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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                   
Commission file number 001-37697

CENTENNIAL RESOURCE DEVELOPMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
47-5381253
(State of Incorporation)
 
(I.R.S. Employer Identification Number)
 
 
 
 
 
 
1001 Seventeenth Street,
Suite 1800,
Denver,
Colorado
 
80202
(Address of Principal Executive Offices)
 
(Zip Code)
(720) 499-1400
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A Common Stock, par value $0.0001 per share
 
CDEV
 
The NASDAQ Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer 
 
Non-accelerated filer

 
Smaller reporting company 
 
Emerging growth company
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of October 31, 2019, there were 275,600,503 shares of Class A Common Stock, par value $0.0001 per share and 1,143,039 shares of Class C Common Stock, par value $0.0001 per share, outstanding.
 



TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

GLOSSARY OF OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of certain terms used in this Quarterly Report on Form 10-Q, which are commonly used in the oil and natural gas industry:

Bbl. One stock tank barrel of 42 U.S. gallons liquid volume used herein in reference to crude oil, condensate or NGLs.

Bbl/d. One Bbl per day.

Boe. One barrel of oil equivalent, calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Bbl of oil. This is an energy content correlation and does not reflect a value or price relationship between the commodities.

Boe/d. One Boe per day.

Btu. One British thermal unit, which is the quantity of heat required to raise the temperature of a one-pound mass of water by one-degree Fahrenheit.

Completion. The process of preparing an oil and gas wellbore for production through the installation of permanent production equipment, as well as perforation and fracture stimulation to optimize production.

Development project. The means by which petroleum resources are brought to the status of economically producible. As examples, the development of a single reservoir or field, an incremental development in a producing field or the integrated development of a group of several fields and associated facilities with a common ownership may constitute a development project.
Development well. A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
Differential. An adjustment to the price of oil or natural gas from an established spot market price to reflect differences in the quality and/or location of oil or natural gas.
Exploratory well. A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir.
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on, or related to, the same individual geological structural feature or stratigraphic condition. The field name refers to the surface area, although it may refer to both the surface and the underground productive formations.

Flush production. First yield from a flowing oil well during its most productive period after it is first completed and put on line.

Formation. A layer of rock which has distinct characteristics that differs from nearby rock.

Horizontal drilling. A drilling technique used in certain formations where a well is drilled vertically to a certain depth and then drilled at a right angle within a specified interval.

LIBOR. London Interbank Offered Rate.

MBbl. One thousand barrels of crude oil, condensate or NGLs.

MBoe. One thousand Boe.

Mcf. One thousand cubic feet of natural gas.

Mcf/d. One Mcf per day.

MMBtu. One million British thermal units.

MMcf. One million cubic feet of natural gas.


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NGL. Natural gas liquids. These are naturally occurring substances found in natural gas, including ethane, butane, isobutane, propane and natural gasoline, that can be collectively removed from produced natural gas, separated into these substances and sold.

NYMEX. The New York Mercantile Exchange.

Operator. The individual or company responsible for the development and/or production of an oil or natural gas well or lease.

Proved developed reserves. Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well.

Proved reserves. The estimated quantities of oil, NGLs and natural gas that geological and engineering data demonstrate with reasonable certainty to be commercially recoverable in future years from known reservoirs under existing economic and operating conditions.

Proved undeveloped reserves or PUD. Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion or recompletion. 

Realized price. The cash market price less differentials.

Recompletion. The completion for production of an existing wellbore in another formation from that which the well has been previously completed.

Reserves. Estimated remaining quantities of oil and natural gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and natural gas or related substances to market and all permits and financing required to implement the project.

Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

Royalty interest. An interest in an oil or gas property entitling the owner to shares of the production free of costs of exploration, development and production operations.

Spot market price. The cash market price without reduction for expected quality, transportation and demand adjustments.

Wellbore. The hole drilled by a drill bit that is equipped for oil and natural gas production once the well has been completed. Also called well or borehole.

Working interest. The interest in an oil and gas property (typically a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and to a share of production, subject to all royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.

Workover. Operations on a producing well to restore or increase production.

WTI. West Texas Intermediate is a grade of crude oil used as a benchmark in oil pricing.

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GLOSSARY OF CERTAIN OTHER TERMS
The following are definitions of certain other terms that are used in this Quarterly Report on Form 10-Q:
Business Combination. The acquisition of approximately 89% of the outstanding membership interests in CRP from the Centennial Contributors, which closed on October 11, 2016, and the other transactions contemplated by the Contribution Agreement.
Celero. Celero Energy Company, LP, a Delaware limited partnership.
Centennial Contributors. CRD, NGP Follow-On and Celero, collectively.
The Company, we, our or us. (i) Centennial Resource Development, Inc. and its consolidated subsidiaries including CRP, following the closing of the Business Combination and (ii) Silver Run Acquisition Corporation prior to the closing of the Business Combination.
Class A Common Stock. Our Class A Common Stock, par value $0.0001 per share.
Class C Common Stock. Our Class C Common Stock, par value $0.0001 per share, which was issued to the Centennial Contributors in connection with the Business Combination.
Contribution Agreement. The Contribution Agreement, dated as of July 6, 2016, among the Centennial Contributors, CRP and NewCo, as amended by Amendment No. 1 thereto, dated as of July 29, 2016, and the Joinder Agreement, dated as of October 7, 2016, by the Company.
CRD. Centennial Resource Development, LLC, a Delaware limited liability company, which was dissolved on June 15, 2018.
CRP. Centennial Resource Production, LLC, a Delaware limited liability company.
CRP Common Units. The units representing common membership interests in CRP.
NewCo. New Centennial, LLC, a Delaware limited liability company controlled by affiliates of Riverstone.
NGP Follow-On. NGP Centennial Follow-On LLC, a Delaware limited liability company.
Riverstone. Riverstone Investment Group LLC and its affiliates, including Silver Run Sponsor, LLC, a Delaware limited liability company, collectively.


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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Quarterly Report”) 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”). All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “goal,” “plan,” “target” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on management’s current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Annual Report”) and the risk factors and other cautionary statements contained in our other filings with the United States Securities and Exchange Commission (“SEC”).
Forward-looking statements may include statements about:
our business strategy and future drilling plans; 
our reserves and our ability to replace the reserves we produce through drilling and property acquisitions; 
our drilling prospects, inventories, projects and programs; 
our financial strategy, liquidity and capital required for our development program; 
our realized oil, natural gas and NGL prices; 
the timing and amount of our future production of oil, natural gas and NGLs; 
our hedging strategy and results; 
our competition and government regulations; 
our ability to obtain permits and governmental approvals; 
our pending legal or environmental matters; 
the marketing and transportation of our oil, natural gas and NGLs; 
our leasehold or business acquisitions; 
cost of developing our properties;
our anticipated rate of return;
general economic conditions; 
credit markets; 
uncertainty regarding our future operating results; and 
our plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.
You should not place undue reliance on these forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including but not limited to those risks described under “Item 1A. Risk Factors” in our 2018 Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.
Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil and natural gas that are ultimately recovered.
Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Quarterly Report are reasonable, we can give no assurance that these plans, intentions or expectations will be

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achieved or occur, and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.
All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
All forward-looking statements, expressed or implied, are made only as of the date of this Quarterly Report. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report.



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PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
CENTENNIAL RESOURCE DEVELOPMENT, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share and per share amounts)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
10,933

 
$
18,157

Accounts receivable, net
141,312

 
100,623

Derivative instruments

 
1,632

Prepaid and other current assets
8,931

 
9,777

Total current assets
161,176

 
130,189

Property and Equipment
 
 
 
Oil and natural gas properties, successful efforts method
 
 
 
Unproved properties
1,515,458

 
1,680,065

Proved properties
3,704,555

 
2,895,280

Accumulated depreciation, depletion and amortization
(809,979
)
 
(496,900)

Total oil and natural gas properties, net
4,410,034

 
4,078,445

Other property and equipment, net
14,799

 
8,837

Total property and equipment, net
4,424,833

 
4,087,282

Noncurrent assets
 
 
 
Operating lease right-of-use assets
17,182

 

Other noncurrent assets
42,940

 
42,550

TOTAL ASSETS
$
4,646,131

 
$
4,260,021

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued expenses
$
267,962

 
$
240,575

Derivative instruments
4,433

 
6,051

Operating lease liabilities
14,151

 

Other current liabilities
942

 
1,090

Total current liabilities
287,488

 
247,716

Noncurrent liabilities
 
 
 
Long-term debt, net
1,001,867

 
691,630

Asset retirement obligations
14,629

 
13,895

Deferred income taxes
84,471

 
62,167

Operating lease liabilities
3,862

 

Other long-term liabilities

 
744

Total liabilities
1,392,317

 
1,016,152

Commitments and contingencies (Note 11)


 


Shareholders’ equity
 
 
 
Preferred stock, $0.0001 par value, 1,000,000 shares authorized:
 
 
 
Series A: 1 share issued and outstanding

 

Common stock, $0.0001 par value, 620,000,000 shares authorized:
 
 
 
Class A: 280,443,894 shares issued and 275,556,804 shares outstanding at September 30, 2019 and 265,859,273 shares issued and 264,323,328 shares outstanding at December 31, 2018
28

 
27

Class C (Convertible): 1,143,039 shares issued and outstanding at September 30, 2019 and 12,003,183 shares issued and outstanding at December 31, 2018

 
1

Additional paid-in capital
2,967,149

 
2,833,611

Retained earnings
272,718

 
266,538

Total shareholders’ equity
3,239,895

 
3,100,177

Noncontrolling interest
13,919

 
143,692

Total equity
3,253,814

 
3,243,869

TOTAL LIABILITIES AND EQUITY
$
4,646,131

 
$
4,260,021


The accompanying notes are an integral part of these unaudited consolidated financial statements.

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CENTENNIAL RESOURCE DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except per share data)

For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,

2019

2018

2019

2018
Operating revenues











Oil and gas sales
$
229,130


$
234,880


$
687,938


$
668,541

Operating expenses











Lease operating expenses
42,330


23,706


107,077


59,164

Severance and ad valorem taxes
12,213


14,410


45,519


42,791

Gathering, processing and transportation expenses
20,853


16,090


52,120


45,214

Depreciation, depletion and amortization
112,720


83,423


321,392


224,379

Impairment and abandonment expense
6,745


8,612


42,427


10,396

Exploration expense
2,869


2,712


9,246


8,026

General and administrative expenses
20,036


16,561


56,589


44,667

Total operating expenses
217,766


165,514


634,370


434,637

Net gain (loss) on sale of long-lived assets
(22
)

52


(15
)

(74
)
Income from operations
11,342


69,418


53,553


233,830













Other income (expense)











Interest expense
(15,246
)

(6,534
)

(39,843
)

(18,138
)
Net gain (loss) on derivative instruments
1,522


(9,571
)

(2,221
)

14,969

Other income (expense)
62


13


321


(4
)
Total other income (expense)
(13,662
)

(16,092
)

(41,743
)

(3,173
)












Income (loss) before income taxes
(2,320
)

53,326


11,810


230,657

Income tax expense
(1,393
)

(11,652
)

(5,058
)

(50,729
)
Net income (loss)
(3,713
)

41,674


6,752


179,928

Less: Net income (loss) attributable to noncontrolling interest
(128
)

2,386


572


11,009

Net income (loss) attributable to Class A Common Stock
$
(3,585
)

$
39,288


$
6,180


$
168,919













Income (loss) per share of Class A Common Stock:











Basic
$
(0.01
)

$
0.15


$
0.02


$
0.64

Diluted
$
(0.01
)

$
0.15


$
0.02


$
0.63

The accompanying notes are an integral part of these unaudited consolidated financial statements.


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CENTENNIAL RESOURCE DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
 
For the Nine Months Ended September 30,
 
2019

2018
Cash flows from operating activities:
 
 
 
Net income
$
6,752

 
$
179,928

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
321,392

 
224,379

Stock-based compensation expense
21,351

 
14,329

Impairment and abandonment expense
42,427

 
10,396

Exploratory dry hole costs

 
395

Deferred tax expense
5,058

 
50,729

Net loss on sale of long-lived assets
15

 
74

Non-cash portion of derivative (gain) loss
14

 
(579
)
Amortization of debt issuance costs and discount
2,070

 
1,258

Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in accounts receivable
(47,771
)
 
(18,327
)
(Increase) decrease in prepaid and other assets
(995
)
 
(52
)
Increase (decrease) in accounts payable and other liabilities
34,562

 
32,165

Net cash provided by operating activities
384,875

 
494,695

Cash flows from investing activities:
 
 
 
Acquisition of oil and natural gas properties
(73,346
)
 
(114,870
)
Drilling and development capital expenditures
(644,945
)
 
(723,100
)
Purchases of other property and equipment
(8,207
)
 
(4,409
)
Proceeds from sales of oil and natural gas properties
28,378

 
147,413

Net cash used in investing activities
(698,120
)
 
(694,966
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings under revolving credit facility
345,000

 
295,000

Repayment of borrowings under revolving credit facility
(525,000
)
 
(155,000
)
Proceeds from issuance of 2027 Senior Notes
496,175

 

Debt issuance costs
(7,200
)
 
(4,217
)
Proceeds from exercise of stock options

 
847

Restricted stock used for tax withholdings
(911
)
 
(1,119
)
Net cash provided by financing activities
308,064

 
135,511

Net decrease in cash, cash equivalents and restricted cash
(5,181
)
 
(64,760
)
Cash, cash equivalents and restricted cash, beginning of period
21,422

 
125,915

Cash, cash equivalents and restricted cash, end of period
$
16,241

 
$
61,155

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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CENTENNIAL RESOURCE DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)
(in thousands)
 
For the Nine Months Ended September 30,
 
2019

2018
Supplemental cash flow information
 
 
 
Cash paid for interest
$
27,985

 
$
15,587

Operating lease liability payments:
 
 
 
Cash used in operating activities
16,808

 

Cash used in investing activities
13,946

 

Supplemental non-cash activity
 
 
 
Accrued capital expenditures included in accounts payable and accrued expenses
$
120,238

 
$
97,844

Asset retirement obligations incurred, including revisions to estimates
1,075

 
1,040

Right-of-use assets obtained in exchange for operating lease liabilities
35,686

 

Reconciliation of cash, cash equivalents and restricted cash presented on the Consolidated Statements of Cash Flows for the periods presented:
 
For the Nine Months Ended September 30,
 
2019
 
2018
Cash and cash equivalents
$
10,933

 
$
58,922

Restricted cash(1)
5,308

 
2,233

Total cash, cash equivalents and restricted cash
$
16,241

 
$
61,155

 
(1) 
Included in Prepaid and other current assets and Other noncurrent assets line items on the Consolidated Balance Sheets.


The accompanying notes are an integral part of these unaudited consolidated financial statements.


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CENTENNIAL RESOURCE DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
(in thousands)


 
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class C
 
Series A
 
Additional Paid-In Capital
 
Retained Earnings
 
Total Shareholder's Equity
 
Non-controlling Interest
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2018
265,859

 
$
27

 
12,003

 
$
1

 

 
$

 
$
2,833,611

 
$
266,538

 
$
3,100,177

 
$
143,692

 
$
3,243,869

Restricted stock issued
436

 

 

 

 

 

 

 

 

 

 

Restricted stock used for tax withholding
(24
)
 

 

 

 

 

 
(291
)
 

 
(291
)
 

 
(291
)
Stock-based compensation

 

 

 

 

 

 
6,483

 

 
6,483

 

 
6,483

Net income (loss)

 

 

 

 

 

 

 
(8,112
)
 
(8,112
)
 
(425
)
 
(8,537
)
Balance at March 31, 2019
266,271

 
$
27

 
12,003

 
$
1

 

 
$

 
$
2,839,803

 
$
258,426

 
$
3,098,257

 
$
143,267

 
$
3,241,524

Restricted stock issued
4

 

 

 

 

 

 

 

 

 

 

Restricted stock forfeited
(16
)
 

 

 

 

 

 

 

 

 

 

Restricted stock used for tax withholding
(4
)
 

 

 

 

 

 
(41
)
 

 
(41
)
 

 
(41
)
Stock-based compensation

 

 

 

 

 

 
6,758

 

 
6,758

 

 
6,758

Net income (loss)

 

 

 

 

 

 

 
17,877

 
17,877

 
1,125

 
19,002

Balance at June 30, 2019
266,255

 
$
27

 
12,003

 
$
1

 

 
$

 
$
2,846,520

 
$
276,303

 
$
3,122,851

 
$
144,392

 
$
3,267,243

Restricted stock issued
3,466

 

 

 

 

 

 

 

 

 

 

Restricted stock forfeited
(30
)
 

 

 

 

 

 

 

 

 

 

Restricted stock used for tax withholding
(107
)
 

 

 

 

 

 
(579
)
 

 
(579
)
 

 
(579
)
Stock-based compensation

 

 

 

 

 

 
8,110

 

 
8,110

 

 
8,110

Conversion of common stock from Class C to Class A, net of tax
10,860

 
1

 
(10,860
)
 
(1
)
 

 

 
113,098

 

 
113,098

 
(130,345
)
 
(17,247
)
Net income (loss)

 

 

 

 

 

 

 
(3,585
)
 
(3,585
)
 
(128
)
 
(3,713
)
Balance at September 30, 2019
280,444

 
$
28

 
1,143

 
$

 

 
$

 
$
2,967,149

 
$
272,718

 
$
3,239,895

 
$
13,919

 
$
3,253,814



The accompanying notes are an integral part of these unaudited consolidated financial statements.







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CENTENNIAL RESOURCE DEVELOPMENT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited) (Continued)
(in thousands)


 
Common Stock
 
Preferred Stock
 
 
 
 
 
 
 
 
 
 
 
Class A
 
Class C
 
Series A
 
Additional Paid-In Capital
 
Retained Earnings
 
Total Shareholder's Equity
 
Non-controlling Interest
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2017
261,338

 
$
26

 
15,661

 
$
2

 

 
$

 
$
2,767,558

 
$
66,639

 
$
2,834,225

 
$
169,747

 
$
3,003,972

Restricted stock issued
199

 

 

 

 

 

 

 

 

 

 

Restricted stock forfeited
(26
)
 

 

 

 

 

 

 

 

 

 

Restricted stock used for tax withholding
(10
)
 

 

 

 

 

 
(192
)
 

 
(192
)
 

 
(192
)
Stock option exercises
10

 

 

 

 

 

 
164

 

 
164

 

 
164

Stock-based compensation

 

 

 

 

 

 
4,333

 

 
4,333

 

 
4,333

Conversion of common stock from Class C to Class A, net of tax
3,347

 
1

 
(3,347
)
 
(1
)
 

 

 
42,188

 

 
42,188

 
(35,519
)
 
6,669

Net income (loss)

 

 

 

 

 

 

 
66,090

 
66,090

 
4,682

 
70,772

Balance at March 31, 2018
264,858

 
$
27

 
12,314

 
$
1

 

 
$

 
$
2,814,051

 
$
132,729

 
$
2,946,808

 
$
138,910

 
$
3,085,718

Restricted stock issued
23

 

 

 

 

 

 

 

 

 

 

Restricted stock forfeited
(17
)
 

 

 

 

 

 

 

 

 

 

Restricted stock used for tax withholding
(4
)
 

 

 

 

 

 
(65
)
 

 
(65
)
 

 
(65
)
Stock option exercises
28

 

 

 

 

 

 
411

 

 
411

 

 
411

Stock-based compensation

 

 

 

 

 

 
4,655

 

 
4,655

 

 
4,655

Net income (loss)

 

 

 

 

 

 

 
63,541

 
63,541

 
3,941

 
67,482

Balance at June 30, 2018
264,888

 
$
27

 
12,314

 
$
1

 

 
$

 
$
2,819,052

 
$
196,270

 
$
3,015,350

 
$
142,851

 
$
3,158,201

Restricted stock issued
697

 

 

 

 

 

 

 

 

 

 

Restricted stock forfeited
(93
)
 

 

 

 

 

 

 

 

 

 

Restricted stock used for tax withholding
(46
)
 

 

 

 

 

 
(862
)
 

 
(862
)
 

 
(862
)
Stock option exercises
14

 

 

 

 

 

 
272

 

 
272

 

 
272

Stock-based compensation

 

 

 

 

 

 
5,341

 

 
5,341

 

 
5,341

Conversion of common stock from Class C to Class A, net of tax
311

 

 
(311
)
 

 

 

 
3,953

 

 
3,953

 
(3,373
)
 
580

Net income (loss)

 

 

 

 

 

 

 
39,288

 
39,288

 
2,386

 
41,674

Balance at September 30, 2018
265,771

 
$
27

 
12,003

 
$
1

 

 
$

 
$
2,827,756

 
$
235,558

 
$
3,063,342

 
$
141,864

 
$
3,205,206


The accompanying notes are an integral part of these unaudited consolidated financial statements.

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CENTENNIAL RESOURCE DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation
Description of Business
Centennial Resource Development, Inc. is an independent oil and natural gas company focused on the development of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin. The Company’s assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin, and its properties consist of large, contiguous acreage blocks primarily in West Texas and New Mexico. Unless otherwise specified or the context otherwise requires, all references in these notes to “Centennial” or the “Company” are to Centennial Resource Development, Inc. and its consolidated subsidiary, Centennial Resource Production, LLC (“CRP”).
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain disclosures normally included in an Annual Report on Form 10-K have been omitted. The consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2018 (the “2018 Annual Report”). Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in the Company’s 2018 Annual Report.
In the opinion of management, all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial results have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year.
The consolidated financial statements include the accounts of the Company and its majority owned subsidiary CRP, and CRP’s wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Noncontrolling interest represents third-party ownership in CRP, and it is presented as a component of equity. See Note 8—Noncontrolling Interest for further discussion of noncontrolling interest.
Use of Estimates
The preparation of the Company’s consolidated financial statements requires the Company’s management to make various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events, and accordingly, actual results could differ from amounts previously established.
The more significant areas requiring the use of assumptions, judgments and estimates include: (i) oil and natural gas reserves; (ii) cash flow estimates used in impairment tests of long-lived assets; (iii) impairment expense of unproved properties; (iv) depreciation, depletion and amortization; (v) asset retirement obligations; (vi) determining fair value and allocating purchase price in connection with business combinations and asset acquisitions; (vii) accrued revenues and related receivables; (viii) accrued liabilities; (ix) valuation of derivatives; and (x) deferred income taxes.
Income Taxes
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to the Company’s year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various state jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information becomes known or as the tax environment changes.


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Table of Contents
CENTENNIAL RESOURCE DEVELOPMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Recently Issued or Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which updates the disclosure requirements for fair value measurements in Accounting Standard Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC Topic 820”). Certain disclosure requirements under ASC Topic 820 were removed, modified or added in order to improve the effectiveness of the fair value note included in the financial statements. This update will be effective for financial statements issued for fiscal years beginning after December 31, 2019, including interim periods within those fiscal years. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until the effective date. The Company is currently assessing the impact of this update on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which created ASC Topic 842, Leases (“ASC Topic 842”), superseding current lease requirements under ASC Topic 840, Leases. Subsequently in 2018, the FASB issued various ASUs which provide a practical expedient for the evaluation of existing land easement agreements, optionality in the adoption transition method, and additional implementation guidance. ASC Topic 842 and its related amendments apply to any entity that enters into a lease, with some specified scope exemptions. Under ASC Topic 842, a lessee should recognize in its consolidated balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset, representing its right to use the underlying asset for the lease term. While there were no major changes to lessor accounting, changes were made to align key aspects with revenue recognition guidance. ASC Topic 842 was effective for public entities for fiscal years, beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.
The standard permits retrospective application using either of the following methodologies: (i) application of the new standard at the earliest presented period or (ii) application of the new standard at the adoption date with a cumulative-effect adjustment recognized to retained earnings. The Company has adopted this guidance as of January 1, 2019 and elected to recognize a cumulative-effect adjustment at the time of adoption. The Company has elected the following practical expedients that allow an entity to carry forward historical accounting treatment relating to: (i) lease identification and classification for existing leases and (ii) existing land easements. The adoption of ASC 842 resulted in the recognition of Operating lease right-of-use assets and Operating lease liabilities in the Company’s Consolidated Balance Sheets for its existing operating leases including drilling rig contracts, office rental agreements, and other wellhead equipment. This adoption did not have a significant impact on the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows. Refer to Note 13—Leases for additional information.
Note 2—Accounts Receivable, Accounts Payable and Accrued Expenses
Accounts receivable are comprised of the following:
(in thousands)
September 30, 2019

December 31, 2018
Accrued oil and gas sales receivable, net
$
71,732


$
66,997

Joint interest billings, net
65,444


31,658

Other
4,136


1,968

Accounts receivable, net
$
141,312


$
100,623


Accounts payable and accrued expenses are comprised of the following:
(in thousands)
September 30, 2019

December 31, 2018
Accounts payable
$
33,455


$
55,984

Accrued capital expenditures
94,952


75,791

Revenues payable
85,275


63,399

Accrued interest
24,162


11,129

Accrued employee compensation and benefits
9,699


9,757

Accrued expenses and other
20,419