basis, except for using average annual NYMEX forward-month contract pricing in effect as of December 31, 2021. Further, our reserve estimates are presented as of December 31, 2021 and, as a result, do not give effect to the impact of production that has occurred subsequent to such date, PUD conversions subsequent to such date or any subsequent changes to our development plans, type curves and well spacing. As a result, such reserve estimates may differ from estimates that would have arisen if prepared as of the date of this Proxy Statement.

Additionally, loss of production and leasehold rights due to mechanical failure or depletion of wells and our inability to re-establish their production may occur in certain cases. Production from wellbores may be affected by nearby fracturing activities by offset operators and us resulting in reserve revisions.

Furthermore, SEC rules require that, subject to limited exceptions, PUD reserves may only be recorded if they relate to wells scheduled to be drilled within five years after the date of booking. This rule may limit and may continue to limit our potential to record additional PUD reserves as we pursue our drilling program. To the extent that commodity prices decline, such commodity prices could render uneconomic a significant number of our identified drilling locations, and we may be required to write down our PUD reserves if we do not drill those

 

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wells within the required five-year time frame. If we choose not to develop PUD reserves, or if we are not otherwise able to successfully develop them, we will be required to remove the associated volumes from our reported proved reserves.

As a result, estimated quantities of reserves and projections of future production rates and the timing of development expenditures may prove to be inaccurate. Over time, we may make material changes to reserve estimates. Any significant variance in our assumptions and actual results could greatly affect our estimates of reserves, the economically recoverable quantities of oil, natural gas and NGL attributable to any particular group of properties, the classifications of reserves based on risk of recovery, and estimates of the future net cash flows.

The present value of future net revenues from our reserves, or PV-10, will not necessarily be the same as the current market value of our estimated oil, natural gas and NGL reserves.

You should not assume that the present value of future net revenues from our reserves is the current market value of our estimated oil, natural gas and NGL reserves. Actual future net revenues from our oil and natural gas properties will be affected by factors such as:

 

   

actual prices we receive for crude oil, natural gas and NGL;

 

   

actual cost of development and production expenditures;

 

   

the amount and timing of actual production;

 

   

transportation and processing; and

 

   

changes in governmental regulations or taxation.

The timing of both our production and our incurrence of expenses in connection with the development and production of our oil and natural gas properties will affect the timing and amount of actual future net revenues from reserves, and thus their actual present value. In addition, the 10% discount factor we use when calculating discounted future net revenues may not be the most appropriate discount factor based on interest rates in effect from time to time and risks associated with us or the oil and natural gas industry in general. Actual future prices and costs may differ materially from those used in the present value estimate.

If oil, natural gas and NGL prices decline for extended periods of time or decline materially from current levels, we may be required to record additional write-downs of the carrying value of our proved oil and natural gas properties.

Accounting rules require that we review periodically the carrying value of our oil and natural gas properties for possible impairment. Based on specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development plans, production data, economics and other factors, we may be required to write down the carrying value of our oil and natural gas properties. In the future because our properties serve as collateral for our revolving credit facility, a writedown in the carrying values of our properties could require us to repay debt earlier than would otherwise be required. A write-down would also constitute a non-cash charge to earnings.

We account for our oil and natural gas properties using the successful efforts method of accounting. Under this method, all development costs and acquisition costs of proved properties are capitalized and amortized on a units-of-production basis over the remaining life of proved developed reserves and proved reserves, respectively. Costs of drilling exploratory wells are initially capitalized, but charged to expenses if and when a well is determined to be unsuccessful. We evaluate impairment of our proved oil and natural gas properties whenever events or changes in circumstances indicate an asset’s carrying amount may not be recoverable. The risk that we will be required to write down the carrying value of our oil and natural gas properties increases when oil and natural gas prices are low or volatile. In addition, write-downs would occur if we were to experience sufficient downward adjustments to our estimated proved reserves or the present value of estimated future net revenues.

 

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We periodically evaluate our unproved oil and natural gas properties to determine recoverability of our costs and could be required to recognize noncash charges in the earnings of future periods.

As of December 31, 2021 and 2020, we carried unproved oil and natural gas property costs of approximately $233.6 million and $111.0 million, respectively. GAAP requires periodic evaluation of these costs on a project-by-project basis. These evaluations are affected by the results of exploration activities, commodity price outlooks, planned future sales or expirations of all or a portion of these leases and the contracts and permits relevant to such projects. If the quantity of potential reserves determined by such evaluations is not sufficient to fully recover the costs invested in each project, we will recognize non-cash charges in future periods.

Market conditions or operational impediments may hinder our access to oil, natural gas and NGL markets or delay or curtail our production.

Market conditions or the unavailability of oil, natural gas and NGL processing, transportation or storage arrangements may hinder our access to oil, natural gas and NGL markets or delay or curtail our production. The availability of a ready market for our oil, natural gas and NGL production depends on a number of factors, including the demand for and supply of oil, natural gas and NGL, the proximity of our production to and capacity of pipelines and storage facilities, gathering systems and other transportation, processing, fractionation, refining and export facilities, competition for such facilities and the inability of such facilities to gather, transport, store or process our production due to shutdowns or curtailments arising from mechanical, operational or weather related matters, including hurricanes and other severe weather conditions, or pandemics such as COVID- 19 or regulatory action related thereto. Additionally, the unavailability of third-party transportation services to accommodate potential production from existing and new wells may result in substantial discounts in the prices we receive for our oil, natural gas and NGL.

For example, actions of foreign oil producers such as Saudi Arabia and Russia, coupled with the impact on global oil demand of the COVID- 19 outbreak, materially decreased global crude oil prices and generated a surplus of oil. This significant surplus caused crude storage constraints, which could lead to the shut-in of production due to lack of sufficient markets or lack of availability and capacity of gathering, storage and transportation systems, pipelines and processing facilities owned and operated by third parties. Moreover, pipeline constraints and third-party gathering facility failures beyond our control may require us to curtail natural gas production lasting from a few days to several months or longer and, in many cases, we may be provided only limited, if any, advanced notice as to when these circumstances will arise and their duration. Our failure to obtain such services on acceptable terms or the failure of counterparties to perform under certain transportation and marketing agreements could have material adverse effects to our business, financial condition and results of operations. Any such shut in or curtailment, or any ability to obtain favorable terms for delivery or storage of the oil, natural gas and NGL produced from our fields, could adversely affect our financial condition and results of operations.

A majority of our crude oil production is transported pursuant to an agreement with a single midstream services provider, and a majority of our natural gas production is gathered and processed by a separate single midstream services provider.

While our long-term transportation agreements with Oryx and EagleClaw (each as defined herein) are intended to address access to and potential curtailments on existing midstream infrastructure, as of December 31, 2021, a majority of our crude oil production is transported pursuant to an agreement with affiliates of Oryx Midstream Services, LLC (“Oryx”) and a majority of our natural gas production is gathered and processed by EagleClaw Midstream Ventures, LLC (“EagleClaw”). Any extended interruption of access to or service from pipelines and facilities operated by Oryx or EagleClaw, or of services provided by Oryx or EagleClaw for any reason, including mechanical failures on such pipelines and facilities, service interruptions, worsening financial conditions or other factors, could result in adverse consequences to us, such as delays in producing and selling our oil, natural gas and NGL. In such an event, we might have to shut in our wells awaiting a pipeline connection

 

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or capacity and/or sell our production at prices lower than market prices or at prices lower than we currently project, all of which could adversely affect our business, financial condition and results of operations.

Prolonged periods of storage capacity constraints and depressed oil, natural gas and NGL prices could have a material adverse impact on our business, financial condition, cash flows and results of operations.

Prolonged periods of storage capacity constraints and depressed oil, natural gas and NGL prices could have a material adverse impact on our business, financial condition, cash flows and results of operations. As a result of COVID-19, coupled with a significant reduction in demand for oil, natural gas and NGL, storage facilities such as those in Cushing, Oklahoma and other locations approached their capacity limits which, in turn, placed and may continue to place downward pressure on oil, natural gas and NGL prices. During April 2020, storage constraints as of the expiration date for front month oil purchase contracts resulted in negative NYMEX WTI oil futures prices, as holders of such contracts that were unable or unwilling to take physical delivery of crude oil were forced to make payments to purchasers of such contracts to transfer the corresponding purchase obligations.

If oil storage facilities reach their maximum capacity and oil, natural gas and NGL prices remain depressed for prolonged periods of time, we may be forced to shut in wells, which could have a material adverse impact on our business, financial condition, cash flows and results of operations.

We depend upon one purchaser for the sale of most of our oil, natural gas and NGL production. The loss of such purchaser could, among other factors, limit our access to suitable markets for the oil, natural gas and NGLs we produce.

For the year ended December 31, 2021, two purchasers, Enterprise Products Partners and EagleClaw Midstream, accounted for approximately 63% and 16% of our revenue, respectively. No other purchaser accounted for more than 10% of our revenue. The loss of either Enterprise Products Partners or EagleClaw Midstream as a purchaser of our oil transported by Oryx, as discussed further under “Information About Colgate— Marketing and Customers,” could adversely affect our revenues and have a material adverse effect on our financial condition and results of operations. We cannot assure you that any of our customers will continue to do business with us or that we will continue to have ready access to suitable markets for our future production.

The availability of a ready market for any hydrocarbons we produce depends on numerous factors beyond the control of our management, including but not limited to the extent of domestic production and imports of oil, the proximity and capacity of natural gas and NGL pipelines, the availability of skilled labor, materials and equipment, the effect of state and federal regulation of oil, natural gas and NGL production and federal regulation of oil, natural gas and NGLs sold in interstate commerce. In addition, we depend upon a limited number of significant customers for the sale of most of our production, and our contracts with those customers typically are on a month-to-month basis.

We depend on our executive officers and key operations personnel, certain of whom have responsibilities with other entities, the loss of any of whom would materially adversely affect future operations.

Our success depends to a large extent upon the efforts and abilities of our executive officers and key operations personnel. The loss of the services of one or more of these key employees would have a material adverse effect on us. We currently do not have a succession plan for the replacement of any of our executive officers and key operations personnel. Although we maintain key-man life insurance for certain executive officers, we do not maintain such insurance for other key employees.

Historically, our management has dedicated a relatively minimal portion of its time to the activities of certain joint ventures in which we held an interest. During December 2020, we undertook certain internal restructuring transactions, as a result of which our interests in such joint ventures were transferred to our equity holders. We

 

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do not expect that our management will be required to dedicate a substantial portion of its time and resources to the activities of such joint ventures in the future; however, there can be no assurances as to the future allocation of time and resources between our business, on the one hand, and the joint ventures in which our management team and other equity holders hold an interest, on the other hand.

Our business is also dependent upon our ability to attract and retain qualified personnel. Acquiring and keeping these personnel could prove more difficult or cost substantially more than estimated. This could cause us to incur greater costs, or prevent us from pursuing our development and exploration strategy as quickly as we would otherwise wish to do.

Unless we replace our reserves with new reserves and develop those reserves, our reserves and production will decline, which would adversely affect our future cash flows and results of operations.

In general, the volume of production from oil and natural gas properties declines as reserves are depleted, with the rate of decline depending on each reservoir’s characteristics. Except to the extent that we conduct successful exploration, exploitation and development activities or acquire properties, including through bolt-on acquisitions and acreage trades, containing reserves, or both, our reserves will decline as reserves are produced. Our future oil, natural gas and NGL production is, therefore, highly dependent on our level of success in finding or acquiring, including through acreage trades, additional reserves as well as the pace of drilling and completion of new wells. Additionally, the business of exploring for, exploiting, developing or acquiring reserves is capital intensive. Recovery of our reserves, particularly undeveloped reserves, will require significant additional capital expenditures and successful drilling operations. To the extent cash flow from operations is reduced and external sources of capital become limited or unavailable, our ability to make the necessary capital investment to maintain or expand our asset base of oil, natural gas and NGL reserves would be impaired.

Our business is subject to operational risks that will not be fully insured, which, if they were to occur, could adversely affect our financial condition or results of operations.

Our business activities are subject to operational risks, including, but not limited to:

 

   

damages to equipment caused by natural disasters such as earthquakes and adverse weather conditions, including tornadoes, winter storms and flooding;

 

   

facility or equipment malfunctions;

 

   

pipeline ruptures or spills;

 

   

surface fluid spills, produced water contamination and saltwater, surface or groundwater contamination resulting from petroleum constituents or hydraulic fracturing chemical additions;

 

   

fires, blowouts, craterings and explosions; and

 

   

uncontrollable flows of oil or natural gas or well fluids.

In addition, a portion of our natural gas production is processed to extract NGLs at processing plants that are owned by others. If these plants were to cease operations for any reason, we would need to arrange for alternative transportation and processing facilities. These alternative facilities may not be available, which could cause us to shut in our natural gas production. Further, such alternative facilities could be more expensive than the facilities we currently use.

Any of these events could adversely affect our ability to conduct operations or cause substantial losses, including personal injury or loss of life, damage to or destruction of property, natural resources and equipment, pollution or other environmental contamination, loss of wells, regulatory penalties, corrective action costs, suspension or termination of operations, and attorney’s fees and other expenses incurred in the prosecution or defense of litigation. As is customary in the industry, we maintain insurance against some but not all of these risks.

 

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Additionally, we may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the perceived risks presented. Losses could therefore occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. The occurrence of an event that is not fully covered by insurance could have a material adverse impact on our business activities, financial condition and results of operations.

We may be unable to successfully integrate the assets and operations related to prior acquisitions or to realize anticipated cost savings, revenues or other benefits of such acquisitions.

Our ability to achieve the anticipated benefits of the prior acquisitions will depend in part upon whether we can integrate these assets and operations into our existing business in an efficient and effective manner. We may not be able to accomplish this integration process successfully. The successful acquisition of oil and gas properties, requires an assessment of several factors, including:

 

   

recoverable reserves;

 

   

future natural gas and oil prices and their appropriate differentials;

 

   

availability and cost of transportation of production to markets;

 

   

availability and cost of drilling equipment and of skilled personnel;

 

   

development and operating costs and potential environmental and other liabilities; and

 

   

regulatory, permitting and similar matters.

The accuracy of these assessments is inherently uncertain. In connection with these assessments, we have performed, and will continue to perform, a review of the subject properties that we believe to be generally consistent with industry practices. Our review may not reveal all existing or potential problems or permit us to become sufficiently familiar with the properties to fully assess their deficiencies and potential recoverable reserves. Inspections will not always be performed on every well, and environmental problems are not necessarily observable even when an inspection is undertaken. Even if problems are identified, the contractual protection provided with respect to all or a portion of the underlying deficiencies may prove ineffective or insufficient. The integration process may be subject to delays or changed circumstances, and we can give no assurance that the acquired properties will perform in accordance with our expectations or that our expectations with respect to integration or cost savings as a result of our prior acquisitions will materialize. Significant acquisitions and other strategic transactions may involve other risks that may cause our business to suffer, including:

 

   

diversion of our management’s attention to evaluating, negotiating and integrating significant acquisitions and strategic transactions;

 

   

the challenge and cost of integrating acquired assets and operations with those of ours while carrying on our ongoing business; and

 

   

the failure to realize the full benefit that we expect in estimated proved reserves, production volume, cost savings from operating synergies or other benefits anticipated from an acquisition, or to realize these benefits within the expected time frame.

The unavailability or high cost of equipment, supplies, personnel and oilfield services could adversely affect our ability to execute development and exploration plans on a timely basis and within budget, and consequently could adversely affect our anticipated cash flow.

We utilize third-party services to maximize the efficiency of our operations. The cost of oilfield services typically fluctuates based on demand for those services. While we currently have excellent relationships with oilfield service companies, there is no assurance that we will be able to contract for such services on a timely basis or that the cost of such services will remain at a satisfactory or affordable level. Shortages or the high cost of equipment, supplies or personnel could delay or adversely affect our development and exploration operations, which could have a material adverse effect on our business, financial condition or results of operations.

 

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Uncertainties associated with enhanced recovery methods may result in our not realizing an acceptable return on our investments in such projects.

We may inject water into formations on some of our properties to increase the production of oil and natural gas or employ other enhanced recovery methods in our operations. The additional production and reserves, if any, attributable to the use of enhanced recovery methods are inherently difficult to predict. If our enhanced recovery methods do not allow for the extraction of oil, natural gas and NGL in a manner or to the extent that we anticipate, we may not realize an acceptable return on our investments in such projects. In addition, if proposed legislation and regulatory initiatives relating to hydraulic fracturing become law, the cost of some of these enhanced recovery methods could increase substantially.

We may be unable to compete effectively with larger companies, which may adversely affect our ability to generate sufficient revenues.

The oil and natural gas industry is intensely competitive, and we compete with other companies that have greater resources than we do. Many of our larger competitors not only drill for and produce oil, natural gas and NGL, but they also engage in refining operations and market petroleum and other products on a regional, national or worldwide basis. Our competitors may be able to pay more for oil, natural gas and NGL properties, and evaluate, bid for and purchase a greater number of properties than our financial or human resources permit. In addition, these companies may have a greater ability to continue drilling activities during periods of low oil, natural gas and NGL prices, to contract for drilling equipment, to secure trained personnel, and to absorb the burden of present and future federal, state, local and other laws and regulations. In addition, competition is strong for attractive oil, natural gas and NGL producing properties, oil, natural gas and NGL companies, and undeveloped leases and drilling rights. Our inability to compete effectively with our competitors could have a material adverse impact on our business activities, financial condition and results of operations.

Our operations are substantially dependent on the availability of water. Restrictions on our ability to obtain water may have an adverse effect on our financial condition, results of operations and cash flows.

Water is an essential component of both the drilling and hydraulic fracturing processes. In our Texas operations, we have historically been able to drill our own source water wells, purchase water from local landowners and utilize other sources for use in our operations. Some areas in which we have operations have experienced drought conditions that could result in restrictions on water use. We have entered into water supply agreements in New Mexico which provide for freshwater and recycled water sourcing by third parties for use in our operations. If we are unable to obtain water to use in our operations from local sources, we may be unable to economically produce oil, natural gas and NGL in the affected areas, which could have an adverse effect on our financial condition, results of operations and cash flows.

Our undeveloped acreage must be drilled before lease expiration to hold the acreage by production. In highly competitive markets for acreage, failure to drill sufficient wells to hold acreage could result in a substantial lease renewal cost or, if renewal is not feasible, loss of our lease and prospective drilling opportunities.

As of March 31, 2022, approximately 30% of our net operated leasehold acreage was undeveloped, or acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves. Unless production is established within the spacing units covering the undeveloped acres on which some of our drilling locations are identified, our leases for such acreage may expire. The cost to renew such leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. As such, our actual drilling activities may differ materially from our current expectations, which could adversely affect our business. These risks are greater at times and in areas where the pace of our exploration and development activity slows. Our ability to drill and develop these locations depends on a number of uncertainties, including oil, natural gas and NGL prices, the availability and cost of capital, drilling and production costs, availability of drilling services

 

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and equipment, drilling results, lease expirations, gathering system and pipeline transportation constraints, access to and availability of water sourcing and distribution systems, regulatory approvals, approvals of the Texas General Land Office for our Delaware Basin properties, and other factors. Our future oil, natural gas and NGL reserves and production and, therefore, our future cash flow and results of operations are highly dependent on successfully developing our undeveloped leasehold acreage.

Deficiencies of title to our leased interests could significantly affect our financial condition.

If an examination of the title history of a property reveals that an oil or natural gas lease or other developed rights has been purchased in error from a person who is not the owner of the mineral interest desired, our interest would substantially decline in value. In such cases, the amount paid for such oil or natural gas lease or leases or other developed rights would be lost. It is management’s practice, in acquiring oil and natural gas leases or undivided interests in oil and natural gas leases or other developed rights, to retain lawyers to examine the title to the mineral interest to be acquired.

Nevertheless, prior to drilling an oil, natural gas or NGL well, it is the normal practice in the oil, natural gas and NGL industry for the person or company acting as the operator of the well to obtain a preliminary title review of the spacing unit within which the proposed oil, natural gas or NGL well is to be drilled to ensure there are no obvious deficiencies in title to the leasehold. Frequently, as a result of such examinations, certain curative work must be done to correct deficiencies in the marketability of the title, such as obtaining affidavits of heirship or causing an estate to be administered. Such curative work entails expense, and it may happen, from time to time, that the operator may elect to proceed with a well despite defects to the title identified in the preliminary title opinion. Our failure to obtain perfect title to our leaseholds may adversely impact our ability in the future to increase production and reserves.

Our operations may be interrupted by severe weather or natural disasters.

Our operations are conducted entirely in Texas and New Mexico, and our operations are primarily focused on the development of our core Delaware Basin assets. The weather in these areas can be extreme and can cause interruption in our exploration and production operations. Severe weather can result in damage to our facilities, operational interruptions and significant capital investment.

Substantially all of our properties are located in the Delaware Basin, making us vulnerable to risks associated with operating in one geographic area.

Substantially all of our producing properties are located in the Delaware Basin in West Texas and New Mexico. As a result of this concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, severe weather, processing or transportation capacity constraints, availability of equipment, facilities, personnel or services market limitations or interruption of the processing or transportation of crude oil, natural gas or NGL. For example, the Railroad Commission of Texas (the “TRRC”) regulates the production of oil and gas in the state of Texas. In April 2020, the TRRC held a hearing regarding potential production cuts for producers in Texas in light of the global decline in oil prices. While the TRRC ultimately declined to institute mandatory production cuts, the agency may choose to revisit the issue if market weakness persists. If it decides to limit the production of oil and natural gas in Texas, our business and results of operations could be materially and adversely impacted. Any such production limitations may force us to shut in production. If we are forced to shut in production, we will likely incur greater costs to bring the associated production back online. Cost increases necessary to bring the associated wells back online may be significant enough that such wells would become uneconomic at low commodity price levels, which may lead to decreases in our reserve estimates and potential impairments and associated charges to our earnings.

 

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In addition, the effect of fluctuations on supply and demand may become more pronounced within specific geographic oil, natural gas and NGL producing areas such as the Delaware Basin, which may cause these conditions to occur with greater frequency or magnify the effects of these conditions. Due to the concentrated nature of our portfolio of oil, natural gas and NGL properties, a number of our properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of properties. Such delays or interruptions could have a material adverse effect on our financial condition and results of operations.

Increased attention to ESG matters and conservation measures may adversely impact our business.

Increasing attention to climate change, societal expectations on companies to address climate change, investor and societal expectations regarding voluntary ESG disclosures, and consumer demand for alternative forms of energy may result in increased costs, reduced demand for our products, reduced profits, increased investigations and litigation and difficulties with respect to accessing capital markets. Increasing attention to climate change and environmental conservation, for example, may result in demand shifts for oil and natural gas products and additional governmental investigations and private litigation against us or our operators. To the extent that societal pressures or political or other factors are involved, it is possible that such liability could be imposed without regard to our causation of or contribution to the asserted damage, or to other mitigating factors.

Moreover, while we may create and publish voluntary disclosures regarding ESG matters from time to time, many of the statements in those voluntary disclosures are based on hypothetical expectations and assumptions that may or may not be representative of current or actual risks or events or forecasts of expected risks or events, including the costs associated therewith. Such expectations and assumptions are necessarily uncertain and may be prone to error or subject to misinterpretation given the long timelines involved and the lack of an established single approach to identifying, measuring and reporting on many ESG matters.

In addition, organizations that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to ESG matters. Such ratings are used by some investors to inform their investment and voting decisions. Unfavorable ESG ratings could lead to reputational harm to our business and recent activism directed at shifting funding away from our industry could lead to increased negative investor sentiment toward us and our industry and to the diversion of investment to other industries, which could have a negative impact on our access to and costs of capital. Also, institutional lenders may decide not to provide funding for fossil fuel energy companies based on climate change related concerns, which could affect our access to capital for potential growth projects.

Loss of our information and computer systems could adversely affect our business.

We are heavily dependent on our information systems and computer-based programs, including our well operations information, seismic data, electronic data processing and accounting data. If any of such programs or systems were to fail or create erroneous information in our hardware or software network infrastructure, possible consequences include our loss of communication links, inability to find, produce, process and sell oil, natural gas and NGL and inability to automatically process commercial transactions or engage in similar automated or computerized business activities. Any such consequence could have a material adverse effect on our business.

A terrorist attack, armed conflict or civil unrest could harm our business.

Terrorist activities, anti-terrorist efforts, armed conflicts involving the United States or other countries and civil unrest domestically or abroad may adversely affect the United States and global economies and could prevent us from meeting our financial and other obligations. If any of these events occur, the resulting political instability

 

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and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our services and causing a reduction in our revenues. Oil, natural gas and NGL related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure integral to our customers’ operations is destroyed or damaged. Costs for insurance and other security may increase as a result of these threats, and some insurance coverage may become more difficult to obtain, if available at all.

The ongoing military action between Russia and Ukraine could adversely affect our business, financial condition and results of operations.

On February 24, 2022, Russian military forces invaded Ukraine, and sustained conflict and disruption in the region is likely. Although the length, impact and outcome of the ongoing military conflict in Ukraine is highly unpredictable, this conflict could lead to significant market and other disruptions, including significant volatility in commodity prices and supply of energy resources, instability in financial markets, supply chain interruptions, political and social instability, changes in consumer or purchaser preferences as well as increase in cyberattacks and espionage.

Russia’s recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military action against Ukraine have led to an unprecedented expansion of sanction programs imposed by the United States, the European Union, the United Kingdom, Canada, Switzerland, Japan and other countries against Russia, Belarus, the Crimea Region of Ukraine, the so-called Donetsk People’s Republic and the so-called Luhansk People’s Republic, including, among others:

 

   

blocking sanctions against some of the largest state-owned and private Russian financial institutions (and their subsequent removal from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) payment system) and certain Russian businesses, some of which have significant financial and trade ties to the European Union;

 

   

blocking sanctions against Russian and Belarusian individuals, including the Russian President, other politicians and those with government connections or involved in Russian military activities; and

 

   

blocking of Russia’s foreign currency reserves as well as expansion of sectoral sanctions and export and trade restrictions, limitations on investments and access to capital markets and bans on various Russian imports.

The situation is rapidly evolving as a result of the conflict in Ukraine, and the United States, the European Union, the United Kingdom and other countries may implement additional sanctions, export controls or other measures against Russia, Belarus and other countries, regions, officials, individuals or industries in the respective territories. Such sanctions and other measures, as well as the existing and potential further responses from Russia or other countries to such sanctions, tensions and military actions, could adversely affect the global economy and financial markets and could adversely affect our business, financial condition and results of operations.

We are actively monitoring the situation in Ukraine and assessing its impact on our business. To date we have not experienced any material interruptions in our infrastructure, supplies, technology systems or networks needed to support our operations. We have no way to predict the progress or outcome of the conflict in Ukraine or its impacts in Ukraine, Russia or Belarus as the conflict, and any resulting government reactions, are rapidly developing and beyond our control. The extent and duration of the military action, sanctions and resulting market disruptions could be significant and could potentially have substantial impact on the global economy and our business for an unknown period of time. Any of the abovementioned factors could affect our business, financial condition and results of operations. Any such disruptions may also magnify the impact of other risks described herein.

 

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Our business could be negatively affected by security threats, including cybersecurity threats and other disruptions.

As an oil, natural gas and NGL producer, we face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information or to render data or systems unusable; threats to the security of our facilities and infrastructure or third-party facilities and infrastructure, such as processing plants and pipelines, and threats from terrorist acts. We rely on our information technology systems and networks in connection with many of our business activities. Some of these networks and systems are managed by third-party service providers and are not under our direct control. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. The potential for such security threats has subjected our operations to increased risks that could have a material adverse effect on our business. In particular, our implementation of various procedures and controls to monitor and mitigate security threats and to increase security for our information, facilities and infrastructure may result in increased capital and operating costs. Moreover, there can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring. Security breaches could lead to losses of trade secrets or other proprietary or competitively sensitive information, critical infrastructure or capabilities essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations or cash flows. Certain cyber incidents could also materially disrupt operational systems, compromise personally identifiable information regarding customers or employees, delay our ability to deliver products to customers and/or jeopardize the security of our facilities. Cybersecurity attacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Certain cybersecurity incidents could be caused by malicious outsiders or insiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware and other cyber-attacks, are increasing in both frequency and sophistication and could create financial liability, subject us to legal or regulatory sanctions or damage our reputation with customers, dealers, suppliers and other stakeholders. The risk of a cybersecurity attack may increase as a result of the increased volume of “remote” work due to governmental “stay at home” orders resulting from the spread of COVID-19. These events could damage our reputation and lead to financial losses from remedial actions, loss of business or potential liability. Security breaches could also result in a violation of U.S. and international privacy and other laws and subject the Company to various litigations and proceedings. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology event could have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flows.

Risks Related to Environmental and Regulatory Matters

A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of our assets, which may cause our revenues to decline and operating expenses to increase.

Section 1(b) of the Natural Gas Act (the “NGA”) exempts natural gas gathering facilities from regulation by the Federal Energy Regulatory Commission (“FERC”). Although FERC has not made any formal determinations with respect to all of the facilities we consider to be gathering facilities, we believe that the natural gas and crude oil pipelines in our gathering systems in which we own an interest meet the traditional tests FERC has used to establish a pipeline’s status as a gathering pipeline not subject to regulation by FERC. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is fact intensive, the subject of ongoing litigation, and may be subject to change. If FERC were to determine that our gathering system is subject to FERC regulation, it would have authority to review and potentially modify our rates and terms and conditions of service and to impose civil penalties or require the disgorgement of excess charges found to be in

 

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violation of the NGA, the Natural Gas Policy Act of 1978, or the Interstate Commerce Act. Such regulation could decrease revenue, increase operating costs, and adversely affect our business, financial condition, and results of operations.

While we believe our natural gas gathering operations satisfy the criteria for exemption from FERC regulation under the NGA, our natural gas gathering operations may be subject to certain FERC reporting and posting requirements in a given year. Further, FERC’s policies and practices across the range of its natural gas regulatory activities, including, for example, its policies on open access transportation, natural gas quality, ratemaking, capacity release and market center promotion, may indirectly affect the intrastate natural gas market.

In addition, the pipelines used to gather and transport natural gas and NGLs we produce may be subject to regulation by the U.S. Department of Transportation (“DOT”). The Pipeline and Hazardous Materials Safety Administration (“PHMSA”) has established a risk-based approach to determine which gathering pipelines are subject to regulation and what safety standards regulated gathering pipelines must meet. Over the past several years PHMSA has taken steps to expand the regulation of rural gathering lines and impose a number of reporting and inspection requirements on regulated pipelines, and additional requirements are expected in the future. On November 2, 2021, PHMSA released a final rule that expanded the definition of regulated gathering pipelines and imposes safety measures on certain previously unregulated gathering pipelines. The final rule, which became effective on May 16, 2022, also imposes reporting requirements on all gathering pipelines, and specifically requires operators to report safety information to PHMSA. Legislation that funds PHMSA through 2023 requires the agency to engage in additional rulemaking efforts to amend other aspects of pipeline-safety oversight in the coming months and years. The adoption of laws or regulations that apply more comprehensive or stringent safety standards could require us to install new or modified safety controls, pursue new capital projects, or conduct maintenance programs on an accelerated basis, all of which could require us to incur increased operating costs that could be significant. In addition, should we fail to comply with PHMSA or comparable state regulations, we could be subject to substantial fines and penalties. As of March 2022, the maximum civil penalties PHMSA may impose for each pipeline safety violation are $239,142 per violation per day, with a maximum of $2,391,412 for a related series of violations.

Our sales of oil, natural gas and NGL, and any hedging activities related to such energy commodities, expose us to potential regulatory risks.

Sales of oil, natural gas and NGLs are not currently regulated and are made at negotiated prices. However, the federal government historically has been active in the area of oil, natural gas and NGL sales regulation. We cannot predict whether new legislation to regulate oil, natural gas and NGL sales might be proposed, what proposals, if any, might actually be enacted by Congress or the various state legislatures and what effect, if any, the proposals might have on our operations.

Additionally, FERC, the Federal Trade Commission and the Commodity Futures Trading Commissions (the “CFTC”) hold statutory authority to monitor certain segments of the physical and futures energy commodities markets relevant to our business. These agencies have imposed broad regulations prohibiting fraud and manipulation of such markets. With regard to our physical sales of oil, natural gas and NGL, and any hedging activities related to these energy commodities, we are required to observe the market-related regulations enforced by these agencies, which hold substantial enforcement authority.

Failure to comply with such regulations, as interpreted and enforced, could materially and adversely affect our financial condition or results of operations.

The adoption of derivatives legislation and regulations by the U.S. Congress related to derivative contracts could have an adverse impact on our ability to hedge risks associated with our business.

Title VII of the Dodd-Frank Act establishes federal oversight and regulation of over-the-counter (“OTC”) derivatives and requires the CFTC and the SEC to enact further regulations affecting derivative contracts,

 

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including the derivative contracts we use to hedge our exposure to price volatility through the OTC market. Although the CFTC and the SEC have issued final regulations in certain areas, final rules in other areas and the scope of relevant definitions and/or exemptions still remain to be finalized.

In one of its rulemaking proceedings still pending under the Dodd-Frank Act, the CFTC issued on January 30, 2020, a re-proposed rule imposing position limits for certain futures and option contracts in various commodities (including oil and natural gas) and for swaps that are their economic equivalents. Under the proposed rules on position limits, certain types of hedging transactions are exempt from these limits on the size of positions that may be held, provided that such hedging transactions satisfy the CFTC’s requirements for certain enumerated “bona fide hedging” transactions or positions. A final rule has not yet been issued.

The CFTC has also adopted final rules regarding aggregation of positions, under which a party that controls the trading of, or owns 10% or more of the equity interests in, another party will have to aggregate the positions of the controlled or owned party with its own positions for purposes of determining compliance with position limits unless an exemption applies. The CFTC’s aggregation rules are now in effect, though CFTC staff have granted relief—until August 12, 2022—from various conditions and requirements in the final aggregation rules. With the implementation of the final aggregation rules and upon the adoption and effectiveness of final CFTC position limits rules, our ability to execute our hedging strategies described above could be limited. It is uncertain at this time whether, when and in what form the CFTC’s proposed new position limits rules may become final and effective.

The CFTC issued a final rule on the amount of capital certain swap dealers and major swap participants are required to set aside with respect to their swap business on July 22, 2020. This rule may require our swap dealer counterparties to post additional capital as a result of entering into uncleared financial derivatives with us, which could increase the costs to us of future financial derivatives transactions.

The CFTC issued a final rule on margin requirements for uncleared swap transactions on January 6, 2016, which includes an exemption from any requirement to post margin to secure uncleared swap transactions entered into by commercial end-users to hedge commercial risks affecting their business. In addition, the CFTC has issued a final rule authorizing an exemption from the otherwise applicable mandatory obligation to clear certain types of swap transactions through a derivatives clearing organization and to trade such swaps on a regulated exchange, which exemption applies to swap transactions entered into by commercial end-users to hedge commercial risks affecting their business.

The mandatory clearing requirement currently applies only to certain interest rate swaps and credit default swaps, but the CFTC could act to impose mandatory clearing requirements for other types of swap transactions. The Dodd-Frank Act also imposes recordkeeping and reporting obligations on counterparties to swap transactions and other regulatory compliance obligations.

All of the above regulations could increase the costs to us of entering into financial derivative transactions to hedge or mitigate our exposure to commodity price volatility and other commercial risks affecting our business. The Volcker Rule provisions of the Dodd-Frank Act may also require our current bank counterparties that engage in financial derivative transactions to spin off some of their derivatives activities to separate entities, which separate entities may not be as creditworthy as the current bank counterparties. Under such rules, other bank counterparties may cease their current business as hedge providers. These changes could reduce the liquidity of the financial derivatives markets thereby reducing the ability of entities like us, as commercial end-users, to have access to financial derivatives to hedge or mitigate our exposure to commodity price volatility.

As a result, the Dodd-Frank Act and any new regulations issued thereunder could significantly increase the cost of derivative contracts (including through requirements to post cash collateral), which could adversely affect our capital available for other commercial operations purposes, materially alter the terms of future swaps relative to the terms of our existing bilaterally negotiated financial derivative contracts and reduce the availability of derivatives to protect against commercial risks we encounter.

 

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If we reduce our use of derivative contracts as a result of the new requirements, our results of operations may become more volatile and cash flows less predictable, which could adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of oil, natural gas and NGL prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil, natural gas and NGL. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower commodity prices. Any of these consequences could have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Our ability to pursue our business strategies may be adversely affected, and we may incur costs and liabilities, due to a failure to comply with environmental laws or regulations or a release of hazardous substances or other wastes into the environment.

We may incur significant costs and liabilities as a result of environmental requirements applicable to the operation of our wells, gathering systems and other facilities. These costs and liabilities could arise under a wide range of federal, state and local environmental laws and regulations, including, for example, the following federal laws and their state and local counterparts, as amended from time to time:

 

   

the federal Clean Air Act (“CAA”), which restricts the emission of air pollutants from many sources, imposes various preconstruction, monitoring and reporting requirements and is relied upon by the U.S. Environmental Protection Agency (“EPA”) as authority for adopting some climate change regulatory initiatives relating to GHG emissions;

 

   

the Federal Water Pollution Control Act, also known as the Clean Water Act, which regulates discharges of pollutants from facilities to state and federal waters and establishes the extent to which waterbodies are subject to federal jurisdiction and rulemaking as protected waters of the United States;

 

   

the Oil Pollution Act (“OPA”), which imposes liabilities for removal costs and damages arising from an oil spill into waters of the United States;

 

   

the federal Safe Drinking Water Act (“SDWA”), which ensures the quality of the nations’ public drinking water through adoption of drinking water standards and control over the subsurface injection of fluids into belowground formations;

 

   

the federal Resource Conservation and Recovery Act (“RCRA”), which imposes requirements for the generation, treatment, storage, transport, disposal and cleanup of nonhazardous and hazardous wastes;

 

   

the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), which imposes liability on generators, transporters and arrangers of hazardous substances at sites where hazardous substance releases have occurred or are threatening to occur as well as imposes liability on present and certain past owners and operators of sites where hazardous substance releases have occurred or are threatening to occur;

 

   

the Emergency Planning and Community Right-to-Know Act, which requires facilities to implement a safety hazard communication program and disseminate information to employees, local emergency planning committees and response departments about toxic chemical uses and inventories; and

 

   

the Endangered Species Act (“ESA”), which restricts activities that may affect federally identified endangered and threatened species or their habitats through the implementation of operating limitations or restrictions or a temporary, seasonal or permanent ban on operations in affected areas.

These U.S. laws and their implementing regulations, as well as any state or local counterparts, generally restrict the level of pollutants emitted to ambient air, discharges to surface water, and disposals or other releases to surfaces, soils and groundwater. Failure to comply with these laws and regulations may result in the assessment of sanctions, including administrative, civil and criminal penalties, the imposition of investigatory, remedial and corrective action obligations, the incurrence of capital expenditures, delays in the permitting, development or expansion of projects and the issuance of orders enjoining some or all of our future operations in a particular

 

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area. Certain environmental laws and analogous state laws and regulations impose strict joint and several liability, without regard to fault or legality of conduct, for costs required to clean up and restore sites where hazardous substances or other wastes have been disposed of or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, wastes or other materials into the environment. In addition, these laws and regulations may restrict the rate of oil or natural gas production. Historically, our environmental compliance costs have not had a material adverse effect on our results of operations; however, there can be no assurance that such costs will not be material in the future or that such future compliance will not have a material adverse effect on our business and operating results.

Moreover, public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to the oil and natural gas industry could continue, resulting in increased costs of doing business and consequently affecting profitability. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes more stringent and costly operating, waste handling, disposal and cleanup requirements, our business, prospects, financial condition or results of operations could be materially adversely affected.

We are subject to complex federal, state, local and other laws and regulations that could adversely affect the cost, manner or feasibility of conducting our operations.

Our oil and natural gas exploration and production operations are subject to complex and stringent laws and regulations. To conduct our operations in compliance with these laws and regulations, we must obtain and maintain numerous permits, approvals and certificates from various federal, state and local governmental authorities. Failure or delay in obtaining regulatory approvals or drilling permits could have a material adverse effect on our ability to develop our properties and execute our drilling and production plans, and receipt of drilling permits with onerous conditions could increase our compliance costs. In addition, regulations regarding conservation practices and the protection of correlative rights affect our operations by limiting the quantity of oil, natural gas and NGL we may produce and sell.

We are subject to federal, state and local laws and regulations as interpreted and enforced by governmental authorities possessing jurisdiction over various aspects of the exploration, production and transportation of oil and natural gas. The possibility exists that new laws, regulations or enforcement policies could be more stringent and significantly increase our compliance costs. If we are not able to recover the resulting costs through insurance or increased revenues, our financial condition could be adversely affected.

For example, the TRRC has previously adopted rules and regulations implementing legislation mandating certain clean-up activities for inactive wells and additional requirements related to the approval of plugging extensions. A major component of the new law is Rule 15, which requires a well operator to comply with certain inactive well clean-up activities, including the disconnection of electricity, purging of all production fluids from inactive lines and tanks and removal of surface equipment for wells that have not produced oil or gas during the preceding year. Noncompliance with Rule 15 could result in administrative penalties of up to $10,000 per violation per day and the loss of an operator’s ability to conduct operations in Texas.

Our access to transportation options can also be affected by U.S. federal and state regulation of oil and natural gas production and transportation, general economic conditions and changes in supply and demand. The interstate transportation and sale for resale of natural gas are subject to federal regulation, including regulation of terms, conditions and rates for interstate transportation, storage and various other matters, primarily by FERC. Federal and state regulations govern the price and terms for access to natural gas pipeline transportation. FERC’s regulations for interstate natural gas transmission in some circumstances may also affect the intrastate transportation of natural gas. The interstate transportation and sale for resale of oil is also subject to federal regulation, primarily from FERC, while intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory

 

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oversight and scrutiny given to intrastate pipeline rates, varies from state to state. Various proposals and proceedings that might affect the petroleum industry are pending before the U.S. Congress, FERC, various state legislatures and the courts. The industry historically has been heavily regulated and we cannot provide assurance that the less stringent regulatory approach recently pursued by FERC and the U.S. Congress will continue nor can we predict what effect such proposals or proceedings may have on our operations.

Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, technological advances in fuel economy and energy generation devices could reduce demand for oil and natural gas. The impact of the changing demand for oil and natural gas may have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may face unanticipated water and other waste disposal costs.

We may be subject to regulation that restricts our ability to discharge water produced as part of our oil, natural gas and NGL production operations. Productive zones frequently contain water that must be removed for the oil, natural gas and NGL to produce, and our ability to remove and dispose of sufficient quantities of water from the various zones will determine whether we can produce oil, natural gas and NGL in commercial quantities. The produced water must be transported from the leasehold and/or injected into disposal wells. The availability of disposal wells with sufficient capacity to receive all of the water produced from our wells may affect our ability to produce our wells. Also, the cost to transport and dispose of that water, including the cost of complying with regulations concerning water disposal, may reduce our profitability. We have entered into various water management services agreements in Texas and New Mexico which provide for the disposal of our produced water by established counterparties with large integrated pipeline networks. If these counterparties fail to perform, we may have to shut in wells, reduce drilling activities, or upgrade facilities for water handling or treatment. The costs to dispose of this produced water may increase for a number of reasons, including if new laws and regulations require water to be disposed in a different manner.

In 2016, the EPA adopted effluent limitations for the treatment and discharge of wastewater resulting from onshore unconventional oil, natural gas and NGL extraction facilities to publicly owned treatment works. The disposal of fluids gathered from oil, natural gas and NGL producing operations in underground disposal wells has been pointed to by some groups and regulators as a potential cause of increased induced seismic events in certain areas of the country, including Texas and New Mexico. These states have adopted, or are considering adopting, laws and regulations that may restrict or prohibit oilfield fluid disposal in certain areas or underground disposal wells, and state agencies implementing those requirements may issue orders directing certain wells in areas where seismic incidents have occurred to restrict or suspend disposal well operations or impose standards related to disposal well construction and monitoring. For example, in Fall 2021, the TRRC issued a notice to operators in the Midland area to reduce daily injection volumes following multiple earthquakes above a 3.5 magnitude over an 18 month period. The notice also required disposal well operators to provide injection data to TRRC staff to further analyze seismicity in the area. Subsequently, the TRRC ordered the suspension of all oil and gas produced water injection wells in the area injecting into deep formations (generally those deeper than 10,000 feet) until further notice. Operators are still permitted to inject into shallower formations. While we cannot predict the ultimate outcome of these actions, any action that temporarily or permanently restricts the availability of disposal capacity for produced water or other oilfield fluids may increase our costs or have other adverse impacts on our operations.

Our operations are subject to a series of risks arising out of the threat of climate change that could result in increased operating costs, limit the areas in which we may conduct oil, natural gas and NGL exploration and production activities, and reduce demand for the oil, natural gas and NGL we produce.

In the United States, no comprehensive climate change legislation has been implemented at the federal level. However, following the U.S. Supreme Court finding that GHG emissions constitute a pollutant under the CAA, the EPA has adopted regulations that, among other things, establish construction and operating permit reviews

 

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for emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources in the United States, and together with the DOT, implement GHG emissions limits on vehicles manufactured for operation in the United States. The federal regulation of methane from oil and gas facilities has been subject to uncertainty in recent years. In September 2020, the Trump Administration revised prior regulations to rescind certain methane standards and remove the transmission and storage segments from the source category for certain regulations. However, shortly after taking office, President Biden issued an executive order directing all federal agencies to review and take action to address any federal regulations, orders, guidance documents, policies and similar agency actions promulgated during the prior administration that may be inconsistent with the current administration’s policies. In response, the U.S. Congress has approved, and President Biden has signed into law, a resolution under the Congressional Review Act to repeal the September 2020 revisions to the methane standards, effectively reinstating the prior standards. In November 2021, as required by President Biden’s executive order, the EPA proposed new regulations to establish comprehensive standards of performance and emission guidelines for methane and volatile organic compound emissions from existing operations in the oil and gas sector, including the exploration and production, transmission, processing, and storage segments. The EPA is currently seeking public comments on its proposal, which the EPA hopes to finalize by the end of 2022. Once finalized, the regulations are likely to be subject to legal challenge and will also need to be incorporated into the states’ implementation plans, which will need to be approved by the EPA in individual rulemakings that could also be subject to legal challenge. As a result, we cannot predict the scope of any final methane regulatory requirements or the cost to comply with such requirements. However, future federal GHG regulations of the oil and gas industry remain a significant possibility.

Additionally, various states and groups of states have adopted or are considering adopting legislation, regulations or other regulatory initiatives that are focused on such areas as GHG cap and trade programs, carbon taxes, reporting and tracking programs, and restriction of emissions. For example, the New Mexico Environment Department has adopted regulations to restrict the venting or flaring of methane from both upstream and midstream operations. Internationally, the United Nations-sponsored “Paris Agreement” requires member states to individually determine and submit non-binding emissions reduction targets every five years after 2020. President Biden has recommitted the United States to the Paris Agreement and, in April 2021, announced a goal of reducing the United States’ emissions by 50-52% below 2005 levels by 2030. In November 2021, the international community gathered again in Glasgow at the 26 Conference to the Parties on the UN Framework Convention on Climate Change (“COP26”), during which multiple announcements were made, including a call for parties to eliminate certain fossil fuel subsidies and pursue further action on non-CO2 GHGs. Relatedly, the United States and European Union jointly announced the launch of the “Global Methane Pledge,” which aims to cut global methane pollution at least 30% by 2030 relative to 2020 levels, including “all feasible reductions” in the energy sector. President Biden also agreed that same month to cooperate with Chinese leader Xi Jinping on accelerating progress toward the adoption of clean energy. The impacts of these orders, pledges, agreements and any legislation or regulation promulgated to fulfill the United States’ commitments under the Paris Agreement, COP26, or other international conventions cannot be predicted at this time.

Governmental, scientific, and public concern over the threat of climate change arising from GHG emissions has resulted in increasing political risks in the United States, including climate change related pledges made by certain candidates elected to public office. President Biden has issued several executive orders focused on addressing climate change, including items that may impact our costs to produce, or demand for, oil and gas. Additionally, in November 2021, the Biden Administration released “The Long-Term Strategy of the United States: Pathways to Net-Zero Greenhouse Gas Emissions by 2050,” which establishes a roadmap to net zero emissions in the United States by 2050 through, among other things, improving energy efficiency; decarbonizing energy sources via electricity, hydrogen, and sustainable biofuels; and reducing non-CO2 GHG emissions, such as methane and nitrous oxide. The Biden Administration is also considering revisions to the leasing and permitting programs for oil and gas development on federal lands. For more information, see our Risk Factor titled “Our operations on federal lands could be subject to disruptions if we cannot obtain or maintain necessary permits and authorizations.” Other actions that could be pursued may include the imposition of more restrictive

 

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requirements for the establishment of pipeline infrastructure or the permitting of LNG export facilities, as well as more strict GHG emission limitations for oil and gas facilities. Litigation risks are also increasing, as a number of entities have sought to bring suit against oil and natural gas companies in state or federal court, alleging, among other things, that such companies created public nuisances by producing fuels that contributed to climate change. Suits have also been brought against such companies under shareholder and consumer protection laws, alleging that companies have been aware of the adverse effects of climate change but failed to adequately disclose those impacts.

There are also increasing financial risks for fossil fuel producers as shareholders currently invested in fossil-fuel energy companies may elect in the future to shift some or all of their investments into other sectors. Institutional lenders who provide financing to fossil-fuel energy companies also have become more attentive to sustainable lending practices and some of them may elect not to provide funding for fossil fuel energy companies. For example, at COP26, the Glasgow Financial Alliance for Net Zero (“GFANZ”) announced that commitments from over 450 firms across 45 countries had resulted in over $130 trillion in capital committed to net zero goals. The various sub-alliances of GFANZ generally require participants to set short-term, sector-specific targets to transition their financing, investing, and/or underwriting activities to net zero emissions by 2050. There is also a risk that financial institutions will be required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector. President Biden signed an executive order calling for the development of a “climate finance plan” and, separately, the Federal Reserve has joined the Network for Greening the Financial System, a consortium of financial regulators focused on addressing climate-related risks in the financial sector. More recently, in November 2021, the Federal Reserve issued a statement in support of the efforts of the NGFS to identify key issues and potential solutions for the climate-related challenges most relevant to central banks and supervisory authorities. Limitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities. Additionally, the SEC recently proposed new rules relating to the disclosure of a range of climate-related risks. We are currently assessing this rule but at this time we cannot predict the costs of implementation or any potential adverse impacts resulting from the rule. To the extent this rule is finalized as proposed, we could incur increased costs related to the assessment and disclosure of climate-related risks. In addition, enhanced climate disclosure requirements could accelerate the trend of certain stakeholders lenders restricting or seeking more stringent conditions with respect to their investments in certain carbon intensive sectors.

The adoption and implementation of new or more stringent international, federal or state legislation, regulations or other regulatory initiatives that impose more stringent standards for GHG emissions from the oil and natural gas sector or otherwise restrict the areas in which this sector may produce oil and natural gas or generate GHG emissions could result in increased costs of compliance or costs of consuming, and thereby reduce demand for, oil and natural gas. Additionally, political, litigation and financial risks may result in us restricting or cancelling production activities, incurring liability for infrastructure damages as a result of climatic changes, or having an impaired ability to continue to operate in an economic manner. One or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

As a final note, many scientists have concluded that climate change could have an effect on the severity of weather (including hurricanes, droughts and floods), sea levels, the arability of farmland, water availability and quality, and meteorological patterns. If such effects were to occur, our development and production operations have the potential to be adversely affected. Potential adverse effects could include damages to our facilities from powerful winds or rising waters in low lying areas, disruption of our production activities either because of climate related damages to our facilities or in our costs of operation potentially arising from such climatic effects, less efficient or non-routine operating practices necessitated by climate effects or increased costs for insurance coverage in the aftermath of such effects. Significant physical effects of climate change could also have an indirect effect on our financing and operations by disrupting the transportation or process-related services provided by midstream companies, service companies or suppliers with whom we have a business relationship. Additionally, changing meteorological conditions, particularly temperature, may result in changes to the amount, timing, or location of demand for energy or the products we produce. We may not be able to recover through

 

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insurance some or any of the damages, losses or costs that may result from potential physical effects of climate change. At this time, we have not developed a comprehensive plan to address the legal, economic, social or physical impacts of climate change on our operations.

Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing as well as governmental reviews of such activities could result in increased costs and additional operating restrictions or delays in the completion of oil and natural gas wells and adversely affect our production.

Hydraulic fracturing is used in many of our operations to stimulate production of hydrocarbons, particularly oil and natural gas. The process involves the injection of water, sand and additives under pressure into a targeted subsurface formation to fracture the surrounding rock and stimulate production. Currently, hydraulic fracturing is generally exempt from federal regulation under the SDWA and is typically regulated by state oil and gas commissions or similar agencies. However, the U.S. Congress from time to time has considered legislation to amend the SDWA to remove the exemption currently available to hydraulic fracturing, which would place additional regulatory burdens upon hydraulic fracturing operations, including requirements to obtain a permit prior to commencing operations adhering to certain construction requirements, to establish financial assurance, and to require reporting and disclosure of the chemicals used in those operations. This legislation has not passed. Nevertheless, several federal agencies have asserted regulatory authority or pursued investigations over certain aspects of the process. For example, in December 2016, the EPA released its final report on the potential impacts of hydraulic fracturing on drinking water resources, concluding that “water cycle” activities associated with hydraulic fracturing may impact drinking water resources under certain limited circumstances. To date, EPA has taken no further action in response to the December 2016 report. In addition, the Bureau of Land Management (“BLM”) finalized rules in March 2015 that impose new or more stringent standards for performing hydraulic fracturing on federal and American Indian lands. Following years of litigation, the BLM rescinded this rule in December 2017. California and various environmental groups filed lawsuits in January 2018 challenging the BLM’s rescission of the rule and, in March 2020, the U.S. District Court for the Northern District of California upheld the BLM’s decision to rescind the rule. The case is currently on appeal to the U.S. Court of Appeals for the Ninth Circuit.

In addition, some states, including Texas and New Mexico, have adopted, and other states are considering adopting, regulations that restrict or could restrict hydraulic fracturing in certain circumstances and that require the disclosure of the chemicals used in hydraulic fracturing operations. Further, state and local governmental entities have exercised the regulatory powers to regulate, curtail or in some cases prohibit hydraulic fracturing. In addition, in March 2016, the U.S. Occupational Safety and Health Administration issued a final rule to impose stricter standards for worker exposure to silica, which went into effect on June 23, 2018 and applies to the use of sand as a proppant for hydraulic fracturing. These standards went into effect on June 23, 2021 for hydraulic fracturing employers. New laws or regulations that impose new obligations on, or significantly restrict hydraulic fracturing, could make it more difficult or costly for us to perform hydraulic fracturing activities and thereby affect our determination of whether a well is commercially viable and increase our cost of doing business. Such increased costs and any delays or curtailments in our production activities could have a material adverse effect on our business, prospects, financial condition, results of operations and liquidity.

Our operations on federal lands could be subject to disruptions if we cannot obtain or maintain necessary permits and authorizations.

A portion of our leases in New Mexico are granted by the federal government and administered by the BLM, a federal agency. Approximately 21% of this acreage falls on federal lands. Of Colgate’s $3.1 billion of proved reserve value based on NYMEX Pricing, less than 8% is associated with drilling locations on federal lands. Operations conducted by us on federal oil and gas leases must comply with numerous additional statutory and regulatory restrictions. In addition, the U.S. Department of the Interior (via various of its agencies, including the BLM and the Office of Natural Resources Revenue) has certain authority over our calculation and payment of royalties, bonuses, fines, penalties, assessments and other revenues related to our federal and tribal oil and gas leases.

 

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These leases contain relatively standardized terms requiring compliance with detailed regulations. Under certain circumstances, the BLM may require operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect our interests.

Additionally, the Biden Administration has taken several actions to curtail oil and gas activities on federal lands. For example, on January 27, 2021, President Biden issued an executive order that instructed the Secretary of the Interior to pause new oil and natural gas leases on public lands, but not existing operations under valid leases or on tribal lands which the federal government merely holds in trust, pending completion of a comprehensive review and reconsideration of federal oil and natural gas permitting and leasing practices. In response to this, on November 26, 2021, the Department of the Interior released a report on the federal oil and gas leasing program that included several recommendations for how to reform the program. These recommended reforms included, among other items, raising royalty rates and current minimum levels for bids, rentals, royalties and bonds; revising bidding practices to avoid leasing of low potential lands; and performing more meaningful public and tribal consultations regarding the leasing and permitting processes. On January 25, 2022, a federal district court judge in Washington, DC vacated the results of the federal government’s Lease Sale 257, effectively canceling the sale, on the grounds that the federal government failed to consider foreign consumption of oil and natural gas from its greenhouse gas emissions analysis. Also in November 2021, the Department of the Interior entered into two Memoranda of Understanding with various federal agencies that focused on sacred sites and treaty rights, respectively, and entered into a joint order with the U.S. Department of Agriculture regarding stewardship of federal lands. These developments may result in increased tribal consultation relating to oil and gas permitting and leasing on federal lands. We cannot predict whether these or other changes will be incorporated into any proposed or final rulemakings; however, any revisions to the federal leasing or permitting process that make it more difficult for us to pursue operations on federal lands may adversely impact our operations. Moreover, there is a risk that authorizations required for existing operations may be delayed, ultimately causing a business disruption, and we cannot guarantee that further action will not be taken to curtail oil and gas development on federal land. For example, certain lawmakers have proposed to reduce or ban further leasing on federal lands or to adopt further restrictions for same. To the extent such legislation is passed, it may adversely impact our business, financial performance or results of operations.

Restrictions on drilling activities intended to protect certain species of wildlife may adversely affect our ability to conduct drilling activities in some of the areas where we operate.

Oil and natural gas operations in our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect certain wildlife, such as those restrictions imposed under the federal ESA. Seasonal restrictions may limit our ability to operate in protected areas and can intensify competition for drilling rigs, oilfield equipment, services, supplies and qualified personnel, which may lead to periodic shortages when drilling is allowed. These constraints and the resulting shortages or high costs could delay our operations and materially increase our operating and capital costs. Permanent restrictions imposed to protect endangered species could prohibit drilling in certain areas or require the implementation of expensive mitigation measures. The designation of previously unprotected species in areas where we operate as threatened or endangered could cause us to incur increased costs arising from species protection measures or could result in limitations on our exploration, development and production activities that could have an adverse impact on our ability to develop and produce our reserves.

For example, there have been repeated calls for the U.S. Fish and Wildlife Service (“USFWS”) to list the dunes sagebrush lizard, which is found only in the active and semi-stable shinnery oak dunes of southeastern New Mexico and adjacent portions of Texas, including areas where we operate. Similar calls have been made for the lesser prairie-chicken, which can also be found in areas where we operate. A review is currently pending to determine whether the dunes sagebrush lizard should be listed, and on June 1, 2021, USFWS proposed to list two distinct population segments of the lesser prairie-chicken under the ESA. To the extent the lesser prairie-chicken or any other species is listed under the ESA, or species are recategorized from threatened to endangered, in areas where our acreage is located, operations on those properties could incur increased costs arising from species protection measures and face delays or limitations with respect to production activities thereon.

 

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Regulatory action may cause us to shut in or curtail production.

Our rate of production and access to transportation and storage options may also be affected by U.S. federal and state regulation of oil and natural gas production. Actions of foreign oil producers such as Saudi Arabia and Russia and the impact on global demand of the COVID-19 outbreak have previously materially decreased global crude oil prices and generated a surplus of oil. As a result, regulatory action to curtail production had been contemplated. For example, the TRRC, which regulates the production of oil and gas in the state of Texas, held a hearing in April 2020 regarding potential production cuts for producers in Texas in light of the decline in oil prices globally. While the TRRC ultimately declined to institute mandatory production cuts, the agency may choose to revisit the issue if market weakness arises. If it decides to limit the production of oil and gas in Texas, our business and results of operations will be materially and adversely impacted.

Any such production limitations will likely force us to shut in production. If we are forced to shut in production as a result of regulatory actions or otherwise, we will likely incur greater costs to bring the associated production back online. Cost increases necessary to bring the associated wells back online may be significant enough that such wells would become uneconomic at low commodity price levels, which may lead to decreases in our reserve estimates and potential impairments and associated charges to our earnings. If we are able to bring wells back online, there is no assurance that such wells will be as productive following recommencement as they were prior to being shut in. Any shut in or curtailment of the oil, natural gas and NGL produced from our fields could adversely affect our financial condition or results of operations.

Changes to applicable tax laws and regulations, exposure to additional income tax liabilities, changes in our effective tax rates or an assessment of taxes resulting from an examination of our income or other tax returns could adversely affect our results of operations and financial condition, including our ability to repay our debt.

We are subject to various complex and evolving U.S. federal, state and local taxes. U.S. federal, state and local tax laws, policies, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us, in each case, possibly with retroactive effect, and may have an adverse effect on our results of operations and financial condition, including our ability to repay our debt. For example, several tax proposals have been set forth that would, if enacted into law, make significant changes to U.S. tax laws. Such proposals include, but are not limited to, (i) an increase in the U.S. income tax rates applicable to individuals and corporations, (ii) the elimination of tax subsidies for fossil fuels, (iii) the imposition of a minimum tax on book income for certain corporations and (iv) the imposition of an excise tax on certain corporate stock repurchases that would be borne by the corporation repurchasing such stock. Congress may consider, and could include, some or all of these proposals in connection with tax reform that may be undertaken. It is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could take effect. The passage of any legislation as a result of these proposals and other similar changes in U.S. federal income tax laws could adversely affect our results of operations and financial condition.

Changes in our effective tax rates or tax liabilities could also adversely affect our results of operations and financial condition. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:

 

   

changes in the valuation of our deferred tax assets and liabilities;

 

   

expected timing and amount of the release of any tax valuation allowances;

 

   

expansion into future activities in new jurisdictions;

 

   

the availability of tax deductions, credits, exemptions, refunds and other benefits to reduce tax liabilities; and

 

   

tax effects of share-based compensation.

 

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In addition, an adverse outcome arising from an examination of our income or other tax returns could result in higher tax exposure, penalties, interest or other liabilities that could have an adverse effect on our results of operations and financial condition.

 

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PROPOSAL 1: THE STOCK ISSUANCE PROPOSAL

Overview

A portion of the consideration to be paid to Colgate in connection with the Transactions will consist of the Share Consideration, consisting of (i) 269,300,000 shares of Class C Common Stock (which we expect will represent approximately 49% of the outstanding shares of Common Stock after giving effect to the Transactions (or approximately 47% on a fully diluted basis)) and (ii) 269,300,000 additional Surviving Company Units, which will be issued to Colgate as set forth in and pursuant to the terms of the Business Combination Agreement and which we expect will represent approximately 49% of the outstanding Surviving Company Units after giving effect to the Transactions. We are proposing the Stock Issuance Proposal in order to comply with Rule 5635(a) of the Nasdaq Stock Market Rules. Under Nasdaq Listing Rule 5635(a), shareholder approval is required prior to the issuance of securities in connection with the acquisition of another company if: (i) such securities are not issued in a public offering and (a) have, or will have upon issuance, voting power equal to, or in excess of, 20% of the voting power outstanding before the issuance of common stock (or securities convertible into or exercisable for common stock); or (b) the number of shares of common stock to be issued is or will be equal to, or in excess of, 20% of the number of shares of common stock outstanding before the issuance of the stock or securities; or (ii) any director, officer or Substantial Shareholder (as defined by Nasdaq Listing Rule 5635(e)(3)) of the company has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction or series of related transactions and the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, could result in an increase in outstanding common shares or voting power of 5% or more.

The terms of the Business Combination Agreement and the Related Agreements are complex and only briefly summarized below. For further information, please see the full text of the Business Combination Agreement, which is attached as Annex A hereto, and the Related Agreements, which are attached as Annexes B, C, D and E hereto. The discussion herein is qualified in its entirety by reference to such documents.

We are asking our shareholders to approve the issuance of the Share Consideration to Colgate in connection with the Transactions. Our shareholders should read carefully this proxy statement in its entirety for more detailed information concerning the Business Combination Agreement, which is attached as Annex A to this proxy statement. Please see the subsection entitled “The Business Combination Agreement” below, for additional information and a summary of certain terms of the Business Combination Agreement. You are urged to read carefully the Business Combination Agreement in its entirety before voting on this proposal.

We will not be able to consummate the Transactions unless this Stock Issuance Proposal is approved by the affirmative vote of a majority of the votes cast by holders of outstanding shares of Common Stock present in person or represented by proxy, assuming a quorum is present.

The Business Combination Agreement

This subsection of the proxy statement describes the material provisions of the Business Combination Agreement, but does not purport to describe all of the terms of the Business Combination Agreement. The following summary is qualified in its entirety by reference to the complete text of the Business Combination Agreement, which is attached as Annex A hereto. You are urged to read the Business Combination Agreement in its entirety because it is the primary legal document that governs the Transactions.

The Business Combination Agreement, together with the other documents entered into in connection with the Business Combination Agreement, contain representations, warranties and covenants that the respective parties to such agreements made to each other as of the date of the Business Combination Agreement or other specific dates. The assertions embodied in those representations, warranties and covenants were made for purposes of the contract among the respective parties and are subject to important qualifications and limitations agreed to by the parties in connection with negotiating the Business Combination Agreement. The representations and warranties

 

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are also modified in important part by the underlying disclosure letters, none of which have been filed publicly and which were used for the purpose of allocating contractual risk among the parties rather than establishing matters as facts.

General Description of the Business Combination Agreement

On May 19, 2022, we entered into the Business Combination Agreement with CRP, Colgate, and, solely for purposes of the specified provisions therein, the Colgate Unitholder, pursuant to which, at the Effective Time, and subject to the satisfaction or waiver of certain conditions in the Business Combination Agreement, (a) CRP will merge with and into Colgate, with CRP surviving the Merger and continuing as a subsidiary of Centennial, (b) all membership interests of CRP, issued and outstanding immediately prior to the Effective Time, will be converted into a number of validly issued, fully paid and nonassessable (except as limited by the Delaware Limited Liability Company Act) Surviving Company Units equal to the number of shares of our Class A Common Stock that are outstanding immediately after the Effective Time after giving effect to the Transactions, free and clear of all liens (other than restrictions on transfer under applicable securities laws and the organizational documents of the Surviving Company) and Centennial will remain as the manager of the Surviving Company, and (c) all of the Colgate Unitholder’s sole membership interest in Colgate will be exchanged for 269,300,000 shares of our Class C Common Stock, 269,300,000 additional Surviving Company Units and $525,000,000 in cash. At the Closing, the Merger Consideration may be adjusted downward pursuant to customary title and environmental defect considerations set forth in the Business Combination Agreement.

Closing of the Transactions

The Closing is expected to take place electronically through the exchange of documents via e-mail or facsimile on the date that is two business days after the satisfaction or (to the extent permitted by applicable law) waiver of the conditions described below under the subsection “Conditions to Closing of the Transactions” or at such other date and time as may be mutually agreed upon in writing by us and Colgate.

Conditions to Closing of the Transactions

Conditions to Each Party’s Obligations

The respective obligations of us and Colgate to consummate and effect the Transactions are subject to the satisfaction, at or prior to the Closing, of each of the following conditions:

 

   

no governmental authority or competent jurisdiction having enacted, issued or promulgated any order or law after the date of the Business Combination Agreement that has the effect of making the Transactions illegal or otherwise prohibiting the consummation thereof;

 

   

the expiration of the waiting period under the HSR Act and no agreement shall be in effect between Colgate, Centennial or any of their respective subsidiaries, on the one hand, and the Antitrust Division or FTC, on the other hand, not to consummate the Transactions;

 

   

the required vote of our shareholders to approve the Stock Issuance Proposal and the A&R Charter Proposals; and

 

   

the shares of Class A Common Stock (including shares of Class A Common Stock issuable upon exchange of the Surviving Company Units) having been approved for listing on Nasdaq, subject to official notice of issuance.

Conditions to Colgate’s Obligations

The obligations of Colgate to consummate the Transactions are subject to the satisfaction (or waiver by Colgate in writing) on or prior to Closing of each of the following conditions precedent:

 

   

(a) the fundamental representations and warranties of Centennial and CRP (i.e., representations related to existence and qualification, organizational power, authorization and enforceability, capitalization

 

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and brokerage arrangements) shall be true and correct in all material respects, except for any de minimis inaccuracies, as of the date of the Business Combination Agreement and the closing date of the Transactions (except to the extent such representations and warranties speak to an earlier date, in which case such representations and warranties shall be true and correct in all respects as of such earlier date); and (b) all other representations and warranties of Centennial and CRP (other than the fundamental representations of Centennial and CRP) shall be true and correct without giving effect to any materiality or Parent Material Adverse Effect qualifiers contained therein as of the closing date of the Transactions as though made on and as of the closing date of the Transactions (except for representations and warranties that refer to a specified date which need only be true and correct on and as of such specified date), except for breaches, if any, of such representations and warranties as would not individually or in the aggregate, reasonably be expected to have a Parent Material Adverse Effect;

 

   

Each of Centennial and CRP must have performed and observed, in all material respects, all covenants and agreements to be performed or observed by them under the Business Combination Agreement prior to or on the date of the Closing;

 

   

Colgate must have received a certificate of Centennial signed by an authorized officer of Centennial, dated as of the closing date of the Transactions, confirming that the conditions in the two bullets above have been fulfilled; and

 

   

Centennial must have delivered to Colgate executed counterparts to all of the Related Agreements to which it is a party.

Conditions to Centennial’s Obligations

The obligations of Centennial and CRP to consummate the Transactions are subject to the satisfaction (or waiver by Centennial in writing) on or prior to the closing date of the Transactions of each of the following conditions precedent:

 

   

(a) the fundamental representations and warranties of Colgate (i.e., representations related to existence and qualification, organizational power, authorization and enforceability, capitalization and brokerage arrangements) shall be true and correct in all material respects, except for any de minimis inaccuracies, as of the date of the Business Combination Agreement and the closing date of the Transactions (except to the extent such representations and warranties speak to an earlier date, in which case such representations and warranties shall be true and correct in all respects as of such earlier date); and (b) all other representations and warranties of Colgate (other than the fundamental representations of Colgate) shall be true and correct without giving effect to any materiality or Company Material Adverse Effect qualifiers contained therein as of the closing date as though made on and as of the closing date of the Transactions (except for representations and warranties that refer to a specified date which need only be true and correct on and as of such specified date), except for breaches, if any, of such representations and warranties as would not individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect;

 

   

Each of Colgate, and solely with respect to certain specified provisions, the Colgate Unitholder, must have performed and observed, in all material respects, all covenants and agreements to be performed or observed by them under the Business Combination Agreement prior to or on the closing date of the Transactions;

 

   

Centennial must have received a certificate of Colgate signed by an authorized officer of Colgate, dated as of the closing date of the Transactions, confirming that the conditions in the two bullets above have been fulfilled;

 

   

Colgate must have delivered to Centennial executed counterparts to all of the Related Agreements to which it, the Colgate Unitholder or any Colgate designee is a party; and

 

   

The Colgate Unitholder must have delivered to Centennial a properly executed Internal Revenue Service Form W-9.

 

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Representations and Warranties

Under the Business Combination Agreement, Colgate made customary warranties regarding Colgate relating to: existence and qualification; organizational power; authorization and enforceability; capitalization; subsidiaries; no conflicts; consents, approvals, or waivers; liability for brokers’ fees; litigation; taxes, compliance with laws; material contracts; payments for production; non-consent operations; payout status; environmental matters; bankruptcy; leases; wells; reserve reports; permits; royalties; outstanding commitments; suspense funds; employee benefit matters; employment and labor matters; financial statements; no liabilities; condemnation; intellectual property; absence of certain changes; no distributions; insurance; hedging transactions; affiliate transactions; and information to be supplied.

Under the Business Combination Agreement, Centennial made customary warranties relating to: existence and qualification; organizational power; authorization and enforceability; shareholder approval; capitalization; subsidiaries; no conflicts; consents, approvals, or waivers; liability for brokers’ fees; litigation; taxes, compliance with laws; material contracts; payments for production; non-consent operations; payout status; environmental matters; bankruptcy; leases; wells; reserve reports; permits; royalties; outstanding commitments; suspense funds; employee benefit matters; employment and labor matters; SEC documents; financial statements; no liabilities; condemnation; intellectual property; absence of certain changes; no distributions; insurance; hedging transactions; affiliate transactions; information to be supplied; internal controls; exchange listing matters; Form S-3; state takeover statutes; opinion of financial advisor; and financial capability.

Covenants of the Parties

Covenants of Colgate

Colgate made certain covenants under the Business Combination Agreement, including, among others, the covenants set forth below.

 

   

Prior to the Closing, Colgate agreed to use commercially reasonable efforts to conduct, and cause its subsidiaries to conduct, their businesses in the ordinary course of business in all material respects consistent with past practice subject to the terms of the Business Combination Agreement.

 

   

In particular, subject to certain exceptions set forth in the Business Combination Agreement, prior to the Closing, Colgate has agreed to, and to cause its subsidiaries to:

 

   

not propose, elect to participate in or non-consent to any operation reasonably anticipated by Colgate and its subsidiaries to require future capital expenditures that are, in the aggregate, greater than 125% of the aggregate amount of capital expenditures scheduled to be made in Colgate’s capital expenditure budget for the applicable period, except for capital expenditures to repair damage resulting from insured casualty events or capital expenditures required on an emergency basis or for the safety of individuals, assets or the environment;

 

   

not take any affirmative action to (i) terminate or materially amend any leases, or (ii) terminate, materially amend, waive, materially modify, or extend any material contract or enter into any new contract that would constitute a material contract if executed prior to the date of the Business Combination Agreement; in each case, other than the extension of leases with primary terms expiring prior to the closing and the execution or extension of a contract for the sale, exchange, or marketing of oil, gas and/or other hydrocarbons in the ordinary course of business and terminable without penalty on 60 days or shorter notice;

 

   

maintain all material insurance policies in the amounts and of the types presently in force with respect to Colgate’s assets and the operations and activities of Colgate and its subsidiaries to the extent commercially reasonable in Colgate and its subsidiaries’ business judgment in light of prevailing conditions in the insurance market;

 

   

use commercially reasonable efforts to maintain their wells in good repair and normal operating condition in the ordinary course in all material respects consistent with past practices, wear and tear excepted;

 

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maintain the books, accounts and records of each of Colgate and its subsidiaries in the ordinary course of business consistent with past practice and in compliance with all applicable laws and contractual obligations;

 

   

notify Centennial of any emergency affecting Colgate and its subsidiaries’ businesses or any of Colgate’s assets as promptly as reasonably practicable;

 

   

notify Centennial of any actions filed with any governmental authority, or threatened in writing against any of Colgate or its subsidiaries with respect to Colgate’s assets, any of Colgate or its subsidiaries, or the Transactions;

 

   

use commercially reasonable efforts to maintain all material permits, approvals, bonds and guaranties required to own and/or operate Colgate’s assets, and make all filings that Colgate or any of its subsidiaries is required to make under applicable law with respect to Colgate’s assets;

 

   

not transfer, sell, or otherwise dispose of any of Colgate’s assets except for (i) sales and dispositions of hydrocarbons or equipment and materials made in the ordinary course of business consistent with past practice, which in the case of equipment and materials, are replaced with equipment and materials of comparable or better value or utility in connection with the maintenance, repair, and operation of Colgate’s assets, (ii) other sales and dispositions of any Colgate assets in the aggregate not exceeding $2,500,000 and (iii) swaps of assets or property in the Delaware Basin, which may include cash consideration of up to $2,500,000 in the aggregate for all such swap transactions;

 

   

not enter into, commence, settle or compromise any litigation affecting Colgate’s assets or any of Colgate or its subsidiaries, other than settlements or compromises that do not exceed $250,000 individually;

 

   

notify Centennial of any written notice received by Colgate or any of its subsidiaries of any material violation of any environmental law relating to Colgate’s assets where such violation has not been previously disclosed to Centennial or cured or otherwise resolved to the written satisfaction of the relevant governmental authority;

 

   

not amend or otherwise change the organizational documents of any of Colgate or its subsidiaries;

 

   

not issue (including by conversion of convertible or exchangeable securities of Colgate or any of its subsidiaries), sell, pledge, transfer, dispose of or otherwise subject to any Encumbrance (as defined in the Business Combination Agreement) (other than (i) pursuant to the Company RBL (as defined in the Business Combination Agreement) and (ii) Permitted Encumbrances (as defined in the Business Combination Agreement)) any of Colgate’s assets or any Company Group Interests (as defined in the Business Combination Agreement), or any options, warrants, convertible securities of any of Colgate’s subsidiaries or other rights of any kind to acquire any such Company Group Interests;

 

   

not declare, set aside or pay any dividends on, or make any other distributions (whether in stock or property) in respect of any Company Group Interests, other than any dividends or distributions between Colgate and its subsidiaries or between Colgate’s subsidiaries;

 

   

not reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or indirectly, any Company Group Interests, or make any other change with respect to Colgate’s or its subsidiaries’ capital structure;

 

   

not acquire any corporation, partnership, limited liability company, other business organization or division thereof or any material amount of assets, or enter into any joint venture, strategic alliance, exclusive dealing, noncompetition or similar contract or arrangement that would reasonably be expected to (i) materially adversely affect or materially delay (A) the expiration or termination of the waiting period under the HSR Act or any other consents under antitrust laws applicable to the Transactions or (B) the parties’ ability to obtain all consents of governmental authorities necessary

 

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for the consummation of the Transactions, or (ii) result in the entry of, or the commencement of litigation seeking the entry of, any order that would materially delay or prevent the consummation of the Transactions, other than (1) transactions solely between Colgate and a wholly owned subsidiary of Colgate (or solely among wholly owned subsidiaries of Colgate), (2) acquisitions as to which the aggregate amount of the consideration paid or transferred by Colgate and its subsidiaries in connection with all such acquisitions would not exceed $1,500,000 or (3) any acquisitions that are in the ordinary course of business and contemplated by Colgate’s capital expenditure budget;

 

   

not adopt any plan or agreement of complete or partial liquidation, dissolution, restructuring, recapitalization, merger, consolidation or other reorganization;

 

   

not incur any Indebtedness (as defined in the Business Combination Agreement) or issue any debt securities or assume, guarantee or endorse, or otherwise become responsible for, the obligations of any person, or make any loans or advances, except for (i) borrowings made under the Company RBL that are made in the ordinary course of business consistent with past practice, (ii) borrowings under the Company RBL that are made for the purpose of unwinding or modifying existing hedges, (iii) Indebtedness incurred by Colgate or any of its subsidiaries that is owed to any wholly owned subsidiary of Colgate or by any subsidiary of Colgate that is owed to Colgate or any wholly owned subsidiary of Colgate, (iv) guarantees by Colgate or its subsidiaries of Indebtedness of any wholly owned subsidiary of Colgate and (v) guarantees by any subsidiary of Colgate of Indebtedness of Colgate or any other wholly owned subsidiary of Colgate;

 

   

not make, compromise or forgive any loans, advances, or capital contributions to any other person, other than as between Colgate or its subsidiaries or employees of Colgate or its subsidiaries in the ordinary course of business;

 

   

not sell, assign, license, transfer, abandon or permit to lapse any Intellectual Property Rights (as defined in the Business Combination Agreement) owned by any of Colgate or its subsidiaries, other than non-exclusive licenses of Intellectual Property Rights granted by any of Colgate or its subsidiaries to customers in the ordinary course of business;

 

   

not make any change in any method of accounting or accounting practice or policy, except as required by GAAP or applicable laws (or as required to conform to any changes in statutory or regulatory accounting rules (including GAAP or regulatory requirements with respect thereto));

 

   

not (i) make, change or revoke any material tax election (including any election to change the tax classification of any of Colgate or its subsidiaries for U.S. federal income tax purposes), (ii) change any annual tax accounting period, (iii) change any material method of accounting for tax purposes, (iv) settle or compromise any claim or assessment with any governmental authority in respect of any material taxes or (v) file any amendment to a material tax return;

 

   

not take any action that would or would reasonably be expected to prevent or materially delay the Closing and the consummation of the Transactions;

 

   

except as required by applicable law, not (i) negotiate, modify, extend, or enter into any labor agreement or (ii) recognize or certify any labor union, labor organization, works council, or group of employees as the bargaining representative for any employees of Colgate or its subsidiaries;

 

   

not implement or announce any employee layoffs, plant closings, reductions in force, furloughs, temporary layoffs, salary or wage reductions, work schedule changes or other such actions that would trigger the WARN Act;

 

   

not hire, engage, or, terminate (without cause), furlough, or temporarily layoff any employee or independent contractor with annual base compensation in excess of $200,000;

 

   

not waive or release any noncompetition, nonsolicitation, nondisclosure, noninterference, nondisparagement, or other restrictive covenant obligation of any current or former employee or independent contractor;

 

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not unwind or otherwise modify existing hedges or enter into any derivative transactions;

 

   

other than in the ordinary course of business and consistent with past practice, not (i) make any material increase or material decrease in the base compensation of any of its directors, officers and employees, (ii) increase, or promise to increase, the compensation or benefits of any of its current or former directors, officers, individual service providers, or employees, (iii) enter into or adopt any new severance, bonus, or incentive compensation (whether cash or equity-based) plan, agreement, or arrangements with or for the benefit of any current or former employee or individual service provider of any of Colgate or its subsidiaries (other than as required by the terms of any benefit plan in effect as of the date hereof), (iv) adopt, establish, commence participation in, or enter into any benefit plan or modify, amend or terminate any benefit plan in any material respect, in each case, including any benefit or compensation plan, program, policy, agreement or arrangement that would be a benefit plan if in effect on the date hereof, but except as may be required by the terms of any benefit plan in effect as of the date hereof or applicable law, or (v) accelerate the timing, vesting or payment of any compensation or benefit payable to any current or former employee or individual service provider of any of Colgate or its subsidiaries; or

 

   

not enter into an agreement or commitment that would cause Colgate or its subsidiaries to violate any of the foregoing.

 

   

Colgate has agreed to terminate, immediately prior to the Closing, each Company Related Party Contract (as defined in the Business Combination Agreement).

 

   

Colgate has agreed to furnish information reasonably requested by Centennial, and to make available personnel, in connection with the preparation, filing and distribution of the proxy statement, and to provide, as promptly as reasonably practicable after the date of the Business Combination Agreement, certain balance sheets and income statements, statements of cash flows and members’ equity of Colgate, as are required to be included in the proxy statement.

Covenants of Centennial

We made certain covenants under the Business Combination Agreement, including, among others, the covenants set forth below.

 

   

Prior to the Closing, we have agreed to use commercially reasonable efforts to conduct our business in the ordinary course of business in all material respects consistent with past practice and subject to the terms of the Business Combination Agreement.

 

   

In particular, subject to certain exceptions, prior to the Closing, we have agreed to, and will cause our subsidiaries to:

 

   

not propose, elect to participate in or non-consent to any operation reasonably anticipated by Centennial and its subsidiaries to require future capital expenditures that are, in the aggregate, greater than 125% of the aggregate amount of capital expenditures scheduled to be made in Centennial’s capital expenditure budget, except for capital expenditures to repair damage resulting from insured casualty events or capital expenditures required on an emergency basis or for the safety of individuals, assets or the environment;

 

   

not take any affirmative action to (i) terminate or materially amend any leases, or (ii) terminate, materially amend, waive, materially modify, or extend any Centennial material contract or Centennial related party contract or enter into any new contract that would constitute a Centennial material contract or Centennial related party contract if executed prior to the date of the Business Combination Agreement; in each case, other than the extension of leases with primary terms expiring prior to the closing and the execution or extension of a contract for the sale, exchange, or marketing of oil, gas and/or other hydrocarbons in the ordinary course of business and terminable without penalty on 60 days or shorter notice;

 

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maintain all material insurance policies in the amounts and of the types presently in force with respect to Centennial’s assets and the operations and activities of Centennial and its subsidiaries to the extent commercially reasonable in Centennial’s and its subsidiaries’ business judgment in light of prevailing conditions in the insurance market;

 

   

use commercially reasonable efforts to maintain the wells in good repair and normal operating condition in the ordinary course in all material respects consistent with past practices, wear and tear excepted;

 

   

maintain the books, accounts and records of Centennial and its subsidiaries in the ordinary course of business consistent with past practice and in compliance with all applicable laws and contractual obligations;

 

   

notify Colgate of any emergency affecting Centennial and its subsidiaries’ businesses or any of Centennial’s assets as promptly as reasonably practicable;

 

   

notify Colgate of any actions filed with any governmental authority, or threatened in writing against any of Centennial or its subsidiaries with respect to Centennial’s assets, any of Centennial or its subsidiaries, or the Transactions;

 

   

use commercially reasonable efforts to maintain all material permits, approvals, bonds and guaranties required to own and/or operate Centennial’s assets, and make all filings that Centennial or any of its subsidiaries is required to make under applicable law with respect to Centennial’s assets;

 

   

not transfer, sell, or otherwise dispose of any of Centennial’s assets except for (i) sales and dispositions of hydrocarbons or equipment and materials made in the ordinary course of business consistent with past practice, which in the case of equipment and materials, are replaced with equipment and materials of comparable or better value and utility in connection with the maintenance, repair, and operation of Centennial’s assets, (ii) other sales and dispositions of any Centennial asset in the aggregate not exceeding $2,500,000 and (iii) swaps of assets or property in the Delaware Basin, which may include cash consideration of up to $2,500,000 in the aggregate for all such swap transactions;

 

   

not enter into, commence, settle or compromise any litigation affecting Centennial’s assets or any of Centennial or its subsidiaries, other than settlements or compromises that do not exceed $250,000 individually;

 

   

notify Colgate of any written notice received by Centennial or any of its subsidiaries of any material violation of any environmental law relating to Centennial’s assets where such violation has not been previously disclosed to Colgate or cured or otherwise resolved to the written satisfaction of the relevant governmental authority;

 

   

not amend or otherwise change the organizational documents of any of Centennial or its subsidiaries;

 

   

not issue (including by conversion of convertible or exchangeable securities of Colgate or any of its subsidiaries), sell, pledge, transfer, dispose of or otherwise subject to any Encumbrance (other than Permitted Encumbrances) any of the Centennial assets or any equity interests of Centennial or any of its subsidiaries, or any options, warrants, convertible securities or other rights of any kind to acquire any such equity interests;

 

   

not declare, set aside or pay any dividends on, or make any other distributions (whether in stock or property) in respect of any equity interests of Centennial or any of its subsidiaries, other than (i) any dividends or distributions between Centennial and its subsidiaries or between Centennial’s subsidiaries or (ii) cash dividends or distributions with respect to the equity interests of Centennial or any of its subsidiaries consistent with Centennial’s past practice;

 

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not reclassify, combine, split, subdivide or redeem, or purchase or otherwise acquire, directly or indirectly, any Common Stock, or make any other change with respect to Centennial’s or its subsidiaries’ capital structure;

 

   

not acquire any corporation, partnership, limited liability company, other business organization or division thereof or any material amount of assets, or enter into any joint venture, strategic alliance, exclusive dealing, noncompetition or similar contract or arrangement that would reasonably be expected to (i) materially adversely affect or materially delay (A) the expiration or termination of the waiting period under the HSR Act or any other consents under antitrust laws applicable to the Transactions or (B) the parties’ ability to obtain all consents of governmental authorities necessary for the consummation of the Transactions, or (ii) result in the entry of, or the commencement of litigation seeking the entry of, any order that would materially delay or prevent the consummation of the Transactions, other than (1) transactions solely between Centennial and a wholly owned subsidiary of Centennial (or solely among wholly owned subsidiaries of Centennial), (2) acquisitions as to which the aggregate amount of the consideration paid or transferred by Centennial and its subsidiaries in connection with all such acquisitions would not exceed $1,500,000 or (3) any acquisitions that are in the ordinary course of business and contemplated by Centennial’s capital expenditure budget;

 

   

not adopt any plan or agreement of complete or partial liquidation, dissolution, restructuring, recapitalization, merger, consolidation or other reorganization;

 

   

not incur any Indebtedness or issue any debt securities or assume, guarantee or endorse, or otherwise become responsible for, the obligations of any person, or make any loans or advances, except for (i) any borrowings made under Centennial’s or its subsidiaries’ existing arrangements for Indebtedness that are made in the ordinary course of business consistent with past practice, (ii) Indebtedness incurred by Centennial or any of its subsidiaries that is owed to any wholly owned subsidiary of Centennial or by any subsidiary of Centennial that is owed to Centennial or any wholly owned subsidiary of Centennial, (iii) guarantees by Centennial or its subsidiaries of Indebtedness of any wholly owned subsidiary of Centennial and (iv) guarantees by any subsidiary of Centennial of Indebtedness of Centennial or any other wholly owned subsidiary of Centennial;

 

   

not make, compromise or forgive any loans, advances, or capital contributions to any other person, other than as between Centennial or its subsidiaries or employees of Centennial or its subsidiaries in the ordinary course of business;

 

   

not sell, assign, license, transfer, abandon or permit to lapse any Intellectual Property Rights owned by any of Centennial or its subsidiaries, other than non-exclusive licenses of Intellectual Property Rights granted by any of Centennial or its subsidiaries to customers in the ordinary course of business;

 

   

not make any change in any method of accounting or accounting practice or policy, except as required by GAAP or applicable laws (or as required to conform to any changes in statutory or regulatory accounting rules (including GAAP or regulatory requirements with respect thereto));

 

   

not (i) make, change or revoke any material tax election (including any election to change the tax classification of any of Centennial or its subsidiaries for U.S. federal income tax purposes), (ii) change any annual tax accounting period, (iii) change any material method of accounting for tax purposes, (iv) settle or compromise any claim or assessment with any governmental authority in respect of any material taxes or (v) file any amendment to a material tax return;

 

   

not take any action that would or would reasonably be expected to prevent or materially delay the Closing and the consummation of the Transactions;

 

   

except as required by applicable law, not (i) negotiate, modify, extend, or enter into any labor agreement or (ii) recognize or certify any labor union, labor organization, works council, or group of employees as the bargaining representative for any employees of Centennial or its subsidiaries;

 

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not implement or announce any employee layoffs, plant closings, reductions in force, furloughs, temporary layoffs, salary or wage reductions, work schedule changes or other such actions that would trigger the WARN Act;

 

   

not hire, engage, or, terminate (without cause), furlough, or temporarily layoff any employee or independent contractor with annual base compensation in excess of $200,000;

 

   

not waive or release any noncompetition, nonsolicitation, nondisclosure, noninterference, nondisparagement, or other restrictive covenant obligation of any current or former employee or independent contractor;

 

   

not unwind or otherwise modify existing hedges or enter into any derivative transactions subject to certain terms set forth in Centennial’s disclosure schedules to the Business Combination Agreement;

 

   

other than in the ordinary course of business and consistent with past practice, not (i) make any material increase or material decrease in the base compensation of any of its directors, officers and employees, (ii) increase, or promise to increase, the compensation or benefits of any of its current or former directors, officers, individual service providers, or employees, (iii) enter into or adopt any new severance, bonus, or incentive compensation (whether cash or equity-based) plan, agreement, or arrangements with or for the benefit of any current or former employee or individual service provider of any of Centennial or its subsidiaries (other than as required by the terms of any Parent Benefit Plan (as defined in the Business Combination Agreement) in effect as of the date hereof), (iv) adopt, establish, commence participation in, or enter into any Parent Benefit Plan or modify, amend or terminate any Parent Benefit Plan in any material respect, in each case, including any benefit or compensation plan, program, policy, agreement or arrangement that would be a Parent Benefit Plan if in effect on the date hereof, but except as may be required by the terms of any Parent Benefit Plan in effect as of the date hereof or applicable law, or (v) except as set forth in Centennial’s disclosure schedules to the Business Combination Agreement, accelerate the timing, vesting or payment of any compensation or benefit payable to any current or former employee or individual service provider of any of Centennial or its subsidiaries; or

 

   

not enter into an agreement or commitment that would cause Centennial or its subsidiaries to violate any of the foregoing.

 

   

We have agreed to promptly prepare and file with the SEC this proxy statement and to use commercially reasonable efforts to cause this proxy statement to be mailed to our shareholders as promptly as practicable after the SEC confirms it has no further comments to this proxy statement.

 

   

We have agreed to, as promptly as practicable following the proxy effectiveness, establish a record date and hold a meeting of shareholders for the purpose of obtaining the required vote of the shareholders to the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal. Our Board has recommended to the shareholders that they vote in favor of the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal (the “Board Recommendation”) and we have agreed that our Board will not change, withdraw, withhold, qualify or modify the Board Recommendation, other than in certain limited circumstances prior to obtaining the required vote of the shareholders.

 

   

We will use our reasonable best efforts to cause the Class A Common Stock (including shares of Class A Common Stock issuable upon exchange of the Surviving Company Units) to be issued in connection with the Transactions to be approved for listing on Nasdaq, subject to official notice of issuance, prior to the of the Transactions.

 

   

From and after the Closing, we are required to maintain “tail” director and officer liability insurance coverage at Colgate’s expense with such coverage in effect for a period of six years from the closing date of the Transactions.

 

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Non-Solicit Restrictions

 

   

During the period from the date of the Business Combination Agreement and continuing until the earlier of the termination of the Business Combination Agreement pursuant to its terms or the, Closing, we and our subsidiaries will not, and will instruct and use our reasonable best efforts to cause our representatives not to, and will cause our subsidiaries to instruct and use their reasonable best efforts to cause their representatives not to:

 

   

(i) directly or indirectly initiate or solicit, or encourage or facilitate (including by way of furnishing any information relating to Centennial or any of its subsidiaries) any inquiries or the making or submission of any proposal that constitutes, or would reasonably be expected to lead to, a Parent Acquisition Proposal (as defined in the Business Combination Agreement);

 

   

(ii) other than clarifying terms of the Parent Acquisition Proposal in accordance with the applicable terms of the Business Combination Agreement, participate or engage in discussions or negotiations with, or disclose any information or data relating to Centennial or any of its subsidiaries or afford access to the properties, books or records of Centennial or any of its subsidiaries to any person that has made a Parent Acquisition Proposal or to any person in contemplation of making a Parent Acquisition Proposal; or

 

   

(iii) accept a Parent Acquisition Proposal or enter into any agreement, including any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement, option agreement, joint venture agreement, partnership agreement or other similar agreement, arrangement or understanding, (A) constituting or related to, or that is intended to or would reasonably be expected to lead to, any Parent Acquisition Proposal (other than an Acceptable Confidentiality Agreement (as defined in the Business Combination Agreement and permitted thereunder) or (B) requiring, intending to cause, or which could reasonably be expected to cause Centennial to abandon, terminate or fail to consummate the Merger or the Transactions.

 

   

From and after the date of the Business Combination Agreement, we shall as promptly as reasonably practicable (and in any event within 48 hours) notify Colgate in writing of the receipt of any request for information or any Parent Acquisition Proposal received from any person, or any inquiry, discussions or negotiations with respect to any Parent Acquisition Proposal, and the terms and conditions of such request, Parent Acquisition Proposal, inquiry, discussions or negotiations, and we shall promptly provide to Colgate copies of any written materials received in connection with any of the foregoing and the identity of the person or group making any such request, Parent Acquisition Proposal or inquiry or with whom any discussions or negotiations are taking place. We have agreed to simultaneously provide Colgate any information concerning us or our subsidiaries provided to any other person or group in connection with any Parent Acquisition Proposal that was not previously provided to Colgate. We have also agreed to keep Colgate reasonably informed of the status of any Parent Acquisition Proposals (including the identity of the parties and price involved and any changes to any material terms and conditions thereof).

Exceptions to Our Non-Solicit Restrictions

Prior to the approval of the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal, if we receive a bona fide written Parent Acquisition Proposal that was not in violation of the Business Combination Agreement, we are not prohibited from contacting such person or person’s representatives who made such Parent Acquisition Proposal solely to (i) clarify the terms of such Parent Acquisition Proposal so that we may inform ourselves about such Parent Acquisition Proposal and (ii) inform a third party Parent Acquisition Proposalof our non-solicit obligations. (and not to convey, request or attempt to gather any other information except as specifically provided for in the Business Combination Agreement).

 

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Change of Recommendation Restrictions

Subject to certain exceptions, neither we nor our Board shall:

 

   

withhold or withdraw (or amend, modify or qualify in a manner adverse to Colgate,), or publicly propose or announce any intention to withhold or withdraw (or amend, modify or qualify in a manner adverse to Colgate,), the Board Recommendation; or

 

   

recommend, adopt or approve, or propose publicly to recommend, adopt or approve, any Parent Acquisition Proposal;

We refer to the taking of any of the actions described in the bullets above as a “Change of Recommendation.”

Exceptions to Our Change of Recommendation Restrictions

Prior to the shareholder approval of the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal, our Board is entitled to make a Change of Recommendation in response to a Superior Proposal (as defined in the Business Combination Agreement) if in the case of a Change of Recommendation taken in connection with a Parent Acquisition Proposal that was not initiated, solicited, encouraged or facilitated by Centennial or any of its subsidiaries:

 

   

we have complied with our non-solicit, proxy and shareholders’ meeting obligations set forth in the Business Combination Agreement;

 

   

we have provided notice to Colgate advising Colgate of the receipt of a Superior Proposal and, within three business days after delivery of such notice, Colgate does not propose any alternative transaction or proposes any alternative transaction (including the modification of the Business Combination Agreement), but our Board determines in good faith (after consultation with financial advisors and outside legal counsel, and taking into account all financial, legal, and regulatory terms and conditions of such alternative transaction proposal, including any conditions to and expected timing of consummation, and any risks of non-consummation of such alternative transaction proposal) that such alternative transaction proposal is not at least as favorable to Centennial and Centennial’s shareholders as the Superior Proposal; and

 

   

our Board, after consultation with outside legal counsel, determines that the failure to make a Change of Recommendation would be inconsistent with its fiduciary duties;

Prior to the shareholder approval of the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal, our Board is entitled to withhold or withdraw (or amend, modify or qualify in a manner adverse to Colgate), or publicly propose or announce any intention to withhold or withdraw (or amend, modify or qualify in a manner adverse to Colgate) the Board Recommendation in the case of a Change of Recommendation that is not in response to and does not otherwise involve or relate to Parent Acquisition Proposal:

 

   

a Parent Intervening Event (as defined in the Business Combination Agreement) has occurred;

 

   

we have complied with our non-solicit, proxy and shareholders’ meeting obligations set forth in the Business Combination Agreement;

 

   

our Board determines in good faith, after consultation with Centennial’s outside legal counsel and any other advisor it chooses to consult, that the failure to make such Change of Recommendation would be inconsistent with its fiduciary duties;

 

   

our Board determines in good faith that the reasons for making such Change of Recommendation are independent of any Parent Acquisition Proposal (whether pending, potential or otherwise); and

 

   

we provide written notice to Colgate advising Colgate that our Board is contemplating making a Change of Recommendation and specifying the material facts and information constituting the basis for such contemplated determination; provided, that (x) our Board may not make such a Change of Recommendation until the third business day after receipt by Colgate of such notice and (y) during

 

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such three business day period, at the request of Colgate, Centennial will negotiate in good faith with respect to any changes or modifications to the Business Combination Agreement that would allow our Board not to make such Change of Recommendation consistent with its fiduciary duties.

Mutual Covenants

 

   

We and Colgate have agreed to grant to each other reasonable access, subject to certain conditions, to the properties, contracts, books and records, data and senior management, and will make available all information concerning our respective businesses, properties and personnel as may be reasonably requested.

 

   

We and Colgate have agreed to (i) cooperate with each other and use (and cause each of our respective affiliates to use) best efforts to take all actions reasonably necessary or advisable to consummate the Transactions as promptly as reasonably practicable and (ii) keep each other apprised of the status of matters relating to regulatory approval and the consummation of the transaction.

 

   

Prior to the consummation of the Transactions, Colgate may engage in a consent solicitation with respect to certain Colgate indentures. We and Colgate have agreed to use reasonable best efforts to provide all cooperation reasonably requested in connection with such consent solicitation.

 

   

We and Colgate have agreed to file and submit all necessary or advisable notifications, filings, draft filings or other documentation required in connection with the Transactions pursuant to certain applicable antitrust, competition, foreign investment or national security laws or regulations, including under the HSR Act, and we and the Colgate Unitholder have agreed to each be responsible for and pay 50% of all fees and payments to any governmental authority relating to any consent, clearance, registration, approval, permit or authorization or expiration or termination of a waiting period relating the Transactions, whether or not the Transactions are consummated.

 

   

We and Colgate will remain subject to certain continuing obligations of confidentiality with regard to information relating to Centennial and Colgate.

 

   

We and Colgate have agreed that without the prior written consent of the other party, no party shall contact or engage with any officer, director, manager, employee, consultant, direct or indirect equity holder, distributor, supplier, customer, contractor, material business relation or joint venture partner of the other party of any of such party’s subsidiaries or those of any third party operator of the other party’s assets or properties in connection with the Transactions or make any announcement or communication to any of the aforementioned parties regarding the Business Combination Agreement or the Transactions.

 

   

We and Colgate have agreed to provide continuing employees certain severance payments and benefits, as applicable.

 

   

We and Colgate have agreed to not take any action that would cause the Transactions to be subject to requirements imposed by any takeover laws.

 

   

We and Colgate (for itself and the Colgate Unitholder) have agreed to pay our own costs and expenses (including attorneys’ accountants’ and investment bankers’ fees and other out-of-pocket expenses) incurred in connection with the Business Combination Agreement, whether or not the transactions contemplated thereby are consummated, provided, however, that the Colgate Unitholder has agreed to pay and be fully responsible for all Financial Advisory Fees (as defined in the Business Combination Agreement) of Colgate in excess of the amount of the Financial Advisory Fees of Centennial.

Survival

None of the representations, warranties or agreements contained in the Business Combination Agreement or in any certificate delivered pursuant thereto survive the effective time of the Merger except for agreements that by their terms survive the effective time of the merger; provided, however, that the environmental matters, title matters and miscellaneous sections of the Business Combination Agreement shall survive without time limit.

 

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Termination

The Business Combination Agreement may be terminated and the Transactions may be abandoned any time prior to Closing as follows:

 

   

by mutual prior written consent;

 

   

by either us or Colgate, by prior written notice to the other party, if:

 

   

Closing has not occurred on or before February 19, 2023 (the “Outside Date”), subject to extension in the event certain closing conditions relating to regulatory approval and the legality of the consummation of the Transactions are satisfied;

 

   

any governmental authority of competent jurisdiction enacts, issues or promulgates, any order or law (whether temporary, preliminary or permanent) after the date of the Business Combination Agreement that is in effect and has the effect of making the Transactions illegal or otherwise prohibiting consummation of the Transactions; or

 

   

the required approvals of Centennial’s shareholders shall not have been obtained at our shareholders’ meeting (or at any adjournment thereof); provided, however, Centennial will not be entitled to terminate due to failure to obtain the necessary shareholder approval if such failure was caused by the action or failure to act of Centennial and such action or failure to act constitutes a material breach by Centennial of the Business Combination Agreement.

 

   

By Colgate, by prior written notice to Centennial, if:

 

   

either Centennial or CRP breaches any of its representations or warranties contained in the Business Combination Agreement or Centennial or CRP breach or fail to perform any of their covenants contained in the Business Combination Agreement and such breach or failure to perform (i) would render a condition precedent to Colgate’s obligations to consummate the Transactions not capable of being satisfied and (ii) after the giving of written notice of such breach or failure to perform to Centennial by Colgate, cannot be cured or has not been cured by the earlier of the Outside Date or thirty days after the delivery of such notice; provided, however, that Colgate’s right to terminate the Business Combination Agreement is not available if Colgate is then in material breach of any of its representations, warranties, covenants or agreements contained in the Business Combination Agreement and such breach or failure to perform would render a condition precedent to Centennial’s or CRP’s obligations to consummate the Transactions not capable of being satisfied;

 

   

at any point prior to receipt of required approvals of Centennial’s shareholders, if the Board (i) makes a Change of Recommendation, (ii) does not include its recommendation in favor of the Transactions in this proxy statement or (iii) resolves, agrees to, publicly proposes to or allows Centennial to take any of the foregoing actions;

 

   

since the date of the Business Combination Agreement, there has been any change, event, development, circumstance, condition, occurrence or effect or combination of the foregoing that has resulted in, or would reasonably be expected to result in, a Parent Material Adverse Effect (as defined in the Business Combination Agreement); or

 

   

at any point prior to receipt of the required approvals of Centennial’s shareholders, Centennial materially breaches its non-solicitation obligations, other than in the case where (i) such material breach is a result of an isolated action by a person that is a representative of Centennial, (ii) Centennial uses reasonable best efforts to remedy such material breach and (iii) Colgate is not significantly harmed as a result there.

 

   

By Centennial, by written notice to Colgate, if:

 

   

Colgate breaches its representations or warranties contained in the Business Combination Agreement or Colgate or the Colgate Unitholder breaches or fails to perform any of its covenants

 

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contained in the Business Combination Agreement and such breach or failure to perform (i) would render a condition precedent to Centennial’s obligations to consummate the Transactions not capable of being satisfied and (ii) after the giving of written notice of such breach or failure to perform by Colgate to Centennial, cannot be cured or has not been cured by the earlier of the Outside Date or thirty days after the delivery of such notice; or provided, however, that Centennial’s and CRP’s rights to terminate the Business Combination Agreement are not available if Centennial or CRP are then in material breach of any of their representations, warranties, covenants or agreements contained in the Business Combination Agreement and such breach or failure to perform would render a condition precedent to Colgate’s obligations to consummate the Transactions not capable of being satisfied; or

 

   

since the date of the Business Combination Agreement, there has been any change, event, development, circumstance, condition, occurrence or effect or combination of the foregoing that has resulted in, or would reasonably be expected to result in, a Company Material Adverse Effect (as defined in the Business Combination Agreement)

In the event of termination of the Business Combination Agreement, the Business Combination Agreement will become immediately null and void, except for provisions relating to: (i) fraud or willful breach; (ii) access waiver of claims; (iii) confidentiality and public announcements; (iv) effect of termination; and (v) certain miscellaneous provisions of the Business Combination Agreement.

Termination Fees

The Business Combination Agreement provides that if the Business Combination Agreement is terminated by either party pursuant to not receiving the necessary Centennial shareholder approval, Centennial will pay the reasonable and documented out-of-pocket fees and expenses incurred or paid by or on behalf of Colgate and its affiliates in connection with the Merger, the Transactions or the authorization, preparation, negotiation, execution and performance of the Business Combination Agreement, such reimbursed amount not to exceed $20,000,000.

If the Business Combination Agreement is terminated by Colgate due to a Change of Recommendation or Centennial’s breach of its non-solicitation obligations, Centennial shall pay Colgate a termination fee of $72,000,000 (the “Termination Fee”) within three business days. Such Termination Fee is also payable by Centennial to Colgate if (1) (i) prior to the Centennial shareholders’ meeting, a Parent Acquisition Proposal is publicly proposed or disclosed, (ii) the Business Combination Agreement is terminated by either party due to (a) the passing of the Outside Date, (b) failure to receive the necessary Centennial shareholders’ approvals or (c) Centennial or CRP breach any of their representations or warranties contained in the Business Combination Agreement or breach or fail to perform any of their covenants contained in the Business Combination Agreement and (iii) concurrently with or within nine months of such termination described ,in the foregoing clause (ii), Centennial or any of its subsidiaries enters into a definitive agreement with respect to or otherwise consummates any Parent Acquisition Proposal (subject to certain adjustments) or (2) the Business Combination Agreement is terminated by either party due to the passing of the Outside Date and at the time of such termination, the necessary Centennial shareholders’ approvals have not been obtained and Colgate would have been permitted to terminate the Business Combination Agreement pursuant to a Change of Recommendation or Centennial’s breach of its non-solicitation obligations.

Upon payment of the Termination Fee, Centennial will have no further liability with respect to the Business Combination Agreement or the Transactions to Colgate (except with respect to fraud or willful breach), and upon receipt of a Termination Fee, Colgate is not entitled to also receive payment for expenses.

Amendments

The Business Combination Agreement may be amended at any time only by an agreement in writing executed by all parties to the Business Combination Agreement and expressly identified as an amendment or modification.

 

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Governing Law

The Business Combination Agreement is governed by and shall be construed in accordance with Delaware law.

Related Agreements

This section describes the material provisions of certain additional agreements entered into, or to be entered into, in connection with the Business Combination Agreement, which we refer to as the Related Agreements, but does not purport to describe all of the terms thereof. The following summary is qualified in its entirety by reference to the complete text of each of the Related Agreements. Shareholders and other interested parties are urged to read the Related Agreements in their entirety prior to voting on the proposals presented at the Special Meeting. Please see the section entitled “Proposal 1—The Stock Issuance Proposal—Related Agreements” for additional information.

Registration Rights Agreement

Contemporaneously with the Closing, in connection with the Transactions, Centennial, the Colgate Unitholder, and each of the Holders will enter into the Registration Rights Agreement substantially in the form included as Annex D to be effective as of the Closing, pursuant to which Centennial will agree to register for resale, pursuant to Rule 415 under the Securities Act, (a) shares of Class A Common Stock issuable upon the redemption or exchange of the Surviving Company Units in accordance with the A&R LLC Agreement, (b) any outstanding shares of Class A Common Stock or any other equity security (including the shares of Class A Common Stock issued or issuable upon the exercise of any other equity security) of Centennial held by a Holder as of the date of the Registration Rights Agreement, and (c) any other equity security of Centennial issued or issuable with respect to any such share of Class A Common Stock by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or reorganization. At Closing, it is anticipated that 269.3 million shares of Class A Common Stock, which is the same number of shares of Class C Common Stock that will be issued to the Colgate Unitholder as a portion of the Merger Consideration, will have registration rights under the Registration Rights Agreement. At any time that the registration statement is effective, subject to the lock-up described below, any Holder may, subject to certain customary exceptions and limitations on number of requests, request to sell all or a portion of its Registrable Securities in an underwritten offering pursuant to the registration statement. In addition, the Holders will have, subject to certain customary exceptions, certain “piggyback” rights with respect to underwritten offerings.

Pursuant to the Registration Rights Agreement, the Holders have, subject to limited exceptions, agreed to a lock-up on their respective shares of Class A Common Stock and Class C Common Stock following consummation of the Merger, pursuant to which such parties will not transfer such shares of Class A Common Stock or Class C Common Stock for a period of six months following the Closing.

Voting Agreement

On May 19, 2022, in connection with the execution of the Business Combination Agreement, Centennial, Colgate, and the Centennial Holders entered into the Voting Agreement, pursuant to which and subject to the terms and conditions thereof, the Centennial Holders agreed to vote all of the shares of Class A Common Stock beneficially owned by the Centennial Holders in favor of the approval of each of the proposals presented at the Special Meeting.

As of the Record Date, the Centennial Holders beneficially owned an aggregate of approximately     % of the outstanding shares of Common Stock. The Voting Agreement entered into by the foregoing parties is included as Annex E.

Sixth Amended and Restated Limited Liability Company Agreement of the Surviving Company

In connection with the Transactions, at the Effective Time, the Fifth Amended and Restated Limited Liability Company Agreement of CRP, dated as of October 11, 2016 (as amended, restated, amended and restated,

 

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supplemented or otherwise modified from time to time, together with all schedules, exhibits and annexes thereto) will be amended and restated in its entirety to, among other things, recapitalize the authorized equity securities of the Surviving Company (including the reclassification of all membership interests of CRP into Surviving Company Units, with the rights, preferences and obligations set forth therein), permit the issuance and ownership of the Surviving Company Units as contemplated by the Transactions, with the rights, preferences, and obligations set forth therein and admit the Colgate Unitholder as a member of the Surviving Company.

Pursuant to the A&R LLC Agreement, each member of the Surviving Company (other than Centennial) will have the right to cause the Surviving Company to redeem all or a portion of its Surviving Company Units in exchange for, at the Surviving Company’s option, (i) an equal number of shares of Class A Common Stock or (ii) an amount of cash equal to the market value of an equal number of shares of Class A Common Stock to be determined based on the volume weighted average price of a share of Class A Common Stock on Nasdaq for the five trading days ending on, and including, the date on which such redeeming shareholder delivers notice to the Surviving Company of such member’s intention to redeem all or a portion of its Surviving Company Units. Upon completion of any such redemption, the Surviving Company will cancel such redeemed Surviving Company Units and we will cancel a corresponding number of shares of Class C Common Stock. Pursuant to the A&R LLC Agreement, we have agreed to contribute to the Surviving Company the consideration to which any redeeming member is entitled in connection with such a redemption pursuant to the A&R LLC Agreement. Alternatively, we may, in our sole discretion, effect a direct exchange with such redeeming member of the Surviving Company, whereby we will pay the applicable cash consideration, or issue the applicable number of shares of Class A Common Stock, to which the redeeming member of the Surviving Company is entitled directly to such redeeming member in exchange for its Surviving Company Units. In such case, we will acquire such Surviving Company Units from such redeeming member and we will be treated for all purposes of the A&R LLC Agreement as the owner of such Surviving Company Units thereafter.

Fourth Amended and Restated Certificate of Incorporation of Centennial

In connection with the Transactions, at the Effective Time and subject to obtaining the approval of the A&R Charter Proposals, the Third Amended and Restated Certificate of Incorporation of Centennial will be amended and restated in its entirety to, among other things, (i) increase the number of shares of Common Stock authorized for issuance from 620,000,000 to 1,500,000,000, (ii) allow shareholders of the Company to act by written consent, subject to certain limitations and (iii) designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for substantially all actions and proceedings that may be initiated by shareholders.

Background of the Transactions

Background of the Merger

The Board and Centennial management periodically have evaluated and considered various financial and strategic opportunities as part of their strategy to maximize shareholder value. As part of such evaluation, Centennial management has contacts from time to time with financial and strategic parties, including other public and private oil and gas E&P companies.

In the Fall of 2021, Colgate engaged Credit Suisse Securities (USA) LLC (“Credit Suisse”) and Jefferies LLC (“Jefferies”) to investigate possible strategic transactions, including an initial public offering, merger or outright sale.

On February 1, 2022, representatives of Credit Suisse contacted Sean R. Smith, Chief Executive Officer of Centennial, to determine whether Mr. Smith would be willing to meet with Will Hickey and James Walter, co-Chief Executive Officers of Colgate.

 

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On February 2, 2022, Centennial and Colgate executed a nondisclosure agreement to facilitate the exchange of information in connection with the evaluation of a potential transaction.

Beginning on February 10, 2022, Colgate granted Centennial management access to Colgate’s virtual data room, which contained various information relating to Colgate and its assets.

On February 11, 2022, at the invitation of Credit Suisse, Messrs. Smith and Glyphis met at Credit Suisse’s office in Houston with representatives of Colgate, Credit Suisse and Jefferies to discuss a possible transaction between Centennial and Colgate. Credit Suisse and Jefferies informed Centennial that they planned to provide additional details regarding the sale process in the coming weeks.

On February 21, 2022, on behalf of Colgate, Credit Suisse and Jefferies distributed to Centennial, among other parties, a set of bid instructions soliciting proposals to acquire all of the outstanding membership interests in Colgate.

On March 7, 2022, Centennial submitted to Credit Suisse and Jefferies a nonbinding indication of interest to acquire all of the outstanding membership interests in Colgate for $2.975 billion, funded with a combination of Common Stock (to be issued directly to Colgate’s owners) and cash (from the proceeds of a public offering of Common Stock and the issuance of Centennial senior notes). Centennial also proposed to assume or refinance Colgate’s existing senior notes and credit facility borrowings implying an enterprise value for Colgate of $4.25 billion.

Following submission by Centennial of the nonbinding indication of interest, Colgate and Centennial began to exchange financial information and other due diligence documents and information regarding their respective companies, assets and business plans. This exchange of information continued throughout March, April and May 2022 until the execution of the Business Combination Agreement.

On March 9, 2022, Credit Suisse and Jefferies notified Centennial that it had been selected by Colgate, together with other bidders, to participate in a second round of bidding and that bid instructions for that round would be provided in the next few weeks.

In March 2022, Centennial engaged Citi as its financial advisor and Latham & Watkins as its legal counsel in connection with the potential transaction.

Additional material information was added to the virtual data room on March 16, 2022.

On March 17, 2022, Centennial and Colgate conducted in-person and reciprocal management presentations in Houston.

On March 31, 2022, Credit Suisse and Jefferies distributed revised bid instructions to Centennial and others. The revised instructions called for updated proposals to be submitted by bidders no later than April 19, 2022.

On April 14, 2022, the Board held a special meeting attended by representatives of Centennial’s management team and Citi. During the meeting, Centennial management and Citi provided an overview of the potential transaction with Colgate, possible structures for the transaction and proposed terms of a possible second round bid to be submitted to Colgate. The Board unanimously authorized the submission of a bid to acquire all of the membership interests in Colgate, with financing to be comprised of the issuance of Common Stock directly to Colgate’s owners, cash consideration to be funded through revolving credit facility borrowings, the issuance of senior unsecured notes and a possible public offering of Common Stock, as well as the assumption of Colgate’s current debt.

On April 19, 2022, Centennial submitted a revised proposal to Credit Suisse and Jefferies to acquire all of the outstanding membership interests in Colgate, to be comprised of 220.8 million shares of Common Stock

 

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(as calculated below), $1.01 billion in cash and $1.39 billion in assumption of debt. At the time this would have implied a total purchase price of $4.4 billion, with Colgate’s investors owning approximately 41% of the combined business. Centennial submitted with such proposal a “highly confident” letter from Citi regarding, among other things, Citi’s ability to underwrite and syndicate an upsize to CRP’s credit facility. The proposed equity consideration represented an implied value of $2.0 billion based on the volume-weighted average closing price of Common Stock for the ten trading days ending on April 18, 2022, which was $9.06 (the “10-Day VWAP”).

On April 21, 2022, Messrs. Hickey and Walter met with Messrs. Smith and Glyphis in Denver. During the meeting, Messrs. Hickey and Walter presented a Colgate counterproposal to Centennial’s April 19 proposal. Colgate’s counterproposal was for consideration comprised of 313.5 million shares of Common Stock, $300 million in cash consideration and the assumption of $1.36 billion of Colgate’s current outstanding net debt inclusive of the fair value of its commodity derivatives as of the period ended March 31, 2022. Mr. Walter and Mr. Hickey emphasized the desire of Colgate’s board to receive increased equity consideration relative to cash given their outlook on the combined company, and Colgate’s proposal would provide its investors with a 51.3% interest in the combined company. In order to ensure that the transaction was handled in a tax efficient manner, Colgate proposed that the transaction be structured as an “Up-C” structure. As a result, Colgate sellers would receive their economic interest in CRP, Centennial’s operating subsidiary, which would avoid the tax inefficiency created by the taxable event that would occur if Colgate were to merge directly with Centennial. The proposal contemplated that Messrs. Hickey and Walter would be appointed co-chief executive officers of the combined company, with Mr. Smith as chairman of an 11-person board of directors, comprised of Mr. Quinn, Mr. Tichio, three independent directors nominated by Colgate and three independent directors nominated by Centennial. Following the meeting, Credit Suisse and Jefferies sent Centennial a counterproposal letter containing a draft of the Business Combination Agreement.

On April 22, 2022, the Board held a special meeting attended by representatives of Centennial’s management team, Latham & Watkins and Citi. During the meeting, Mr. Smith briefed the directors on the meeting that occurred the preceding day with Colgate management and on Centennial management’s and Citi’s initial reactions to Colgate’s April 21 counterproposal, including with respect to the increase in merger consideration and increase in weighting towards equity consideration and Centennial management’s views regarding the proposed co-chief executive officer management structure. In addition, Latham & Watkins gave a presentation on fiduciary duties owed by the directors to Centennial shareholders in considering any proposal. Representatives of Centennial management and Citi informed the Board that a further evaluation of the Colgate counterproposal would be conducted and could be discussed with the Board in the following days.

On April 24, 2022, the Board held a special meeting attended by representatives of Centennial’s management team, Latham & Watkins and Citi. During the meeting, Citi reviewed with the Board certain financial aspects of Centennial’s and Colgate’s respective proposals to date and certain structural considerations, including governance and tax structures, contemplated by Colgate’s counterproposal.

On April 26, 2022, the Board held a special meeting attended by representatives of Centennial’s management team, Latham & Watkins and Citi. The meeting focused primarily on potential value implications of the “Up-C” structure, Colgate’s existing hedges and what updated proposal to deliver to Colgate. Following discussions, the Board authorized management to submit an updated proposal to Colgate comprised of 258.3 million shares of Common Stock, a $600 million cash payment and the assumption of $1.36 billion in Colgate net debt. This proposal would result in an approximate 46.6% ownership interest by Colgate in the combined company. Additionally, the proposal would maintain Centennial’s “Up-C” structure, but without a corresponding tax receivable agreement. The Board also instructed management to provide in its updated proposal that the combined company would continue to be managed by Centennial’s existing management team and have a ten person board of directors comprised of two inside directors and three independent directors nominated by Colgate and two inside directors (including Mr. Smith) and three independent directors nominated by Centennial.

After the Board meeting, Mr. Smith submitted an updated proposal to Colgate consistent with the Board’s authorization. Later that evening, at Centennial’s direction, Latham & Watkins sent a material issues list relating to the Business Combination Agreement to Colgate’s legal counsel, Kirkland & Ellis.

 

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On April 28, 2022, Messrs. Hickey and Walter telephoned Messrs. Smith and Glyphis to share Colgate’s reaction to Centennial’s April 26 revised proposal. Following the call, Colgate submitted its written response to Centennial’s proposal, in which Colgate proposed a merger consideration comprised of 269.3 million shares of Common Stock, a cash payment of $600 million and the assumption of $1.36 billion of net Colgate debt, which would result in the unitholders of Colgate owning approximately 47% of the combined company. In addition, Colgate proposed retaining the previously discussed “Up-C” tax structure, but, contrary to Centennial’s proposal, reiterated Colgate’s previous request for Centennial and Colgate’s members to enter into a tax receivable agreement. The Colgate proposal also contemplated that the combined company would be led by Messrs. Hickey and Walter as co-chief executive officers and agreed that the Denver office would remain open for a period of time.

On April 29, 2022, representatives of Centennial and Colgate, together with Centennial’s and Colgate’s respective legal and financial advisors, held a group conference call to discuss the proposed “Up-C” structure, for the transaction and related tax considerations.

On May 2, 2022, the Board held a special meeting attended by representatives of Centennial’s management team, Latham & Watkins and Citi. At the meeting, Citi discussed with the Board certain financial aspects of Centennial’s and Colgate’s competing proposals. Following further discussion, the Board commissioned Steven J. Shapiro, the Chairman of the Board, to contact Colgate’s board chair, William J. Quinn of Pearl Energy Investments, to discuss the merits of Centennial’s April 26 proposal and considerations regarding management of the combined company. The Board also authorized Mr. Shapiro and Centennial management to send an updated proposal to Colgate following the discussions between Messrs. Shapiro and Quinn.

Later that day, Mr. Shapiro met by telephone with Mr. Quinn. Mr. Shapiro reiterated Centennial’s April 26 proposal and Centennial’s interest in engaging in a transaction on those terms. Mr. Quinn agreed to further discuss Centennial’s proposal with Colgate and with NGP Energy Capital Management, LLC, another private equity sponsor of Colgate.

The following day, Mr. Quinn called Mr. Shapiro to further discuss possible deal terms. During the discussion, Mr. Quinn stressed that Colgate’s proposals relating to pro forma management was an important factor to Colgate’s existing owners and believed that element of the transaction would be crucial to achieving the support of Colgate’s owners.

On May 4, 2022, Mr. Quinn separately telephoned Robert Tichio, a member of Centennial’s Board, to discuss potential transaction terms. On that same day, Mr. Shapiro contacted each independent director on the Board to apprise them of status of negotiations and terms of a possible counterproposal to Colgate.

On May 5, 2022, Centennial submitted an updated proposal to Colgate with the merger consideration of 269.3 million shares of Common Stock, $450 million of cash, and the assumption of $1.36 billion of Colgate net debt, reflecting an approximate 47% ownership interest in the combined company. Under the proposal, Messrs. Hickey and Walter would become co-chief executive officers of the combined company, Mr. Smith would be executive chairman of the Board until September 30, 2023, and the Board would be comprised of 11 directors, five appointed by Centennial (to be Messrs. Smith and Tichio, and three independent directors), five appointed by Colgate (to be Messrs. Hickey, Walter and Quinn and two independent directors), and one additional independent director mutually selected by Centennial and Colgate. The proposal accepted the “Up-C” deal structure, but reiterated that there would be no tax receivable agreement. In addition, Mr. Shapiro communicated this proposal to Mr. Quinn by telephone.

On May 9, 2022, Mr. Quinn contacted Mr. Shapiro to advise that Colgate was considering alternative proposals that were potentially more compelling due to the recent decline in Centennial’s stock price and that he planned to contact Mr. Shapiro as soon as he had an update.

On May 10, 2022, Mr. Quinn called Mr. Shapiro and advised him that Colgate was prepared to accept Centennial’s May 5 proposal, provided the cash component of the consideration increased by $100 million to

 

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$550 million. Mr. Shapiro indicated that he would discuss the updated proposal with the Board and requested that Messrs. Hickey and Walter be available to join the next Board call to present their vision of the combined company. Later that day, Colgate confirmed its counterproposal in writing to Mr. Smith.

On May 11, 2022, the Board held a special meeting attended by representatives of Centennial’s management team, Latham & Watkins and Citi. Messrs. Hickey and Walter were present by telephone for a portion of the meeting to explain their vision for a combined company and to address questions raised by the Centennial directors. After Messrs. Hickey and Walter were excused from the meeting and following further discussion with Latham & Watkins and Citi present, including an update from Citi regarding certain financial information relating to Centennial, Colgate and the proposed merger, the Board commissioned Mr. Shapiro to contact Mr. Quinn in an effort to negotiate a reduction in the merger consideration prior to Centennial accepting Colgate’s counterproposal.

Later that day, Mr. Shapiro spoke with Mr. Quinn and they mutually agreed (subject to final Board approval) to a transaction, with merger consideration consisting of 269.3 million shares of Common Stock, a cash payment of $525 million and the assumption of Colgate’s outstanding net debt (assumed at $1.36 billion).

Later that day, Latham & Watkins sent a revised draft of the Business Combination Agreement to Kirkland & Ellis, which reflected (a) the addition of certain Colgate representations and warranties, (b) the removal of the “force the vote” provision for the Special Meeting, (c) the addition of title and environmental defect mechanics relating to Colgate’s assets, (d) a reduction of the termination fee payable by Centennial to Colgate in certain circumstances in which the Business Combination Agreement had been terminated (the “Termination Fee”) from 5.0% to 2.0% of the Merger Consideration, and (e) the reduction of the expense reimbursement payable by Centennial to Colgate in which the Business Combination Agreement is terminated as a result of the failure to receive the approval of Centennial shareholders at the Special Meeting (the “Expense Reimbursement”) from 1.0% to 0.5% of Merger Consideration. Latham & Watkins also sent a detailed document due diligence request list to Kirkland & Ellis, which included requests for information relating to Colgate’s corporate, benefits, and compensation, oil and gas, litigation, regulatory and tax matters.

On May 14, 2022, Kirkland & Ellis sent Latham & Watkins an updated draft of the Business Combination Agreement that contemplated, among other items, (a) reinsertion of a “force the vote” provision for the Special Meeting, (b) the adjustment of the title and environmental defect mechanics to be reciprocal for Centennial and Colgate, (c) increasing the Termination Fee to 4.0% and (d) increasing the Expense Reimbursement to 1.0% of Merger Consideration.

On May 15, 2022, Latham & Watkins sent Kirkland & Ellis an updated draft of the Business Combination Agreement that reflected (a) the removal of the “force the vote” clause for the Special Meeting, (b) the adjustment of the title and environmental defect mechanics to apply solely to Colgate’s assets, (c) the reduction of the Termination Fee to 2.5% of Merger Consideration, and (d) the reduction of the Expense Reimbursement to 0.75% of Merger Consideration.

On May 16, 2022, the Board held a special meeting attended by representatives of Centennial’s management team, Latham and Citi. The Board was initially updated on the status, current terms of, and outstanding issues in the potential transaction. Next, at the request of the Board, Citi reviewed with the Board certain preliminary financial analyses regarding Centennial, Colgate and the proposed merger based on the proposed consideration consisting of 269.3 million shares of Common Stock, a cash payment of $525 million and the assumption of Colgate’s outstanding net debt (assumed at $1.36 billion) reflected in the parties’ most recent negotiations. The Board also discussed the strategic rationale for the transaction and certain other transaction-related considerations. Representatives of Latham & Watkins advised the Board on its fiduciary duties.

Beginning on May 16, 2022, and continuing through May 18, 2022, Centennial and Colgate management, together with representatives of Centennial’s and Colgate’s respective legal and financial advisors, held a series of in-person meetings to resolve the outstanding issues in the Business Combination Agreement (including

 

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among others management structure, board composition, title and environmental defect mechanisms, size of the Termination Fee and Expense Reimbursement, the right of the Board to terminate the Business Combination Agreement under certain circumstances, tax indemnities, derivative transactions, payment of financial advisory fees and legal fees, and the level of effort required to secure antitrust clearance), the disclosure schedules to the Business Combination Agreement and the ancillary agreements. In addition, the parties continued exchanging financial and other due diligence information.

On May 17, 2022, Kirkland & Ellis sent Latham & Watkins an updated draft of the Business Combination Agreement that reflected the agreement between the parties on various material terms, including (a) the reinsertion of a “force the vote” clause for the Special Meeting, (b) the acceptance by Colgate of title and environmental defect mechanics relating to Colgate’s assets, but with increased thresholds and deductibles and (c) the revision of the Termination Fee to 2.7%.

On May 18, 2022, the Board held a special meeting attended by representatives of Centennial’s management team, Latham & Watkins and Citi. During the meeting, the Board reviewed certain information from Citi regarding Citi’s material relationships during the preceding two-year period with Centennial, Colgate and certain of Colgate’s owners. Representatives of Latham & Watkins also refreshed the Board on its fiduciary duties and provided a summary of the material terms of the Business Combination Agreement and the ancillary agreements. Thereafter, Citi reviewed its financial analysis of the Merger Consideration with the Board and rendered an oral opinion, confirmed by delivery of a written opinion dated May 18, 2022, to the Board to the effect that, as of such date and based on and subject to various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Citi, the Merger Consideration to be paid pursuant to the Business Combination Agreement was fair, from a financial point of view, to Centennial. After discussion and deliberation, the Board determined that the Business Combination Agreement, and the transactions contemplated thereby, were advisable, fair to and in the best interest of Centennial and its shareholders and unanimously authorized management to execute the Business Combination Agreement on behalf of Centennial.

Following the approval of the Board and the Colgate board of managers, the management of Centennial and Colgate and their respective legal advisors finalized the remaining ancillary agreements and the disclosure schedules and the parties entered into the Business Combination Agreement on May 19, 2022.

On May 19, 2022, Centennial and Colgate issued a joint press release announcing the execution of the Business Combination Agreement and the proposed transactions.

Our Board of Directors’ Reasons for the Approval of the Transactions and the Stock Issuance

Our Board, in evaluating the Transactions, held a number of meetings, consulted with our management, legal and financial advisors and other advisors, and considered the businesses, assets and liabilities, results of operations, financial performance, strategic direction and prospects of both Centennial and Colgate. In reaching its unanimous resolution (i) that the terms and conditions of the Business Combination Agreement and the transactions contemplated thereby, including the Transactions, are fair to, advisable and in the best interests of Centennial and our shareholders and (ii) to recommend that our shareholders approve the proposals required as conditions to Closing, our Board considered and evaluated a number of factors, including, but not limited to, the factors discussed below. This explanation of our Board’s reasons for the Transactions and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under “Cautionary Note Regarding Forward-Looking Statements of this proxy statement.

Our Board identified a number of potential benefits of the Transactions, which it believes will contribute to the success of the combined company and thus inure to the benefit of the combined company’s shareholders, including but not limited to the following (which are not necessarily presented in order of their relative importance to Centennial):

 

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Return of Capital. The scaled cash flow base and balance sheet of the combined company provides clear line of sight to significant near-term shareholder returns. At current strip prices, we expect the combined company to have over $1 billion in expected free cash flow in 2023.

 

   

Highly Accretive to Key Financial Metrics. We expect the Transactions to be accretive to our cash flow, free cash flow and net asset value per share, which we consider key financial metrics.

 

   

Deep Inventory of High-Return Locations. The combined company’s adjacent acreage position, coupled with its high-return inventory supports a highly capital-efficient development plan and provides operational flexibility. Upon the Closing, the combined company will have over 15 years of drilling inventory, assuming its current drilling pace.

 

   

Combining Best Practices. The combined company intends to integrate leading-edge operational practices from two, highly skilled teams with proven track records. This leveraging of best practices from both organizations is expected to position the combined company for continued success.

 

   

Significant Equity Ownership of the Combined Management Team Aligns with Shareholders. Upon the Closing, the combined company will have one of the largest management ownership interests of any public E&P company, with the management team owning approximately 12% of the pro forma total shares outstanding. The significant equity ownership of the combined management teams aligns with, and reinforces management’s focus on, increasing shareholder value.

 

   

Commitment to ESG and Sustainability. The management teams of each of Centennial and Colgate have a shared commitment to prioritizing ESG with a continued focus on reducing environmental impacts. As both companies have demonstrated significant reductions in emissions intensity and natural gas flaring to date, ESG excellence will continue to be a core competency of the combined company, with opportunities for greater emissions reductions through shared technologies, techniques and synergies, supported by increased scale and acreage overlap.

In addition to its consideration of the above benefits, our Board considered a number of other factors pertaining to the Transactions as generally supporting its decision to enter into the Business Combination Agreement and the transactions contemplated thereby, including but not limited to, the following material factors:

 

   

Opinion of Centennial’s Financial Advisor. The opinion, dated May 18, 2022, of Citi to our Board as to the fairness, from a financial point of view and as of the date of the opinion, to Centennial of the Merger Consideration to be paid pursuant to the Business Combination Agreement, which opinion was based on and subject to various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Citi, as more fully described in “Proposal 1—The Stock Issuance Proposal—Opinion of Centennial’s Financial Advisor” below and attached as Annex F.

 

   

Terms of the Business Combination Agreement. The terms and conditions of the Business Combination Agreement, including the ability of Centennial to consider, receive and respond to, under certain circumstances specified in the Business Combination Agreement, an unsolicited written proposal for a business combination from a third party prior to completion of the Transactions and the right of our Board after complying with the terms of the Business Combination Agreement to change its recommendation to our shareholders, and belief that the terms thereof were reasonable, and were not a significant deterrent to potential competing transactions and would not prevent such competing transactions from third parties.

 

   

Related Agreements. Our Board’s belief that the terms of the ancillary agreements, including the Registration Rights Agreement and the Voting Agreement, are reasonable, and the fact that the parties have agreed to certain lock-up restrictions in the Registration Rights Agreement.

 

   

Board Composition. Our Board’s belief that the expansion of our Board to 11 and the inclusion of Sean R. Smith, William M. Hickey III, James H. Walter, William J. Quinn and Robert M. Tichio, in

 

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addition to six independent directors, will add further valuable expertise and experience and in-depth familiarity with Colgate to our Board, which will enhance the likelihood of realizing the strategic benefits that we expect to derive from the Transactions.

 

   

Shareholder Approval. The fact that our shareholders will have the opportunity to vote on the Stock Issuance Proposal and A&R Charter Proposals, which are conditions precedent to the Transactions.

 

   

Other Factors. The Board also considered historical information concerning Centennial’s and Colgate’s respective businesses, financial condition, results of operations, earnings, management, competitive positions and prospects on a standalone basis and a forecasted combined basis, as well as the current and prospective business environment in which Centennial and Colgate operate, including international, national and local economic conditions and the competitive and regulatory environment, and the likely effect of these factors on Centennial and the combined company.

Our Board was also aware of and considered a variety of uncertainties and risks and other potentially negative factors in its deliberations concerning the Business Combination Agreement and the Transactions, including, but not limited to, the following:

 

   

Risks in Obtaining the Benefits of the Transactions. The risk that the integration of Centennial and Colgate and their respective subsidiaries may not be as successful as envisioned and the anticipated benefits of the Transactions may not be realized in full or in part in the expected time frame.

 

   

Business Disruption Resulting from the Transactions. The possibility that the announcement and pendency of the Transactions could result in the disruption of Centennial’s business, including the possible diversion of management and employee attention, potential employee attrition and potential adverse effects on Centennial’s business relationships.

 

   

Significant Stock Issuance. The potential impact on the market price of our Common Stock from the increased number of outstanding shares of our Common Stock as a result of the issuance of the Share Consideration.

 

   

Force the Vote; No-Shop Restrictions. The force the vote provision and restrictions the Business Combination Agreement imposes on Centennial from soliciting acquisition proposals may impact the ability of Centennial to receive an alternative acquisition proposal.

 

   

Unknown Liabilities. The risk that Colgate may have or incur material liabilities that were not identified during our due diligence.

 

   

Interim Restrictions. The fact that restrictions on the conduct of our business during the period between the execution of the Business Combination Agreement and the completion of the Transactions may delay or prevent us from taking certain actions with respect to our operations during the pendency of the Transactions.

 

   

Regulatory Risks. The fact that the completion of the Transactions requires clearance under the HSR Act and the satisfaction of other closing conditions that are not within our control, the potential length of the regulatory approval process, and the possibility that regulatory or other governmental authorities might seek to require certain actions or undertakings of Centennial or Colgate or impose certain terms, conditions or limitations on Centennial’s or Colgate’s businesses in connection with granting approval of the Transactions or might otherwise seek to prevent or delay the Transactions.

 

   

Termination Fee and Expense Reimbursement. The possibility that a termination fee of $72.0 million, or expense reimbursement of up to $20.0 million, may be payable by us to Colgate under certain circumstances, which may deter third parties from exploring an alternative transaction with us and, if the Business Combination Agreement is terminated in circumstances where the applicable termination fee is not immediately payable, may impact our ability to engage in another transaction for up to nine months following such termination, and the fact that we may be required to pay a termination fee under circumstances in which Centennial does not engage in another transaction. Our Board recognized that

 

the provisions in the Business Combination Agreement relating to the termination fees and expense

 

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reimbursement and the non-solicitation of acquisition proposals were insisted upon by Colgate as a condition to entering into the Business Combination Agreement. However, our Board was of the view, after discussions with its legal advisors, that the amount of the termination fees and expense reimbursement and the non-solicitation of acquisition proposals were reasonable and would not prevent our Board from exercising its fiduciary duties in light of, among other things, the benefits of the Transactions to us, and would not unreasonably deter competing transactions.

 

   

Risks Associated with Failure to Complete the Transactions. The risks and costs to us, including the transaction costs to be incurred by us in connection with the Transactions, that our shareholders may not approve the Stock Issuance Proposal or A&R Charter Proposals and that the Transactions may not be completed in a timely manner or at all and the potential consequences of non-completion or delays in completion.

 

   

Litigation Risk. The inherent risk of litigation in transactions of this nature, including the potential lawsuits that could be brought against us or our Board in connection with the Transactions.

In addition, our Board was aware of and considered the interests that certain of our directors and executive officers have with respect to the Transactions that differ from, or are in addition to, their interests as shareholders of Centennial, as described in “Proposal 1—The Stock Issuance Proposal—Interests of Centennial’s Directors and Executive Officers in the Transactions” of this proxy statement.

Our Board conducted discussions of, among other things, the factors described above, including asking questions of our management and our legal, regulatory and financial advisors. After due consideration, our Board concluded that, on balance, the overall potential benefits that it expected Centennial and our shareholders to achieve as a result of the Transactions outweighed the potentially negative factors or risks associated with the Transactions. Accordingly, our Board unanimously determined that the Business Combination Agreement and the transactions contemplated thereby, including the Transactions, and the issuance of the Share Consideration to Colgate, are fair to, advisable and in the best interests of Centennial and our shareholders.

The foregoing discussion of the information and factors that Centennial considered is not intended to be exhaustive, but rather is meant to include the material factors that Centennial considered. Our Board collectively reached the conclusion to approve the Business Combination Agreement and the other transactions contemplated by the Business Combination Agreement in light of the various factors described above and other factors that the members of our Board believed were appropriate. In view of the complexity and wide variety of factors, both positive and negative, that we considered in connection with our evaluation of the Transactions, our Board did not find it practical, and did not attempt, to quantify, rank or otherwise assign relative or specific weights or values to any of the factors it considered in reaching its decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of our Board. Rather, our Board viewed its decision as based on the totality of the information available and the factors presented to and considered by it. In addition, in considering the factors discussed above, individual directors may have given different weights to different factors.

Opinion of Centennial’s Financial Advisor

Centennial has engaged Citi as Centennial’s financial advisor in connection with the proposed Merger. In connection with Citi’s engagement, the Board requested that Citi evaluate the fairness, from a financial point of view, to Centennial of the Merger Consideration to be paid pursuant to the Business Combination Agreement. On May 18, 2022, at a meeting of the Board held to evaluate the proposed Merger, Citi rendered an oral opinion, confirmed by delivery of a written opinion dated May 18, 2022, to the Board to the effect that, as of such date and based on and subject to various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Citi, the Merger Consideration to be paid pursuant to the Business Combination Agreement was fair, from a financial point of view, to Centennial.

 

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The full text of Citi’s written opinion, dated May 18, 2022, which describes the assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Citi, is attached as Annex F to this proxy statement and is incorporated into this proxy statement by reference. The description of Citi’s opinion set forth below is qualified in its entirety by reference to the full text of Citi’s opinion. Citi’s opinion was provided for the information of the Board (in its capacity as such) in connection with its evaluation of the Merger Consideration from a financial point of view to Centennial and did not address any other terms, aspects or implications of the Merger. Citi expressed no view as to, and its opinion did not address, the underlying business decision of Centennial to effect or enter into the Merger, the relative merits of the Merger as compared to any alternative business strategies that might exist for Centennial or the effect of any other transaction which Centennial might engage in or consider. Citi’s opinion is not intended to be and does not constitute a recommendation as to how the Board or any securityholder should vote or act on any matters relating to the proposed Merger or otherwise.

In arriving at its opinion, Citi:

 

   

reviewed a draft, dated May 18, 2022, of the Business Combination Agreement, which Citi was advised by representatives of Centennial was in substantially final form;

 

   

held discussions with certain senior officers, directors and other representatives and advisors of Centennial and certain senior officers and other representatives and advisors of Colgate concerning the businesses, operations and prospects of Colgate and Centennial;

 

   

reviewed certain publicly available and other business and financial information relating to Colgate and Centennial provided to or discussed with Citi by the respective managements of Colgate and Centennial, including certain financial forecasts and other information and data relating to Colgate and Centennial prepared by the management of Centennial, certain publicly available future commodity price estimates and assumptions reviewed and discussed with such management and certain information and data provided to or discussed with Citi by such management relating to potential strategic implications, cost savings, tax benefits and other financial and operational benefits (including the amount, timing and achievability thereof) anticipated by such management to result from the Merger;

 

   

reviewed the financial terms of the Merger as set forth in the Business Combination Agreement in relation to, among other things, current and historical market prices of Class A Common Stock, the financial condition and certain historical and projected financial and operating data of Colgate and Centennial, and the capitalization of Colgate and Centennial;

 

   

analyzed certain financial, stock market and other publicly available information relating to the businesses of certain other companies whose operations Citi considered relevant in evaluating those of Colgate and Centennial;

 

   

analyzed, to the extent publicly available, financial terms of certain other transactions which Citi considered relevant in evaluating the Merger;

 

   

reviewed certain potential pro forma financial effects of the Merger on Centennial utilizing the financial forecasts and other information and data relating to Colgate and Centennial and the potential strategic implications, cost savings, tax benefits and other financial and operational benefits referred to above; and

 

   

conducted such other analyses and examinations and considered such other information and financial, economic and market criteria as Citi deemed appropriate in arriving at its opinion.

For purposes of its analyses and opinion, in evaluating Class C Common Stock and Surviving Company Units, Citi assumed that one share of Class C Common Stock and one Surviving Company Unit collectively have a value equivalent to one share of Class A Common Stock, without regard to specific attributes of such securities (whether voting, economic or otherwise).

In rendering its opinion, Citi assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information and data publicly available or provided to or otherwise

 

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reviewed by or discussed with Citi and upon the assurances of the managements and other representatives of Centennial and Colgate that they were not aware of any relevant information that was omitted or that remained undisclosed to Citi. With respect to the financial forecasts and other information and data (including, without limitation, as to hedging transactions) that Citi was directed to utilize in its analyses, Citi was advised and assumed, with Centennial’s consent, that such financial forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Centennial as to, and were a reasonable basis upon which to evaluate, the future financial performance of Colgate and Centennial, the potential strategic implications, cost savings, tax benefits and other financial and operational benefits (including the amount, timing and achievability thereof) anticipated by such management to result from, and other potential pro forma financial effects of, the Merger and the other matters covered thereby. With respect to future commodity price estimates and assumptions that Citi was directed to utilize in its analyses, Citi assumed, with Centennial’s consent, that they were a reasonable and appropriate basis upon which to evaluate the matters covered thereby. Citi expressed no view or opinion as to any financial forecasts and other information or data (or underlying assumptions on which any such financial forecasts and other information or data were based) provided to or otherwise reviewed by or discussed with Citi and Citi assumed, with Centennial’s consent, that the financial results, including with respect to the potential strategic implications, cost savings, tax benefits and other financial and operational benefits anticipated to result from the Merger, reflected in such financial forecasts and other information and data would be realized in the amounts and at the times projected.

Citi relied, at Centennial’s direction, upon the assessments of the management of Centennial as to, among other things, (i) the oil, natural gas and natural gas liquids reserves and undeveloped well inventory, and drilling and well development (including geological and technical reservoir characteristics of such wells), gathering and transportation and other exploration, development and production activities, of Colgate and Centennial, and related costs and expenditures and capital funding requirements, (ii) the potential impact on Colgate and Centennial of macroeconomic, geopolitical, market, competitive, seasonal and other conditions, trends and developments in and prospects for, and governmental, regulatory and legislative matters relating to or otherwise affecting, the oil, natural gas and natural gas liquids industry, including with respect to the geographic regions and basins in which Colgate and Centennial operate, environmental regulations, commodity and raw materials pricing and supply and demand for oil, natural gas and natural gas liquids, which are subject to significant volatility and which, if different than as assumed, could have a material impact on Citi’s analyses or opinion, (iii) completed or planned acquisitions or divestitures of Colgate and Centennial, as applicable, including the financial and other terms involved and integration and continuing obligations (if any), (iv) hedging transactions of Colgate and Centennial, including the timing and impact thereof, related unwinding costs and other terms involved, (v) implications for Colgate and Centennial of the global COVID-19 pandemic, (vi) existing and future agreements and other arrangements involving, and the ability to attract, retain and/or replace, key customers, suppliers, service providers and other commercial relationships of Colgate and Centennial, and (vii) the ability of Centennial to integrate the operations of Colgate and Centennial and to realize the potential strategic implications, cost savings, tax benefits and other financial and operational benefits as contemplated. Citi assumed, with Centennial’s consent, that there would be no developments with respect to any such matters, or any adjustments to or allocations of the Merger Consideration, that would have an adverse effect on Colgate, Centennial or the Merger (including the contemplated benefits thereof) or that otherwise would be meaningful in any respect to Citi’s analyses or opinion.

Citi did not make and, except for certain reserve reports relating to Colgate and Centennial, was not provided with an independent evaluation or appraisal of the assets or liabilities (contingent, accrued, derivative, off-balance sheet or otherwise) of Colgate, Centennial or any other entity and Citi did not make any physical inspection of the properties or assets of Colgate, Centennial or any other entity. Citi expressed no view or opinion as to reserve quantities, or the exploration, development or production (including, without limitation, as to the feasibility or timing thereof and associated expenditures), of any properties of Colgate, Centennial or any other entity. Citi did not evaluate the solvency or fair value of Colgate, Centennial or any other entity under any state, federal or other laws relating to bankruptcy, insolvency or similar matters. Citi expressed no view or opinion as to any actual or potential litigation, claims or governmental, regulatory or other proceedings, enforcement

 

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actions, consent or other orders or investigations or the potential impact thereof on Colgate, Centennial or any other entity or the Merger.

Citi assumed, with Centennial’s consent, that the Merger would be consummated in accordance with its terms and in compliance with all applicable laws, documents and other requirements, without waiver, modification or amendment of any material term, condition or agreement, and that, in the course of obtaining the necessary governmental, regulatory or third party approvals, consents, releases, waivers and agreements for the Merger or otherwise, no delay, limitation, restriction, condition or other action, including any divestiture or other requirements, amendments or modifications, would be imposed or occur that would have an adverse effect on Colgate, Centennial or the Merger (including the contemplated benefits thereof) or that otherwise would be meaningful in any respect to Citi’s analyses or opinion. Citi also assumed, with Centennial’s consent, that the Merger would qualify for the intended tax treatment contemplated by the Business Combination Agreement. Representatives of Centennial advised Citi, and Citi further assumed, that the final terms of the Business Combination Agreement would not vary materially from those set forth in the draft reviewed by Citi. Citi did not express any view or opinion as to the actual value of Class C Common Stock, Surviving Company Units or Class A Common Stock when issued in connection with the Merger or upon redemption, exchange or otherwise, as applicable, or the prices at which such securities or any other securities of Centennial, Colgate or Surviving Company may trade or otherwise be transferable at any time, including following the announcement or consummation of the Merger. Citi did not express any view or opinion with respect to accounting, tax, regulatory, legal or similar matters, including, without limitation, as to tax or other consequences of the Merger or otherwise or changes in, or the impact of, accounting standards or tax and other laws, regulations and governmental and legislative policies affecting Colgate, Centennial or the Merger (including the contemplated benefits thereof), and Citi relied, with Centennial’s consent, upon the assessments of representatives of Centennial as to such matters.

Citi’s opinion addressed only the fairness, from a financial point of view and as of the date of such opinion, to Centennial of the Merger Consideration (to the extent expressly specified therein), and did not address any other terms, aspects or implications of the Merger, including, without limitation, the form or structure of the Merger or the Merger Consideration, any adjustments to or allocations of the Merger Consideration, or any terms, aspects or implications of any escrow arrangements, reorganizations, governance matters, registration rights agreement, voting agreement or any other agreement, arrangement or understanding to be entered into in connection with or contemplated by the Merger or otherwise. Citi expressed no view as to, and Citi’s opinion did not address, the underlying business decision of Centennial to effect or enter into the Merger, the relative merits of the Merger as compared to any alternative business strategies that might exist for Centennial or the effect of any other transaction which Centennial might engage in or consider. Citi also expressed no view as to, and its opinion did not address, the fairness (financial or otherwise) of the amount or nature or any other aspect of any compensation or other consideration to any officers, directors or employees of any parties to the Merger, or any class of such persons, relative to the Merger Consideration or otherwise. Citi’s opinion was necessarily based upon information available, and financial, stock market and other conditions and circumstances existing and disclosed, to Citi as of the date of its opinion. Although subsequent developments may affect its opinion, Citi has no obligation to update, revise or reaffirm its opinion. As the Board was aware, the credit, financial and stock markets, the industry in which Colgate and Centennial operate (including commodity prices related to such industry) and the securities of Centennial have experienced and may continue to experience volatility and disruptions, and Citi expressed no view or opinion as to any potential effects of such volatility or disruptions on Colgate, Centennial or the Merger (including the contemplated benefits thereof). The issuance of Citi’s opinion was authorized by Citi’s fairness opinion committee.

In preparing its opinion, Citi performed a variety of financial and comparative analyses, including those described below. The summary of the analyses below is not a complete description of Citi’s opinion or the analyses underlying, and factors considered in connection with, Citi’s opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial

 

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opinion is not readily susceptible to summary description. Citi arrived at its ultimate opinion based on the results of all analyses and factors assessed as a whole, and it did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis. Accordingly, Citi believes that the analyses must be considered as a whole and in context and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying such analyses and its opinion.

In its analyses or other methodologies undertaken, Citi considered industry performance, general business, economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond the control of Colgate and Centennial. No company, business or transaction reviewed is identical or directly comparable to Colgate, Centennial or the Merger and views as to comparability may vary; accordingly, such analyses may not necessarily include all companies, businesses or transactions that could be deemed relevant. In addition, an evaluation of these analyses or methodologies is not entirely mathematical; rather, such analyses and methodologies involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the public trading, acquisition or other values of the companies, businesses or transactions reviewed or the results from any particular analysis or methodology.

The estimates contained in Citi’s analyses or other methodologies undertaken and the ranges resulting from any particular analysis or methodology are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by such analyses or methodologies. In addition, analyses or other methodologies relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold or acquired. Accordingly, the estimates used in, and the results derived from, Citi’s analyses or other methodologies are inherently subject to substantial uncertainty.

Citi was not requested to, and it did not, recommend or determine the specific consideration payable in the Merger. The type and amount of consideration payable in the Merger were determined through negotiations between Centennial and Colgate and the decision of Centennial to enter into the Business Combination Agreement was solely that of the Board. Citi’s opinion was only one of many factors considered by the Board in its evaluation of the Merger and should not be viewed as determinative of the views of the Board or management of Centennial with respect to the Merger or the consideration payable in the Merger.

Financial Analyses

The summary of the financial analyses described below under this heading “—Financial Analyses” is a summary of the material financial analyses reviewed with the Board and performed by Citi in connection with Citi’s opinion, dated May 18, 2022. The summary set forth below does not purport to be a complete description of the financial analyses performed by, and underlying the opinion of, Citi, nor does the order of the financial analyses described represent the relative importance or weight given to those financial analyses by Citi. Certain financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses, the tables must be read together with the text of each summary as the tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the financial analyses, could create a misleading or incomplete view of such financial analyses. Future results may be different from those described and such differences may be material. For purposes of the financial analyses described below, (i) the term “EBITDAX” refers to earnings before interest, taxes, depreciation, depletion, amortization and exploration expenses, adjusted for certain non-recurring, non-cash and other items, and (ii) the term “implied merger consideration” refers to the $525 million cash consideration and the implied value of 269,300,000 shares of Class C Common Stock and 269,300,000 Surviving Company Units based on the closing price of Class A Common Stock of $7.88 per share on May 17, 2022 assuming that one share of Class C Common Stock and one Surviving Company Unit collectively have a value equivalent to one share of Class A Common Stock, without regard to specific attributes

 

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of such securities (whether voting, economic or otherwise). Except as otherwise noted, financial data utilized for Colgate and Centennial in the financial analyses described below were based on certain financial forecasts and other information and data relating to Colgate and Centennial prepared by the management of Centennial, referred to as the “Colgate forecasts” and the “Centennial forecasts,” respectively, and publicly available Wall Street consensus commodity price estimates as of May 13, 2022, referred to as “Wall Street consensus pricing,” and publicly available New York Mercantile Exchange Strip pricing as of May 13, 2022, referred to as “NYMEX strip pricing,” as applicable. Approximate implied equity value reference ranges derived from the financial analyses described below were rounded to the nearest $25 million and approximate implied per share equity value reference ranges were rounded to the nearest $0.05.

Colgate Financial Analyses.

Selected Public Companies Analysis. Citi reviewed certain financial information of Colgate and publicly available financial and stock market information of the following six selected companies that Citi viewed as generally relevant for purposes of analysis as publicly traded oil and gas exploration and production companies with operations primarily in the Permian basin of a size and scale deemed similar to Colgate (collectively, the “Colgate selected companies”):

 

 

Callon Petroleum Company

 

 

Centennial Resource Development, Inc.

 

 

Earthstone Energy, Inc.

 

 

Laredo Petroleum, Inc.

 

 

Matador Resources Company

 

 

SM Energy Company

Citi reviewed, among other information, enterprise values, calculated as implied equity values based on closing stock prices on May 17, 2022 plus total debt, preferred equity and non-controlling interests (as applicable) and less cash and cash equivalents, as a multiple of calendar year 2023 estimated EBITDAX and closing stock prices on May 17, 2022 as a multiple of calendar year 2023 estimated cash flow per share. Citi also reviewed calendar year 2023 estimated free cash flow yields. Financial data of the Colgate selected companies was based on publicly available Wall Street research analysts’ estimates, public filings and other publicly available information. Financial data of Colgate was based on the Colgate forecasts prepared by the management of Centennial utilizing Wall Street consensus pricing.

The overall low to high calendar year 2023 estimated EBITDAX multiples, calendar year 2023 estimated cash flow per share multiples and calendar year 2023 estimated free cash flow yields observed for the Colgate selected companies were 1.9x to 3.6x (with a mean of 2.9x and a median of 3.0x), 1.0x to 3.1x (with a mean and median of 2.1x) and 52.1% to 19.2% (with a mean of 29.4% and a median of 27.4%), respectively. Citi then applied selected ranges of calendar year 2023 estimated EBITDAX multiples, calendar year 2023 estimated cash flow per share multiples and calendar year 2023 estimated free cash flow yields derived from the Colgate selected companies of 3.0x to 3.6x, 2.1x to 3.1x and 27.4% to 19.2%, respectively, to the estimated calendar year 2023 estimated EBITDAX, calendar year 2023 estimated cash flow and calendar year 2023 estimated free cash flow of Colgate, respectively.

This analysis indicated the following approximate implied equity value reference ranges for Colgate, as compared to the implied merger consideration (in each case expressed in millions):

 

Implied Equity Value Reference Ranges Based On:    Implied Merger
Consideration
CY2023E
EBITDAX
   CY2023E
Cash Flow
   CY2023E
Free Cash Flow Yield
    
$2,700 -$3,575    $2,550 - $3,650    $1,725 - $2,475    $2,647

 

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Selected Precedent Transactions Analysis. Using publicly available information, Citi reviewed financial data relating to the following nine selected transactions that Citi considered generally relevant for purposes of analysis as transactions involving oil and gas exploration and production companies and assets with operations primarily in the Permian basin (collectively, the “selected precedent transactions”):

Publicly-Traded Target Companies

 

                          

Announced

 

Acquiror

 

Target

                          
  May 2021  

•  Cabot Oil & Gas Corporation

 

•  Cimarex Energy Co.

 
  December 2020  

•  Diamondback Energy, Inc.

 

•  QEP Resources, Inc.

 
  October 2020  

•  Pioneer Natural Resources Company

 

•  Parsley Energy, Inc.

 
  October 2020  

•  ConocoPhillips

 

•  Concho Resources Inc.

 
  September 2020  

•  Devon Energy Corporation

 

•  WPX Energy, Inc.

 
  October 2019  

•  Parsley Energy, Inc.

 

•  Jagged Peak Energy Inc.

 

Private Target Companies or Assets

 

                          

Announced

 

Acquiror

 

Target

                          
  November 2021  

•  Continental Resources, Inc.

 

•  Pioneer Natural Resources Company (Delaware basin assets)

 
  September 2021  

•  ConocoPhillips

 

•  Shell Enterprises LLC (Delaware basin assets)

 
  December 2019  

•  WPX Energy, Inc.

 

•  Felix Energy, LLC

 

Citi reviewed, among other information, transaction values as a multiple of the target company’s or asset’s next 12 months estimated EBITDAX as of the date of announcement of the applicable transaction. Financial data of the selected precedent transactions was based on public filings and other publicly available information. Financial data of Colgate was based on the Colgate forecasts prepared by the management of Centennial utilizing Wall Street consensus pricing.

The overall low to high next 12 months estimated EBITDAX multiples observed for the selected precedent transactions was 2.9x to 5.7x (with a mean of 4.4x and a median of 4.1x). Citi then applied a selected range of next 12 months estimated EBITDAX multiples derived from the selected precedent transactions of 3.1x to 5.1x to Colgate’s next 12 months (as of March 31, 2022) estimated EBITDAX.

This analysis indicated the following approximate implied equity value reference range for Colgate, as compared to the implied merger consideration (in each case expressed in millions):

 

Implied Equity Value Reference Range

   Implied Merger
Consideration

$2,900 – $5,700

   $2,647

Net Asset Value Analysis. Citi performed a net asset value analysis of Colgate’s assets and liabilities based on the Colgate forecasts prepared by the management of Centennial, public filings and other publicly available information utilizing Wall Street consensus pricing and NYMEX strip pricing, as applicable. An implied aggregate reference range for Colgate’s proved developed reserves, drilled uncompleted reserves and currently

 

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undeveloped reserves in Texas and New Mexico was derived by calculating the net present values (as of March 31, 2022) of the unlevered, after-tax free cash flows that Colgate was projected to generate from such assets net of general and administrative expenses based on the Colgate forecasts prepared by the management of Centennial using a selected range of discount rates of 10.6% to 11.9%.

This analysis indicated the following approximate implied equity value reference ranges for Colgate both before and after taking into account the potential tax basis step-up expected by the management of Centennial to result from the Merger, as compared to the implied merger consideration (in each case expressed in millions):

 

Implied Equity Value Reference Ranges Utilizing:

   Implied Merger
Consideration

Wall Street Consensus Pricing

   NYMEX Strip Pricing     

Before Tax

Basis Step-Up

   After Tax
Basis Step-Up
   Before Tax
Basis Step-Up
   After Tax
Basis Step-Up
    

$3,250 - $3,550

   $3,450 - $3,775    $3,725 - $4,050    $3,925 - $4,275    $2,647

Discounted Cash Flow Analysis. Citi performed a discounted cash flow analysis of Colgate by calculating the estimated present value of the standalone unlevered, after-tax free cash flows that Colgate was forecasted to generate during the nine-month period ended December 31, 2022 through the full fiscal year ending December 31, 2026 based on the Colgate forecasts prepared by the management of Centennial utilizing both Wall Street consensus pricing and NYMEX strip pricing. Citi calculated terminal values for Colgate by applying to Colgate’s fiscal year 2026 estimated EBITDAX a selected range of EBITDAX multiples of 3.5x to 5.0x. The present values (as of March 31, 2022) of the cash flows and terminal values were then calculated using a selected range of discount rates of 10.6% to 11.9%.

This analysis indicated the following approximate implied equity value reference ranges for Colgate both before and after taking into account the potential tax basis step-up expected by the management of Centennial to result from the Merger, as compared to the implied merger consideration (in each case expressed in millions):

 

Implied Equity Value Reference Ranges Utilizing:

   Implied Merger
Consideration

Wall Street Consensus Pricing

   NYMEX Strip Pricing     

Before Tax

Basis Step-Up

   After Tax
Basis Step-Up
   Before Tax
Basis Step-Up
   After Tax
Basis Step-Up
    

$3,000 - $4,275

   $3,200 - $4,500    $3,400 - $4,725    $3,600 - $4,950    $2,647

Centennial Financial Analyses.

Selected Public Companies Analysis. Citi reviewed publicly available financial and stock market information of Centennial and the following five selected companies that Citi viewed as generally relevant for purposes of analysis as publicly traded oil and gas exploration and production companies with operations primarily in the Permian basin of a size and scale deemed similar to Centennial (collectively, the “Centennial selected companies”):

 

 

Callon Petroleum Company

 

 

Earthstone Energy, Inc.

 

 

Laredo Petroleum, Inc.

 

 

Matador Resources Company

 

 

SM Energy Company

Citi reviewed, among other information, enterprise values, calculated as implied equity values based on closing stock prices on May 17, 2022 plus total debt, preferred equity and non-controlling interests (as applicable) and less cash and cash equivalents, as a multiple of calendar year 2023 estimated EBITDAX and closing stock prices

 

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on May 17, 2022 as a multiple of calendar year 2023 estimated cash flow per share. Citi also reviewed calendar year 2023 estimated free cash flow yields. Financial data of the Centennial selected companies was based on publicly available Wall Street research analysts’ estimates, public filings and other publicly available information. Financial data of Centennial was based on the Centennial forecasts prepared by the management of Centennial utilizing Wall Street consensus pricing, Wall Street research analysts’ estimates, public filings and other publicly available information.

The overall low to high calendar year 2023 estimated EBITDAX multiples, calendar year 2023 estimated cash flow per share multiples and calendar year 2023 estimated free cash flow yields observed for the Centennial selected companies were 1.9x to 3.6x (with a mean of 2.8x and a median of 3.0x), 1.0x to 3.1x (with a mean of 2.0x and median of 2.1x) and 52.1% to 19.2% (with a mean of 31.3% and a median of 29.1%), respectively. Citi noted that the calendar year 2023 estimated EBITDAX multiple, calendar year 2023 estimated cash flow per share multiple and calendar year 2023 estimated free cash flow yield observed for Centennial based on Wall Street research analysts’ estimates were 3.3x, 2.6x and 19.5%, respectively. Citi then applied selected ranges of calendar year 2023 estimated EBITDAX multiples, calendar year 2023 estimated cash flow per share multiples and calendar year 2023 estimated free cash flow yields derived from the Centennial selected companies of 3.0x to 3.6x, 2.1x to 3.1x and 29.1% to 19.2%, respectively, to the estimated calendar year 2023 estimated EBITDAX, calendar year 2023 estimated cash flow and calendar year 2023 estimated free cash flow of Centennial based on the Centennial forecasts prepared by the management of Centennial utilizing Wall Street consensus pricing.

This analysis indicated the following approximate implied per share equity value reference ranges for Centennial, as compared to the per share closing price of Class A Common Stock on May 17, 2022:

 

Implied Per Share Equity Value Reference Range Based On:

   Class A Common
Stock Closing Price

CY2023E

EBITDAX

   CY2023E
Cash Flow
   CY2023E
Free Cash Flow Yield
    

$6.80 - $8.90

   $6.30 - $9.05    $4.90 - $7.45    $7.88

Net Asset Value Analysis. Citi performed a net asset value analysis of Centennial’s assets and liabilities based on the Centennial forecasts prepared by the management of Centennial, public filings and other publicly available information utilizing Wall Street consensus pricing and NYMEX strip pricing, as applicable. An implied aggregate reference range for Centennial’s proved developed reserves and currently undeveloped reserves in Texas and proved developed reserves, drilled uncompleted reserves and currently undeveloped reserves in New Mexico was derived by calculating the net present values (as of March 31, 2022) of the unlevered, after-tax free cash flows that Centennial was projected to generate from such assets net of general and administrative expenses based on the Centennial forecasts prepared by the management of Centennial using a selected range of discount rates of 10.6% to 11.9%.

This analysis indicated the following approximate implied per share equity value reference ranges for Centennial, as compared to the per share closing price of Class A Common Stock on May 17, 2022:

 

Implied Per Share Equity Value Reference Ranges Utilizing:

   Class A Common
Stock Closing Price

Wall Street

Consensus Pricing

   NYMEX
Strip Pricing
    

$10.10 - $11.15

   $11.30 - $12.40    $7.88

Discounted Cash Flow Analysis. Citi performed a discounted cash flow analysis of Centennial by calculating the estimated present value of the standalone unlevered, after-tax free cash flows that Centennial was forecasted to generate during the nine-month period ended December 31, 2022 through the full fiscal year ending December 31, 2026 based on the Centennial forecasts prepared by the management of Centennial utilizing both Wall Street consensus pricing and NYMEX strip pricing. Citi calculated terminal values for Centennial by

 

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applying to Centennial’s fiscal year 2026 estimated EBITDAX a selected range of EBITDAX multiples of 3.5x to 5.0x. The present values (as of March 31, 2022) of the cash flows and terminal values were then calculated using a selected range of discount rates of 10.6% to 11.9%.

This analysis indicated the following approximate implied per share equity value reference ranges for Centennial, as compared to the per share closing price of Class A Common Stock on May 17, 2022:

 

Implied Per Share Equity Value Reference Ranges Utilizing:

   Class A Common
Stock Closing Price

Wall Street

Consensus Pricing

   NYMEX
Strip Pricing
    

$8.65 - $11.55

   $9.60 - $12.60    $7.88

Illustrative Pro Forma Equity Ownership. Utilizing the approximate implied equity value reference ranges derived for Colgate and Centennial as described above under “Colgate Financial Analyses” (other than the selected precedent transactions analysis for Colgate) and “Centennial Financial Analyses,” respectively, and after deducting the $525 million cash portion of the Merger Consideration, Citi compared the implied pro forma equity ownership reference ranges for Colgate Unitholder in Centennial upon consummation of the Merger based on such analyses relative to the implied pro forma equity ownership of Colgate Unitholder in Centennial upon consummation of the Merger based on the equity portion of the Merger Consideration. In calculating the low-ends (or high-ends, as the case may be) of the implied pro forma equity ownership percentage reference ranges described below, Citi divided (i) the low-ends (or high-ends, as the case may be) of the approximate implied equity value reference ranges derived for Colgate from such analyses by (ii) the sum of (a) the high-ends (or low-ends, as the case may be) of the approximate implied equity value reference ranges derived for Centennial from such analyses and (b) the low-ends (or high-ends, as the case may be) of the approximate implied equity value reference ranges derived for Colgate from such analyses.

This indicated the following overall approximate implied pro forma equity ownership percentage reference range for Colgate Unitholder in Centennial upon consummation of the Merger, as compared to Colgate Unitholder’s approximate implied pro forma equity ownership percentage in Centennial upon consummation of the Merger based on the Merger Consideration:

 

Overall Implied Pro Forma Equity
Ownership Percentage Reference Range

   Implied Pro Forma Equity Ownership
Percentage of Colgate Unitholder in Centennial
Upon Consummation of the Merger

35.2% – 62.3%

   47.4%

Illustrative Has/Gets. Citi reviewed the illustrative potential uplift in value of Class A Common Stock resulting from the Merger by comparing the approximate implied per share equity value reference ranges derived for Centennial on a standalone basis as described above under “Centennial Financial Analyses – Net Asset Value Analysis” and “Centennial Financial Analyses – Discounted Cash Flow Analysis” relative to the illustrative pro forma approximate implied per share equity value reference ranges for Centennial upon consummation of the Merger utilizing approximate implied equity value references ranges derived for Centennial on a standalone basis based on such analyses and implied enterprise value reference ranges derived for Colgate on a standalone basis based on the analyses for Colgate as described above under “Colgate Financial Analyses – Net Asset Value Analysis” and “Colgate Financial Analyses – Discounted Cash Flow Analysis” after taking into account (i) the potential strategic implications, cost savings, tax benefits and other financial and operational benefits anticipated by the management of Centennial to result from the Merger and (ii) certain debt to be incurred or assumed by Centennial in connection with the Merger as estimated by the management of Centennial. Citi observed that, based on the Merger Consideration, the Merger could result in an overall illustrative potential value uplift for holders of Class A Common Stock of approximately 3.5% to 14.7%.

Citi also compared the approximate implied per share equity value reference ranges derived for Centennial on a standalone basis as described above under “Centennial Financial AnalysesSelected Public Companies Analysis” relative to the illustrative approximate implied per share equity value reference ranges derived from a

 

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selected public companies analysis of Centennial on a pro forma basis, utilizing the same selected ranges of calendar year 2023 estimated EBITDAX multiples as in the standalone selected public companies analysis of Centennial and applying such ranges to the calendar year 2023 estimated EBITDAX, calendar year 2023 estimated cash flow and calendar year 2023 estimated free cash flow yield of Centennial on a pro forma basis, based on the Centennial forecasts and the Colgate forecasts prepared by the management of Centennial utilizing Wall Street consensus pricing. Citi observed that, based on the Merger Consideration and after taking into account the potential strategic implications, cost savings, tax benefits and other financial and operational benefits anticipated by the management of Centennial to result from the Merger, the Merger could result in an overall illustrative potential value uplift for holders of Class A Common Stock of approximately 6.6% to 25.4%.

Actual results achieved by Centennial, Colgate and the pro forma combined company may vary from forecasted results and variations may be material.

Certain Additional Information

Citi also observed certain additional information that was not considered part of its financial analyses with respect to its opinion but was noted for informational purposes, including the following:

 

 

historical closing prices of Class A Common Stock during the 52-week period ended May 17, 2022, which indicated low to high closing prices of Class A Common Stock during such period of $3.90 per share to $9.58 per share;

 

 

publicly available Wall Street research analysts’ price targets for Class A Common Stock, which implied overall low and high price targets for Class A Common Stock of $9.00 per share and $14.00 per share, respectively, and, on an illustrative discounted basis, approximately $7.95 per share and $12.35 per share, respectively; and

 

 

certain illustrative pro forma financial effects of the Merger on, among other things, Centennial’s calendar year 2023 and calendar year 2024 estimated cash flow per share and calendar year 2023 and calendar year 2024 estimated free cash flow per share, based on the Centennial forecasts and the Colgate forecasts prepared by the management of Centennial utilizing Wall Street consensus pricing and NYMEX strip pricing, public filings and other publicly available information and after taking into account, among other things, potential strategic implications, cost savings, tax benefits and other financial and operational benefits anticipated by the management of Centennial to result from the Merger, which indicated that the Merger could be accretive to Centennial based on such metrics.

Actual results achieved by Centennial, Colgate and the pro forma combined company may vary from forecasted results and variations may be material.

Miscellaneous

Centennial has agreed to pay Citi for its services in connection with the proposed Merger an aggregate fee of $20 million, of which a portion was payable upon delivery of Citi’s opinion and $17 million is payable contingent upon consummation of the Merger. As the Board was aware, at Centennial’s request, Citi and certain of its affiliates expect to participate in an amendment to CRP’s credit facility to increase the principal amount of financing available thereunder in connection with the Merger, for which services Citi and such affiliates will receive compensation, including acting as a joint lead arranger for, and as a lender under, such amendment. Centennial currently expects that Citi’s aggregate fees in connection with such financing will be up to approximately $7 million. In addition, Centennial agreed to reimburse Citi for Citi’s expenses, including fees and expenses of counsel, and to indemnify Citi and related parties against certain liabilities, including liabilities under federal securities laws, arising from Citi’s engagement.

As the Board was aware, Citi and its affiliates in the past have provided, currently are providing and in the future may provide investment banking, commercial banking and other similar financial services to Centennial and/or certain of its affiliates unrelated to the proposed Merger, for which services Citi and its affiliates have received and expect to receive compensation, including, during the approximately two-year period prior to the date of

 

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Citi’s opinion, having acted or acting as (i) joint bookrunning manager in connection with an exchangeable senior notes offering of an affiliate of Centennial and (ii) joint lead arranger and joint bookrunner for, and as a lender under, a credit facility of an affiliate of Centennial, for which services described in clauses (i) and (ii) above Citi and its affiliates received during such approximately two-year period aggregate fees of approximately $2.5 million from Centennial and/or certain of its affiliates. As the Board also was aware, Citi and its affiliates in the past have provided, currently are providing and in the future may provide investment banking, commercial banking and other similar financial services to Colgate and NGP Energy Capital Management, L.L.C. (“NGP”), a significant investor in Colgate, and/or certain of their respective affiliates and/or portfolio companies, as applicable, for which services Citi and its affiliates have received and expect to receive compensation, including, during the approximately two-year period prior to the date of Citi’s opinion, having acted or acting as (i) in the case of Colgate, (A) joint bookrunner in connection with bond offerings of Colgate and (B) mandated arranger for, and as a lender under, a credit facility of Colgate and (ii) in the case of NGP, (A) joint bookrunner in connection with bond offerings of certain portfolio companies of NGP and (B) a lender under credit facilities of certain portfolio companies of NGP, for which services described in clause (i) above Citi and its affiliates received during such approximately two-year period aggregate fees of less than $1 million from Colgate and/or certain of its affiliates and for which services described in clause (ii) above Citi and its affiliates received during such approximately two-year period aggregate fees of approximately $2 million from NGP and/or certain of its affiliates and/or portfolio companies. Although Citi and its affiliates did not provided investment banking, commercial banking or other similar financial services during the approximately two-year period prior to the date of Citi’s opinion to Pearl Energy Investments, L.P. (“Pearl”), another significant investor in Colgate, for which services Citi or its affiliates received or expect to receive compensation, Citi and its affiliates may provide such services to Pearl and/or certain of its affiliates and/or portfolio companies in the future, for which services Citi and its affiliates would expect to receive compensation. In the ordinary course of business, Citi and its affiliates may actively trade or hold the securities or financial instruments (including loans and other obligations) of Centennial, Colgate, Surviving Company, NGP, Pearl and/or their respective affiliates and/or portfolio companies, as applicable, for their own account or for the account of customers and, accordingly, may at any time hold a long or short position or otherwise effect transactions in such securities or financial instruments. In addition, Citi and its affiliates (including Citigroup Inc. and its affiliates) may maintain relationships with Centennial, Colgate, Surviving Company, NGP, Pearl and/or their respective affiliates and/or portfolio companies, as applicable.

Centennial selected Citi to act as its financial advisor in connection with the proposed Merger based on Citi’s reputation, experience and familiarity with the respective businesses of Centennial and Colgate. Citi is an internationally recognized investment banking firm that regularly engages in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes.

Certain Centennial Projected Financial Information

Centennial does not, as a matter of course, publicly disclose long-term projections as to future revenues, earnings or other results given, among other reasons, the uncertainty, unpredictability and subjectivity of the underlying assumptions and estimates. However, certain non-public financial forecasts relating to Centennial and Colgate covering multiple years were prepared by Centennial management (such forecasts are collectively referred to in this section as the “Centennial forecasted financial information”) and not for public disclosure, and were provided to the Board in connection with its evaluation of the Transactions and to Citi, Centennial’s financial advisor, for its use and reliance in connection with its financial analyses and opinion as described in the section entitled “—Opinion of Centennial’s Financial Advisor.”

A summary of the Centennial forecasted financial information prepared by Centennial management is not included in this proxy statement to influence your decision whether to vote for or against the Stock Issuance Proposal, but is included because such forecasts were made available to the Board and Citi.

 

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The inclusion of this information should not be regarded as an indication that the Board or Centennial or any of their respective affiliates, officers, directors, advisors or other representatives or any other person considered, or now considers, the Centennial forecasted financial information to be necessarily predictive of actual future events or results of Centennial’s or Colgate’s operations and should not be relied upon as such. Centennial management’s internal financial forecasts, upon which the Centennial forecasted financial information is based, are subjective in many respects. There can be no assurance that the projections contained in the Centennial forecasted financial information will be realized or that actual results will not be significantly different than those forecasted. The Centennial forecasted financial information covers multiple years and such information by its nature becomes less predictive with each successive year. As a result, the Centennial forecasted financial information summarized in this proxy statement should not be relied on as necessarily predictive of actual future events.

In addition, the Centennial forecasted financial information was not prepared with a view to publicly disclosing such information or to complying with GAAP, published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of forecasted financial information. Neither KPMG LLP, Centennial’s independent registered public accounting firm, nor any other independent accountants, have audited, compiled, examined or performed any procedures with respect to the Centennial forecasted financial information summarized in this proxy statement, nor have they expressed any opinion or provided any other form of assurance with respect to such information or the achievability of the projections contained therein.

The Centennial forecasted financial information is based on numerous variables and assumptions that Centennial management deemed reasonable as of the date on which such projections were finalized. However, such assumptions are inherently uncertain and difficult or impossible to predict or estimate and most of them are beyond Centennial’s or Colgate’s control. Assumptions used by Centennial management in developing the Centennial forecasted financial information include, but are not limited to, the following: no unannounced acquisitions; normal weather in the forward-looking periods; ongoing investments in Centennial’s and Colgate’s existing entities for maintenance, integrity and other capital expenditures; and no material fluctuations in interest rate assumptions over the forward-looking periods. The Centennial forecasted financial information also reflects assumptions regarding the continuing nature of certain business decisions that, in reality, are subject to change. The Centennial forecasted financial information is generally based on information known to Centennial management as of May 13, 2022.

Important factors that may affect actual results and cause the projections contained in the Centennial forecasted financial information not to be achieved include, but are not limited to, changes in commodity prices from those described in such forecasted information, risks and uncertainties relating to Centennial’s and Colgate’s businesses (including the ability to achieve strategic goals, objectives and targets), industry performance, the legal and regulatory environment, general business and economic conditions and other factors described in this proxy statement or described or referenced in Centennial’s filings with the SEC, including the annual report, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. The Centennial forecasted financial information summarized in this proxy statement constitutes “forward-looking statements” and actual results may differ materially and adversely from those projected. For more information, see the section entitled “Cautionary Note Regarding Forward-Looking Statements.” In addition, the summary of the Centennial forecasted financial information reflects assumptions that are subject to change and does not reflect revised prospects for Centennial’s or Colgate’s respective businesses, changes in general business or economic conditions or any other transaction or event that has occurred or that may occur and that was not anticipated at the time the Centennial forecasted financial information was prepared.

Centennial management developed the Centennial forecasted financial information in connection with its evaluation of the Transactions utilizing reasonably available estimates and judgments at the time of its preparation, including the commodity price assumptions described below. The Centennial forecasted financial information relating to Centennial is based upon the internal financial model that Centennial historically has used in connection with its strategic planning and budgeting process. The Centennial forecasted financial information (other than the pro forma

 

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forecasts) was developed on a standalone basis without giving effect to the Transactions, and therefore the Centennial forecasted financial information does not give effect to the Transactions or any changes to Centennial’s or Colgate’s respective operations or strategy that may be implemented after the effective time of the Transactions, if the Transactions are completed, including any potential cost synergies to be realized as a result of the Transactions or any costs incurred in connection with the Transactions. Furthermore, the Centennial forecasted financial information does not take into account the effect of any failure of the Transactions to be completed and should not be viewed as accurate or continuing in that context.

Accordingly, there can be no assurance that the projections contained in the Centennial forecasted financial information will be realized or that Centennial’s or Colgate’s future financial results will not vary materially from the Centennial forecasted financial information. Neither Centennial nor Colgate, or any of their respective affiliates, officers, directors, advisors or other representatives or any other person, can give any assurance that actual results will not differ from the Centennial forecasted financial information, nor does any such party undertake any obligation to update or otherwise revise or reconcile the Centennial forecasted financial information to reflect circumstances existing, or developments or events occurring, after the date on which the Centennial forecasted financial information was finalized, or that may occur in the future, even if any or all of the assumptions underlying the Centennial forecasted financial information are not appropriate. Centennial does not intend to make available publicly any update or other revision to the Centennial forecasted financial information, except as otherwise required by applicable law. None of Centennial, Colgate or any of their respective affiliates, officers, directors, advisors or other representatives has made or makes any representation to any Centennial shareholder or Colgate equityholder regarding the ultimate performance of Centennial or Colgate compared to the information contained in the Centennial forecasted financial information, or that the projections contained in the Centennial forecasted financial information will be achieved.

In light of the foregoing factors as well as the uncertainties inherent in the Centennial forecasted financial information, and given that the Special Meeting will be held several months after the Centennial forecasted financial information was prepared, Centennial shareholders are cautioned not to place undue, if any, reliance on the information presented in this summary of the Centennial forecasted financial information, and Centennial urges all Centennial shareholders to review Centennial’s most recent SEC filings for a description of Centennial’s reported financial results. The inclusion of this information in this proxy statement does not constitute an admission or representation by Centennial or its affiliates, officers, directors, advisors or other representatives or any other person that the information is material, particularly in light of the inherent risks and uncertainties associated with such forecasts.

Centennial Management Assumptions Regarding Commodity Prices

The Centennial forecasted financial information described below under the sections entitled “—Centennial Management’s Unaudited Forecasted Financial Information of Centennial” and “—Centennial Management’s Unaudited Forecasted Financial Information of Colgate” was based on various assumptions of Centennial’s management, including, but not limited to, the following commodity price assumptions, which were based on (1) New York Mercantile Exchange strip pricing (“NYMEX Strip”) and (2) Wall Street consensus pricing (“Wall Street Consensus”), each as of May 13, 2022.

 

     Commodity Prices  

NYMEX Strip

   2022E      2023E      2024E      2025E      2026E  

Oil (West Texas Intermediate, $/bbl)

   $ 101.44      $ 89.89      $ 80.42      $ 73.86      $ 69.11  

Natural Gas (Henry Hub, $/MMBtu)

   $ 6.94      $ 5.38      $ 4.25      $ 4.08      $ 4.15  
     Commodity Prices  

Wall Street Consensus

   2022E      2023E      2024E      2025E      2026E  

Oil (West Texas Intermediate, $/bbl)

   $ 97.98      $ 83.79      $ 75.85      $ 70.00      $ 70.00  

Natural Gas (Henry Hub, $/MMBtu)

   $ 5.21      $ 4.31      $ 3.77      $ 3.31      $ 3.31  

 

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Centennial Management’s Unaudited Forecasted Financial Information of Centennial

The following tables set forth certain summarized unaudited financial and operating information with respect to Centennial for the fiscal years 2022 through 2026 on a standalone basis prepared by Centennial’s management based on the assumptions described above in the section entitled “ —Centennial Management Assumptions Regarding Commodity Prices.”

 

Daily Production

   2022E      2023E      2024E      2025E      2026E  

Oil (MBbl/d)

     35.8        40.0        39.2        39.2        39.1  

Gas (MMcf/d)

     107.1        106.4        113.2        122.4        127.0  

NGL (Mboe/d)

     10.3        10.7        11.4        12.3        12.8  

Total Daily Production (Mboe/d) (4)

     64.0        68.4        69.5        71.9        73.1  

NYMEX Strip

 

Total Sales

   $ 1,641      $ 1,532      $ 1,377      $ 1,311      $ 1,263  

EBITDAX (5)

     1,081        1,085        998        934        888  

Cash Flow from Operations (Pre-NWC) (6)

     1,024        1,028        910        806        768  

Free Cash Flow (Levered) (7)

     567        569        538        388        381  

Free Cash Flow (Unlevered) (8)

     615        616        545        423        405  

Wall Street Consensus

 

Total Sales

   $ 1,493      $ 1,356      $ 1,309      $ 1,242      $ 1,238  

EBITDAX (5)

     994        942        935        871        865  

Cash Flow from Operations (Pre-NWC) (6)

     938        886        878        791        751  

Free Cash Flow (Levered) (7)

     480        427        506        373        364  

Free Cash Flow (Unlevered) (8)

     528        475        545        374        388  

 

(1)

All dollar values are in millions, unless otherwise noted.

(2)

The information in this table does not take into account any circumstances or events occurring after the date it was prepared. Given that the Special Meeting will be held several months after such information was prepared and the uncertainties inherent in any forecasted information, Centennial shareholders are cautioned not to place undue reliance on such information.

(3)

The table reflects certain summarized unaudited prospective financial and operating information of Centennial that reflect historical unaudited financial and operating information of Centennial through March 31, 2022 and unaudited prospective financial and operating information for April 1, 2022 through December 31, 2022 and January 1, 2023 through December 31, 2026.

(4)

Centennial’s forecasted Total Daily Production is calculated on a three-stream basis of oil, natural gas and NGLs.

(5)

Centennial defines EBITDAX (a non-GAAP measure) as net income before interest expense, income taxes, depreciation, depletion and amortization, exploration and other expenses, impairment and abandonment expense, non-cash gains or losses on derivatives, stock-based compensation (non-cash settled), gain/loss from the sale of assets and non-recurring items. Centennial excludes the items listed above from net income in arriving at EBITDAX because these amounts can vary substantially from company to company within Centennial’s industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Certain items excluded from EBITDAX are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as historical costs of depreciable assets, none of which are components of EBITDAX.

(6)

Centennial defines Cash Flow from Operations (Pre-NWC) (a non-GAAP measure) as cash flow from operations before changes in net working capital. Accordingly, it should not be considered as a substitute for any measure prepared in accordance with GAAP.

 

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(7)

Centennial defines Free Cash Flow (Levered) (a non-GAAP measure) as net cash provided by operating activities, less incurred capital expenditures and certain non-ordinary cash payments. Accordingly, it should not be considered as a substitute for any measure prepared in accordance with GAAP.

(8)

Centennial defines Free Cash Flow (Unlevered) (a non-GAAP measure) as net cash provided by operating activities, less incurred capital expenditures, certain non-ordinary cash payments and cash interest payments on debt. Accordingly, it should not be considered as a substitute for any measure prepared in accordance with GAAP.

Centennial Management’s Unaudited Forecasted Financial Information of Colgate

The following tables set forth certain summarized unaudited prospective financial and operating information with respect to Colgate for the fiscal years 2022 through 2026 on a standalone basis. This information was prepared by Centennial management using publicly sourced information and information provided by Colgate management and based on the assumptions described above in the section entitled “ —Centennial Management Assumptions Regarding Commodity Prices.”

 

Daily Production

   2022E      2023E      2024E      2025E      2026E  

Oil (MBbl/d)

     35.1        45.2        50.8        53.6        51.6  

Gas (MMcf/d)

     118.5        141.4        154.9        168.8        163.3  

NGL (Mboe/d)

     15.1        19.1        21.5        24.3        23.9  

Total Daily Production (Mboe/d) (4)

     69.9        87.9        98.1        106.1        102.7  

NYMEX Strip

 

Total Sales

   $ 1,837      $ 1,925      $ 1,938      $ 1,911      $ 1,741  

EBITDAX (5)

     1,498        1,540        1,512        1,461        1,304  

Cash Flow from Operations (Pre-NWC) (6)

     1,254        1,311        1,272        1,227        1,098  

Free Cash Flow (Levered) (7)

     602        596        630        611        596  

Free Cash Flow (Unlevered) (8)

     654        638        672        654        623  

Wall Street Consensus

 

Total Sales

   $ 1,703      $ 1,758      $ 1,813      $ 1,774      $ 1,710  

EBITDAX (5)

     1,374        1,386        1,396        1,335        1,276  

Cash Flow from Operations (Pre-NWC) (6)

     1,156        1,190        1,183        1,130        1,076  

Free Cash Flow (Levered) (7)

     504        475        541        514        575  

Free Cash Flow (Unlevered) (8)

     558        518        583        556        601  

 

(1)

All dollar values are in millions, unless otherwise noted.

(2)

The information in this table does not take into account any circumstances or events occurring after the date it was prepared. Given that the Special Meeting will be held several months after such information was prepared and the uncertainties inherent in any forecasted information, Centennial unitholders are cautioned not to place undue reliance on such information.

(3)

The table reflects certain summarized unaudited prospective financial and operating information of Colgate that reflect unaudited prospective financial and operating information for January 1, 2022 through December 31, 2026.

(4)

Colgate’s forecasted Total Daily Production is calculated on a three-stream basis of oil, natural gas and NGLs.

(5)

Centennial defines Colgate EBITDAX (a non-GAAP measure) as net income before interest expense, income taxes, depreciation, depletion and amortization, exploration and other expenses, impairment and abandonment expense, non-cash gains or losses on derivatives, stock-based compensation (non-cash settled), gain/loss from the sale of assets and non-recurring items. Centennial excludes the items listed above from net income in arriving at Colgate EBITDAX because these amounts can vary substantially from company to company within Colgate’s industry depending upon accounting methods and book values of

 

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  assets, capital structures and the method by which the assets were acquired. Certain items excluded from Colgate EBITDAX are significant components in understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure, as well as historical costs of depreciable assets, none of which are components of Colgate EBITDAX.
(6)

Centennial defines Colgate Cash Flow from Operations (Pre-NWC) (a non-GAAP measure) as cash flow from operations less adjustments for net working capital. Accordingly, it should not be considered as a substitute for any measure prepared in accordance with GAAP.

(7)

Centennial defines Colgate Free Cash Flow (Levered) (a non-GAAP measure) as net cash provided by operating activities, less incurred capital expenditures and certain non-ordinary cash payments. Accordingly, it should not be considered as a substitute for any measure prepared in accordance with GAAP.

(8)

Centennial defines Colgate Free Cash Flow (Unlevered) (a non-GAAP measure) as net cash provided by operating activities, less incurred capital expenditures, certain non-ordinary cash payments and cash interest payments on debt. Accordingly, it should not be considered as a substitute for any measure prepared in accordance with GAAP.

CENTENNIAL DOES NOT INTEND TO UPDATE OR OTHERWISE REVISE THE ABOVE UNAUDITED FINANCIAL AND OPERATING FORECASTS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE ON WHICH SUCH FORECASTS WERE FINALIZED OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS, EVEN IF ANY OR ALL OF THE ASSUMPTIONS UNDERLYING SUCH UNAUDITED FINANCIAL AND OPERATING FORECASTS ARE NO LONGER APPROPRIATE, EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW.

Interests of Centennial’s Directors and Executive Officers in the Transactions

In considering the recommendation of the Board that you vote to approve and adopt the Transactions, you should be aware that aside from their interests as Centennial shareholders, Centennial’s directors and executive officers have interests in the Merger that are different from, or in addition to, those of other Centennial shareholders generally. The members of the Board were aware of and considered these interests, among other matters, in evaluating and negotiating the Business Combination Agreement and the Transactions, and in recommending to the Centennial shareholders that the Transactions. See the section above entitled “ –Background of the Transactions,” and the section entitled “ –Our Board of Directors’ Reasons for the Approval of the Transactions and the Stock Issuance.” Centennial’s shareholders should take these interests into account in deciding whether to vote “FOR” the proposals herein. These interests include, among other things, the expected continued employment of George S. Glyphis and Matthew R. Garrison as chief financial officer and chief operating officer, respectively, by the combined company, and the expected service of Sean R. Smith as the executive chairman of the board of directors of the combined company.

Continued Indemnification and Insurance Coverage

Pursuant to the terms of the Business Combination Agreement, Centennial’s directors and executive officers will be entitled to certain ongoing indemnification and coverage under directors’ and officers’ liability insurance policies from the combined company following the Closing.

Quantification of Payments and Benefits to Centennial’s Named Executive Officers

Treatment of Equity and Equity-Based Awards

Centennial’s non-employee directors hold restricted stock awards that, pursuant to their terms, become fully vested upon a change in control. The Merger will be deemed a change in control for purposes of the restricted stock awards.

 

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The following table sets forth the number of outstanding unvested shares of restricted stock held by our current non-employee directors as of June 6, 2022 and the value of such awards. No individual who previously served as a non-employee director since January 1, 2021 holds any outstanding restricted shares.

 

NAME

   Shares of
Restricted
Stock (#)
     Value of
Restricted
Stock ($)(1)
 

NON-EMPLOYEE DIRECTORS

     

Maire A. Baldwin

     31,708        220,054  

Jeffrey H. Tepper

     32,602        226,258  

Matthew G. Hyde

     31,708        220,054  

Steven J. Shapiro

     40,997        284,519  

Vidisha Prasad

     41,163        285,671  

 

(1)

Amount reflects the number of shares of Centennial restricted stock, multiplied by $6.94 (the Assumed Centennial Stock Price).

Severance Benefits

We maintain the Centennial Resource Development, Inc. Second Amended and Restated Severance Plan (the “Severance Plan”), which provides our executive officers with severance benefits in the event of a termination without “Cause” or for “Good Reason” (each, a “Qualifying Termination”) in either case occurring on or within 24 months after a “Change in Control” (each as defined in the Executive Severance Plan), subject to a requirement that the executive officer execute a release of claims. The Merger will be deemed to constitute a Change in Control for purposes of the Severance Plan. For purposes of the Severance Plan, our Chief Executive Officer is a Tier I participant, and the rest of our executive officers are Tier II participants.

For an estimate of the value of the payments and benefits described below that would be payable to our executive officers (each of whom is a named executive officer) upon a Qualifying Termination in connection with the Merger, see “—Named Officer Golden Parachute Compensation” below.

In the event that one of our executive officers were to experience a Qualifying Termination, the executive officer would be entitled to the compensation and benefits under the Severance Plan set forth in the table below according to the executive officer’s participant tier:

 

EXECUTIVE GROUP

  

Tier I Participant

  

Tier II Participant

Cash Severance    3x the sum of (i) annual base salary, plus (ii) average Annual Incentive Plan award for the preceding three years    2.75x the sum of (i) annual base salary, plus (ii) average Annual Incentive Plan award for the preceding three years
Accelerated Vesting    Accelerated vesting of the officer’s unvested time-based equity awards and performance-based awards (based on the actual achievement of the applicable performance conditions through the termination date).
Pro-Rata Bonus    A cash amount equal a pro-rata portion (as of the date of the Qualifying Termination) of the executive officer’s annual incentive compensation award for the year of termination, calculated at target.
Benefits    Cash payment equal to 125% of the aggregate COBRA premiums that the CEO would need to pay to continue coverage of the benefit plans for the CEO and the CEO’s family for two years following the termination date.    Cash payment equal to 125% of the aggregate COBRA premiums that the NEO would need to pay to continue coverage of the benefit plans for the NEO and the NEO’s family for two years following the termination date.

 

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EXECUTIVE GROUP

  

Tier I Participant

  

Tier II Participant

Outplacement    Outplacement benefits for one year following the termination date.    Outplacement benefits for one year following the termination date.

Named Executive Officer Golden Parachute Compensation

The following table provides information about certain compensation for each of our named executive officers that is based on or otherwise relates to the Transactions, using the following assumptions: (i) the completion of the Merger occurs on June 6, 2022, (ii) each named executive officer experiences a Qualifying Termination on such date, (iii) the named executive officer’s base salary rate and annual target bonus remain unchanged from that in effect as of the date of this filing, (iv) the value of the accelerated vesting of any Centennial equity award is calculated assuming a market price per share of Centennial common stock equal to $6.94 (which equals the average closing market price of a share of Centennial common stock on the NASDAQ over the first five business days following May 19, 2022, the date of the first public announcement of entering into the Business Combination Agreement) (the Assumed Centennial Stock Price), (v) no named executive officers receive any additional equity grants prior to completion of the Merger and (vi) each named executive officer has properly executed any required releases necessary in order to receive the payments and benefits. The amounts in the following table are estimates based on multiple assumptions that may not actually occur and do not include amounts that were vested as of June 6, 2022. In addition, certain amounts will vary depending on the actual date of closing of the Merger and whether or not a named executive officer experiences a Qualifying Termination. As a result, the actual amounts, if any, to be received by a named executive officer may differ in material respects from the amounts set forth below.

The compensation summarized in the table and footnotes and narrative disclosure below is subject to a non-binding, advisory vote of the shareholders of Centennial, as described in “Proposal 3: Approval of the Merger Compensation Proposal” on page 106 of this proxy statement.

 

NAME

   CASH
($)(1)
     PERQUISITES/
BENEFITS
($)(2)
     EQUITY
($)(3)
     TOTAL ($)  

Sean R. Smith

     5,441,229        60,045        41,510,958        47,012,232  

George S. Glyphis

     2,957,977        84,300        21,396,624        24,438,901  

Davis O. O’Connor

     2,495,811        60,130        13,959,060        16,515,001  

Matthew R. Garrison

     2,594,399        78,994        13,347,438        16,020,831  

Brent P. Jensen

     2,090,579        78,994        10,820,605        12,990,178  

 

(1)

The amounts in this column represent aggregate cash severance payments that each named executive officer would be entitled to receive under the Severance Plan if his employment were terminated by Centennial without Cause or by the named executive officer for Good Reason on June 6, 2022. These amounts, if paid, represent double-trigger payments. See “—Severance Benefits” on page 99 of this proxy statement for a description of each named executive officer’s severance rights under the Severance Plan.

(2)

The amounts in this column include (i) the estimated value of the cash payment equal to 125% of the COBRA premiums that the named executive officers would be entitled to receive under the Severance Plan and (ii) $18,000 in outplacement services for each named executive officer, for the length of time provided under the Severance Plan. These amounts, if paid, represent double-trigger payments.

(3)

The amounts in this column represent the estimated value of the accelerated vesting that each named executive officer would receive with respect to his unvested Centennial restricted stock and Centennial performance stock units (“PSUs”), calculated by multiplying (i) the number of shares of Centennial restricted stock, or the total number of unvested shares of Centennial common stock subject to each Centennial PSU (with the number of shares of common stock subject to each PSU determined at target level), as applicable, by (ii) $ 6.94 (the Assumed Centennial Stock Price). These amounts, if paid, represent double-trigger payments. The maximum payout level under the PSU awards is 200% of the target level (or 250% in the case of the PSU awards granted in 2021 and 2022).

 

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Narrative Disclosure to Named Officer Golden Parachute Compensation Table

For additional information relating to our named executive officers’ potential cash severance payments and other severance benefits, see “—Interests of Centennial’s Directors and Executive Officers in the Transactions” on page 98 of this proxy statement.

Our Board Following the Transactions

If the Transactions are consummated, we will take all necessary action (but solely to the extent such actions are permitted by law) to cause the Board to consist of 11 members, including: (i) an executive chairman, which will be Sean R. Smith, our current Chief Executive Officer; (ii) four directors designated by Centennial, which will include Robert M. Tichio and three independent directors; (iii) five directors designated by Colgate, which will include William M. Hickey III, James H. Walter, William J. Quinn and two independent directors; and (iv) one independent director mutually agreed to by Centennial and Colgate. For more information, please see the section entitled “Management After the Transactions.”

Total Shares of Common Stock to be Issued in the Transactions

In connection with the Transactions, we expect to issue 269,300,000 shares of Class C Common Stock to the Colgate Unitholder. Because we are issuing 20% or more of the outstanding Common Stock in connection with the Transactions, we are required to obtain shareholder approval of such issuance pursuant to Rule 5635(a). For more information, please see the section entitled “Proposal 1—The Stock Issuance Proposal.” As a result of the Transactions, the amount of Common Stock outstanding will increase by approximately 94% to approximately 554.29 million shares of Common Stock outstanding. It is anticipated that immediately after the consummation of the Transactions our current shareholders will own approximately 51% of our outstanding Common Stock (or approximately 53% on a fully diluted basis) and the Colgate Unitholder will own approximately 49% of our outstanding Common Stock (or approximately 47% on a fully diluted basis).

Appraisal Rights

Appraisal rights are not available to holders of Common Stock in connection with the Transactions.

Accounting and Tax Treatment

The Transactions will be accounted for using the acquisition method of accounting for business combinations. The allocation of the preliminary estimated purchase price is based upon management’s estimates and assumptions related to the fair value of assets acquired and liabilities assumed on the closing date of the Transactions. The initial accounting for the business combination is therefore preliminary, and adjustments to provisional amounts, or the recognition of additional assets acquired or liabilities assumed, may occur as additional information is obtained. We expect to finalize the allocation of the purchase consideration as soon as practicable after completion of the Transactions and are required to do so within one year from the closing date of the Transactions.

For U.S. federal income tax purposes, we expect to treat the Merger as a contribution by the Colgate Unitholder of the assets of Colgate in a contribution governed, in part, by Section 721 of the Code, and we do not expect the Merger to result in the recognition of taxable gain or loss for Centennial or CRP.

Regulatory Matters

Under the HSR Act and the rules that have been promulgated thereunder by the FTC, certain transactions may not be consummated unless information has been furnished to the Antitrust Division and the FTC and certain waiting period requirements have been satisfied. The Transactions are subject to these requirements and may not be completed until the expiration of a 30-day waiting period following the filing of the required Notification and

 

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Report Forms with the Antitrust Division and the FTC. If the FTC or the Antitrust Division makes a Second Request, the waiting period with respect to the Transactions will be extended for an additional period of 30 calendar days, which will begin on the date on which Centennial and Colgate each certify compliance with the Second Request. Complying with a Second Request can take a significant period of time. On June 2, 2022, Centennial and Colgate filed the required forms under the HSR Act with the Antitrust Division and the FTC. The 30-day waiting period with respect to the Transactions, which cannot expire on a Saturday, Sunday or a U.S. federal holiday, expired at 11:59 p.m. Eastern Time on July 5, 2022.

At any time before or after consummation of the Transactions, notwithstanding expiration of the waiting period under the HSR Act, the applicable competition authorities could take such action under applicable antitrust laws as each deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Transactions. Private parties may also seek to take legal action under the antitrust laws under certain circumstances. We cannot assure you that the Antitrust Division, the FTC, any state attorney general or any other government authority will not attempt to challenge the Transactions on antitrust grounds, and, if such a challenge is made, we cannot assure you as to its result. We are not aware of any material regulatory approvals or actions that are required for completion of the Transactions other than the expiration of the waiting period under the HSR Act. It is presently contemplated that if any such additional regulatory approvals or actions are required, those approvals or actions will be sought. There can be no assurance, however, that any additional approvals or actions will be obtained.

Why We Need Shareholder Approval

We are seeking shareholder approval in order to comply with Rule 5635(a) of the Nasdaq Stock Market Rules. Under Rule 5635(a), shareholder approval is required prior to the issuance of common stock (or securities convertible into or exercisable for common stock) in connection with the acquisition of the stock or assets of another company (other than a public offering for cash) where the issuance equals 20% or more of the common stock or 20% of the voting power outstanding before such issuance.

The Merger Consideration to be received by the Colgate Unitholder will consist of $525.0 million in cash, 269,300,000 shares of Class C Common Stock and 269,300,000 additional Surviving Company Units. The Merger Consideration is subject to certain downward adjustments for customary title and environmental defect considerations as more fully described in the Business Combination Agreement. For more information on the closing adjustments to the Merger Consideration, please see the section entitled “Proposal 1—The Stock Issuance Proposal—The Business Combination Agreement.” Because the Share Consideration exceeds 20% of the voting power outstanding before the Transactions and includes a number of shares convertible into Class A Common Stock to be issued that exceeds 20% of the number of shares of the Class A Common Stock, as converted, before the Transactions, Rule 5635(a) requires us to obtain shareholder approval before completing the Transactions.

Effect of Proposal on Current Shareholders

If the Stock Issuance Proposal is adopted, 269,300,000 shares of Class C Common Stock will be issued as Share Consideration pursuant to the terms of the Business Combination Agreement. The issuance of such shares would result in significant potential dilution to our shareholders, and would afford our shareholders a smaller percentage interest in the voting power, liquidation value and aggregate book value of Centennial. We anticipate that the Share Consideration to be issued to Colgate will represent approximately 49% of the total outstanding shares of Common Stock immediately after the Transactions (or approximately 47% on a fully diluted basis), and that existing Centennial shareholders would collectively own approximately 51% of the total outstanding shares of Common Stock immediately after the Transactions (or approximately 53% on a fully diluted basis).

 

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We will not be able to consummate the Transactions unless the Stock Issuance Proposal is adopted.

Vote Required for Approval

The Stock Issuance Proposal requires the affirmative vote of a majority of the votes cast by holders of outstanding shares of Common Stock, voting together as a single class, present in person or represented by proxy, assuming a quorum is present. Accordingly, a shareholder’s failure to vote by proxy or to vote in person at the Special Meeting, as well as an abstention or broker non-vote with regard to the Stock Issuance Proposal, will have no effect on the Stock Issuance Proposal. Abstentions (but not broker non-votes) will be counted in connection with the determination of whether a valid quorum is established.

Recommendation of Our Board

Our Board unanimously recommends that you vote “FOR” the Stock Issuance Proposal.

 

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PROPOSALS 2A – 2D: Approval of the A&R Charter Proposals

Overview

Assuming the Stock Issuance Proposal and these A&R Charter Proposals are approved, we will amend and restate our Existing Charter in the form attached to this proxy statement as Annex B, which, in the judgment of our Board, is necessary to adequately address our needs following the Closing. Even if our shareholders approve the A&R Charter Proposals, the Transactions may not be completed if the other conditions to the Closing are not satisfied or, if allowed by applicable law, waived. We can give no assurance that the conditions to the Closing will be satisfied or waived.

The following table sets forth a summary of the principal proposed changes between our Existing Charter and the Proposed Charter. This summary is qualified by reference to the complete text of the Proposed Charter, a copy of which is attached to this proxy statement as Annex B. We encourage our shareholders to read the Proposed Charter in its entirety for a more complete description of its terms.

 

     
      Existing Charter    Proposed Charter
     

Charter Proposal A – Authorized Capital

   The Existing Charter authorizes the issuance of 621,000,000 shares of capital stock, including 620,000,000 shares of Class A Common Stock, 20,000,000 shares of Class C common stock and 1,000,000 shares of preferred stock.    The Proposed Charter authorizes the issuance of 1,501,000,000 shares of capital stock, including 1,000,000,000 shares of Class A Common Stock, 500,000,000 shares of Class C common stock and 1,000,000 shares of preferred stock.
     

Charter Proposal B – Action by Written Consent

   The Existing Charter provides that, except as may be otherwise provided for therein or as relates to the rights of holders of preferred stock, any action required or permitted to be taken by our shareholders must be effected by a duly called annual or special meeting of such shareholders and may not be effected by written consent of the shareholders.    The Proposed Charter provides that, except as otherwise provided for therein or relating to the rights of holders of preferred stock, any action required or permitted to be taken by shareholders must be effected by a duly called annual or special meeting of such shareholders and may not be effected by written consent of the shareholders; provided, however, that prior to the first date following the consummation of the transactions contemplated by the Business Combination Agreement on which investment funds affiliated with Riverstone Holdings LLC, Pearl Energy Investments and NGP Energy Capital cease to collectively have beneficial ownership (directly or indirectly) of more than 50% of our outstanding Common Stock, any action required or permitted to be taken by the shareholders that is approved in advance by the Board may be effected without a meeting, without prior notice and without a vote of shareholders, if a consent or consents in writing, setting forth the action so taken, is or are signed by the holders of outstanding Common Stock having not less than the minimum

 

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      Existing Charter    Proposed Charter
          number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, in accordance with Section 228 of the Delaware General Corporation Law.
     

Charter Proposal C – Exclusive Forum

   The Existing Charter does not provide for an exclusive forum for certain actions.    Subject to the limitations set forth therein, the Proposed Charter will provide that, unless the combined company consents in writing to the selection of an alternative forum, the (i) Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (A) any derivative action or proceeding brought on behalf of the combined company, (B) any action asserting a claim of breach of a fiduciary duty owed by any of the directors, officers, employees or agents of the combined company to the combined company or its shareholders, (C) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, the Proposed Charter or the combined company’s bylaws or (D) any action asserting a claim against the combined company that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein; and (ii) subject to the foregoing, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, including all causes of action asserted against any defendant to such complaint. In the event the Delaware Court of Chancery lacks subject matter jurisdiction, then the sole and exclusive forum for such action or proceeding shall be the federal district court for the District of Delaware. Any person or entity purchasing or otherwise acquiring any interest in shares of the capital stock of the combined company will be deemed to have notice of, and consented to, the provisions of the Proposed Charter described in the preceding sentences.

 

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      Existing Charter    Proposed Charter
         

 

Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As noted above, the Proposed Charter will provide that the federal district courts of the United States of America shall have exclusive jurisdiction over any action arising under the Securities Act. Accordingly, there is uncertainty as to whether a court would enforce this provision.

Reasons for the Amendments

The Proposed Charter increases the authorized number of shares necessary to issue the Share Consideration. Our Board also believes that it is important for us to have available for issuance a number of authorized shares of Common Stock and preferred stock sufficient to support our growth and to provide flexibility for future corporate needs (including, if needed, as part of financing for future growth acquisitions). In addition, the increase in the total number of authorized shares of capital stock provides us adequate authorized capital to provide flexibility for future issuances of Common Stock if determined by our Board to be in our best interests, without incurring the risk, delay and potential expense incident to obtaining shareholder approval for a particular issuance. Although there is no present intention to issue any shares of Common Stock beyond those contemplated by the Transactions or otherwise in the ordinary course of business, the additional authorized shares of Common Stock would be issuable for any proper corporate purpose, including, without limitation, stock splits, stock dividends, future acquisitions, investment opportunities, capital raising transactions of equity or convertible debt securities, issuances under current or future equity compensation plans or for other corporate purposes. Our authorized but unissued shares of capital stock will be available for future issuances without shareholder approval (except to the extent otherwise required by law or Nasdaq rules) and could be utilized for a variety of corporate purposes, including future offerings to raise additional capital, acquisitions and employee benefit plans.

The Proposed Charter also provides that, except as otherwise provided for therein or relating to the rights of holders of preferred stock, any action required or permitted to be taken by shareholders must be effected by a duly called annual or special meeting of such shareholders and may not be effected by written consent of the shareholders; provided, however, that prior to the first date following the consummation of the transactions contemplated by the Business Combination Agreement on which investment funds affiliated with Riverstone Holdings LLC, Pearl Energy Investments and NGP Energy Capital cease to collectively have beneficial ownership (directly or indirectly) of more than 50% of our outstanding Common Stock, any action required or permitted to be taken by the shareholders that is approved in advance by the Board may be effected without a meeting, without prior notice and without a vote of shareholders, if a consent or consents in writing, setting forth the action so taken, is or are signed by the holders of outstanding Common Stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, in accordance with Section 228 of the Delaware General Corporation Law. Our Board believes that providing for the ability of such shareholders to act by written consent will enable the combined company to act without the burden, delay and expense that may be incurred by the calling of an annual or special meeting of the shareholders and will allow such shareholders to raise important matters outside of the normal annual meeting cycle. In addition, the proposed change to the Existing Charter related to the delivery of written consents is intended to refer specifically to the Delaware General Corporation Law to ensure that the combined company complies with the most recent Delaware General Corporation Law

 

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statutory language. Once less than 50% of our outstanding Common Stock ceases to be owned by Riverstone Holdings LLC, Pearl Energy Investments or NGP Energy Capital or their affiliated investment funds, successors or affiliates, our shareholders would no longer be able effect any action by written consent.

The Proposed Charter will also provide that, unless the combined company consents in writing to the selection of an alternative forum, the (i) Court of Chancery of the State of Delaware will, to the fullest extent permitted by applicable law, be the sole and exclusive forum for (A) any derivative action or proceeding brought on behalf of the combined company, (B) any action asserting a claim of breach of a fiduciary duty owed by any of the directors, officers, employees or agents of the combined company to the combined company or its shareholders, (C) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, the Proposed Charter or the combined company’s bylaws or (D) any action asserting a claim against the combined company that is governed by the internal affairs doctrine, in each such case subject to such Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein; and (ii) subject to the foregoing, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, including all causes of action asserted against any defendant to such complaint. In the event the Delaware Court of Chancery lacks subject matter jurisdiction, then the sole and exclusive forum for such action or proceeding shall be the federal district court for the District of Delaware. Any person or entity purchasing or otherwise acquiring any interest in shares of the capital stock of the combined company will be deemed to have notice of, and consented to, the provisions of the Proposed Charter described in the preceding sentences.

Notwithstanding the foregoing, this provision would not apply to claims brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder.

Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As noted above, the Proposed Charter will provide that the federal district courts of the United States of America shall have exclusive jurisdiction over any action arising under the Securities Act. Accordingly, there is uncertainty as to whether a court would enforce this provision. This choice of forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with the combined company or the directors, officers, employees or agents of the combined company, which may discourage such lawsuits against the combined company and such persons. Alternatively, if a court were to find these provisions of the Proposed Charter inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, the combined company may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect the business, financial condition or results of operations of the combined company. Our Board believes that establishing an exclusive forum for substantially all actions and proceedings that may be initiated by shareholders will provide increased consistency in the application of Delaware and federal securities law in the types of lawsuits to which such laws apply.

We will not be able to consummate the Transactions unless each of Charter Proposal A, Charter Proposal B, Charter Proposal C and Charter Proposal D is adopted.

Vote Required for Approval

Each of the A&R Charter Proposals requires the affirmative vote of a majority of the outstanding shares of Common Stock entitled to vote thereon, voting together as a single class, assuming a quorum is present. Because each of the A&R Charter Proposals requires the affirmative vote of a majority of the outstanding shares of Common Stock entitled to vote thereon, a shareholder’s failure to vote by proxy or to vote in person at the

 

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Special Meeting, as well as an abstention or broker non-vote with regard to the A&R Charter Proposals, will have the same effect as a vote “AGAINST” the A&R Charter Proposals.

Recommendation of the Board of Directors

Charter Proposal A – Authorized Capital

Our Board unanimously recommends that you vote “FOR” Charter Proposal A.

Charter Proposal B – Action by Written Consent

Our Board unanimously recommends that you vote “FOR” Charter Proposal B.

Charter Proposal C – Exclusive Forum

Our Board unanimously recommends that you vote “FOR” Charter Proposal C.

Charter Proposal D – A&R Charter Adoption

Our Board unanimously recommends that you vote “FOR” Charter Proposal D.

 

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PROPOSAL 3: APPROVAL OF THE MERGER COMPENSATION PROPOSAL

Overview

Pursuant to Section 14A of the Exchange Act and Rule 14a-21(c) thereunder, Centennial is seeking a non-binding advisory shareholder approval of the compensation of Centennial’s named executive officers that is based on or otherwise relates to the Merger as disclosed in “Proposal 1The Stock Issuance Proposal–Interests of Centennials Directors and Executive Officers in the Transactions–Quantification of Payments and Benefits to Centennials Named Executive Officers.” Centennial is requesting the Centennial shareholders’ approval, on an advisory (non-binding) basis, of specified compensation that may be payable to the Centennial named executive officers in connection with the Transactions and therefore is asking shareholders to adopt the following resolution:

“RESOLVED, that the compensation that may be paid or become payable to Centennial’s named executive officers in connection with the Merger, as disclosed in the tables in the section of the proxy statement entitled “Proposal 1—The Stock Issuance Proposal–Interests of Centennial’s Directors and Executive Officers in the Transactions—Quantification of Payments and Benefits to Centennial’s Named Executed Officers,” including the associated narrative discussion, and the agreements and plans pursuant to which such compensation may be paid or become payable, are hereby APPROVED.”

Because the vote is advisory in nature only, it will not be binding on Centennial. Accordingly, to the extent Centennial is contractually obligated to pay the compensation, the compensation will be payable to the named executive officers, subject only to the conditions applicable thereto, if the Merger is completed, regardless of the outcome of the advisory vote.

Vote Required for Approval

Approval of the Merger Compensation Proposal requires the affirmative vote of the holders of a majority of the shares of Common Stock entitled to vote thereon, voting together as a single class, assuming a quorum is present. Accordingly, a shareholder’s failure to vote by proxy or to vote in person at the Special Meeting, as well as an abstention or broker non-vote with regard to the Merger Compensation Proposal, will have no effect on the Merger Compensation Proposal. Abstentions (but not broker non-votes) will be counted in connection with the determination of whether a valid quorum is established.

Recommendation of the Board of Directors

Our Board unanimously recommends that you vote “FOR” the Merger Compensation Proposal.

 

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PROPOSAL 4: APPROVAL OF THE ADJOURNMENT PROPOSAL

Overview

The Adjournment Proposal, if adopted, will allow our Board to adjourn the special meeting to a later date or dates to permit further solicitation of proxies. The Adjournment Proposal will only be presented to our shareholders in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Stock Issuance Proposal, the A&R Charter Proposals and the Merger Compensation Proposal.

Consequences if the Adjournment Proposal is Not Approved

If the Adjournment Proposal is not approved by our shareholders, our Board may not be able to adjourn the special meeting to a later date in the event that there are insufficient votes for, or otherwise in connection with, the approval of the Stock Issuance Proposal, the A&R Charter Proposals or the Merger Compensation Proposal.

Vote Required for Approval

Approval of the Adjournment Proposal requires the affirmative vote of the holders of a majority of the shares of Common Stock entitled to vote thereon, voting together as a single class, assuming a quorum is present. Accordingly, a shareholder’s failure to vote by proxy or to vote in person at the Special Meeting, as well as an abstention or broker non-vote with regard to the Adjournment Proposal, will have no effect on the Adjournment Proposal. Abstentions (but not broker non-votes) will be counted in connection with the determination of whether a valid quorum is established.

Recommendation of the Board of Directors

Our Board unanimously recommends that you vote “FOR” the Adjournment Proposal.

 

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INFORMATION ABOUT CENTENNIAL

Overview

We are an independent oil and natural gas company focused on the development of crude oil and associated liquids-rich natural gas reserves in the Permian Basin. Our assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin. Our capital programs are focused on projects that we believe provide the highest return on capital.

Our principal business objective is to increase shareholder value by efficiently developing our oil and natural gas assets in the Delaware Basin in an environmentally and socially responsible way. We intend to drive disciplined free cash flow growth through an increased focus on optimizing drilling and completion results, by drilling extended laterals, and by managing our costs, with an overall objective of improving our rates of return and generating sustainable free cash flow. We believe that the successful execution of these objectives will allow us to fund our drilling and development capex entirely from cash flows from operations, to lower our leverage profile and to return capital to our shareholders. We also look for opportunities to accretively increase scale and grow production and reserves through selective acquisitions that meet our strategic and financial objectives.

Description of Our Properties

Our assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin, and our properties consist of large, contiguous acreage blocks in West Texas and New Mexico. This continuity allows us to efficiently develop our drilling inventory and focus on maximizing returns to our stakeholders. We have established commercial production on our acreage using horizontal drilling from ten distinct zones: the Avalon Shale, 1st Bone Spring Sand, 2nd Bone Spring Sand, 2nd Bone Spring Shale, 3rd Bone Spring Sand, 3rd Bone Spring Shale, Upper Wolfcamp A, Lower Wolfcamp A, Wolfcamp B and Wolfcamp C. Our development drilling plan is comprised exclusively of horizontal drilling with an ongoing focus on operational execution and capital efficiency.

As of December 31, 2021, we have leased or acquired approximately 73,675 net acres, 97% of which we operate. In addition, we own 991 net mineral acres in the Delaware Basin. Approximately 66% of our total acreage is located in Texas, primarily Reeves County, in the southern portion of the Delaware Basin and the remaining 34% is located in Lea County, New Mexico, in the northern portion of the Delaware Basin. Over 96% of our net acreage is held by production as of December 31, 2021. The relatively high proportion of our operated acreage that is held by production gives us significant operational control and capital spending flexibility. This allows us to execute our development program with significant control over the timing and allocation of capital expenditures and application of the optimal drilling and completion techniques to efficiently develop our resource base as evidenced by our operational flexibility executed in 2021 and years passed.

Competition

The oil and natural gas industry is a highly competitive environment. We compete with both major integrated and other independent oil and natural gas companies in all aspects of our business including exploring, developing and operating our properties as well as transporting and marketing our production. Competitive conditions may be affected by future legislation and regulations as the United States develops new energy and climate-related policies. In addition, some of our competitors may have a competitive advantage when responding to factors that affect the supply and demand for oil and natural gas production, such as price fluctuations (including basis differentials), domestic and foreign political conditions, weather conditions, the proximity and capacity of natural gas pipelines and other transportation facilities and overall economic conditions. We also face indirect competition from alternative energy sources. Our ability to acquire additional prospects and to find and develop reserves in the future will depend on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment.

 

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Transportation

During the initial development of our fields, we consider all gathering and delivery infrastructure options in the areas of our production. The majority of our oil production is sold at the lease as it enters third-party gathering pipelines. The purchaser then transports the oil by pipeline or truck to a tank farm, another pipeline or a refinery. Our natural gas is either transported by gathering lines from the wellhead to a central delivery point and is then gathered by third-party lines to a gas processing facility or gathered by a third-party directly from the wellhead.

Regulation of the Oil and Natural Gas Industry

Our operations are subject to extensive federal, state and local laws and regulations. All of the jurisdictions in which we own or operate producing properties have statutory provisions regulating the development and production of oil and natural gas, including, but not limited to, provisions related to permits for the drilling of wells, bonding requirements to drill or operate wells, the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, sourcing and disposal of water used in the drilling and completion process, and the abandonment of wells. Our operations are also subject to various conservation laws and regulations including, but not limited to, the regulation of the size of drilling and spacing units or proration units, the number of wells which may be drilled in an area, and the unitization or pooling of crude oil or natural gas wells, as well as regulations that generally prohibit the venting or flaring of natural gas and impose certain requirements regarding the ratability or fair apportionment of production from fields and individual wells.

Failure to comply with applicable laws and regulations can result in substantial penalties. The regulatory burden on the industry increases the cost of doing business and affects profitability. Although we believe we are in substantial compliance with all applicable laws and regulations, such laws and regulations are frequently amended or reinterpreted. Therefore, we are unable to predict the future costs or impact of compliance. Additional proposals and proceedings affecting the oil and natural gas industry are regularly considered by Congress, the states, regulatory authorities, including FERC, and the courts. We cannot predict when or whether any such proposals may become effective.

We believe we are in substantial compliance with currently applicable laws and regulations and that continued substantial compliance with existing requirements will not have a material adverse effect on our financial position, cash flows or results of operations. However, current regulatory requirements may change, currently unforeseen environmental incidents may occur or past non-compliance with environmental laws or regulations may be discovered. In addition, governmental, scientific, and public concern over the threat of climate change arising from greenhouse gas (“GHG”) emissions has resulted in increasing political and regulatory risks in the United States, including climate change related pledges made by certain candidates elected to public office. President Biden has issued several executive orders focused on addressing climate change since taking office last year, including items that may impact the costs to produce, or demand for, oil and natural gas. Additionally, in November 2021, the Biden Administration released “The Long-Term Strategy of the United States: Pathways to Net-Zero Greenhouse Gas Emissions by 2050,” which establishes a roadmap to net zero emissions in the United States by 2050 through, among other things, improving energy efficiency; decarbonizing energy sources via electricity, hydrogen, and sustainable biofuels; and reducing non-carbon dioxide GHG emissions, such as methane and nitrous oxide. The Biden Administration is also considering revisions to the leasing and permitting programs for oil and natural gas development on federal lands.

For further information about the extensive federal, state and local laws and regulations we are subject to in the Oil and Natural Gas Industry, please review our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, incorporated by reference herein. See “Where You Can Find Additional Information; Incorporation of Certain Documents by Reference.”

 

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Human Capital Resources

We aim to attract and retain top-tier talent in the oil and gas sector and empower our employees to be innovators in our industry. As of December 31, 2021, we had 147 full-time employees. In addition, we hire independent contractors on an as needed basis but have no collective bargaining or employment agreements with our employees.

We believe that our employees give us a sustainable competitive advantage, and we understand the need to attract, retain and train the best team possible. We provide fair and competitive wages to assist in retention of our top talent, and our compensation programs are integrated with our overall business strategies to incentivize performance and maximize shareholder returns. In addition, we conduct a gender and ethnic pay analysis at least annually to ensure that we are adequately and fairly compensating all employees based on their experience and performance. We offer a variety of programs that are designed to retain our employees and also provide opportunities to grow their professional careers while continuing to deliver value to Centennial. Additionally, we maintain a comprehensive suite of benefits that provide our employees with various options including retirement, health and wellness, and life and disability plans.

We are committed to a diverse workforce because we believe employees with different backgrounds, experiences, interests and skillsets drive superior results. In terms of gender and racial distribution, approximately 37% of our employees identify as female and approximately 21% of our employees identify as non-white. We plan to continue to recruit and develop a diverse workforce to ensure that we remain an employer of choice delivering top-tier results.

We strive to promote a safe and healthy working environment with a focus on protecting our employees, contractors, the public and the environment in the communities in which we conduct our business. We provide frequent trainings and monthly safety meetings for all field employees and have excelled in health, safety and environmental performance maintaining zero employee recordable incidents due to illnesses or injuries at the workplace.

Offices

Our principal executive offices are located at 1001 17th Street, Suite 1800, Denver, Colorado 80202, and our telephone number is (720) 499-1400. We also have office space in Midland, Texas; Pecos, Texas; and Eunice, New Mexico.

Available Information

Our internet website address is www.cdevinc.com. We routinely post important information for investors on our website. Within our website’s investor relations section, we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed with or furnished to the SEC under applicable securities laws. These materials are made available as soon as reasonably practical after we electronically file such materials with or furnish such materials to the SEC. Except for our filings with the SEC that are incorporated by reference into this proxy statement, the information on or accessible through our website is not a part of this proxy statement. For further information about Centennial, please review our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and subsequent Quarterly Reports on Form 10-Q, incorporated by reference herein. See “Where You Can Find Additional Information; Incorporation of Certain Documents by Reference.”

 

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INFORMATION ABOUT COLGATE

Overview

Colgate is an independent oil and natural gas company headquartered in Midland, Texas focused on generating robust equity returns through the responsible acquisition, optimization and development of oil and liquids-rich natural gas assets. Colgate’s operations are focused in the core of the Delaware Basin. Colgate’s assets are concentrated in Reeves, Ward and Eddy Counties, consisting of approximately 102,000 net leasehold acres and 25,000 net royalty acres as of March 31, 2022. In the first quarter of 2022, Colgate produced an average of approximately 60,000 net Boe/d, over 98% of which came from wells operated by Colgate.

Colgate’s Acreage

Colgate owns approximately 102,000 net leasehold acres and 25,000 net royalty acres in the Delaware Basin as of March 31, 2022. Colgate’s mineral and royalty interests, which are largely in the footprint of its leasehold position, bring its weighted average net revenue interest in relation to its working interest to 78%. The majority of Colgate’s acreage is located on private land in Texas, with 31% of its acreage in New Mexico and 22% of its acreage on federal lands. Approximately 95% of Colgate’s net acreage is held by production, enabling Colgate to focus on its highest return projects. Colgate operates 91% of its net acreage.

Colgate classifies its assets and operations into Colgate’s operating areas: Riverbend, Pacific Theater and East in Texas and Parkway in New Mexico. The following table sets forth Colgate’s net leasehold acreage and net royalty acreage by operating area as of March 31, 2022.

 

     Net Leasehold
Acreage
     Net Royalty
Acreage (NRA)
 

Operating Area

     

East

     23,449        4,488  

Pacific Theater

     25,633        1,668  

Riverbend

     17,524        1,696  

Other

     3,951        1,070  
  

 

 

    

 

 

 

Total Texas

     70,557        8,922  

Parkway

     27,687        13,972  

Other

     3,949        2,908  
  

 

 

    

 

 

 

Total New Mexico

     31,636        16,880  

Total

     102,193        25,802  
  

 

 

    

 

 

 

Colgate’s Infrastructure

Colgate’s current and future development program is supported by a broad portfolio of Colgate-owned infrastructure, including approximately 145 miles of gathering pipelines, over 10,000 gross surface acres, 75 freshwater wells with over 525,000 barrels per day of water production capacity and over 6,000,000 barrels of water storage assets in service.

Colgate’s Reserves

Summary of Oil and Gas Reserves

The following tables summarize Colgate’s estimated oil, natural gas and NGL reserves on a historical basis as of December 31, 2021. These estimates are based on an SEC pricing case prepared by Colgate’s independent reservoir engineers, Netherland, Sewell, & Associates, Inc (NSAI). The report was prepared in accordance with current SEC rules and regulations regarding reserve reporting. Prices were adjusted by lease for quality, energy content, transportation fees and market differentials.

 

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As of December 31, 2021, NSAI had identified 990 total gross drilling locations and of those total locations, 179 gross drilling locations associated with Colgate’s proved reserves, 388 gross drilling locations associated with Colgate’s probable reserves and 423 gross drilling locations associated with Colgate’s possible reserves as of December 31, 2021. The following tables provide information regarding Colgate’s SEC reserves as of December 31, 2021. This information is based on evaluations prepared by Colgate’s independent reservoir engineers, NSAI. All of Colgate’s proved, probable and possible reserves are located in the United States.

Summary of Reserves as of December 31, 2021 Based on SEC Pricing

The following table provides Colgate’s historical reserves, PV- 10 and Standardized Measure as of December 31, 2021, which such reserve estimates were prepared in accordance with the SEC rules regarding reserve reporting currently in effect, including the use of an average price, calculated as prices equal to the 12-month unweighted arithmetic average of the first day of the month prices for each of the preceding 12 months as adjusted for location and quality differentials, unless prices are defined by contractual arrangements, excluding escalations based on future conditions.

 

     As of
December 31,
2021 (1)
     Colgate
Historical
 

Proved Developed:

  

Oil (MBbls)

     62,906  

Natural gas (MMcf)

     262,080  

Natural gas liquid (MBbls)

     31,836  

Oil equivalent (MBoe) (5)

     138,422  

Proved Undeveloped:

  

Oil (MBbls)

     61,296  

Natural gas (MMcf)

     167,322  

Natural gas liquid (MBbls)

     21,579  

Oil equivalent (MBoe) (5)

     110,762  

Total Proved:

  

Oil (MBbls)

     124,202  

Natural gas (MMcf)

     429,402  

Natural gas liquid (MBbls)

     53,415  

Oil equivalent (MBoe) (5)

     249,184  

Standardized Measure (in thousands) (2)

   $ 3,030,597  

PV-10 (in thousands) (2)

   $ 3,055,138  

Probable (3)(4):

  

Oil (MBbls)

     107,010  

Natural gas (MMcf)

     292,680  

Natural gas liquid (MBbls)

     37,502  

Oil equivalent (MBoe) (5)

     193,293  

Possible (3)(4):

  

Oil (MBbls)

     132,530  

Natural gas (MMcf)

     486,987  

Natural gas liquid (MBbls)

     56,755  

Oil equivalent (MBoe) (5)

     270,449  

 

(1)

Colgate’s historical SEC reserves and PV-10 were calculated using oil and gas price parameters established by current SEC guidelines using average effective prices based on 12-month unweighted arithmetic average of the first day of the month price for each month in the year ended December 31, 2021. These prices were adjusted for differentials on a per-property basis, which may include local basis differential, treating cost, transportation, gas shrinkage, gas heating value and/or crude quality and gravity corrections. All prices are

 

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  held constant throughout the lives of the properties. The following table reflects the historical prices of Oil, Natural Gas and NGL.

 

     As of December 31, 2021
     Colgate Historical  
     Proved      Probable      Possible  

Oil (WTI Cushing price per Bbl)

   $ 65.10      $ 65.08      $ 64.99  

Natural Gas (Henry Hub price per MMBtu)

   $ 2.73      $ 2.76      $ 2.82  

NGL (per Engineering report per Bbl)

   $ 26.90      $ 28.81      $ 28.39  

 

(2)

Colgate’s PV- 10 has historically been computed on the same basis as Colgate’s Standardized Measure of future net cash flows, the most comparable measure under GAAP, but did not include a provision for the Texas gross margin tax. Calculation of PV-10 does not give effect to derivative transactions. PV-10 is not a financial measure calculated or presented in accordance with GAAP and generally differs from Standardized Measure, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. Neither PV-10 nor Standardized Measure represents an estimate of the fair market value of Colgate’s oil and natural gas properties. Colgate and others in the industry use PV-10 as a measure to compare the relative size and value of proved reserves held by companies without regard to the specific tax characteristics of such entities. Moreover, GAAP does not provide a measure of estimated future net cash flows for reserves other than proved reserves. Nonetheless, Colgate believe that PV-10 estimates for reserve categories other than proved present useful information for investors about the future net cash flows of its reserves in the absence of a comparable GAAP measure such as Standardized Measure. Because of this, PV-10 can be used within the industry and by creditors and securities analysts to evaluate estimated net cash flows from proved reserves on a more comparable basis.

The following table presents a reconciliation of Colgate’s historical PV- 10 the GAAP financial measure of Standardized Measure.

 

     SEC Pricing  
     As of
December 31, 2021
 
     Colgate Historical  

PV-10 of proved reserves (in thousands)

   $ 3,055,138  

Present value of future income taxes discounted at 10%

   $ (24,541

Standardized Measure

   $ 3,030,597  

 

(3)

Sustained lower prices for oil and natural gas may cause Colgate to forecast less capital to be available for development of its PUD, probable and possible reserves, which may cause it to decrease the amount of its PUD, probable and possible reserves it expects to develop within the allowed time frame. In addition, lower oil and natural gas prices may cause Colgate’s PUD, probable and possible reserves to become uneconomic to develop, which would cause it to remove them from their respective reserve category. All of Colgate’s estimated probable and possible reserves are classified as undeveloped.

(4)

Estimates of probable and possible reserves, respectively, and the respective future cash flows related to such estimates, are inherently imprecise and are more uncertain than proved reserves, and the future cash flows related to such estimates. Estimates of probable and possible reserves have not been adjusted for risk due to uncertainty, and therefore may not be comparable and should not be summed either together or with estimates of proved reserves.

(5)

Calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Boe. This calculation is an energy content correlation and does not reflect a value or price relationship between the commodities.

Production, Price and Cost Data

Oil, natural gas and NGL are commodities. The price that Colgate receives for the oil, natural gas and NGL produced is largely a function of market supply and demand. Demand for oil, natural gas and NGL in the United

 

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States has increased dramatically during this decade. Demand is affected by general economic conditions, weather and other seasonal conditions, including hurricanes and tropical storms. Over or under supply of oil, natural gas or NGL can result in substantial price volatility. Historically, commodity prices have been volatile and Colgate expects that volatility to continue in the future. A substantial or extended decline in oil, natural gas or NGL prices or poor drilling results could have a material adverse effect on Colgate’s financial position, results of operations, cash flows, quantities of oil, natural gas and NGL reserves that may be economically produced.

The following table summarizes Colgate’s oil, natural gas and NGL production and historical operating data for the periods presented.

 

     Colgate Historical  
     Years Ended
December 31,
 
     2021      2020  

Net Production Volumes:

     

Oil (MBbl)

     7,403        4,118  

Natural gas (MMcf)

     26,011        10,574  

NGLs (MBbl)

     3,181        1,366  

Total (MBoe)

     14,919        7,246  

Average daily production (Boe per day)

     40,874        19,798  

Average Wellhead Realized Prices (before giving effect to derivatives):

     

Oil ($/Bbl)

   $ 68.67      $ 38.36  

Natural Gas ($/Mcf)

     3.54        0.87  

NGLs ($/Bbl)

     30.56        9.13  

Average Wellhead Realized Prices (after giving effect to derivatives):

     

Oil ($/Bbl)

   $ 53.80      $ 58.97  

Natural Gas ($/Mcf)

     2.56        1.16  

NGLs ($/Bbl)

     27.14        9.13  

Operating costs and expenses (per Boe):

     

Lease operating expense

   $ 5.37      $ 4.22  

Production and ad valorem taxes

     2.70        1.33  

Depreciation, depletion, amortization and accretion

     9.01        9.45  

General and administrative expenses

     1.03        1.35  

Operations

Marketing and Customers

All of Colgate’s horizontally-produced oil, gas and produced water from wells it has drilled is connected to its production facilities via pipeline. A majority of Colgate’s oil production as of December 31, 2021 is transported pursuant to a dedication and connection agreement with affiliates of Oryx Midstream Services, LLC (“Oryx”), the largest private midstream crude oil logistics provider in the Delaware Basin. Pursuant to this agreement, which extends through 2035 and contains no minimum volume commitments, Oryx agreed to provide firm service to Crane or Midland at Colgate’s election. Pursuant to this agreement, Colgate agreed to dedicate a significant majority of its current and future acreage related to oil production in Reeves and Ward Counties to Oryx, so long as such production is not otherwise subject to a pre-existing dedication (in which case the acreage is dedicated to Oryx upon such prior dedication expiring).

Colgate has an agreement with Enterprise Products Partners pursuant to which Enterprise Products Partners has agreed to purchase all of Colgate’s crude oil transported by Oryx to Enterprise Products Partner’s Midland, Texas terminal. This agreement terminates in December 2023, subject to automatic renewal if neither party provides proper notice thereunder.

 

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A majority of Colgate’s gas production as of December 31, 2021 is gathered and processed pursuant to a gas gathering and processing agreement with EagleClaw Midstream Ventures, LLC (“EagleClaw”), the largest private midstream operator in the Delaware Basin. Colgate’s agreement with EagleClaw provides for gathering, compression, transportation and processing of Colgate’s natural gas production related to Colgate’s current and future acreage in Reeves County and certain of Colgate’s current acreage in Ward County. Pursuant to this agreement, which extends through 2033 and contains no minimum volume commitments, EagleClaw agreed to provide firm service for Colgate’s natural gas production. Pursuant to such agreement, Colgate agreed to dedicate Colgate’s Reeves and southeastern Ward County acreage related to natural gas production to EagleClaw, so long as such production is not otherwise subject to a pre-existing dedication (in which case the acreage is dedicated to EagleClaw upon such prior dedication expiring).

Production from Colgate’s natural gas properties is marketed using methods that are consistent with industry practices. Sales prices for natural gas production, including natural gas with recoverable NGL, are negotiated based on factors normally considered in the industry, such as an index or spot price, price regulations, distance from the well to the pipeline, commodity quality and prevailing supply and demand conditions. In areas where there is no practical or commercial access to pipelines, oil is transported to storage facilities by trucks. Colgate’s marketing of oil and natural gas can be affected by factors beyond Colgate’s control, the effects of which cannot be accurately predicted.

Infrastructure

To enhance Colgate’s operational efficiency and control and optimize the long-term development economics of its acreage position, Colgate has proactively built infrastructure and acquired surface rights across its position. Colgate’s current and future development program is supported by a broad portfolio of infrastructure, including the following as of March 31, 2022:

 

   

Gathering Pipelines: Approximately 145 miles of gathering pipelines located in Texas that support crude oil, gas and produced water gathering;

 

   

Surface Acreage: Over 10,330 gross strategic surface acres acquired to support its operations including water supply and disposal;

 

   

Water Supply: 75 freshwater wells with over 525,000 barrels per day of water production capacity with significant additional capacity available via third party suppliers; and

 

   

Water Storage: Approximately 6,195,000 barrels of water storage in service and additional third-party options in close proximity.

The vast majority of Colgate’s operated wells are horizontal development, which allows it to utilize more recent facilities and equipment consistent with Colgate’s approach to operating in a safe and sustainable manner. In addition to the Colgate-owned assets, ample third-party infrastructure is in place that can service Colgate’s operations. Over the past five years, the Delaware Basin has seen a large increase of piped infrastructure as midstream providers have installed long-term solutions to accommodate increased development. Colgate long-term contracts in place with some of the largest midstream operators in the Delaware Basin which provides takeaway assurance, facilitates development, helps reduce its operational footprint and increases its netbacks. Colgate has benefited from this expansion which ensures takeaway assurance for its operations with over 99% of its hydrocarbon and produced water production being on pipe as of March 31, 2022.

Competition

The oil and natural gas industry is highly competitive, particularly for prospective undeveloped leases and purchases of proved reserves. There is also competition for rigs and related equipment used to drill for and produce oil, natural gas and NGL, however, to a lesser extent in the current market environment. Colgate’s competitive position also is highly dependent on its ability to recruit and retain geological, geophysical and

 

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engineering expertise. Colgate competes for prospects, proved reserves, oil-field services and qualified oil, natural gas and NGL professionals with major and diversified energy companies and other independent operators that have larger financial, human, and technological resources than Colgate. Colgate competes with integrated, independent and other energy companies for the sale and transportation of its oil, natural gas and NGL to marketing companies and end users. The oil, natural gas and NGL industry competes with other energy industries that supply fuel and power to industrial, commercial and residential consumers. Many of these competitors have greater financial and human resources than Colgate. The effect of these competitive factors cannot be predicted.

Human Capital Resources

As of March 31, 2022, Colgate had 69 full-time employees at its headquarters in Midland, Texas, in addition to numerous contractors in the field. Colgate is not a party to any collective bargaining agreements, and has not experienced any strikes or work stoppages. Colgate believes that employee relations are satisfactory.

Colgate is committed to a diverse workforce because it believes employees with different backgrounds, experiences, interests and skillsets drive superior results. In terms of gender and racial distribution, as of March 31, 2022, approximately 37% of Colgate’s employees identified as female and approximately 15% of Colgate’s employees identified as non-white. Colgate plans to continue to recruit and develop a diverse workforce to ensure that it remains an employer of choice delivering top-tier results.

Employee Health and Safety

Safety is important to Colgate and begins with the protection and safety of its employees, contractors and communities where it operates. Colgate values people above all else and remains committed to making safety and health Colgate’s top priority. Colgate continually seeks to maintain and deepen its safety culture by providing a safe working environment that encourages active employee engagement, including implementing safety programs to achieve improvements in its safety culture.

Diversity and Inclusion

Colgate is committed to fostering a work environment in which all employees treat each other with dignity and respect. This commitment extends to providing equal employment and advancement opportunities based on merit and experience. Colgate continually strives to attract a diverse workforce by identifying potential candidates to advance and strengthen Colgate’s human capital management program.

Colgate’s employee demographic profile allows it to promote inclusion of thought, skill, knowledge, and culture across its operations to achieve its social obligations and commitments.

Talent Development and Retention

Colgate values and provides opportunities for cross training and increased responsibilities, including leadership learning. These efforts allow Colgate to recruit from within its organization for future vocational and occupational opportunities. Colgate’s management promotes formal and informal learning and development throughout the organization. Colgate offers developmental programs focused on building the skills of its employees and to help advance employee careers, knowledge, and skillsets through training and related programs.

Environmental Matters and Regulation

Colgate’s operations are subject to stringent and complex federal, state and local laws and regulations that govern the protection of the environment, as well as the discharge of materials into the environment. These laws and regulations may, among other things:

 

   

require the acquisition of various permits before drilling, workover or well stimulation commences;

 

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require the installation of pollution control equipment in connection with operations;

 

   

place restrictions or regulations upon the use of the material based on Colgate’s operations;

 

   

restrict the types, quantities and concentrations of various substances that can be released into the environment or used in connection with drilling, production and transportation activities;

 

   

limit or prohibit drilling activities on lands lying within wilderness, wetlands and other protected areas;

 

   

require remedial measures to mitigate pollution from former and ongoing operations, such as site restoration, pit closure and plugging of abandoned wells; and

 

   

require the expenditure of significant amounts in connection with worker health and safety.

These laws, rules and regulations may also restrict the rate of oil and natural gas production below the rate that would otherwise be possible. For example, the TRRC regulates the production of oil and gas in the state of Texas. In April 2020, the TRRC held a hearing regarding potential production cuts for producers in Texas in light of the global decline in oil prices. While the TRRC ultimately declined to institute mandatory production cuts, the agency may choose to revisit the issue if market weakness persists. Any such production limitations could force producers to shut in wells and incur greater costs to bring the associated production back online. Cost increases necessary to bring wells back online may be significant enough that such wells would become uneconomic to produce at low commodity price levels and plugging and abandonment may become necessary, which costs may be significant. The regulatory burden on the oil and natural gas industry increases the cost of doing business in the industry and consequently affects profitability. Additionally, Congress and federal, state and local agencies frequently revise environmental laws and regulations, and such changes could result in increased costs for environmental compliance, such as waste handling, permitting, or cleanup for the oil and natural gas industry and could have a significant impact on Colgate’s operating costs. In general, the oil and natural gas industry recently has been the subject of increased legislative and regulatory scrutiny with respect to environmental matters.

Colgate has not incurred any material capital expenditures for remediation, pollution control activities, or other environmental issues in the preceding two years.

 

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COLGATE MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For purposes of this section, references to “we,” “our,” “us,” the “Company” or “Colgate” refer to Colgate Energy Partners III, LLC and its consolidated subsidiaries. You should read the following discussion of our historical performance, financial condition and future prospects in conjunction with our audited financial statements as of and for the years ended December 31, 2021 and 2020, and the notes thereto, as well as our unaudited interim financial statements as of and for the three months ended March 31, 2022 and 2021 included elsewhere in this Proxy Statement. The information provided below supplements, but does not form part of our consolidated financial statements. This discussion contains forward looking statements that are based on the views and beliefs of our management, as well as assumptions and estimates made by our management. Actual results could differ materially from such forward looking statements as a result of various risk factors, including those that may not be in the control of management. For further information on items that could impact our future operating performance or financial condition, see the section entitled “Risk Factors—Risks Related to Colgate’s Business” elsewhere in this Proxy Statement.

Overview of Colgate

We are an independent oil and natural gas company headquartered in Midland, Texas focused on generating robust equity returns through the responsible acquisition, optimization and development of oil and liquids-rich natural gas assets. Our operations are focused in the core of the Delaware Basin, which we believe has the lowest break-even pricing of any oil and gas producing basin in North America. Our assets are concentrated in Reeves, Ward and Eddy Counties, consisting of approximately 102,000 net leasehold acres and 25,000 net royalty acres as of March 31, 2022. In the first quarter of 2022, we produced an average of approximately 60,000 net Boe/d, over 98% of which came from wells operated by Colgate.

As significant owners of the company, management has sought to build a business that can generate substantial Free Cash Flow, return capital to our investors and generate outsized equity returns in nearly any commodity price environment. We have grown the business steadily through thoughtful acquisitions, strategic mergers and the disciplined development of our assets. We believe we have a proven track record of responsible capital stewardship and risk mitigation, with a focus on meaningful return of capital to our investors in the form of cash dividends. Every investment we make—whether that be acquiring additional assets or the development of our existing portfolio—is made with the goal of increasing the amount of capital we can return to our investors.

Sources of Our Revenues

Our main source of revenues is the sale of oil and natural gas production. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold, production mix or commodity prices. We also receive revenues from operating various subsidiary service companies. The following table presents the breakdown of our revenues for the following periods:

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 
     2021     2020     2022     2021  

Crude oil sales

     73     87     73     76

Natural gas sales

     13     5     12     14

Natural gas liquid sales

     14     7     15     10

Other

     —       1     —       —  

Oil and natural gas prices have historically been volatile. Lower commodity prices may not only decrease our revenues, but also potentially the amount of oil and natural gas that we can produce economically. Lower oil and

 

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natural gas prices may also result in a reduction in the borrowing base under our revolving credit facility, which may be redetermined periodically.

The following table presents historical production volumes for our properties for the periods indicated:

 

     Years Ended
December 31,
     Three Months Ended
March 31,
 
     2021      2020      2022      2021  

Oil (MBbl)

     7,403        4,118        2,660        1,379  

Natural gas (MMcf)

     26,011        10,574        10,355