PDC ENERGY, INC. - Quarter Report: 2021 March (Form 10-Q)
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 March 31, 2021
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 001-37419
![pdce-20210331_g1.jpg](https://www.sec.gov/Archives/edgar/data/0000077877/000007787721000035/pdce-20210331_g1.jpg)
PDC ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware | 95-2636730 | ||||
(State of incorporation) | (I.R.S. Employer Identification No.) |
1775 Sherman Street, Suite 3000
Denver, Colorado 80203
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 860-5800
Securities registered pursuant to Section 12(b) of the Act.
Title of each class | Ticker Symbol | Name of each exchange on which registered | ||||||||||||
Common stock, par value $0.01 per share | PDCE | Nasdaq Global Select Market |
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 x No o
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See 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 | x | 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 99,315,624 shares of the Company's Common Stock ($0.01 par value) were outstanding as of April 23, 2021.
PDC ENERGY, INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | Page | ||||||||||
Item 1. | |||||||||||
Item 2. | |||||||||||
Item 3. | |||||||||||
Item 4. | |||||||||||
PART II – OTHER INFORMATION | |||||||||||
Item 1. | |||||||||||
Item 1A. | |||||||||||
Item 2. | |||||||||||
Item 3. | |||||||||||
Item 4. | |||||||||||
Item 5. | |||||||||||
Item 6. | |||||||||||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act") and the United States ("U.S.") Private Securities Litigation Reform Act of 1995 regarding our business, financial condition, results of operations and prospects. All statements other than statements of historical fact included in and incorporated by reference into this report are "forward-looking statements." Words such as expect, anticipate, intend, plan, believe, seek, estimate, schedule and similar expressions or variations of such words are intended to identify forward-looking statements herein. Forward-looking statements include, among other things, statements regarding future: production, costs and cash flows; impacts of Colorado political matters, including recent rulemaking initiatives influencing our ability to continue to obtain permits; drilling locations, zones and growth opportunities; commodity prices and differentials; capital expenditures and projects, including the number of rigs employed; cash flows from operations relative to future capital investments; financial ratios and compliance with covenants in our revolving credit facility and other debt instruments; impacts of certain accounting and tax changes; ability to meet our volume commitments to midstream providers and timing and adequacy of midstream infrastructure; the potential return of capital to shareholders through buybacks of shares and/or payments of dividends; ongoing compliance with our consent decree; risk of our counterparties non-performance on derivative instruments; and our ability to repay our 1.125% convertible notes due 2021 (the "2021 Convertible Notes") and fund planned activities.
The above statements are not the exclusive means of identifying forward-looking statements herein. Although forward-looking statements contained in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known to us. Forward-looking statements are always subject to risks and uncertainties, and become subject to greater levels of risk and uncertainty as they address matters further into the future. Throughout this report or accompanying materials, we may use the term “projection” or similar terms or expressions, or indicate that we have “modeled” certain future scenarios. We typically use these terms to indicate our current thoughts on possible outcomes relating to our business or our industry in periods beyond the current fiscal year. Because such statements relate to events or conditions further in the future, they are subject to increased levels of uncertainty.
Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:
•the coronavirus 2019 ("COVID-19") pandemic, including its effects on commodity prices, downstream capacity, employee health and safety, business continuity and regulatory matters;
•changes in global production volumes and demand, including economic conditions that might impact demand and prices for the products we produce;
•impacts of political and regulatory developments in Colorado, particularly with respect to additional permit scrutiny;
•geopolitical factors, such as events that may reduce or increase production from particular oil-producing regions and/or from members of the Organization of Petroleum Exporting Countries;
•volatility of prices for crude oil, natural gas and natural gas liquids ("NGLs") and the risk of an extended period of depressed prices, including risks relating to decreased revenue, income and cash flow, write-downs and impairments and availability of capital;
•volatility and widening of differentials;
•reductions in the borrowing base under our revolving credit facility;
•impact of governmental policies and/or regulations, including changes in environmental and other laws, the interpretation and enforcement of those laws and regulations, liabilities arising thereunder and the costs to comply with those laws and regulations;
•declines in the value of our crude oil, natural gas and NGLs properties resulting in impairments;
•changes in estimates of proved reserves;
•inaccuracy of reserve estimates and expected production rates;
•potential for production decline rates from our wells being greater than expected;
•timing and extent of our success in discovering, acquiring, developing and producing reserves;
•availability and cost of sufficient pipeline, gathering and other transportation facilities and related infrastructure to process and transport our production and the impact of these facilities and regional capacity on the prices we receive for our production;
•risks incidental to the drilling and operation of crude oil and natural gas wells;
•difficulties in integrating our operations and potential effects on capital requirements as a result of any significant acquisitions or acreage exchanges;
•increases in costs and expenses;
•limitations in the availability of supplies, materials, contractors and services that may delay the drilling or completion of our wells;
•potential losses of acreage due to lease expirations or otherwise;
•future cash flows, liquidity and financial condition;
•competition within the oil and gas industry;
•availability and cost of capital;
•success in marketing our crude oil, natural gas and NGLs;
•effect of crude oil and natural gas derivative activities;
•impact to our operations, personnel retention, strategy, stock price and expenses caused by the actions of activist shareholders;
•impact of environmental events, governmental and other third-party responses to such events and our ability to insure adequately against such events;
•cost of pending or future litigation;
•our ability to replace our oil and natural gas reserves;
•title defects in our oil and natural gas properties;
•civil unrest, terrorist attacks and cyber threats;
•our ability to retain or attract senior management and key technical employees; and
•success of strategic plans, expectations and objectives for our future operations.
Further, we urge you to carefully review and consider the cautionary statements and disclosures, specifically those under Item 1A, Risk Factors made in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission ("SEC") for further information on risks and uncertainties that could affect our business, financial condition, results of operations and prospects, which are incorporated by this reference as though fully set forth herein. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We undertake no obligation to update any forward-looking statements in order to reflect any event or circumstance occurring after the date of this report or currently unknown facts or conditions or the occurrence of unanticipated events. All forward-looking statements are qualified in their entirety by this cautionary statement.
REFERENCES
Unless the context otherwise requires, references in this report to "PDC Energy," "PDC," "the Company," "we," "us," "our" or "ours" refer to the registrant, PDC Energy, Inc. and all subsidiaries consolidated for the purposes of its financial statements.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PDC ENERGY, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
March 31, 2021 | December 31, 2020 | |||||||||||||
Assets | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 59,067 | $ | 2,623 | ||||||||||
Accounts receivable, net | 256,837 | 244,251 | ||||||||||||
Fair value of derivatives | 8,032 | 48,869 | ||||||||||||
Prepaid expenses and other current assets | 11,323 | 12,505 | ||||||||||||
Total current assets | 335,259 | 308,248 | ||||||||||||
Properties and equipment, net | 4,832,798 | 4,859,199 | ||||||||||||
Fair value of derivatives | 15,587 | 9,565 | ||||||||||||
Other assets | 57,013 | 60,961 | ||||||||||||
Total Assets | $ | 5,240,657 | $ | 5,237,973 | ||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||
Liabilities | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | 120,647 | $ | 90,635 | ||||||||||
Production tax liability | 126,144 | 124,475 | ||||||||||||
Fair value of derivatives | 197,967 | 98,152 | ||||||||||||
Funds held for distribution | 209,448 | 177,132 | ||||||||||||
Accrued interest payable | 20,975 | 14,734 | ||||||||||||
Other accrued expenses | 72,935 | 81,715 | ||||||||||||
Current portion of long-term debt | 195,451 | 193,014 | ||||||||||||
Total current liabilities | 943,567 | 779,857 | ||||||||||||
Long-term debt | 1,242,108 | 1,409,548 | ||||||||||||
Asset retirement obligations | 125,193 | 132,637 | ||||||||||||
Fair value of derivatives | 52,335 | 36,359 | ||||||||||||
Other liabilities | 290,386 | 264,034 | ||||||||||||
Total liabilities | 2,653,589 | 2,622,435 | ||||||||||||
Commitments and contingent liabilities | ||||||||||||||
Stockholders' equity | ||||||||||||||
Common shares - par value $0.01 per share, 150,000,000 authorized, 99,367,276 and 99,758,720 issued as of March 31, 2021 and December 31, 2020, respectively | 994 | 998 | ||||||||||||
Additional paid-in capital | 3,369,272 | 3,387,754 | ||||||||||||
Accumulated deficit | (781,301) | (772,265) | ||||||||||||
Treasury shares - at cost, 51,094 and 37,510 as of March 31, 2021 and December 31, 2020, respectively | (1,897) | (949) | ||||||||||||
Total stockholders' equity | 2,587,068 | 2,615,538 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 5,240,657 | $ | 5,237,973 |
See accompanying Notes to Condensed Consolidated Financial Statements
1
PDC ENERGY, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||
Revenues | ||||||||||||||
Crude oil, natural gas and NGLs sales | $ | 468,119 | $ | 320,315 | ||||||||||
Commodity price risk management gain (loss), net | (181,256) | 434,698 | ||||||||||||
Other income (expense) | (827) | 2,017 | ||||||||||||
Total revenues | 286,036 | 757,030 | ||||||||||||
Costs, expenses and other | ||||||||||||||
Lease operating expense | 41,804 | 49,534 | ||||||||||||
Production taxes | 29,492 | 18,470 | ||||||||||||
Transportation, gathering and processing expense | 21,732 | 13,496 | ||||||||||||
Exploration, geologic and geophysical expense | 354 | 136 | ||||||||||||
General and administrative expense | 32,677 | 62,165 | ||||||||||||
Depreciation, depletion and amortization | 146,763 | 176,157 | ||||||||||||
Accretion of asset retirement obligations | 3,128 | 2,620 | ||||||||||||
Impairment of properties and equipment | 190 | 881,074 | ||||||||||||
Loss (gain) on sale of properties and equipment | (212) | (179) | ||||||||||||
Other | 48 | 2,144 | ||||||||||||
Total costs, expenses and other | 275,976 | 1,205,617 | ||||||||||||
Income (loss) from operations | 10,060 | (448,587) | ||||||||||||
Interest expense, net | (19,041) | (24,173) | ||||||||||||
Income (loss) before income taxes | (8,981) | (472,760) | ||||||||||||
Income tax benefit (expense) | (55) | 7,745 | ||||||||||||
Net income (loss) | $ | (9,036) | $ | (465,015) | ||||||||||
Earnings (loss) per share: | ||||||||||||||
Basic | $ | (0.09) | $ | (4.94) | ||||||||||
Diluted | $ | (0.09) | $ | (4.94) | ||||||||||
Weighted-average common shares outstanding: | ||||||||||||||
Basic | 99,702 | 94,077 | ||||||||||||
Diluted | 99,702 | 94,077 |
See accompanying Notes to Condensed Consolidated Financial Statements
2
PDC ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net loss | $ | (9,036) | $ | (465,015) | ||||||||||
Adjustments to net loss to reconcile to net cash from operating activities: | ||||||||||||||
Net change in fair value of unsettled commodity derivatives | 150,606 | (388,875) | ||||||||||||
Depreciation, depletion and amortization | 146,763 | 176,157 | ||||||||||||
Impairment of properties and equipment | 190 | 881,074 | ||||||||||||
Accretion of asset retirement obligations | 3,128 | 2,620 | ||||||||||||
Non-cash stock-based compensation | 5,020 | 5,672 | ||||||||||||
Gain on sale of properties and equipment | (212) | (179) | ||||||||||||
Amortization and write-off of debt discount, premium and issuance costs | 3,837 | 3,640 | ||||||||||||
Deferred income taxes | — | (6,331) | ||||||||||||
Other | (305) | 1,011 | ||||||||||||
Changes in assets and liabilities | 53,068 | 56,507 | ||||||||||||
Net cash from operating activities | 353,059 | 266,281 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||
Capital expenditures for development of crude oil and natural gas properties | (109,048) | (190,768) | ||||||||||||
Capital expenditures for other properties and equipment | (69) | (455) | ||||||||||||
Acquisition of crude oil and natural gas properties | — | (139,812) | ||||||||||||
Proceeds from sale of properties and equipment | 4,370 | 793 | ||||||||||||
Proceeds from divestitures | — | 62 | ||||||||||||
Net cash from investing activities | (104,747) | (330,180) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||
Proceeds from revolving credit facility and other borrowings | 229,000 | 917,000 | ||||||||||||
Repayment of revolving credit facility and other borrowings | (397,000) | (304,000) | ||||||||||||
Payment of debt issuance costs | — | (4,666) | ||||||||||||
Purchase of treasury shares | (21,067) | (23,819) | ||||||||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | (2,356) | (7,693) | ||||||||||||
Redemption of senior notes | — | (452,153) | ||||||||||||
Principal payments under financing lease obligations | (445) | (489) | ||||||||||||
Net cash from financing activities | (191,868) | 124,180 | ||||||||||||
Net change in cash, cash equivalents and restricted cash | 56,444 | 60,281 | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 2,623 | 963 | ||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 59,067 | $ | 61,244 |
See accompanying Notes to Condensed Consolidated Financial Statements
3
PDC ENERGY, INC.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands)
(Unaudited)
Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-in Capital | Shares | Amount | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||
Balance, January 1, 2021 | 99,759 | $ | 998 | $ | 3,387,754 | (38) | $ | (949) | $ | (772,265) | $ | 2,615,538 | |||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (9,036) | (9,036) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 209 | 2 | 3,670 | — | 1,348 | — | 5,020 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | — | — | — | (81) | (2,356) | — | (2,356) | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares for employee stock-based compensation tax withholding obligations | (33) | — | (1,091) | 33 | 1,091 | — | — | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares | — | — | — | (598) | (22,098) | — | (22,098) | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares | (568) | (6) | (21,061) | 568 | 21,067 | — | — | ||||||||||||||||||||||||||||||||||
Issuance of treasury shares | — | — | — | 65 | — | — | — | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | 99,367 | $ | 994 | $ | 3,369,272 | (51) | $ | (1,897) | $ | (781,301) | $ | 2,587,068 | |||||||||||||||||||||||||||||
Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Additional Paid-in Capital | Shares | Amount | Accumulated Deficit | Total Stockholders' Equity | |||||||||||||||||||||||||||||||||||
Balance, January 1, 2020 | 61,652 | $ | 617 | $ | 2,384,309 | (35) | $ | (1,474) | $ | (47,945) | $ | 2,335,507 | |||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | (465,015) | (465,015) | ||||||||||||||||||||||||||||||||||
Issuance pursuant to acquisition | 39,182 | 391 | 1,014,921 | — | — | — | 1,015,312 | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 121 | 1 | 3,713 | — | 1,958 | — | 5,672 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | — | — | — | (306) | (7,693) | — | (7,693) | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares for employee stock-based compensation tax withholding obligations | (251) | (3) | (6,425) | 251 | 6,428 | — | — | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares | — | — | — | (1,266) | (23,819) | — | (23,819) | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares | (1,266) | (12) | (23,807) | 1,266 | 23,819 | — | — | ||||||||||||||||||||||||||||||||||
Issuance of treasury shares | — | — | — | 69 | — | — | — | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2020 | 99,438 | $ | 994 | $ | 3,372,711 | (21) | $ | (781) | $ | (512,960) | $ | 2,859,964 | |||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
PDC Energy, Inc. is a domestic independent exploration and production company that acquires, explores and develops properties for the production of crude oil, natural gas and NGLs, with operations in the Wattenberg Field in Colorado and the Delaware Basin in west Texas. Our operations in the Wattenberg Field are focused in the horizontal Niobrara and Codell plays and our Delaware Basin operations are primarily focused in the horizontal Wolfcamp zones. As of March 31, 2021, we owned an interest in approximately 3,600 gross productive wells.
The accompanying unaudited condensed consolidated financial statements include the accounts of PDC and our wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments necessary for a fair statement of the results of interim periods presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. The December 31, 2020 condensed consolidated balance sheet data was derived from audited statements, but does not include all disclosures required by U.S. GAAP. The information presented in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and notes thereto included in our 2020 Form 10-K. Our results of operations and cash flows for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year or any other future period.
NOTE 2 - BUSINESS COMBINATION
In January 2020, we merged with SRC Energy Inc. ("SRC") in a transaction valued at $1.7 billion, inclusive of SRC's net debt (the "SRC Acquisition"). SRC was an independent oil and natural gas company engaged in the exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in Weld County, Colorado. The acquisition added approximately 83,000 net acres which are located on large, contiguous acreage blocks in the core of the Wattenberg Field.
Upon closing, we issued approximately 38.9 million shares of our common stock to SRC shareholders and holders of SRC equity awards, reflecting the issuance of 0.158 of a share of our common stock in exchange for each outstanding share of SRC common stock and the cancellation of outstanding SRC equity awards pursuant to the terms of the merger agreement that we entered into with SRC. We finalized the purchase price allocation on December 31, 2020, and we recognized total transaction costs of $19.9 million for the year ended December 31, 2020.
5
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The following table details our final purchase price, valuation and allocation of the purchase price to the assets acquired and liabilities assumed as a result of the SRC Acquisition:
(in thousands) | |||||
Consideration: | |||||
Cash | $ | 40 | |||
Retirement of seller's credit facility | 166,238 | ||||
Total cash consideration | 166,278 | ||||
Common stock issued | 1,009,015 | ||||
Shares withheld in lieu of taxes | 6,299 | ||||
Total consideration | $ | 1,181,592 | |||
Recognized amounts of identifiable assets acquired and liabilities assumed: | |||||
Assets acquired: | |||||
Current assets | $ | 145,792 | |||
Properties and equipment, net - proved | 1,613,674 | ||||
Properties and equipment, net - unproved | 109,615 | ||||
Properties and equipment, net - other | 16,242 | ||||
Deferred tax asset | 189,311 | ||||
Other assets | 11,810 | ||||
Total assets acquired | 2,086,444 | ||||
Liabilities assumed: | |||||
Current liabilities | (253,967) | ||||
Senior notes | (555,500) | ||||
Asset retirement obligations | (42,417) | ||||
Other liabilities | (52,968) | ||||
Total liabilities assumed | (904,852) | ||||
Total identifiable net assets acquired | $ | 1,181,592 |
This acquisition was accounted for under the acquisition method of accounting for business combinations. Accordingly, we conducted assessments of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisition were expensed as incurred. The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market, and therefore represent Level 3 inputs. The fair values of crude oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs and assumptions to the valuation of proved and unproved crude oil and natural gas properties include estimates of reserve volumes, future operating and development costs, future commodity prices, lease terms and expirations and a market-based weighted-average cost of capital rate of 10 percent. These inputs require significant judgments and estimates by management at the time of the valuation.
The results of operations for the SRC Acquisition since the closing date have been included in our condensed consolidated financial statements for the three months ended March 31, 2020 and include approximately $103.5 million of total revenue, and $13.2 million of income from operations.
6
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Pro Forma Information. The following unaudited pro forma financial information represents a summary of the consolidated results of operations for the three months ended March 31, 2020, assuming the acquisition had been completed as of January 1, 2020. The information below reflects certain nonrecurring pro forma adjustments that were directly related to the business combination based on available information and certain assumptions that we believe are reasonable, including (i) the Company's common stock issued to convert SRC's outstanding shares of common stock and the cancellation of equity awards, (ii) the depletion of SRC's fair-valued proved oil and gas properties using the successful efforts method of accounting and (iii) the estimated tax impacts of the proforma adjustments, if any. Additionally, pro forma earnings were adjusted to exclude acquisition-related costs incurred by the Company and SRC totaling approximately $38.0 million for the three months ended March 31, 2020. The pro forma financial information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had been effective as of these dates, or of future results.
Three Months Ended March 31, 2020 | ||||||||
(in thousands, except per share data) | ||||||||
Total revenue | $ | 778,370 | ||||||
Net income (loss) | (425,717) | |||||||
Earnings (loss) per share: | ||||||||
Basic | $ | (4.25) | ||||||
Diluted | (4.25) |
7
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
NOTE 3 - REVENUE RECOGNITION
Disaggregated Revenue. The following table presents crude oil, natural gas and NGLs sales disaggregated by commodity and operating region for the periods presented:
Three Months Ended March 31, | ||||||||||||||||||||
Revenue by Commodity and Operating Region | 2021 | 2020 | Percent Change | |||||||||||||||||
(in thousands) | ||||||||||||||||||||
Crude oil | ||||||||||||||||||||
Wattenberg Field | $ | 235,963 | $ | 206,649 | 14 | % | ||||||||||||||
Delaware Basin | 37,688 | 42,525 | (11) | % | ||||||||||||||||
Total | 273,651 | 249,174 | 10 | % | ||||||||||||||||
Natural gas | ||||||||||||||||||||
Wattenberg Field | 97,022 | 40,078 | 142 | % | ||||||||||||||||
Delaware Basin (1) | 8,624 | (563) | * | |||||||||||||||||
Total | 105,646 | 39,515 | 167 | % | ||||||||||||||||
NGLs | ||||||||||||||||||||
Wattenberg Field | 77,777 | 25,241 | 208 | % | ||||||||||||||||
Delaware Basin | 11,045 | 6,385 | 73 | % | ||||||||||||||||
Total | 88,822 | 31,626 | 181 | % | ||||||||||||||||
Crude oil, natural gas and NGLs | ||||||||||||||||||||
Wattenberg Field | 410,762 | 271,968 | 51 | % | ||||||||||||||||
Delaware Basin | 57,357 | 48,347 | 19 | % | ||||||||||||||||
Total | $ | 468,119 | $ | 320,315 | 46 | % |
_____________
* Percent change is not meaningful.
(1)Negative natural gas revenue was due to the deduction for transportation, gathering and processing by the purchaser exceeding the average sales price.
Contract Assets. Contract assets include material contributions in aid of construction, which are common in purchase and processing agreements with midstream service providers that are our customers. The intent of the payments is primarily to reimburse the customer for actual costs incurred related to the construction of its gathering and processing infrastructure. Contract assets are included in other assets on the condensed consolidated balance sheets. The contract assets are amortized as a reduction to crude oil, natural gas and NGLs sales revenue during the periods in which the related production is transferred to the customer.
The following table presents the changes in carrying amounts of the contract assets associated with our crude oil, natural gas and NGLs sales revenue for the three months ended March 31, 2021:
(in thousands) | |||||
Beginning balance | $ | 25,872 | |||
Reduction to additions previously recognized | (1,134) | ||||
Amortized as a reduction to crude oil, natural gas and NGLs sales | (751) | ||||
Ending balance | $ | 23,987 |
8
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
NOTE 4 - FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
Derivative Financial Instruments. We measure the fair value of our commodity derivative instruments based upon a pricing model that utilizes market-based inputs, including, but not limited to, the contractual price of the underlying position, current market prices, crude oil and natural gas forward curves, discount rates, volatility factors and nonperformance risk. Nonperformance risk considers the effect of our credit standing on the fair value of derivative liabilities and the effect of our counterparties' credit standings on the fair value of derivative assets. Both inputs to the model are based on published credit default exchange rates and the duration of each outstanding derivative position. We validate our fair value measurement by corroborating the original source of inputs, monitoring changes in valuation methods and assumptions and reviewing counterparty statements and other supporting documentation.
Our crude oil and natural gas fixed-price exchanges are included in Level 2. Our collars are included in Level 3. Our basis exchanges are included in Level 2 and Level 3. The following table presents, for each applicable level within the fair value hierarchy, our derivative assets and liabilities, including both current and non-current portions, measured at fair value on a recurring basis as of the dates indicated:
March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||
Condensed Consolidated Balance Sheet Line Item | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||||||||||||
Derivative assets | |||||||||||||||||||||||||||||||||||||||||
Current | Fair value of derivatives | $ | (390) | $ | 8,422 | $ | 8,032 | $ | 36,580 | $ | 12,289 | $ | 48,869 | ||||||||||||||||||||||||||||
Non-current | Fair value of derivatives | 4,611 | 10,976 | 15,587 | 315 | 9,250 | 9,565 | ||||||||||||||||||||||||||||||||||
Total | $ | 4,221 | $ | 19,398 | $ | 23,619 | $ | 36,895 | $ | 21,539 | $ | 58,434 | |||||||||||||||||||||||||||||
Derivative liabilities | |||||||||||||||||||||||||||||||||||||||||
Current | Fair value of derivatives | $ | 153,497 | $ | 44,470 | $ | 197,967 | $ | 76,420 | $ | 21,732 | $ | 98,152 | ||||||||||||||||||||||||||||
Non-current | Fair value of derivatives | 41,173 | 11,162 | 52,335 | 28,125 | 8,234 | 36,359 | ||||||||||||||||||||||||||||||||||
Total | $ | 194,670 | $ | 55,632 | $ | 250,302 | $ | 104,545 | $ | 29,966 | $ | 134,511 |
The following table presents a reconciliation of our Level 3 assets and liabilities measured at fair value:
Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||
(in thousands) | ||||||||||||||
Fair value of Level 3 instruments, net asset (liability) beginning of period | $ | (8,427) | $ | 8,414 | ||||||||||
Changes in fair value included in consolidated statements of operations line item: | ||||||||||||||
Commodity price risk management gain (loss), net | (33,389) | 67,530 | ||||||||||||
Settlements included in condensed consolidated statement of operations line items: | ||||||||||||||
Commodity price risk management loss, net | 5,582 | (8,704) | ||||||||||||
Fair value of Level 3 instruments, net asset (liability) end of period | $ | (36,234) | $ | 67,240 | ||||||||||
Net change in fair value of Level 3 unsettled derivatives included in consolidated statements of operations line item: | ||||||||||||||
Commodity price risk management gain (loss), net | $ | (30,863) | $ | 59,417 |
The significant unobservable input used in the fair value measurement of our derivative contracts is the implied volatility curve, which is provided by a third-party vendor. A significant increase or decrease in the implied volatility, in isolation, would have a directionally similar effect resulting in a significantly higher or lower fair value measurement of our Level 3 derivative contracts. There has been no change in the methodology we apply to measure the fair value of our Level 3 derivative contracts during the periods covered by the financial statements.
9
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Nonrecurring Fair Value Measurement
Acquisitions and impairment of long-lived assets. We utilize fair value with inputs that are not observable in the market, and are therefore designated as Level 3 within the valuation hierarchy, on a nonrecurring basis for any acquired assets or businesses and to review our proved and unproved crude oil and natural gas properties for possible impairment.
Asset Retirement Obligations. We measure the fair value of asset retirement obligations as of the date a well begins drilling or when production equipment and facilities are installed using a discounted cash flow model based on inputs that are not observable in the market and therefore are designated as Level 3 within the valuation hierarchy.
Other Financial Instruments
The carrying value of the financial instruments included in current assets and current liabilities approximates fair value due to the short-term maturities of these instruments.
Long-term debt. The portion of our long-term debt related to our revolving credit facility approximates fair value, as the applicable interest rates are variable and reflective of market rates. We have not elected to account for the portion of our debt related to our senior notes under the fair value option; however, we have determined an estimate of the fair values based on measurements of trading activity and broker or dealer quotes, which are published market prices, and therefore are Level 2 inputs. The table below presents these estimates of the fair value of the portion of our long-term debt related to our senior notes and convertible notes as of the dates indicated:
March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
Estimated Fair Value | Percent of Par | Estimated Fair Value | Percent of Par | |||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||
Senior Notes: | ||||||||||||||||||||||||||
2021 Convertible Notes | $ | 198.2 | 99.1 | % | $ | 196.2 | 98.1 | % | ||||||||||||||||||
2024 Senior Notes | 410.4 | 102.6 | % | 410.8 | 102.7 | % | ||||||||||||||||||||
2025 Senior Notes | 102.8 | 100.5 | % | 102.8 | 100.5 | % | ||||||||||||||||||||
2026 Senior Notes | 777.8 | 103.7 | % | 775.5 | 103.4 | % |
NOTE 5 - COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS
Objective and Strategy. Our results of operations and operating cash flows are affected by changes in market prices for crude oil, natural gas and NGLs. To manage a portion of our exposure to price volatility from producing crude oil and natural gas we enter into commodity derivative contracts such as collars, fixed-price exchanges and basis protection exchanges, to protect against price declines in future periods. We do not enter into derivative contracts for speculative or trading purposes.
We believe our commodity derivative instruments continue to be effective in achieving the risk management objectives for which they were intended. Depending on changes in oil and gas futures markets and management's view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. As of March 31, 2021, we had derivative instruments in place for a portion of our anticipated production in 2021 through 2023. Our commodity derivative contracts have been entered into at no upfront cost to us as we hedge our anticipated production at the then-prevailing commodity market prices, without adjustment for premium or discount.
10
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Commodity Derivative Contracts. As of March 31, 2021, we had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted-average contract price is shown:
Collars | Fixed-Price Swaps | |||||||||||||||||||||||||||||||||||||
Commodity/ Index/ Maturity Period | Quantity (Crude oil - MBbls Natural Gas - BBtu) | Weighted-Average Contract Price | Quantity (Crude Oil - MBbls Gas and Basis- BBtu) | Weighted- Average Contract Price | Fair Value March 31, 2021 (in thousands) | |||||||||||||||||||||||||||||||||
Floors | Ceilings | |||||||||||||||||||||||||||||||||||||
Crude Oil | ||||||||||||||||||||||||||||||||||||||
NYMEX | ||||||||||||||||||||||||||||||||||||||
2021 | 3,255 | $ | 38.47 | $ | 49.76 | 7,576 | $ | 45.33 | $ | (126,882) | ||||||||||||||||||||||||||||
2022 | 2,112 | 45.74 | 58.34 | 6,384 | 43.65 | (69,493) | ||||||||||||||||||||||||||||||||
2023 | — | — | — | 2,010 | 53.73 | 3,856 | ||||||||||||||||||||||||||||||||
Total Crude Oil | 5,367 | 15,970 | $ | (192,519) | ||||||||||||||||||||||||||||||||||
Natural Gas | ||||||||||||||||||||||||||||||||||||||
NYMEX | ||||||||||||||||||||||||||||||||||||||
2021 | 54,900 | 2.51 | 2.92 | 23,850 | 2.40 | (10,278) | ||||||||||||||||||||||||||||||||
2022 | 17,400 | 2.50 | 2.89 | 14,700 | 2.65 | 554 | ||||||||||||||||||||||||||||||||
2023 | — | — | — | 10,200 | 2.50 | (406) | ||||||||||||||||||||||||||||||||
Total Natural Gas | 72,300 | 48,750 | (10,130) | |||||||||||||||||||||||||||||||||||
Basis Protection - Natural Gas | ||||||||||||||||||||||||||||||||||||||
CIG | ||||||||||||||||||||||||||||||||||||||
2021 | 78,750 | (0.44) | (18,592) | |||||||||||||||||||||||||||||||||||
2022 | 32,100 | (0.33) | (5,242) | |||||||||||||||||||||||||||||||||||
2023 | 10,200 | (0.23) | (200) | |||||||||||||||||||||||||||||||||||
Total Basis Protection - Natural Gas | 121,050 | (24,034) | ||||||||||||||||||||||||||||||||||||
Commodity Derivatives Fair Value | $ | (226,683) |
Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet. The balance sheet line items and fair value amounts of our derivative instruments are disclosed in Note 4 - Fair Value Measurements.
Our financial derivative agreements contain master netting provisions that provide for the net settlement of contracts through a single payment in the event of early termination. We have elected not to offset the fair value positions recorded on our condensed consolidated balance sheets.
The following table reflects the impact of netting agreements on gross derivative assets and liabilities as of the dates indicated:
As of March 31, 2021 | Total Gross Amount Presented on Balance Sheet | Effect of Master Netting Agreements | Total Net Amount | |||||||||||||||||
(in thousands) | ||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||
Derivative instruments, at fair value | $ | 23,619 | $ | (22,760) | $ | 859 | ||||||||||||||
Derivative liabilities: | ||||||||||||||||||||
Derivative instruments, at fair value | $ | 250,302 | $ | (22,760) | $ | 227,542 |
11
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
As of December 31, 2020 | Total Gross Amount Presented on Balance Sheet | Effect of Master Netting Agreements | Total Net Amount | |||||||||||||||||
(in thousands) | ||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||
Derivative instruments, at fair value | $ | 58,434 | $ | (39,691) | $ | 18,743 | ||||||||||||||
Derivative liabilities: | ||||||||||||||||||||
Derivative instruments, at fair value | $ | 134,511 | $ | (39,691) | $ | 94,820 |
Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations. The following table presents the impact of our derivative instruments on our condensed consolidated statements of operations:
Three Months Ended March 31, | ||||||||||||||
Condensed Consolidated Statement of Operations Line Item | 2021 | 2020 | ||||||||||||
(in thousands) | ||||||||||||||
Commodity price risk management gain (loss), net | ||||||||||||||
Net settlements | $ | (30,650) | $ | 45,823 | ||||||||||
Net change in fair value of unsettled derivatives | (150,606) | 388,875 | ||||||||||||
Total commodity price risk management gain (loss), net | $ | (181,256) | $ | 434,698 |
Derivative Counterparties. Our commodity derivative instruments expose us to credit risk of non-performance by our counterparties. We primarily use financial institutions who are also lenders under our revolving credit facility as counterparties to our commodity derivative contracts. To date, we have had no derivative counterparty default losses. We have evaluated the credit risk of our derivative assets from our counterparties using relevant credit market default rates, giving consideration to amounts outstanding for each counterparty and the duration of each outstanding derivative position. Based on our evaluation, we have determined that the potential impact of nonperformance of our current counterparties on the fair value of our derivative instruments is not significant at March 31, 2021; however, this determination may change.
NOTE 6 - PROPERTIES AND EQUIPMENT, NET
The following table presents the components of properties and equipment, net of accumulated depreciation, depletion and amortization ("DD&A") as of the dates indicated:
March 31, 2021 | December 31, 2020 | ||||||||||
(in thousands) | |||||||||||
Properties and equipment, net: | |||||||||||
Crude oil and natural gas properties | |||||||||||
Proved | $ | 7,650,594 | $ | 7,523,639 | |||||||
Unproved | 350,993 | 350,677 | |||||||||
Total crude oil and natural gas properties | 8,001,587 | 7,874,316 | |||||||||
Equipment and other | 64,900 | 65,027 | |||||||||
Land and buildings | 17,665 | 24,299 | |||||||||
Construction in progress | 519,931 | 523,550 | |||||||||
Properties and equipment, at cost | 8,604,083 | 8,487,192 | |||||||||
Accumulated DD&A | (3,771,285) | (3,627,993) | |||||||||
Properties and equipment, net | $ | 4,832,798 | $ | 4,859,199 |
Impairment of Oil and Gas Properties. There were no significant impairment charges recognized related to our proved and unproved properties during the three months ended March 31, 2021. In the first quarter of 2020, the significant decline in crude oil prices in addition to the ongoing effects of COVID-19 was considered a triggering event that required us to assess our crude oil and natural gas properties for possible impairment. As a result of our assessment, we recorded impairment expense of $881.1 million to our proved and unproved properties.
12
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Proved Properties. Of the total impairment expense recognized in the first quarter of 2020, approximately $753.0 million was related to our Delaware Basin proved properties. These impairment charges represented the amount by which the carrying value of the crude oil and natural gas properties exceeded the estimated fair value. We estimated the fair value of proved crude oil and natural gas properties using valuation techniques that convert future cash flows to a single discounted amount, a level 3 input. Significant inputs and assumptions to the valuation of proved crude oil and natural gas properties include estimates of reserves volumes, future operating and development costs, future commodity prices, and a discount rate of 17 percent, which was based on a weighted-average cost of capital for the area where the assets are located.
Unproved Properties. We recognized approximately $127.3 million of impairment charges for our unproved properties in the Delaware Basin during the three months ended March 31, 2020. These impairment charges were recognized based on the fair value of the properties, a Level 3 input. The fair value is estimated based on a review of our current drilling plans, estimated future cash flows for probable well locations and expected future lease expirations, primarily in areas where we have no development plans.
Suspended Well Costs. The following table presents the capitalized exploratory well cost pending determination of proved reserves and included in properties and equipment for the periods presented:
Three Months Ended March 31, | Year Ended December 31, 2020 | |||||||||||||
(in thousands, except for number of wells) | ||||||||||||||
Beginning balance | $ | 7,459 | $ | 16,078 | ||||||||||
Additions to capitalized exploratory well costs pending the determination of proved reserves | 1,219 | 11,770 | ||||||||||||
Reclassifications to proved properties | — | (20,389) | ||||||||||||
Ending balance | $ | 8,678 | $ | 7,459 | ||||||||||
Number of wells pending determination at period-end | 2 | 2 |
Our net capitalized exploratory well costs that have been capitalized for a period greater than one year were $7.5 million as of March 31, 2021 and December 31, 2020. We expect to complete our two gross suspended wells associated with two projects prior to the end of 2021.
13
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
NOTE 7 - ACCOUNTS RECEIVABLE, OTHER ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts Receivable. The following table presents the components of accounts receivable, net of allowance for doubtful accounts as of the dates indicated:
March 31, 2021 | December 31, 2020 | ||||||||||
(in thousands) | |||||||||||
Crude oil, natural gas and NGLs sales | $ | 220,121 | $ | 178,147 | |||||||
Joint interest billings | 20,044 | 35,396 | |||||||||
Other | 22,748 | 37,471 | |||||||||
Allowance for doubtful accounts | (6,076) | (6,763) | |||||||||
Accounts receivable, net | $ | 256,837 | $ | 244,251 |
Other Accrued Expenses. The following table presents the components of other accrued expenses as of the dates indicated:
March 31, 2021 | December 31, 2020 | |||||||||||||
(in thousands) | ||||||||||||||
Employee benefits | $ | 14,754 | $ | 23,304 | ||||||||||
Asset retirement obligations | 33,711 | 33,933 | ||||||||||||
Environmental expenses | 10,083 | 10,139 | ||||||||||||
Operating and finance leases | 7,251 | 7,986 | ||||||||||||
Other | 7,136 | 6,353 | ||||||||||||
Other accrued expenses | $ | 72,935 | $ | 81,715 |
Other Liabilities. The following table presents the components of other liabilities as of the dates indicated:
March 31, 2021 | December 31, 2020 | |||||||||||||
(in thousands) | ||||||||||||||
Deferred midstream gathering credits | $ | 166,826 | $ | 168,478 | ||||||||||
Deferred oil gathering credits | 17,588 | 18,090 | ||||||||||||
Production taxes | 94,371 | 65,592 | ||||||||||||
Operating and finance leases | 9,883 | 10,763 | ||||||||||||
Other | 1,718 | 1,111 | ||||||||||||
Other liabilities | $ | 290,386 | $ | 264,034 |
Deferred Midstream Gathering Credits. In the second quarter of 2019, concurrent with the sale of our Delaware Basin midstream assets, we entered into an agreement with each of the purchasers pursuant to which we dedicated the gathering of certain of our production and all water gathering and disposal volumes in the Delaware Basin. The terms of these agreements range from 15 to 22 years. The acreage dedication agreements resulted in initial cash receipts and are being amortized on a units-of-production basis. The amortization rates are assessed on an annual basis for changes in estimated future production.
Deferred Oil Gathering Credits. In 2018, we entered into an agreement that dedicates crude oil from the majority of our Wattenberg Field acreage to the midstream provider's gathering lines and extends the term of the agreement through December 2029. The acreage dedication agreement resulted in an initial cash receipt and is being amortized over the life of the agreement.
14
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The following table presents the amortization charges recognized in the condensed consolidated statements of operations for the periods indicated:
Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||
(in thousands) | ||||||||||||||
Crude oil, natural gas and NGL sales | $ | — | $ | 149 | ||||||||||
Transportation, gathering and processing expense | 1,521 | 1,161 | ||||||||||||
Lease operating expense | 438 | 323 |
NOTE 8 - LONG-TERM DEBT
Long-term debt consisted of the following as of the dates indicated:
March 31, 2021 | December 31, 2020 | ||||||||||
(in thousands) | |||||||||||
Senior Notes: | |||||||||||
1.125% Convertible Notes due September 2021: | |||||||||||
Principal amount | $ | 200,000 | $ | 200,000 | |||||||
Unamortized discount | (4,102) | (6,295) | |||||||||
Unamortized debt issuance costs | (447) | (691) | |||||||||
Net of unamortized discount and debt issuance costs | 195,451 | 193,014 | |||||||||
6.125% Senior Notes due September 2024: | |||||||||||
Principal amount | 400,000 | 400,000 | |||||||||
Unamortized debt issuance costs | (3,387) | (3,632) | |||||||||
Net of unamortized debt issuance costs | 396,613 | 396,368 | |||||||||
6.25% Senior Notes due December 2025: | |||||||||||
Principal amount | 102,324 | 102,324 | |||||||||
Unamortized premium | 837 | 880 | |||||||||
Net of unamortized premium | 103,161 | 103,204 | |||||||||
5.75% Senior Notes due May 2026: | |||||||||||
Principal amount | 750,000 | 750,000 | |||||||||
Unamortized discount | (1,368) | (1,429) | |||||||||
Unamortized debt issuance costs | (6,298) | (6,595) | |||||||||
Net of unamortized discount and debt issuance costs | 742,334 | 741,976 | |||||||||
Total senior notes | 1,437,559 | 1,434,562 | |||||||||
Revolving Credit Facility: | |||||||||||
Revolving credit facility due May 2023 | — | 168,000 | |||||||||
Total debt, net of unamortized discount, premium and debt issuance costs | 1,437,559 | 1,602,562 | |||||||||
Less current portion of long-term debt | 195,451 | 193,014 | |||||||||
Total Long-term debt | $ | 1,242,108 | $ | 1,409,548 |
Senior Notes
2021 Convertible Notes. In September 2016, we issued $200 million of 1.125% convertible notes due September 15, 2021 (the "2021 Convertible Notes"). Interest is payable semi-annually in arrears on March 15 and September 15.
15
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The 2021 Convertible Notes are convertible after March 15, 2021 at a conversion rate of 11.7113 shares of our common stock per $1,000 principal amount of the 2021 Convertible Notes, which is equal to the conversion price of approximately $85.39 per share. The conversion rate is subject to adjustment upon certain events. Upon conversion, the 2021 Convertible Notes may be settled, at our sole election, in shares of our common stock, cash or a combination thereof. We have initially elected a combination settlement method to satisfy our conversion obligation, which allows us to settle the principal amount of the 2021 Convertible Notes in cash and to settle the excess conversion value, if any, in shares, as well as cash in lieu of fractional shares.
2024 Senior Notes. In September 2016, we issued $400 million aggregate principal amount of 6.125% senior notes due September 15, 2024. Interest is payable semi-annually on March 15 and September 15. Approximately $7.8 million in costs associated with the issuance of the 2024 Senior Notes were capitalized as debt issuance costs and are being amortized as interest expense over the life of the notes. The principal amount of the 2024 Senior Notes are redeemable after September 15, 2020 at fixed redemption prices, currently at 103.063 percent plus accrued and unpaid interest.
2025 Senior Notes. Upon completion of the SRC Acquisition in January 2020, we assumed $550 million aggregate principal amount of 6.25% senior notes due December 1, 2025 (the "2025 Senior Notes"). The 2025 Senior Notes were recorded at their approximate fair value of $555.5 million. The difference between the acquisition date fair value and the principal amount of the 2025 Senior Notes will be recognized as a reduction to interest expense over the remaining life of the notes. Interest is payable semi-annually on June 1 and December 1.
On January 17, 2020, we commenced an offer to repurchase the 2025 Senior Notes from the holders at 101 percent of the principal amount of the 2025 Senior Notes, together with any accrued and unpaid interest. Upon expiration of the repurchase offer on February 18, 2020, holders of $447.7 million of the outstanding 2025 Senior Notes accepted the redemption offer for a total redemption price of approximately $452.2 million, plus accrued and unpaid interest of $6.2 million. The fair value of the 2025 Senior Notes approximated the repurchase offer price, resulting in recognition of an immaterial loss on extinguishment of the repurchased notes. The repurchase was funded by proceeds from our revolving credit facility. An aggregate principal amount of approximately $102.3 million remains outstanding.
On and after December 1, 2020, the Company may redeem the remaining 2025 Senior Notes at a redemption price equal to a specified percentage of the principal amount of the redeemed notes, currently at 103.125 percent plus accrued and unpaid interest.
2026 Senior Notes. In November 2017, we issued $600 million aggregate principal amount 5.75% senior notes due May 15, 2026 (the "2026 Senior Notes"). Interest is payable semi-annually on May 15 and November 15. Approximately $7.6 million in costs associated with the issuance of the 2026 Senior Notes were capitalized as debt issuance costs and are being amortized as interest expense over the life of the notes.
In September 2020, we issued an additional $150 million aggregate principal amount of the 2026 Senior Notes at a price equal to 99 percent of par, which resulted in net proceeds of $146.7 million, after deducting the original issuance discount of $1.5 million and debt issuance costs of $1.8 million. The additional 2026 Senior Notes issued have the same terms and conditions as the existing 2026 Senior Notes.
The 2026 Senior Notes are redeemable after May 15, 2021 at fixed redemption prices beginning at 104.313 percent plus accrued and unpaid interest. At any time prior to May 15, 2021, we may redeem all or part of the 2026 Senior Notes at a make-whole price set forth in the indenture which generally approximates the present value of the redemption price at May 15, 2021 and remaining interest payments on the 2026 Senior Notes at the time of redemption.
Our wholly-owned subsidiary, PDC Permian, Inc., is a guarantor of our obligations under the 2021 Convertible Notes, the 2024 Senior Notes, the 2025 Senior Notes and the 2026 Senior Notes (collectively, the "Senior Notes").
The Senior Notes are senior unsecured obligations and rank senior in right of payment to our future indebtedness that is expressly subordinated to the notes; equal in right of payment to our existing and future indebtedness that is not so subordinated; effectively junior in right of payment to all of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our non-guarantor subsidiaries.
16
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Upon the occurrence of a "change of control," as defined in the indentures for the 2024 Senior Notes, 2025 Senior Notes and 2026 Senior Notes, holders will have the right to require us to repurchase all or a portion of the notes at a price equal to 101 percent of the aggregate principal amount of the notes repurchased, together with any accrued and unpaid interest to the date of purchase. In connection with certain asset sales, we may, under certain circumstances, be required to use the net cash proceeds of such asset sale to make an offer to purchase the notes at 100 percent of the principal amount, together with any accrued and unpaid interest to the date of purchase.
The indentures governing the 2024 Senior Notes, 2025 Senior Notes, and 2026 Senior Notes contain covenants that, among other things, limit our ability and the ability of our subsidiaries to incur additional indebtedness; pay dividends or make distributions on our stock; purchase or redeem stock or subordinated indebtedness; make investments; create certain liens; enter into agreements that restrict distributions or other payments by restricted subsidiaries to us; enter into transactions with affiliates; sell assets; consolidate or merge with or into other companies or transfer all or substantially of our assets; and create unrestricted subsidiaries. As of March 31, 2021, we were in compliance with all covenants related to our Senior Notes.
Revolving Credit Facility
In May 2018, we entered into a Fourth Amended and Restated Credit Agreement (the “Restated Credit Agreement”), which provides for a maximum credit amount of $2.5 billion. The amount we may borrow under the Restated Credit Agreement is subject to certain limitations. As of March 31, 2021, we had a borrowing base and elected commitment level of $1.6 billion and availability under our revolving credit facility of $1.6 billion. On April 30, 2021, as part of our spring 2021 semi-annual redetermination, the borrowing base of our credit facility increased from $1.6 billion to $1.8 billion; however, we retained our elected commitment of $1.6 billion.
The revolving credit facility is available for working capital requirements, capital investments, acquisitions, to support letters of credit and for general corporate purposes. The borrowing base is based on, among other things, the loan value assigned to the proved reserves attributable to our crude oil and natural gas interests. The borrowing base is subject to a semi-annual redetermination on November 1 and May 1 based upon quantification of our reserves at June 30 and December 31, and is also subject to a redetermination upon the occurrence of certain events. Substantially all of our crude oil and natural gas properties have been mortgaged or pledged as security for our revolving credit facility.
The outstanding principal amount under the revolving credit facility accrues interest at a varying interest rate that fluctuates with an alternate base rate (equal to the greatest of the administrative agent's prime rate, the federal funds rate plus a premium and the rate for dollar deposits in the London interbank market (“LIBOR”) for one month, plus a premium) or, at our election, a rate equal to LIBOR for certain time periods. Additionally, commitment fees, interest margin and other bank fees, charged as a component of interest, vary with our utilization of the facility. As of March 31, 2021, the applicable interest margin is 0.75 percent for the alternate base rate option or 1.75 percent for the LIBOR option, and the unused commitment fee is 0.375 percent. Principal payments are generally not required until the revolving credit facility expires in May 2023, unless the borrowing base falls below the outstanding balance.
The revolving credit facility contains various restrictive covenants and compliance requirements, which include, among other things: (i) maintenance of certain financial ratios, as defined per the revolving credit facility, including a minimum current ratio of 1.0:1.0 and a maximum leverage ratio of 4.0:1.0; (ii) restrictions on the payment of cash dividends; (iii) limits on the incurrence of additional indebtedness; (iv) prohibition on the entry into commodity hedges exceeding a specified percentage of our expected production; and (v) restrictions on mergers and dispositions of assets. As of March 31, 2021, we were in compliance with all covenants related to our revolving credit facility.
As of March 31, 2021 and December 31, 2020, debt issuance costs related to our revolving credit facility were $7.3 million and $8.1 million, respectively, and are included in other assets line on our condensed consolidated balance sheets.
NOTE 9 - LEASES
We have operating leases for office space and compressors and finance leases for vehicles. There were no significant changes in our operating and finance leases in the first quarter of 2021. For the three months ended March 31, 2021 and 2020, we had short-term lease costs of $38.9 million and $96.1 million, respectively. Our short-term lease costs include amounts that are capitalized as part of the cost of assets and are recorded as properties and equipment or recognized as expense.
17
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
The following table presents the balance sheet classification of our leases as of the dates indicated:
Leases | Condensed Consolidated Balance Sheet Line Item | March 31, 2021 | December 31, 2020 | |||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating Leases: | ||||||||||||||||||||
Operating lease right-of-use assets | Other assets | $ | 10,051 | $ | 11,722 | |||||||||||||||
Operating lease obligation - short-term | Other accrued expenses | 5,821 | 6,520 | |||||||||||||||||
Operating lease obligation - long-term | Other liabilities | 7,692 | 9,061 | |||||||||||||||||
Total operating lease liabilities | $ | 13,513 | $ | 15,581 | ||||||||||||||||
Finance Leases: | ||||||||||||||||||||
Finance lease right-of-use assets | Properties and equipment, net | $ | 3,639 | $ | 3,189 | |||||||||||||||
Finance lease obligation - short-term | Other accrued expenses | 1,430 | 1,466 | |||||||||||||||||
Finance lease obligation - long-term | Other liabilities | 2,191 | 1,702 | |||||||||||||||||
Total finance lease liabilities | $ | 3,621 | $ | 3,168 |
NOTE 10 - ASSET RETIREMENT OBLIGATIONS
The following table presents the changes in carrying amounts of the asset retirement obligations associated with our working interests in crude oil and natural gas properties for the three months ended March 31, 2021:
(in thousands) | |||||
Asset retirement obligations at beginning of period | $ | 166,570 | |||
Obligations incurred with development activities and other | 1,062 | ||||
Accretion expense | 3,128 | ||||
Revisions in estimated cash flows | (780) | ||||
Obligations discharged with asset retirements | (11,001) | ||||
Obligations discharged with divestitures | (75) | ||||
Asset retirement obligations at end of period | 158,904 | ||||
Current portion | (33,711) | ||||
Long-term portion | $ | 125,193 |
Our estimated asset retirement obligations liability is based on historical experience in plugging and abandoning wells, estimated economic lives and estimated plugging, abandonment and surface reclamation costs considering federal and state regulatory requirements in effect at that time. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised. To the extent future revisions to these assumptions impact the present value of the existing asset retirement obligations liability, a corresponding adjustment is made to the properties and equipment balance. Changes in the liability due to the passage of time are recognized as an increase in the carrying amount of the liability and as accretion expense. Short-term asset retirement obligations are included in other accrued expenses in our condensed consolidated balance sheets.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Commitments. We routinely enter into, extend or amend operating agreements in the ordinary course of business. We have long-term transportation, sales, processing and facility expansion agreements for pipeline capacity and water delivery and disposal commitments. There were no significant commitments entered into during the three months ended March 31, 2021. For details of our commitments, refer to Note 12 - Commitments and Contingencies in Item 8. Financial Statements and Supplementary Data included in our Form 10-K for the year ended December 31, 2020.
Litigation and Legal Items. We are involved in various legal proceedings. We review the status of these proceedings on an ongoing basis and, from time to time, may settle or otherwise resolve these matters on terms and conditions that
18
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
management believes are in our best interests. We have provided the necessary estimated accruals in the accompanying condensed consolidated balance sheets where deemed appropriate for litigation and legal related items that are ongoing and not yet concluded. Although the results cannot be known with certainty, we currently believe that the ultimate results of such proceedings will not have a material adverse effect on our financial position, results of operations or liquidity.
Environmental. Due to the nature of the oil and gas industry, we are exposed to environmental risks. We have various policies and procedures to minimize and mitigate the risks from environmental contamination. Liabilities are recorded when environmental damages resulting from past events are probable and the costs can be reasonably estimated. Except as discussed herein, we are not aware of any material environmental claims existing as of March 31, 2021 which have not been provided for or would otherwise have a material impact on our financial statements; however, there can be no assurance that current regulatory requirements will not change or that unknown potential past non-compliance with environmental laws or other environmental liabilities will not be discovered on our properties. Accrued environmental liabilities are recorded in other accrued expenses in the condensed consolidated balance sheets.
In recent years, we have been executing a program to plug and abandon certain of our older vertical wells in the Wattenberg Field. A self-audit of final reclamation activities associated with site retirements, which we concluded in 2019, identified deficiencies, including incomplete documentation and agency submittals, inadequate plant growth and incomplete earthwork. In December 2019, we formally disclosed these deficiencies to the Colorado Oil and Gas Conservation Commission ("COGCC") and are working to close this backlog of site reclamation work. In August 2020, the COGCC issued a Notice of Alleged Violation ("NOAV") citing a failure to comply with reclamation requirements at multiple locations. During 2020, we assessed and identified deficiencies in reclamation activities at sites acquired through the January 2020 SRC Acquisition. In January 2021, we formally disclosed to the COGCC the deficiencies at sites acquired in the SRC Acquisition. We do not believe potential penalties and other expenditures associated with the deficiencies disclosed to the COGCC and the NOAV will have a material effect on our financial condition or results of operations, but they may exceed $300,000.
As part of our integration activities over the facilities acquired through the SRC Acquisition, we are in the process of conducting a comprehensive air quality compliance audit. We do not believe potential penalties and other expenditures associated with deficiencies identified through the audit will have a material effect on our financial condition or results of operations, but they may exceed $300,000.
Clean Air Act Agreement and Related Consent Decree. In June 2017, following our receipt of a 2015 Clean Air Act information request from the EPA and a 2015 compliance advisory from the Colorado Department of Public Health and Environment's (“CDPHE”) Air Pollution Control Division, the U.S. Department of Justice, on behalf of the EPA and the state of Colorado, filed a complaint against us in the U.S. District Court for the District of Colorado, claiming that we failed to operate and maintain certain condensate collection facilities at 65 facilities so as to minimize leakage of volatile organic compounds in compliance with applicable law.
In October 2017, we entered into a consent decree to resolve the lawsuit and the compliance advisory. Pursuant to the consent decree, we agreed to implement a variety of operational enhancements, and environmental mitigations and similar projects, including vapor control system modifications and verification, increased inspection and monitoring and installation of tank pressure monitors. While many of those actions are complete, some requirements will continue until the consent decree is terminated.
In addition, as a result of the SRC Acquisition, we are subject to a 2018 Compliance Order on Consent (“COC”) entered into by SRC with CDPHE, applicable to certain oil and gas production facilities we acquired in the SRC Acquisition. The CDPHE revised the COC to make the inspection and monitoring requirements, among others, consistent with those contained in our consent decree.
Since the consent decree took effect, and more recently was expanded to include the COC, we have timely implemented the various programs that meet its requirements. Over the course of this execution, we have identified certain immaterial deficiencies in our implementation of the programs. We report these immaterial deficiencies to the appropriate authorities and remediate them promptly. We do not believe that the penalties and expenditures associated with the consent decree, including any sanctions associated with these deficiencies, will have a material effect on our financial condition or results of operations, but they may exceed $300,000.
19
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Further, we could be the subject of other enforcement actions by regulatory authorities in the future relating to our past, present or future operations.
NOTE 12 - COMMON STOCK
Stock-Based Compensation Plans
2018 Equity Incentive Plan. In May 2020, our stockholders approved an amendment to increase the number of shares of our common stock reserved for issuance pursuant to our long-term equity compensation plan for employees and non-employee directors (the “2018 Plan”) from 1,800,000 to 7,050,000. As of March 31, 2021, there were 4,510,117 shares available for grant under the 2018 Plan.
2010 Long-Term Equity Compensation Plan. Our Amended and Restated 2010 Long-Term Equity Compensation Plan, which was approved by stockholders in 2013 (the "2010 Plan"), remains outstanding and we may continue to use the 2010 Plan to grant awards. No awards may be granted under the 2010 Plan on or after June 5, 2023. As of March 31, 2021, there were 287,031 shares available for grant under the 2010 Plan.
2015 SRC Equity Incentive Plan. For the three months ended and as of March 31, 2021, there were no changes to the 2015 SRC Equity Incentive Plan and there were no shares available for grant.
The following table provides a summary of the impact of our outstanding stock-based compensation plans on the results of operations for the periods presented:
Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||
General and administrative expense | $ | 4,828 | $ | 5,408 | ||||||||||
Lease operating expense | 192 | 264 | ||||||||||||
Total stock-based compensation expense | $ | 5,020 | $ | 5,672 |
Restricted Stock Units
The following table presents the changes in non-vested time-based RSUs to all employees, including executive officers, for the three months ended March 31, 2021:
Shares | Weighted-Average Grant Date Fair Value per Share | ||||||||||
Non-vested at beginning of period | 1,150,970 | $ | 20.14 | ||||||||
Granted | 237,719 | 28.75 | |||||||||
Vested | (206,368) | 29.38 | |||||||||
Forfeited | (9,987) | 13.84 | |||||||||
Non-vested at end of period | 1,172,334 | 20.32 |
The weighted-average grant date fair value of restricted stock units was $28.75 and $22.73 for the three months ended March 31, 2021 and 2020, respectively. Total compensation cost related to non-vested time-based awards and not yet recognized in our condensed consolidated statements of operations as of March 31, 2021 was $16.3 million. This cost is expected to be recognized over a weighted-average period of 1.90 years.
20
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Performance Stock Units
The Compensation Committee awarded a total of 207,655 market-based PSUs to our executive officers during the three months ended March 31, 2021. In addition to continuous employment, the vesting of these PSUs is contingent on a combination of absolute stock performance and our total stockholder return ("TSR"), which is essentially our stock price change, including any dividends, over a three-year period ending on December 31, 2023, as compared to the TSR of a group of peer companies over the same period. The PSUs will result in a payout between zero and 250 percent of the target PSUs awarded.
The grant-date fair value was estimated using a Monte Carlo valuation model. The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. The expected term of the awards was based on the requisite service period. The risk-free interest rate was based on the U.S. Treasury yields in effect at the time of grant and extrapolated to approximate the life of the award. The expected volatility was based on our common stock historical volatility.
The following table summarizes the key assumptions and related information used to determine the grant-date fair value of performance stock units awarded during the periods presented:
Three Months Ended March 31, | |||||||||||
2021 | 2020 | ||||||||||
Expected term of award (in years) | 3 | 3 | |||||||||
Risk-free interest rate | 0.2% | 1.4% | |||||||||
Expected volatility | 84.6% | 46.6% | |||||||||
Weighted-average grant date fair value per share | $54.01 | $33.52 |
SRC Performance Stock Units. The terms of the SRC PSUs are substantially the same as those of the PDC PSUs, except that the SRC PSUs do not require continuous employment and the performance period associated with the awards of January 1, 2019 through December 31, 2021 predates the grant date. The fair value of the SRC PSU awards was determined on the grant date of January 13, 2020 using the Monte Carlo pricing model using the following assumptions:
Three Months Ended March 31, 2020 | |||||
Expected term of awards (in years) | 2 | ||||
Risk-free interest rate | 1.6% | ||||
Expected volatility | 56.9% | ||||
Weighted-average grant date fair value per share | $33.35 |
The expected term of the awards is based on the number of years from the grant date through the end of the performance period. The risk-free interest rate was based on the U.S. Treasury yields in effect at the time of grant, extrapolated to approximate the life of the awards. The expected volatility was based on our common stock historical volatility, as well as that of our peer group.
The following table presents the change in non-vested market-based awards, including SRC PSUs, during the three months ended March 31, 2021:
Shares | Weighted-Average Grant Date Fair Value per Share | |||||||||||||
Non-vested at beginning of period | 499,547 | $ | 38.66 | |||||||||||
Granted | 207,655 | 54.01 | ||||||||||||
Non-vested at end of period | 707,202 | 43.17 |
Total compensation cost related to non-vested market-based awards not yet recognized in our condensed consolidated statements of operations as of March 31, 2021 was $17.2 million. This cost is expected to be recognized over a weighted-average period of 1.90 years.
21
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
Stock Appreciation Rights
All outstanding SARs as of March 31, 2021 have vested and the related compensation cost has been fully recognized. As of March 31, 2021, there were 176,124 SARs outstanding and exercisable which have a weighted-average exercise price of $48.92 and average remaining contractual term of 3.7 years. Outstanding and exercisable SARs have no intrinsic value as of March 31, 2021.
Preferred Stock
We are authorized to issue 50,000,000 shares of preferred stock, par value $0.01 per share, which may be issued in one or more series, with such rights, preferences, privileges and restrictions as shall be fixed by the board of directors from time to time. Through March 31, 2021, no shares of preferred stock have been issued.
Stock Repurchase Program
In April 2019, the board of directors approved the repurchase of up to $200 million of our outstanding common stock, depending on market conditions (the "Stock Repurchase Program"). Effective upon the closing of the SRC Acquisition, our board of directors approved an increase and extension to the Stock Repurchase Program from $200 million to $525 million. Repurchases under the Stock Repurchase Program can be made in open markets at our discretion and in compliance with safe harbor provisions, or in privately negotiated transactions. The Stock Repurchase Program does not require any specific number of shares to be acquired, and can be modified or discontinued by the board of directors at any time. Pursuant to the Stock Repurchase Program, we repurchased 0.6 million shares and 1.3 million shares of outstanding common stock at a cost of $22.1 million and $23.8 million during the three months ended March 31, 2021 and 2020, respectively. Due to adverse market conditions, we suspended the program in March 2020 and reinstated it in February 2021. Repurchases may extend until December 31, 2023. As of March 31, 2021, $324.7 million of our outstanding common stock remained available for repurchase under the Stock Repurchase Program.
NOTE 13 - INCOME TAXES
We compute our quarterly tax provision using the effective tax rate method by applying the anticipated annual effective rate to our year-to-date income or loss, except for discrete items. Income tax on discrete items is computed and recorded in the period in which the specific transaction occurs.
We consider whether a portion, or all, of the deferred tax assets (“DTAs”) will be realized based on a more likely than not standard of judgment. The ultimate realization of DTAs is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. As of December 31, 2020, we had a full valuation allowance totaling $165.6 million against our DTAs resulting from prior year cumulative financial losses, oil and gas impairments, and significant net operating losses for U.S. federal and state income tax. The Company assesses the appropriateness of its valuation allowance on a quarterly basis. As of March 31, 2021, there was no change in our assessment of the realizability of our DTAs. We will continue to evaluate whether the valuation allowance is warranted in future reporting periods.
As long as we conclude that we will continue to provide for a valuation allowance against our net DTA, we will likely not have any additional income tax expense or benefit other than for state income taxes. The effective income tax rates for the three months ended March 31, 2021 and March 31, 2020 were 0.6 percent provision on loss and 1.6 percent benefit on loss, respectively.
As of March 31, 2021, there is no liability for unrecognized income tax benefits. As of the date of this report, we are current with our income tax filings in all applicable state jurisdictions and are not currently under any state income tax examinations. The IRS has partially accepted our 2019 federal income tax return with no tax adjustments. We continue to voluntarily participate in the IRS CAP Program for the review of our 2020 and 2021 tax years. Participation in the IRS CAP Program has enabled us to have minimal uncertain tax benefits associated with our federal tax return filings.
22
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
NOTE 14 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is similarly computed, except that the denominator includes the effect, using the treasury stock method, of unvested equity-based employee awards, convertible notes and shares held pursuant to our non-employee director deferred compensation plan, if including such potential shares of common stock is dilutive.
The following table presents our weighted-average basic and diluted shares outstanding for the periods presented:
Three Months Ended March 31, | |||||||||||
2021 | 2020 | ||||||||||
(in thousands) | |||||||||||
Weighted-average common shares outstanding - basic | 99,702 | 94,077 | |||||||||
Weighted-average common shares and equivalents outstanding - diluted | 99,702 | 94,077 | |||||||||
We reported a net loss for the three months ended March 31, 2021 and 2020. As a result, our basic and diluted weighted-average common shares outstanding were the same for those periods because the effect of the common share equivalents was anti-dilutive.
The following table presents the weighted-average common share equivalents excluded from the calculation of diluted earnings per share due to their anti-dilutive effect for the periods presented:
Three Months Ended March 31, | |||||||||||
2021 | 2020 | ||||||||||
(in thousands) | |||||||||||
Weighted-average common share equivalents excluded from diluted earnings per share due to their anti-dilutive effect: | |||||||||||
RSUs and PSUs | 1,748 | 1,319 | |||||||||
Other equity-based awards | 212 | 245 | |||||||||
Total anti-dilutive common share equivalents | 1,960 | 1,564 |
The 2021 Convertible Notes give the holders, at our election, the right to convert the aggregate principal amount into 2.3 million shares of our common stock at a conversion price of $85.39 per share. The 2021 Convertible Notes were not included in the diluted earnings per share calculation using the treasury stock method for any periods presented as the average market price of our common stock did not exceed the conversion price.
23
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)
NOTE 15 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||
(in thousands) | ||||||||||||||
Supplemental cash flow information: | ||||||||||||||
Cash payments (receipts) for: | ||||||||||||||
Interest, net of capitalized interest | $ | 9,043 | $ | 16,915 | ||||||||||
Income taxes | (1,388) | (204) | ||||||||||||
Non-cash investing and financing activities: | ||||||||||||||
Change in accounts payable related to capital expenditures | $ | 15,393 | $ | 70,026 | ||||||||||
Change in asset retirement obligations, with a corresponding change to crude oil and natural gas properties, net of disposals | 206 | 42,126 | ||||||||||||
Issuance of common stock for the acquisition of crude oil and natural gas properties, net | — | 1,009,015 | ||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
Operating cash flows from operating leases | $ | 2,224 | $ | 2,131 | ||||||||||
Operating cash flows from finance leases | 20 | 57 | ||||||||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||
Operating leases | $ | — | $ | 4,217 | ||||||||||
Finance leases | 917 | 471 |
24
PDC ENERGY, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in Item 1. Financial Statements of this report. Further, we encourage you to review the Special Note Regarding Forward-Looking Statements.
EXECUTIVE SUMMARY
March 31, 2021 Financial Overview of Operations and Liquidity
COVID-19 Impact
In 2020, the COVID-19 pandemic led to a significant decline in global demand for crude oil and natural gas, contributing to a drastic reduction in commodity prices and negatively impacting oil and natural gas producers located in the United States, including PDC. Various actions by OPEC and other producing countries have aided in the recovery of global commodity prices since the first quarter of 2020. Specifically, WTI spot prices for crude oil fell to a low of negative $36.98 per barrel on April 20, 2020 and have since recovered to a high of $66.08 on March 5, 2021. The commodity price environment may remain volatile for an extended period as a result of reduced global oil and natural gas demand and the global economic recession. We expect to be able to fund our operations, planned capital expenditures, working capital and other requirements during the next 12 months and for the foreseeable future.
Financial Matters
Production volumes were 15.7 MMboe for the three months ended March 31, 2021, representing a decrease of 7 percent as compared to the three months ended March 31, 2020. The decrease was primarily driven by (i) reduced capital expenditures in the second half of 2020 resulting from the COVID-19 related decrease in demand for oil and natural gas and (ii) a loss of approximately 0.5 MMBoe from temporary shut-ins of our wells driven by severe weather during the first quarter of 2021. For the month ended March 31, 2021, we maintained an average daily production rate of approximately 173,000 Boe per day, which reflected a reduction of approximately 8,000 Boe per day from the severe weather during the period. Production for the month ended March 31, 2020 was approximately 194,000 Boe per day.
On a sequential quarterly basis, total production for the three months ended March 31, 2021 decreased 5 percent to 15.7 MMboe as compared to 16.6 MMboe for the three months ended December 31, 2020 due to the temporary shut-ins mentioned above and two fewer days in the first quarter of 2021.
Crude oil, natural gas and NGLs sales increased to $468.1 million for the three months ended March 31, 2021 compared to $320.3 million for the three months ended March 31, 2020. The increase in revenues between periods was primarily due to the 56 percent increase in weighted-average realized commodity prices, with a positive realization of approximately $25 million to $30 million in natural gas sales as a result of atypical pricing from the February 2021 severe weather conditions. The overall increase was partially offset by the 7 percent decrease in production between periods.
We had negative net settlements from our commodity derivative contracts of $30.7 million for the three months ended March 31, 2021, as compared to positive net settlements of $45.8 million for the three months ended March 31, 2020.
The combined revenue from crude oil, natural gas and NGLs sales and net settlements from our commodity derivative instruments increased 19 percent to $437.4 million for the three months ended March 31, 2021 from $366.1 million for the three months ended March 31, 2020.
For the three months ended March 31, 2021, we generated a net loss of $9.0 million, or $0.09 per diluted share, compared to a net loss of $465.0 million, or $4.94 per diluted share, for the comparable period in 2020. The decrease in net loss between periods of $456.0 million was primarily due to an increase in crude oil, natural gas and NGLs sales of $147.8 million, a decrease in general and administrative expense of $29.5 million realized in the first quarter of 2021 and an $881.1 million impairment charge recognized in the first quarter of 2020. These positive factors impacting the decrease in our net loss between periods were partially offset by a $181.3 million commodity price risk management loss in the first quarter of 2021 compared to a $434.7 million commodity price risk management gain in the first quarter of 2020.
25
PDC ENERGY, INC.
Adjusted EBITDAX, a non-U.S. GAAP financial measure, was $316.0 million and $228.1 million for the three months ended March 31, 2021 and 2020, respectively, primarily due to an increase in combined revenues of $71.3 million between periods.
Cash flows from operations were $353.1 million and $266.3 million for the three months ended March 31, 2021 and 2020, respectively, and our adjusted cash flows from operations, a non-U.S. GAAP financial measure, were $300.0 million and $209.8 million, respectively. Adjusted free cash flows, a non-U.S. GAAP financial measure, were $175.6 million and a deficit of $51.0 million, respectively. Adjusted free cash flow deficit for the three months ended March 31, 2020 included approximately $26.5 million of transaction and transition costs incurred related to the SRC Acquisition.
See Reconciliation of Non-U.S. GAAP Financial Measures below for a more detailed discussion of these non-U.S. GAAP financial measures and a reconciliation of these measures to the most comparable U.S. GAAP measures.
Drilling and Completion Overview
During the three months ended March 31, 2021, we operated one full-time drilling rig, one spudder rig and one full-time completion crew in the Wattenberg Field. In addition, we operated one full-time drilling rig and one part-time completion crew starting in March in the Delaware Basin. Our total capital investments in crude oil and natural gas properties for the three months ended March 31, 2021 were $124.4 million.
The following tables summarize our drilling and completion activity for the three months ended March 31, 2021:
Operated Wells | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | Delaware Basin | Total | ||||||||||||||||||||||||||||||||||||
Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||||||||||||||||
In-process as of December 31, 2020 | 214 | 201.8 | 20 | 19.0 | 234 | 220.8 | ||||||||||||||||||||||||||||||||
Wells spud | 20 | 19.5 | 4 | 4.0 | 24 | 23.5 | ||||||||||||||||||||||||||||||||
Wells turned-in-line | (34) | (32.6) | — | — | (34) | (32.6) | ||||||||||||||||||||||||||||||||
In-process as of March 31, 2021 | 200 | 188.7 | 24 | 23.0 | 224 | 211.7 |
Our in-process wells represent wells that are in the process of being drilled or have been drilled and are waiting to be fractured and/or for gas pipeline connection. Our in-process wells are generally completed and turned-in-line within two years of drilling.
Stock Repurchase Program
In February 2021, we reinstated our Stock Repurchase Program in light of our reduced level of indebtedness. During the three months ended March 31, 2021, we repurchased 0.6 million shares of our outstanding common stock at a cost of $22.1 million. Approximately $324.7 million remained available for repurchases under the program as of March 31, 2021.
Liquidity
Available liquidity as of March 31, 2021 was $1.7 billion, which was comprised of $59.1 million of cash and cash equivalents and $1.6 billion available for borrowing under our revolving credit facility. On April 30, 2021, as part of our spring 2021 semi-annual redetermination, the borrowing base of our credit facility increased from $1.6 billion to $1.8 billion; however, we retained our elected commitment of $1.6 billion. Based on our expected cash flows from operations, our cash and cash equivalents and availability under our revolving credit facility, we believe that we will have sufficient capital available to repay our 2021 Convertible Notes, which mature in September 2021, to fund our planned activities, and to pay potential future dividends and/or repurchase additional shares through the 12-month period following the filing of this report. Our debt balance on March 31, 2021 was $1.4 billion.
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PDC ENERGY, INC.
2021 Operational and Financial Outlook
We anticipate that our production in 2021 will range between 190,000 Boe to 200,000 Boe per day, approximately 64,000 Bbls to 68,000 Bbls of which are expected to be crude oil. Our planned 2021 capital investments in crude
oil and natural gas properties, which we expect to be between $500 million and $600 million, are focused on continued execution of our development plans in the Wattenberg Field and the Delaware Basin.
We have operational flexibility to control the pace of our capital spending. As we execute our capital investment program, we continually monitor, among other things, expected rates of return, the political environment and our remaining inventory in order to best meet our short- and long-term corporate strategy. We may revise our 2021 capital investment program during the year as a result of, among other things, changes in commodity prices or our internal long-term outlook for commodity prices, requirements to hold acreage, the cost of services for drilling and well completion activities, drilling results, changes in our borrowing capacity, a significant change in cash flows, regulatory issues, requirements to maintain continuous activity on leaseholds or acquisition and/or divestiture opportunities. We expect that we may experience increases in capital and operating costs as oil and gas demand recovers.
Wattenberg Field. We are drilling in the horizontal Niobrara and Codell plays in the rural areas of the core Wattenberg Field, which is further delineated between the Kersey, Prairie, Plains, and Summit development areas. Our 2021 capital investment program for the Wattenberg Field is approximately 75 percent of our expected total capital investments in crude oil and natural gas properties, of which approximately 90 percent is expected to be invested in operated drilling and completion activity. We plan to drill standard-reach lateral ("SRL"), mid-reach lateral (“MRL”) and extended-reach lateral (“XRL”) wells in the Wattenberg Field. In 2021, we anticipate spudding approximately 75 to 85 operated wells and turning-in-line approximately 150 to 175 operated wells. In 2021, we expect to operate with one full-time horizontal drilling rig crew and one full-time completion crew along with a part-time spudder rig. The remainder of the Wattenberg Field capital investment program is expected to be used for land, capital workovers, facilities projects and non-operated drilling.
Delaware Basin. Total capital investments in crude oil and natural gas properties in the Delaware Basin for 2021 are expected to be approximately 25 percent of our total capital investments, of which approximately 90 percent is expected to be invested in operated drilling and completion activity. In 2021, we anticipate spudding and turning-in-line approximately 15 to 20 operated wells. The majority of the wells we plan to drill in 2021 in the Delaware Basin are MRL and XRL wells. We expect to drill at a one-rig pace in 2021 along with a completion crew for four months which started in March 2021.
We are committed to our disciplined approach to managing our development plans. Based on our current production forecast for 2021 and assumed average NYMEX prices of $55.00 per Bbl of crude oil and $2.50 per Mcf of natural gas and an assumed average composite price of $15.00 per Bbl for NGLs, we expect 2021 cash flows from operations to exceed our capital investments in crude oil and natural gas properties. We expect that any excess cash flows from operations will be used to reduce our indebtedness, return capital to our shareholders, and for general corporate purposes.
Colorado Political Update
In Colorado, certain interest groups opposed to oil and natural gas have proposed ballot initiatives that could hinder or eliminate the ability to develop resources in the state. In 2019, the Colorado legislature passed Senate Bill 19-181 ("SB 19-181") to address concerns underlying the ballot initiatives.
As part of SB 19-181, a series of rulemaking hearings were conducted which focused on issues such as permitting requirements, setbacks and siting requirements, resulting in the adoption of new regulatory requirements. Rulemakings focused on financial assurance and permit fees have not been completed.
A key component of SB19-181 was the change in the COGCC mission from "fostering" the industry to "regulating" the industry. As a result, changes were made to the permitting process in Colorado. Permits are now designed as Oil and Gas Development Plans ("OGDP"), which streamlines single pad locations or proximate multi-pad locations into a single permitting package. Operators also have an option to pursue a Comprehensive Area Plan ("CAP"). A CAP is designed to represent a landscape-level look at oil and gas development in a larger area over a longer period of time, and to include multiple OGDPs within its boundaries. As both CAPs and OGDPs are new processes, the time needed to obtain a permit may be lengthened.
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We cannot predict whether future ballot initiatives or other legislation or regulation will be proposed that would dramatically limit the areas of the state in which drilling is permitted to occur.
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Results of Operations
Summary of Operating Results
The following table presents selected information regarding our operating results:
Three Months Ended March 31, | ||||||||||||||||||||
2021 | 2020 | Percent Change | ||||||||||||||||||
(dollars in millions, except per unit data) | ||||||||||||||||||||
Production: | ||||||||||||||||||||
Crude oil (MBbls) | 4,857 | 5,889 | (18) | % | ||||||||||||||||
Natural gas (MMcf) | 40,152 | 41,347 | (3) | % | ||||||||||||||||
NGLs (MBbls) | 4,192 | 4,065 | 3 | % | ||||||||||||||||
Crude oil equivalent (MBoe) | 15,740 | 16,845 | (7) | % | ||||||||||||||||
Average Boe per day (Boe) | 174,889 | 185,110 | (6) | % | ||||||||||||||||
Crude Oil, Natural Gas and NGLs Sales: | ||||||||||||||||||||
Crude oil | $ | 273.7 | $ | 249.2 | 10 | % | ||||||||||||||
Natural gas | 105.6 | 39.5 | 167 | % | ||||||||||||||||
NGLs | 88.8 | 31.6 | 181 | % | ||||||||||||||||
Total crude oil, natural gas and NGLs sales | $ | 468.1 | $ | 320.3 | 46 | % | ||||||||||||||
Net Settlements on Commodity Derivatives | ||||||||||||||||||||
Crude oil | $ | (20.5) | $ | 46.9 | (144) | % | ||||||||||||||
Natural gas | (10.2) | (1.1) | * | |||||||||||||||||
Total net settlements on derivatives | $ | (30.7) | $ | 45.8 | (167) | % | ||||||||||||||
Average Sales Price (excluding net settlements on derivatives): | ||||||||||||||||||||
Crude oil (per Bbl) | $ | 56.34 | $ | 42.32 | 33 | % | ||||||||||||||
Natural gas (per Mcf) | 2.63 | 0.96 | 174 | % | ||||||||||||||||
NGLs (per Bbl) | 21.19 | 7.78 | 172 | % | ||||||||||||||||
Crude oil equivalent (per Boe) | 29.74 | 19.02 | 56 | % | ||||||||||||||||
Average Costs and Expenses (per Boe): | ||||||||||||||||||||
Lease operating expenses | $ | 2.66 | $ | 2.94 | (10) | % | ||||||||||||||
Production taxes | 1.87 | 1.10 | 70 | % | ||||||||||||||||
Transportation, gathering and processing expenses | 1.38 | 0.80 | 73 | % | ||||||||||||||||
General and administrative expenses | 2.08 | 3.69 | (44) | % | ||||||||||||||||
Depreciation, depletion and amortization | 9.32 | 10.46 | (11) | % | ||||||||||||||||
Lease Operating Expense by Operating Region (per Boe) | ||||||||||||||||||||
Wattenberg Field | $ | 2.31 | $ | 2.77 | (17) | % | ||||||||||||||
Delaware Basin | 5.27 | 3.84 | 37 | % |
____________
* Percent change is not meaningful.
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PDC ENERGY, INC.
Crude Oil, Natural Gas and NGLs Sales
Crude oil, natural gas and NGLs sales for the three months ended March 31, 2021 increased compared to the three months ended March 31, 2020 due to the following:
Three Months Ended March 31, 2021 | |||||
(in millions) | |||||
Change in: | |||||
Production | $ | (43.8) | |||
Average crude oil price | 68.2 | ||||
Average natural gas price (1) | 67.2 | ||||
Average NGLs price | 56.2 | ||||
Total change in crude oil, natural gas and NGLs sales revenue | $ | 147.8 |
____________
(1) The change in average natural gas price has a positive realization of approximately $25 million to $30 million in natural gas sales as a result of atypical pricing from the February 2021 severe weather conditions.
Crude Oil, Natural Gas and NGLs Production
The following table presents crude oil, natural gas and NGLs production:
Three Months Ended March 31, | ||||||||||||||||||||
Production by Operating Region | 2021 | 2020 | Percent Change | |||||||||||||||||
Crude oil (MBbls) | ||||||||||||||||||||
Wattenberg Field | 4,173 | 4,926 | (15) | % | ||||||||||||||||
Delaware Basin | 684 | 963 | (29) | % | ||||||||||||||||
Total | 4,857 | 5,889 | (18) | % | ||||||||||||||||
Natural gas (MMcf) | ||||||||||||||||||||
Wattenberg Field | 35,561 | 35,057 | 1 | % | ||||||||||||||||
Delaware Basin | 4,591 | 6,290 | (27) | % | ||||||||||||||||
Total | 40,152 | 41,347 | (3) | % | ||||||||||||||||
NGLs (MBbls) | ||||||||||||||||||||
Wattenberg Field | 3,800 | 3,346 | 14 | % | ||||||||||||||||
Delaware Basin | 392 | 719 | (45) | % | ||||||||||||||||
Total | 4,192 | 4,065 | 3 | % | ||||||||||||||||
Crude oil equivalent (MBoe) | ||||||||||||||||||||
Wattenberg Field | 13,900 | 14,115 | (2) | % | ||||||||||||||||
Delaware Basin | 1,840 | 2,730 | (33) | % | ||||||||||||||||
Total | 15,740 | 16,845 | (7) | % | ||||||||||||||||
Average crude oil equivalent per day (Boe) | ||||||||||||||||||||
Wattenberg Field | 154,444 | 155,110 | — | % | ||||||||||||||||
Delaware Basin | 20,445 | 30,000 | (32) | % | ||||||||||||||||
Total | 174,889 | 185,110 | (6) | % |
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PDC ENERGY, INC.
Net production volumes for oil, natural gas and NGLs decreased 7 percent during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease in production volume between periods was driven by (i) reduced capital expenditures in the second half of 2020 resulting from the COVID-19 related decrease in demand for oil and gas and (ii) a loss of approximately 0.5 MMBoe from temporary shut-ins of a significant portion of our wells driven by severe weather during the first quarter of 2021.
The following table presents our crude oil, natural gas and NGLs production ratio by operating region:
Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||
Crude Oil | Natural Gas | NGLs | Total | |||||||||||||||||||||||
Wattenberg Field | 30% | 43% | 27% | 100% | ||||||||||||||||||||||
Delaware Basin | 37% | 42% | 21% | 100% | ||||||||||||||||||||||
Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||
Crude Oil | Natural Gas | NGLs | Total | |||||||||||||||||||||||
Wattenberg Field | 35% | 41% | 24% | 100% | ||||||||||||||||||||||
Delaware Basin | 35% | 39% | 26% | 100% |
The change in production mix in the Wattenberg Field between periods was driven by our 2021 developmental plans being focused in areas that have a higher gas/oil ratio.
Midstream Capacity
Our ability to market our production depends substantially on the availability, proximity and capacity of in-field gathering systems, compression and processing facilities, as well as transportation pipelines out of the basin, all of which are owned and operated by third parties. If adequate midstream facilities and services are not available on a timely basis and at acceptable costs, our production and results of operations could be adversely affected. In response to the substantial development drilling in our current areas of operation in recent years, third-party midstream providers have significantly expanded their midstream facilities and services. These third-party midstream facility expansions, in conjunction with the more recent slowdown in producer activity, have resulted in improved and more stabilized line pressures and a midstream environment that is more favorable for producers. We expect this to remain the case for the near term given anticipated production levels in the Wattenberg Field.
The ultimate timing and availability of adequate infrastructure remains out of our control. Weather, regulatory developments and other factors also affect the adequacy of midstream infrastructure. Like other producers, from time to time, we enter into volume commitments with midstream providers in order to incentivize them to provide increased capacity to sufficiently meet our projected volume growth from our areas of operation. If our production falls below the level required under these agreements, we could be subject to transportation charges or aid in construction payments for commitment shortfalls.
Wattenberg Field. In the fourth quarter of 2020 and the first quarter of 2021, DCP Midstream, LP's ("DCP") most recent major system expansions were installed, commissioned and placed into service. These major expansions, in combination with available residue gas and NGL takeaway out of the basin, resulted in reduced line pressures for all of our operated areas of the Wattenberg Field. Given current and forecasted activity levels in the basin, we anticipate that these expansions will provide ample processing capacity to accommodate our operated production for the foreseeable future.
Our production in the Wattenberg Field is significantly dependent on DCP's gathering system. We continue to work with our midstream service providers in an effort to ensure all of the existing in-basin infrastructure is fully utilized and that all options for system expansion are evaluated and implemented to the extent possible to accommodate projected future volume growth from the field.
As midstream infrastructure development and upstream capital discipline continues, we anticipate having the ability to move additional volumes on DCP’s system in the long-term. The successful and timely completion of incremental development projects depends on continued capital investment by midstream providers, which could be impacted during times of challenging market conditions.
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Delaware Basin. Our production from the Delaware Basin was not materially affected by midstream or downstream capacity constraints during the three months ended March 31, 2021.
The completion of Kinder Morgan’s Permian Highway Pipeline occurred in the fourth quarter of 2020 and provides additional takeaway capacity out of the Permian Basin. A portion of our natural gas production is committed to the use of this pipeline which began January 2021.
Crude Oil, Natural Gas and NGLs Pricing
Our results of operations depend upon many factors. Key factors include market prices of crude oil, natural gas and NGLs and our ability to market our production effectively. Crude oil, natural gas and NGLs prices have a high degree of volatility and our realizations can change substantially. Our realized sales prices for crude oil, natural gas and NGLs increased 56 percent during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The NYMEX average daily crude oil and NYMEX first-of-the-month natural gas prices increased 25 percent and 38 percent, respectively, in the first quarter of 2021 as compared to the first quarter of 2020.
The following table presents weighted-average sales prices of crude oil, natural gas and NGLs for the periods presented.
Three Months Ended March 31, | ||||||||||||||||||||
Weighted-Average Realized Sales Price by Operating Region | Percent Change | |||||||||||||||||||
(excluding net settlements on derivatives) | 2021 | 2020 | ||||||||||||||||||
Crude oil (per Bbl) | ||||||||||||||||||||
Wattenberg Field | $ | 56.54 | $ | 41.96 | 35 | % | ||||||||||||||
Delaware Basin | 55.13 | 44.15 | 25 | % | ||||||||||||||||
Weighted-average price | 56.34 | 42.32 | 33 | % | ||||||||||||||||
Natural gas (per Mcf) | ||||||||||||||||||||
Wattenberg Field | $ | 2.73 | $ | 1.14 | 139 | % | ||||||||||||||
Delaware Basin(1) | 1.88 | (0.09) | * | |||||||||||||||||
Weighted-average price | 2.63 | 0.96 | 174 | % | ||||||||||||||||
NGLs (per Bbl) | ||||||||||||||||||||
Wattenberg Field | $ | 20.47 | $ | 7.54 | 171 | % | ||||||||||||||
Delaware Basin | 28.23 | 8.88 | 218 | % | ||||||||||||||||
Weighted-average price | 21.19 | 7.78 | 172 | % | ||||||||||||||||
Crude oil equivalent (per Boe) | ||||||||||||||||||||
Wattenberg Field | $ | 29.55 | $ | 19.27 | 53 | % | ||||||||||||||
Delaware Basin | 31.17 | 17.71 | 76 | % | ||||||||||||||||
Weighted-average price | 29.74 | 19.02 | 56 | % |
____________
* Percent change is not meaningful.
(1)Negative realized natural gas pricing due to the deduction for transportation, gathering and processing by the purchaser exceeding the average sales price of natural gas.
Crude oil, natural gas and NGLs revenues are recognized when we transfer control of crude oil, natural gas or NGLs production to the purchaser. We consider the transfer of control to occur when the purchaser has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the crude oil, natural gas or NGLs production. We record sales revenue based on an estimate of the volumes delivered at estimated prices as determined by the applicable sales agreement. We estimate our sales volumes based on company-measured volume readings. We then adjust our crude oil, natural gas and NGLs sales in subsequent periods based on the data received from our purchasers that reflects actual volumes delivered and prices received.
Our crude oil, natural gas and NGLs sales are recorded using either the “net-back” or "gross" method of accounting, depending upon the related purchase agreement. We use the net-back method when control of the crude oil, natural gas or NGLs has been transferred to the purchasers of these commodities that are providing transportation, gathering or processing services. In these situations, the purchaser pays us based on a percent of proceeds or a sales price fixed at index less specified deductions. The net-back method results in the recognition of a net sales price that is lower than the index on which the
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production is based because the operating costs and profit of the midstream facilities are embedded in the net price we are paid. We use the gross method of accounting when control of the crude oil, natural gas or NGLs is not transferred to the purchaser and the purchaser does not provide transportation, gathering or processing services as a function of the price we receive. Rather, we contract separately with midstream providers for the applicable transportation and processing on a per unit basis. Under this method, we recognize revenues based on the gross selling price and recognize transportation, gathering and processing expense.
As discussed above, we enter into agreements for the sale and transportation, gathering and processing of our production, the terms of which can result in variances in the per unit realized prices that we receive for our crude oil, natural gas and NGLs. Information related to the components and classifications in the condensed consolidated statements of operations is shown below. For crude oil, the average NYMEX prices shown below are based on average daily prices throughout each month and, for natural gas, the average NYMEX pricing is based on first-of-the-month index prices, as in each case this is the method used to sell the majority of these commodities pursuant to terms of the relevant sales agreements. For NGLs, we use the NYMEX crude oil price as a reference for presentation purposes. The average realized price both before and after transportation, gathering and processing expense shown in the table below represents our approximate composite per barrel price for NGLs.
Three Months Ended March 31, 2021 | Average NYMEX Price | Average Realized Price Before Transportation, Gathering and Processing Expense | Average Realization Percentage Before Transportation, Gathering and Processing Expense | Average Transportation, Gathering and Processing Expense (1) | Average Realized Price After Transportation, Gathering and Processing Expense | Average Realization Percentage After Transportation, Gathering and Processing Expense | ||||||||||||||||||||||||||||||||
Crude oil (per Bbl) | $ | 57.84 | $ | 56.34 | 97 | % | $ | 3.32 | $ | 53.02 | 92 | % | ||||||||||||||||||||||||||
Natural gas (per MMBtu) | 2.69 | 2.63 | 98 | % | 0.11 | 2.52 | 94 | % | ||||||||||||||||||||||||||||||
NGLs (per Bbl) | 57.84 | 21.19 | 37 | % | — | 21.19 | 37 | % | ||||||||||||||||||||||||||||||
Crude oil equivalent (per Boe) | 40.12 | 29.74 | 74 | % | 1.32 | 28.42 | 71 | % | ||||||||||||||||||||||||||||||
Three Months Ended March 31, 2020 | Average NYMEX Price | Average Realized Price Before Transportation, Gathering and Processing Expense | Average Realization Percentage Before Transportation, Gathering and Processing Expense | Average Transportation, Gathering and Processing Expense (1) | Average Realized Price After Transportation, Gathering and Processing Expense | Average Realization Percentage After Transportation, Gathering and Processing Expense | ||||||||||||||||||||||||||||||||
Crude oil (per Bbl) | $ | 46.17 | $ | 42.32 | 92 | % | $ | 1.46 | $ | 40.86 | 88 | % | ||||||||||||||||||||||||||
Natural gas (per MMBtu) | 1.95 | 0.96 | 49 | % | 0.11 | 0.85 | 44 | % | ||||||||||||||||||||||||||||||
NGLs (per Bbl) | 46.17 | 7.78 | 17 | % | — | 7.78 | 17 | % | ||||||||||||||||||||||||||||||
Crude oil equivalent (per Boe) | 32.08 | 19.02 | 59 | % | 0.77 | 18.25 | 57 | % |
____________
(1)Average TGP excludes unutilized firm transportation fees of $0.06 per Boe and $0.03 per Boe for the three months ended March 31, 2021 and 2020, respectively.
Our average realization percentages for crude oil, natural gas and NGLs increased in the three months ended March 31, 2021 as compared to the same period in 2020 due to the improvement in oil and gas product demand that occurred as countries relaxed COVID-19 restrictions throughout 2020 and 2021. Our natural gas realizations were notably higher due to strong February pricing that resulted from severe weather conditions.
Commodity Price Risk Management
We use commodity derivative instruments to manage fluctuations in crude oil and natural gas prices, including collars, fixed-price exchanges and basis protection exchanges on a portion of our estimated crude oil and natural gas production. For our commodity exchanges, we ultimately realize the fixed price value related to the swaps. See Note 5 - Commodity Derivative Financial Instruments in Item 1. Financial Statements included elsewhere in this report for a summary of our derivative positions as of March 31, 2021.
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Commodity price risk management, net, includes cash settlements upon maturity of our derivative instruments, and the change in fair value of unsettled commodity derivatives related to our crude oil and natural gas production.
Net settlements of commodity derivative instruments are based on the difference between the crude oil and natural gas index prices at the settlement date of our commodity derivative instruments compared to the respective strike prices contracted for the settlement months that were established at the time we entered into the commodity derivative transaction. The net change in fair value of unsettled commodity derivatives is comprised of the net increase or decrease in the beginning-of-period fair value of commodity derivative instruments that settled during the period and the net change in fair value of unsettled commodity derivatives during the period or from inception of any new contracts entered into during the applicable period. The net change in fair value of unsettled commodity derivatives during the period is primarily related to shifts in the crude oil and natural gas forward price curves and changes in certain differentials.
The following table presents net settlements and net change in fair value of unsettled derivatives included in commodity price risk management, net:
Three Months Ended March 31, | |||||||||||
2021 | 2020 | ||||||||||
(in millions) | |||||||||||
Commodity price risk management gain (loss), net: | |||||||||||
Net settlements of commodity derivative instruments: | |||||||||||
Crude oil collars and fixed price exchanges | $ | (20.5) | $ | 46.9 | |||||||
Natural gas collars and fixed price exchanges | (2.8) | 0.3 | |||||||||
Natural gas basis protection exchanges | (7.4) | (1.4) | |||||||||
Total net settlements of commodity derivative instruments | (30.7) | 45.8 | |||||||||
Change in fair value of unsettled commodity derivative instruments: | |||||||||||
Reclassification of settlements included in prior period changes in fair value of commodity derivative instruments | (0.7) | 4.3 | |||||||||
Crude oil collars and fixed price exchanges | (137.8) | 391.9 | |||||||||
Natural gas collars and fixed price exchanges | (2.1) | (1.8) | |||||||||
Natural gas basis protection exchanges | (10.0) | (5.5) | |||||||||
Net change in fair value of unsettled commodity derivative instruments | (150.6) | 388.9 | |||||||||
Total commodity price risk management gain (loss), net | $ | (181.3) | $ | 434.7 |
Lease Operating Expense
Lease operating expense ("LOE") decreased by 16 percent to $41.8 million for the three months ended March 31, 2021 compared to $49.5 million for the three months ended March 31, 2020. The period-over-period decrease in LOE was primarily attributable to operational efficiencies realized from the SRC Acquisition in the Wattenberg Field for approximately $4.5 million. In addition, we had a decrease in water production, which resulted in a $1.5 million decrease in water disposal costs in the Delaware Basin. LOE per Boe decreased 10 percent to $2.66 for the three months ended March 31, 2021 from $2.94 for the three months ended March 31, 2020, primarily due to the factors discussed above, partially offset by a 7 percent decrease in production volumes between periods.
Production Taxes
Production taxes are comprised mainly of severance tax and ad valorem tax, and are directly related to crude oil, natural gas and NGLs sales and are generally assessed as a percentage of net revenues. From time to time, there are adjustments to the statutory rates for these taxes based upon certain credits that are determined based upon activity levels and relative commodity prices from year-to-year.
Production taxes increased 60 percent to $29.5 million for the three months ended March 31, 2021 compared to $18.5 million for the three months ended March 31, 2020. Production taxes per Boe increased 70 percent to $1.87 for the three months ended March 31, 2021 compared to $1.10 for the three months ended March 31, 2020. The increase in production taxes was primarily due to an increase in crude oil, natural gas and NGLs sales between periods.
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Transportation, Gathering and Processing Expense
Transportation, gathering and processing expense ("TGP") increased 61 percent to $21.7 million for the three months ended March 31, 2021 compared to $13.5 million for the three months ended March 31, 2020. TGP per Boe increased 73 percent to $1.38 for the three months ended March 31, 2021 compared to $0.80 for the three months ended March 31, 2020.
The increase in TGP was primarily due to increases in transportation rates relating to our crude oil volumes delivered and amendments to existing crude oil sales contracts, which resulted in a change in recognition from a net-back to a gross presentation of TGP.
Impairment of Properties and Equipment
There were no significant impairment charges recognized related to our proved and unproved oil and gas properties during the three months ended March 31, 2021. If crude oil prices decline, or we change other estimates impacting future net cash flows (e.g. reserves, price differentials, future operating and/or development costs), our proved and unproved oil and gas properties could be subject to additional impairments in future periods.
During the three months ended March 31, 2020, we recorded impairment charges of $881.1 million. The impairment charges during the three months ended March 31, 2020 were due to a significant decline in crude oil prices, which was considered a triggering event that required us to assess our crude oil and natural gas properties for possible impairment. As a result of our assessment, we recorded impairment charges of $881.1 million to our proved and unproved properties.
General and Administrative Expense
General and administrative expense decreased 47 percent to $32.7 million for the three months ended March 31, 2021 compared to $62.2 million for the three months ended March 31, 2020 primarily due to $26.5 million in transaction and transition costs incurred in the first quarter of 2020 related to the SRC Acquisition and a $2.8 million decrease relating to ongoing corporate cost savings initiatives.
Depreciation, Depletion and Amortization Expense
DD&A expense related to crude oil and natural gas properties is directly related to proved reserves and production volumes. DD&A expense related to crude oil and natural gas properties was $144.8 million for the three months ended March 31, 2021, compared to $173.8 million for the three months ended March 31, 2020. The decrease in total DD&A expense was primarily due to the proved property impairment recognized in the first quarter of 2020 in the Delaware Basin, which lowered the carrying value of our depletion base.
The period-over-period change in DD&A expense related to crude oil and natural gas properties was primarily due to the following:
Three Months Ended March 31, 2021 | ||||||||
(in millions) | ||||||||
Decrease in production | $ | (16.7) | ||||||
Decrease in weighted-average depreciation, depletion and amortization rates | (12.4) | |||||||
Total decrease in DD&A expense related to crude oil and natural gas properties | $ | (29.1) |
The following table presents our per Boe DD&A expense rates for crude oil and natural gas properties:
Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||
(per Boe) | ||||||||||||||
Operating Region/Area | ||||||||||||||
Wattenberg Field | $ | 9.22 | $ | 9.17 | ||||||||||
Delaware Basin | 9.01 | 16.60 | ||||||||||||
Total weighted-average | 9.20 | 10.46 |
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PDC ENERGY, INC.
Interest Expense, net
Interest expense, net decreased $5.1 million to $19.0 million for the three months ended March 31, 2021 compared to $24.2 million for the three months ended March 31, 2020. The decrease was primarily related to a $4.1 million decrease in interest as a result of reduced borrowings under our revolving credit facility between periods and a $2.8 million decrease in interest related to the partial redemption in February 2020 of the 2025 Senior Notes we assumed from the SRC Acquisition. These decreases were partially offset by a $2.2 million increase in interest expense related to the issuance of an additional $150 million aggregate principal amount of the 2026 Senior Notes in September 2020.
Provision for Income Taxes
We recorded a full valuation allowance against our net deferred tax assets for the three months ended March 31, 2021 and 2020 resulting in an effective income tax rate of a 0.6 percent provision on loss and a 1.6 percent benefit on loss, respectively. The effective tax rate differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21 percent to pre-tax income due to the valuation allowance in effect for both periods.
As long as we conclude that we will continue to provide for a valuation allowance against our net deferred tax assets, we will likely not have any additional income tax expense or benefit other than for state income taxes.
Net Income (Loss)/Adjusted Net Income (Loss)
The factors impacting net loss of $9.0 million and $465.0 million for the three months ended March 31, 2021 and 2020 are discussed above.
Adjusted net income, a non-U.S. GAAP financial measure, was $141.6 million for the three months ended March 31, 2021, and adjusted net loss, a non-U.S. GAAP financial measure, was $759.6 million for the three months ended March 31, 2020. With the exception of the tax-affected (when applicable) net change in fair value of unsettled commodity derivatives, the same factors impacted adjusted net income (loss). See Reconciliation of Non-U.S. GAAP Financial Measures below for a more detailed discussion of these non-U.S. GAAP financial measures and a reconciliation of these measures to the most comparable U.S. GAAP measures.
Financial Condition, Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operating activities, borrowings from our revolving credit facility, asset sales and proceeds raised in debt and equity capital market transactions. For the three months ended March 31, 2021, our net cash flows from operating activities were $353.1 million.
Our primary source of cash flows from operating activities is the sale of crude oil, natural gas and NGLs. Fluctuations in our operating cash flows are principally driven by commodity prices and changes in our production volumes. Commodity prices have historically been volatile and we manage a portion of this volatility through our use of commodity derivative instruments. We enter into commodity derivative instruments with maturities of no greater than five years from the date of the instrument. Our revolving credit facility imposes limits on the amount of our production we can hedge, and we may choose not to hedge the maximum amounts permitted. Therefore, we may still have fluctuations in our cash flows from operating activities due to the remaining non-hedged portion of our future production.
We may use our available liquidity for operating activities, capital investments, working capital requirements, acquisitions and for general corporate purposes. We maintain a significant capital investment program to execute our development plans, which requires capital expenditures to be made in periods prior to initial production from newly developed wells. From time to time, these activities may result in a working capital deficit; however, we do not believe that our working capital deficit as of March 31, 2021 is an indication of a lack of liquidity. We had working capital deficits of $608.3 million as of March 31, 2021 and $471.6 million as of December 31, 2020. We intend to continue to manage our liquidity position by a variety of means, including through the generation of cash flows from operations, investment in projects with favorable rates of return, protection of cash flows on a portion of our anticipated sales through the use of an active commodity derivative hedging program, utilization of the borrowing capacity under our revolving credit facility and, if warranted, capital markets transactions from time to time.
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PDC ENERGY, INC.
Our cash and cash equivalents were $59.1 million at March 31, 2021 and availability under our revolving credit facility was $1.6 billion, providing for a total liquidity position of $1.7 billion as of March 31, 2021. The borrowing base is primarily based on the loan value assigned to the proved reserves attributable to our crude oil and natural gas interests. Based on our current production forecast for 2021 and assumed average NYMEX prices of $55.00 per Bbl of crude oil and $2.50 per Mcf of natural gas and an assumed average composite price of $15.00 per Bbl of NGLs, we expect 2021 cash flows from operations to exceed our capital investments in crude oil and natural gas properties.
In April 2019, our board of directors approved the Stock Repurchase Program. Effective with the closing of the SRC Acquisition, the board approved an increase and extension to the Stock Repurchase Program from $200 million to $525 million. Pursuant to the Stock Repurchase Program, we repurchased 0.6 million shares and 1.3 million shares of outstanding common stock at a cost of $22.1 million and $23.8 million during the three months ended March 31, 2021 and 2020, respectively. We reinstated the program in February 2021, in light of a reduction in our aggregate indebtedness to below $1.5 billion. Repurchases may extend into 2023 based on current market conditions, although the board could elect to suspend or terminate the program at any time, including if certain share price parameters are not achieved. Approximately $324.7 million remained available for repurchases under the program as of March 31, 2021.
In addition, we may from time to time seek to pay down, retire or repurchase our outstanding debt using cash or through exchanges of other debt or equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on available funds, prevailing market conditions, our liquidity requirements, contractual restrictions in our revolving credit agreement and other factors.
Based on our expected cash flows from operations, our cash and cash equivalents and availability under our revolving credit facility, we believe that we will have sufficient capital available to repay our 2021 Convertible Notes, which mature in September 2021, to fund our planned activities, and to pay potential future dividends, and/or repurchase additional shares pursuant to the Stock Repurchase Program through the 12-month period following the filing of this report.
Our revolving credit facility is available for working capital requirements, capital investments, acquisitions, to support letters of credit and for general corporate purposes. The borrowing base is primarily based on the loan value assigned to the proved reserves attributable to our crude oil and natural gas interests.
The revolving credit facility contains covenants customary for agreements of this type, with the most restrictive being certain financial tests on a quarterly basis. The financial tests, as defined per the revolving credit facility, include requirements to maintain: (a) a minimum current ratio of 1.0:1.0 and (b) a leverage ratio of not greater than 4.0:1.0. For purposes of the current ratio covenant, the revolving credit facility’s definition of total current assets, in addition to current assets as presented under U.S. GAAP, includes, among other things, unused commitments under the revolving credit facility. Additionally, the current ratio covenant calculation allows us to exclude the current portion of our long-term debt and other short-term loans from the U.S. GAAP total current liabilities amount. Accordingly, the existence of a working capital deficit under U.S. GAAP is not necessarily indicative of a violation of the current ratio covenant. At March 31, 2021, we were in compliance with all covenants in the revolving credit facility with a current ratio of 3.5:1.0 and a leverage ratio of 1.3:1.0. We expect to remain in compliance throughout the 12-month period following the filing of this report.
Cash Flows
Operating Activities. Our net cash flows from operating activities are primarily impacted by commodity prices, production volumes, net settlements from our commodity derivative positions, operating costs and general and administrative expense. Cash flows from operating activities increased $86.8 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase between periods was primarily due to a $147.8 million increase in revenue from crude oil, natural gas and NGLs sales and a $29.5 million decrease in general and administrative expense. These amounts were partially offset by a $76.5 million decrease in commodity derivative settlements, an $11.0 million increase in production taxes and an $8.2 million increase in TGP between periods.
Adjusted cash flows from operations, a non-U.S. GAAP financial measure, increased by $90.2 million during the three months ended March 31, 2021 to $300.0 million from $209.8 million during the three months ended March 31, 2020. The increase was primarily due to the factors mentioned above for changes in cash flows provided by operating activities, without regard to timing of cash payments and receipts of assets and liabilities. Adjusted free cash flow, a non-U.S. GAAP financial measure, increased by $226.6 million during the three months ended March 31, 2021 to $175.6 million from a deficit of $51.0
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PDC ENERGY, INC.
million during the three months ended March 31, 2020. The increase between periods was primarily due to the increase in cash flows from operating activities as discussed above and a decrease in capital investments in crude oil and natural gas properties.
See Reconciliation of Non-U.S. GAAP Financial Measures, below, for a more detailed discussion of these non-U.S. GAAP financial measures and a reconciliation of these measures to the most comparable U.S. GAAP measures.
Investing Activities. Because crude oil and natural gas production from a well declines rapidly in the first few years of production, we need to continue to commit significant amounts of capital in order to maintain and grow our production and replace our reserves. If capital is not available or is constrained in the future, we will be limited to our cash flows from operations and liquidity under our revolving credit facility as the sources for funding our capital investments.
Cash flows from investing activities primarily consist of the acquisition, exploration and development of crude oil and natural gas properties, net of dispositions of crude oil and natural gas properties. Net cash used in investing activities of $104.7 million during the three months ended March 31, 2021 was primarily related to our drilling and completion activities of $109.0 million, partially offset by $4.4 million proceeds from the sale of certain properties and equipment. Net cash used in investing activities of $330.2 million during the three months ended March 31, 2020 was primarily related to our drilling and completion activities of $190.8 million and $139.8 million related to the closing of the SRC Acquisition.
Financing Activities. Net cash used in financing activities of $191.9 million during the three months ended March 31, 2021 was primarily due to net repayments to our credit facility of $168.0 million and the repurchase and retirement of shares of our common stock totaling to $21.1 million pursuant to our Stock Repurchase Program. Net cash used in financing activities of $124.2 million during the three months ended March 31, 2020 was primarily due to net borrowings from our credit facility of $613.0 million, partially offset by the redemption of a portion of the 2025 Senior Notes totaling $452.2 million and the repurchase and retirement of shares of our common stock totaling $23.8 million pursuant to our Stock Repurchase Program.
Subsidiary Guarantor
PDC Permian, Inc., a Delaware corporation (the “Guarantor”), our wholly-owned subsidiary, guarantees our obligations under our 2024 Senior Notes, 2025 Senior Notes and 2026 Senior Notes (collectively, the "Senior Notes") and our 2021 Convertible Notes. The Guarantor holds our assets located in the Delaware Basin. The Senior Notes and 2021 Convertible Notes are fully and unconditionally guaranteed on a joint and several basis by the Guarantor. The guarantees are subject to release in limited circumstances only upon the occurrence of certain customary conditions.
The indentures governing the Senior Notes contain customary restrictive covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: (a) incur additional debt including under our revolving credit facility, (b) make certain investments or pay dividends or distributions on our capital stock or purchase, redeem or retire capital stock, (c) sell assets, including capital stock of our restricted subsidiaries, (d) restrict the payment of dividends or other payments by restricted subsidiaries to us, (e) create liens that secure debt, (f) enter into transactions with affiliates and (g) merge or consolidate with another company.
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PDC ENERGY, INC.
The following summarized subsidiary guarantor financial information has been prepared on the same basis of accounting as our condensed consolidated financial statements. Investments in subsidiaries are accounted for under the equity method.
As of/Three Months Ended | As of/Year Ended | |||||||||||||||||||||||||
March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
Issuer | Guarantor | Issuer | Guarantor | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Current assets | $ | 313.9 | $ | (36.3) | $ | 271.4 | $ | (57.8) | ||||||||||||||||||
Intercompany accounts receivable, guarantor subsidiary | 70.4 | — | 107.3 | — | ||||||||||||||||||||||
Investment in guarantor subsidiary | 1,767.2 | — | 1,767.2 | — | ||||||||||||||||||||||
Properties and equipment, net | 3,943.3 | 889.5 | 3,982.1 | 877.1 | ||||||||||||||||||||||
Other non-current assets | 50.1 | 6.9 | 56.6 | 4.3 | ||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||
Current liabilities | $ | 896.6 | $ | 47.1 | $ | 751.3 | $ | 28.5 | ||||||||||||||||||
Intercompany accounts payable | — | 57.3 | — | 94.2 | ||||||||||||||||||||||
Long-term debt | 1,242.1 | — | 1,409.5 | — | ||||||||||||||||||||||
Other non-current liabilities | 291.1 | 176.8 | 254.9 | 178.1 | ||||||||||||||||||||||
Statement of Operations | ||||||||||||||||||||||||||
Crude oil, natural gas and NGLs sales | $ | 410.8 | $ | 57.4 | $ | 968.8 | $ | 183.7 | ||||||||||||||||||
Commodity price risk management gain (loss), net | (181.3) | — | 180.3 | — | ||||||||||||||||||||||
Total revenues | 229.9 | 56.1 | 1,151.5 | 182.5 | ||||||||||||||||||||||
Production costs | 73.9 | 19.1 | 227.0 | 71.6 | ||||||||||||||||||||||
Gross profit | 336.9 | 38.3 | 741.8 | 112.1 | ||||||||||||||||||||||
Impairment of properties and equipment | 0.2 | — | 2.0 | 880.4 | ||||||||||||||||||||||
Net income (loss) | (28.2) | 19.3 | (49.2) | (670.0) |
Off-Balance Sheet Arrangements
At March 31, 2021, we had no off-balance sheet arrangements, as defined under SEC rules, which have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital investments or capital resources.
Contractual Obligations
Since December 31, 2020, there have not been any significant, non-routine changes in our contractual obligations. See Note 11 - Commitments and Contingencies to the accompanying condensed consolidated financial statements included elsewhere in this report.
Recent Accounting Standards
There were no significant new accounting standards adopted or new accounting pronouncements that would have potential effect on us as of March 31, 2021.
Critical Accounting Policies and Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP required management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses.
39
There have been no significant changes to our critical accounting policies and estimates or in the underlying accounting assumptions and estimates used in these critical accounting policies from those disclosed in the consolidated financial statements and accompanying notes contained in our 2020 Form 10-K filed with the SEC on February 25, 2021.
Reconciliation of Non-U.S. GAAP Financial Measures
We use "adjusted cash flows from operations," "adjusted free cash flow (deficit)," "adjusted net income (loss)" and "adjusted EBITDAX," non-U.S. GAAP financial measures, for internal management reporting, when evaluating period-to-period changes and, in some cases, in providing public guidance on possible future results. In addition, we believe these are measures of our fundamental business and can be useful to us, investors, lenders and other parties in the evaluation of our performance relative to our peers and in assessing acquisition opportunities and capital expenditure projects. These supplemental measures are not measures of financial performance under U.S. GAAP and should be considered in addition to, not as a substitute for, net income (loss) or cash flows from operations, investing or financing activities and should not be viewed as liquidity measures or indicators of cash flows reported in accordance with U.S. GAAP. The non-U.S. GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. In the future, we may disclose different non-U.S. GAAP financial measures in order to help us and our investors more meaningfully evaluate and compare our future results of operations to our previously reported results of operations. We strongly encourage investors to review our financial statements and publicly filed reports in their entirety and to not rely on any single financial measure.
Adjusted cash flows from operations and adjusted free cash flow (deficit). We believe adjusted cash flows from operations can provide additional transparency into the drivers of trends in our operating cash flows, such as production, realized sales prices and operating costs, as it disregards the timing of settlement of operating assets and liabilities. We believe adjusted free cash flow (deficit) provides additional information that may be useful in an investor analysis of our ability to generate cash from operating activities from our existing oil and gas asset base to fund exploration and development activities and to return capital to stockholders in the period in which the related transactions occurred. We exclude from this measure cash receipts and expenditures related to acquisitions and divestitures of oil and gas properties and capital expenditures for other properties and equipment, which are not reflective of the cash generated or used by ongoing activities on our existing producing properties and, in the case of acquisitions and divestitures, may be evaluated separately in terms of their impact on our performance and liquidity. Adjusted free cash flow is a supplemental measure of liquidity and should not be viewed as a substitute for cash flows from operations because it excludes certain required cash expenditures. For example, we may have mandatory debt service requirements or other non-discretionary expenditures which are not deducted from the adjusted free cash flow measure.
We are unable to present a reconciliation of forward-looking adjusted cash flow because components of the calculation, including fluctuations in working capital accounts, are inherently unpredictable. Moreover, estimating the most directly comparable GAAP measure with the required precision necessary to provide a meaningful reconciliation is extremely difficult and could not be accomplished without unreasonable effort. We believe that forward-looking estimates of adjusted cash flow are important to investors because they assist in the analysis of our ability to generate cash from our operations.
Adjusted net income (loss). We believe that adjusted net income (loss) provides additional transparency into operating trends, such as production, realized sales prices, operating costs and net settlements on commodity derivative contracts, because it disregards changes in our net income (loss) from mark-to-market adjustments resulting from net changes in the fair value of our unsettled commodity derivative contracts, and these changes are not directly reflective of our operating performance.
Adjusted EBITDAX. We believe that adjusted EBITDAX provides additional transparency into operating trends because it reflects the financial performance of our assets without regard to financing methods, capital structure, accounting methods or historical cost basis. In addition, because adjusted EBITDAX excludes certain non-cash expenses, we believe it is not a measure of income, but rather a measure of our liquidity and ability to generate sufficient cash for exploration, development and acquisitions and to service our debt obligations.
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PDC ENERGY, INC.
The following table presents a reconciliation of each of our non-U.S. GAAP financial measures to its most comparable U.S. GAAP measure:
Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||
(in millions) | ||||||||||||||
Cash flows from operations to adjusted cash flows from operations and adjusted free cash flow (deficit): | ||||||||||||||
Net cash from operating activities | $ | 353.1 | $ | 266.3 | ||||||||||
Changes in assets and liabilities | (53.1) | (56.5) | ||||||||||||
Adjusted cash flows from operations | 300.0 | 209.8 | ||||||||||||
Capital expenditures for development of crude oil and natural gas properties | (109.0) | (190.8) | ||||||||||||
Change in accounts payable related to capital expenditures for oil and gas development activities | (15.4) | (70.0) | ||||||||||||
Adjusted free cash flow (deficit) | $ | 175.6 | $ | (51.0) | ||||||||||
Net income (loss) to adjusted net income (loss): | ||||||||||||||
Net income (loss) | $ | (9.0) | $ | (465.0) | ||||||||||
Loss (gain) on commodity derivative instruments | 181.3 | (434.7) | ||||||||||||
Net settlements on commodity derivative instruments | (30.7) | 45.8 | ||||||||||||
Tax effect of above adjustments (1) | — | 94.3 | ||||||||||||
Adjusted net income (loss) | $ | 141.6 | $ | (759.6) | ||||||||||
Net income (loss) to adjusted EBITDAX: | ||||||||||||||
Net income (loss) | $ | (9.0) | $ | (465.0) | ||||||||||
Loss (gain) on commodity derivative instruments | 181.3 | (434.7) | ||||||||||||
Net settlements on commodity derivative instruments | (30.7) | 45.8 | ||||||||||||
Non-cash stock-based compensation | 5.0 | 5.7 | ||||||||||||
Interest expense, net | 19.0 | 24.2 | ||||||||||||
Income tax expense (benefit) | 0.1 | (7.7) | ||||||||||||
Impairment of properties and equipment | 0.2 | 881.1 | ||||||||||||
Exploration, geologic and geophysical expense | 0.4 | 0.1 | ||||||||||||
Depreciation, depletion and amortization | 146.8 | 176.2 | ||||||||||||
Accretion of asset retirement obligations | 3.1 | 2.6 | ||||||||||||
Loss (gain) on sale of properties and equipment | (0.2) | (0.2) | ||||||||||||
Adjusted EBITDAX | $ | 316.0 | $ | 228.1 | ||||||||||
Cash from operating activities to adjusted EBITDAX: | ||||||||||||||
Net cash from operating activities | $ | 353.1 | $ | 266.3 | ||||||||||
Interest expense, net | 19.0 | 24.2 | ||||||||||||
Amortization and write-off of debt discount, premium and issuance costs | (3.8) | (3.6) | ||||||||||||
Exploration, geologic and geophysical expense | 0.4 | 0.1 | ||||||||||||
Other | 0.4 | (2.4) | ||||||||||||
Changes in assets and liabilities | (53.1) | (56.5) | ||||||||||||
Adjusted EBITDAX | $ | 316.0 | $ | 228.1 |
_____________
(1)Due to the full valuation allowance recorded against our net deferred tax assets, there is no tax effect for the three months ended March 31, 2021.
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PDC ENERGY, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market-Sensitive Instruments and Risk Management
We are exposed to market risks associated with interest rates, commodity price and credit risks. We have established risk management processes to monitor and manage these market risks.
Interest Rate Risk
Changes in interest rates affect the amount of interest we earn on our interest bearing cash, cash equivalents and restricted cash accounts and the interest we pay on borrowings under our revolving credit facility. Our 2021 Convertible Notes, 2024 Senior Notes, 2025 Senior Notes and 2026 Senior Notes have fixed rates, and therefore near-term changes in interest rates do not expose us to risk of earnings or cash flow loss; however, near-term changes in interest rates may affect the fair value of our fixed-rate debt.
As of March 31, 2021, we had no outstanding balance on our revolving credit facility.
Commodity Price Risk
We are exposed to the potential risk of loss from adverse changes in the market price of crude oil, natural gas, natural gas basis and NGLs. Pricing for oil and natural gas production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. The prices we receive for production depend on many factors outside of our control. Pursuant to established policies and procedures, we manage a portion of the risks associated with these market fluctuations using commodity derivative instruments. These instruments help us predict with greater certainty the effective crude oil and natural gas prices we will receive for our hedged production. We believe that our commodity derivative policies and procedures are effective in achieving our risk management objectives.
Based on a sensitivity analysis as of March 31, 2021, we estimate that a ten percent increase in natural gas, crude oil prices and the propane portion of NGLs prices, inclusive of basis, over the entire period for which we have commodity derivatives in place, would have resulted in an increase in the fair value of our net derivative liabilities of $68.9 million, whereas a ten percent decrease in prices would have resulted in a decrease in fair value of our net derivative liabilities of $67.7 million. The potential increase in the fair value of our net derivative liabilities would be recorded in statements of operations as a loss. We are currently unable to estimate the effects on the earnings of future periods resulting from changes in the market value of our commodity derivative contracts.
Credit Risk
Credit risk represents the loss that we would incur if a counterparty fails to perform its contractual obligations. We attempt to reduce credit risk by diversifying our counterparty exposure. When exposed to significant credit risk, we analyze the counterparty’s financial condition prior to entering into an agreement, establish credit limits and monitor the appropriateness of those limits on an ongoing basis. We monitor the creditworthiness of significant counterparties through our credit committee, which utilizes a number of qualitative and quantitative tools to assess credit risk and takes mitigative actions if deemed necessary. While we believe that our credit risk analysis and monitoring procedures are reasonable, no amount of analysis can assure performance by our counterparties.
We primarily use financial institutions which are lenders in our revolving credit facility as counterparties for our derivative financial instruments. Disruption in the credit markets, changes in commodity prices and other factors may have a significant adverse impact on a number of financial institutions. To date, we have had no material counterparty default losses from our commodity derivative financial instruments.
Our crude oil, natural gas and NGLs sales are concentrated with a few predominately large customers. This concentrates our credit risk exposure with a small number of large customers. We do not require our customers to post collateral, and the inability of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results.
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Disclosure of Limitations
Because the information above included only those exposures that existed at March 31, 2021, it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate and commodity price fluctuations will depend on the exposures that arise during the period, our commodity price risk management strategies at the time and interest rates and commodity prices at the time.
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PDC ENERGY, INC.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2021, we carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on the results of this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS
Information regarding our legal proceedings can be found in Note 11 - Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this report.
RISK FACTORS
We face many risks. Each of these risk factors could adversely affect our business, operating results and financial condition as well as the value of an investment in our common stock are described under Item 1A, Risk Factors, of our 2020 Form 10-K. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.
There have been no material changes from the risk factors previously disclosed in our 2020 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table presents information about our purchases of our common stock during the period ended March 31, 2021:
Period | Total Number of Shares Purchased (1) (2) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (in millions) | ||||||||||||||||||||||
January | 28,831 | $ | 23.27 | — | $ | 346.8 | ||||||||||||||||||||
February | 53,401 | 32.25 | 2,289 | 346.7 | ||||||||||||||||||||||
March | 596,388 | 36.99 | 595,460 | 324.7 | ||||||||||||||||||||||
Total first quarter 2021 purchases | 678,620 | 36.03 | 597,749 | 324.7 |
_____________
(1)In April 2019, the board of directors approved a program to acquire up to $200 million of our outstanding common stock and in August 2019, effective with the closing of the SRC Acquisition, increased such amount to $525 million (the "Stock Repurchase Program"). The Stock Repurchase Program does not require any specific number of shares to be acquired and can be modified or discontinued by the board of directors at any time. We reinstated our Stock Repurchase Program in late February 2021. Repurchases may extend until December 31, 2023.
(2)Purchases outside of the Stock Repurchase Program represent shares withheld from employees for the payment of their tax liabilities related to the vesting of securities issued pursuant to our stock-based compensation plans. The withheld shares are not considered common stock repurchased under the Stock Repurchase Program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. MINE SAFETY DISCLOSURES - Not applicable.
ITEM 5. OTHER INFORMATION - None.
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PDC ENERGY, INC.
ITEM 6. EXHIBITS
Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
Exhibit Number | Exhibit Description | Form | SEC File Number | Exhibit | Filing Date | Filed Herewith | ||||||||||||||||||||||||||||||||
22 | X | |||||||||||||||||||||||||||||||||||||
31.1 | X | |||||||||||||||||||||||||||||||||||||
31.2 | X | |||||||||||||||||||||||||||||||||||||
32.1* | ||||||||||||||||||||||||||||||||||||||
99.1 | X | |||||||||||||||||||||||||||||||||||||
99.2 | X | |||||||||||||||||||||||||||||||||||||
99.3 | X | |||||||||||||||||||||||||||||||||||||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||||||||||||||||||||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | X | ||||||||||||||||||||||||||||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||||||||||||||||||||||||||||
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | X | ||||||||||||||||||||||||||||||||||||
* Furnished herewith.
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PDC ENERGY, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PDC Energy, Inc. | |||||
(Registrant) | |||||
Date: May 5, 2021 | /s/ Barton Brookman | ||||
Barton Brookman | |||||
President and Chief Executive Officer | |||||
(principal executive officer) | |||||
/s/ R. Scott Meyers | |||||
R. Scott Meyers | |||||
Senior Vice President and Chief Financial Officer | |||||
(principal financial officer) |
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