PDC ENERGY, INC. - Quarter Report: 2022 June (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 June 30, 2022
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-20220630_g1.jpg](https://www.sec.gov/Archives/edgar/data/0000077877/000007787722000086/pdce-20220630_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 | Trading Symbol(s) | 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ☒ | 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 ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 96,307,108 shares of the Company's Common Stock ($0.01 par value) were outstanding as of July 26, 2022.
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 from the acquisition and integration of Great Western, including changes in results of operations, production volumes and costs per Boe, DD&A per Boe, general and administrative expenses, and interest expense in the second half of 2022; 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; adequacy of midstream infrastructure; the return of capital to shareholders through buybacks of shares and/or payments of dividends; ongoing compliance with our legacy PDC consent decree and Great Western’s compliance order on consent; expected impact from emission reduction initiatives; risk of our counterparties’ non-performance on derivative instruments; tax matters; and our ability to 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:
•market and commodity price volatility, widening price differentials, and related impacts to the Company, including decreased revenue, income and cash flow, write-downs and impairments and decreased availability of capital;
•difficulties in integrating our operations as a result of any significant acquisitions, including the acquisition of Great Western Petroleum, LLC (“Great Western”), or acreage exchanges;
•adverse changes to our future cash flows, liquidity and financial condition;
•changes in, and interpretations and enforcement of, environmental and other laws and other political and regulatory developments, including in particular additional permit scrutiny in Colorado;
•the coronavirus 2019 (“COVID-19”) pandemic, including its effects on commodity prices, downstream capacity, employee health and safety, business continuity and regulatory matters;
•declines in the value of our crude oil, natural gas and natural gas liquids (“NGLs”) properties resulting in impairments;
•changes in, and inaccuracy of, reserve estimates and expected production and decline rates;
•timing and extent of our success in discovering, acquiring, developing and producing reserves;
•reductions in the borrowing base under our revolving credit facility;
•availability and cost of capital;
•risks inherent in the drilling and operation of crude oil and natural gas wells;
•timing and costs of wells and facilities;
•availability, cost, and timing of sufficient pipeline, gathering and transportation facilities and related infrastructure;
•limitations in the availability of supplies, materials, contractors and services that may delay the drilling or
completion of our wells;
•potential losses of acreage or other impacts due to lease expirations, other title defects, or otherwise;
•risks inherent in marketing crude oil, natural gas and NGLs;
•effect of crude oil and natural gas derivative activities;
•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;
•impact to our operations, personnel retention, strategy, stock price and expenses caused by the actions of activist shareholders;
•uncertainties associated with future dividends to our shareholders or share buybacks;
•timing and amounts of federal and state income taxes;
•our ability to retain or attract senior management and key technical employees;
•an unanticipated assumption of liabilities or other problems with the Great Western acquisition or other acquisitions we may pursue;
•civil unrest, terrorist attacks and cyber threats;
•risks associated with recent inflationary trends and the potential for a recession; 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, 2021 (“2021 Form 10-K”) 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)
June 30, 2022 | December 31, 2021 | |||||||||||||
Assets | ||||||||||||||
Current assets: | ||||||||||||||
Cash and cash equivalents | $ | 38,528 | $ | 33,829 | ||||||||||
Accounts receivable, net | 723,415 | 398,605 | ||||||||||||
Fair value of derivatives | 14,643 | 17,909 | ||||||||||||
Prepaid expenses and other current assets | 11,726 | 8,230 | ||||||||||||
Total current assets | 788,312 | 458,573 | ||||||||||||
Properties and equipment, net | 7,087,772 | 4,814,865 | ||||||||||||
Fair value of derivatives | 26,967 | 15,177 | ||||||||||||
Other assets | 73,190 | 48,051 | ||||||||||||
Total Assets | $ | 7,976,241 | $ | 5,336,666 | ||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||
Liabilities | ||||||||||||||
Current liabilities: | ||||||||||||||
Accounts payable | $ | 285,414 | $ | 127,891 | ||||||||||
Production tax liability | 242,653 | 99,583 | ||||||||||||
Fair value of derivatives | 702,329 | 304,870 | ||||||||||||
Funds held for distribution | 548,185 | 285,861 | ||||||||||||
Accrued interest payable | 14,683 | 10,482 | ||||||||||||
Other accrued expenses | 85,021 | 91,409 | ||||||||||||
Total current liabilities | 1,878,285 | 920,096 | ||||||||||||
Long-term debt | 1,698,047 | 942,084 | ||||||||||||
Asset retirement obligations | 146,020 | 127,526 | ||||||||||||
Fair value of derivatives | 235,630 | 95,561 | ||||||||||||
Deferred income taxes | 186,383 | 26,383 | ||||||||||||
Other liabilities | 361,155 | 314,769 | ||||||||||||
Total liabilities | 4,505,520 | 2,426,419 | ||||||||||||
Commitments and contingent liabilities | ||||||||||||||
Stockholders’ equity | ||||||||||||||
Common shares - par value $0.01 per share, 150,000,000 authorized, 97,047,329 and 96,468,071 issued as of June 30, 2022 and December 31, 2021, respectively | 970 | 965 | ||||||||||||
Additional paid-in capital | 3,096,523 | 3,161,941 | ||||||||||||
Retained earnings (accumulated deficit) | 380,467 | (249,954) | ||||||||||||
Treasury shares - at cost, 120,143 and 54,960 as of June 30, 2022 and December 31, 2021, respectively | (7,239) | (2,705) | ||||||||||||
Total stockholders’ equity | 3,470,721 | 2,910,247 | ||||||||||||
Total Liabilities and Stockholders’ Equity | $ | 7,976,241 | $ | 5,336,666 |
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||
Crude oil, natural gas and NGLs sales | $ | 1,237,680 | $ | 533,141 | $ | 2,120,058 | $ | 1,001,260 | ||||||||||||||||||
Commodity price risk management gain (loss), net | (101,976) | (308,253) | (670,031) | (489,509) | ||||||||||||||||||||||
Other income | 2,787 | 3,981 | 4,912 | 3,154 | ||||||||||||||||||||||
Total revenues | 1,138,491 | 228,869 | 1,454,939 | 514,905 | ||||||||||||||||||||||
Costs, expenses and other | ||||||||||||||||||||||||||
Lease operating expense | 70,611 | 42,395 | 124,767 | 84,199 | ||||||||||||||||||||||
Production taxes | 89,251 | 26,968 | 152,167 | 56,460 | ||||||||||||||||||||||
Transportation, gathering and processing expense | 29,584 | 25,989 | 57,555 | 47,721 | ||||||||||||||||||||||
Exploration, geologic and geophysical expense | 320 | 286 | 573 | 640 | ||||||||||||||||||||||
General and administrative expense | 45,649 | 32,843 | 79,756 | 65,520 | ||||||||||||||||||||||
Depreciation, depletion and amortization | 191,061 | 162,210 | 342,116 | 308,973 | ||||||||||||||||||||||
Accretion of asset retirement obligations | 3,352 | 3,232 | 6,339 | 6,360 | ||||||||||||||||||||||
Impairment of properties and equipment | 510 | 62 | 1,453 | 252 | ||||||||||||||||||||||
Loss (gain) on sale of properties and equipment | 498 | (129) | 373 | (341) | ||||||||||||||||||||||
Other expense | — | 2,145 | — | 2,193 | ||||||||||||||||||||||
Total costs, expenses and other | 430,836 | 296,001 | 765,099 | 571,977 | ||||||||||||||||||||||
Income (loss) from operations | 707,655 | (67,132) | 689,840 | (57,072) | ||||||||||||||||||||||
Interest expense, net | (17,565) | (20,060) | (30,510) | (39,101) | ||||||||||||||||||||||
Gain on bargain purchase | 100,273 | — | 100,273 | — | ||||||||||||||||||||||
Income (loss) before income taxes | 790,363 | (87,192) | 759,603 | (96,173) | ||||||||||||||||||||||
Income tax benefit (expense) | (127,982) | 155 | (129,182) | 100 | ||||||||||||||||||||||
Net income (loss) | $ | 662,381 | $ | (87,037) | $ | 630,421 | $ | (96,073) | ||||||||||||||||||
Earnings (loss) per share: | ||||||||||||||||||||||||||
Basic | $ | 6.83 | $ | (0.88) | $ | 6.52 | $ | (0.97) | ||||||||||||||||||
Diluted | $ | 6.74 | $ | (0.88) | $ | 6.42 | $ | (0.97) | ||||||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||||||||
Basic | 96,982 | 99,187 | 96,632 | 99,445 | ||||||||||||||||||||||
Diluted | 98,246 | 99,187 | 98,150 | 99,445 | ||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
2
PDC ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended June 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income (loss) | $ | 630,421 | $ | (96,073) | ||||||||||
Adjustments to net income (loss) to reconcile to net cash from operating activities: | ||||||||||||||
Net change in fair value of unsettled commodity derivatives | 209,777 | 403,723 | ||||||||||||
Depreciation, depletion and amortization | 342,116 | 308,973 | ||||||||||||
Impairment of properties and equipment | 1,453 | 252 | ||||||||||||
Accretion of asset retirement obligations | 6,339 | 6,360 | ||||||||||||
Non-cash stock-based compensation | 12,770 | 11,515 | ||||||||||||
(Gain) loss on sale of properties and equipment | 373 | (341) | ||||||||||||
Amortization of debt discount, premium and issuance costs | 2,715 | 7,714 | ||||||||||||
Deferred income taxes | 128,481 | — | ||||||||||||
Gain on bargain purchase | (100,273) | — | ||||||||||||
Other | (700) | 875 | ||||||||||||
Changes in assets and liabilities | 2,909 | (65,632) | ||||||||||||
Net cash from operating activities | 1,236,381 | 577,366 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||
Capital expenditures for development of crude oil and natural gas properties | (533,592) | (240,266) | ||||||||||||
Capital expenditures for midstream assets | (3,015) | — | ||||||||||||
Capital expenditures for other properties and equipment | (2,537) | (274) | ||||||||||||
Cash paid for acquisition of an exploration and production business | (1,068,241) | — | ||||||||||||
Proceeds from sale of properties and equipment | 461 | 4,414 | ||||||||||||
Proceeds from divestitures | 465 | — | ||||||||||||
Net cash from investing activities | (1,606,459) | (236,126) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||
Proceeds from revolving credit facility and other borrowings | 1,372,000 | 429,800 | ||||||||||||
Repayment of revolving credit facility and other borrowings | (617,000) | (597,800) | ||||||||||||
Payment of debt issuance costs | (47) | — | ||||||||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | (16,860) | (5,656) | ||||||||||||
Purchase of treasury shares under stock repurchase program | (295,005) | (47,694) | ||||||||||||
Dividends paid | (59,219) | (11,885) | ||||||||||||
Principal payments under financing lease obligations | (962) | (879) | ||||||||||||
Net cash from financing activities | 382,907 | (234,114) | ||||||||||||
Net change in cash and cash equivalents | 12,829 | 107,126 | ||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | 33,829 | 2,623 | ||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | 46,658 | $ | 109,749 |
See accompanying Notes to Condensed Consolidated Financial Statements
3
PDC ENERGY, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except dividends per share)
(Unaudited)
Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings (Accumulated Deficit) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2022 | 96,468 | $ | 965 | $ | 3,161,941 | (55) | $ | (2,705) | $ | (249,954) | $ | 2,910,247 | |||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (31,960) | (31,960) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 655 | 7 | 1,798 | — | 3,669 | — | 5,474 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | — | — | — | (164) | (9,203) | — | (9,203) | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares for employee stock-based compensation tax withholding obligations | (53) | (2) | (3,022) | 53 | 3,024 | — | — | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares | (1,320) | (13) | (83,508) | 1,320 | 83,521 | — | — | ||||||||||||||||||||||||||||||||||
Issuance of treasury shares | — | — | — | 67 | — | — | — | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares under stock repurchase program | — | — | — | (1,326) | (85,339) | — | (85,339) | ||||||||||||||||||||||||||||||||||
Dividends declared ($0.25 per share) | — | — | (24,468) | — | — | — | (24,468) | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2022 | 95,750 | 957 | 3,052,741 | (105) | (7,033) | (281,914) | 2,764,751 | ||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 662,381 | 662,381 | ||||||||||||||||||||||||||||||||||
Issuance of stock pursuant to acquisition | 4,007 | 40 | 293,274 | — | — | — | 293,314 | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 337 | 3 | 6,924 | — | 369 | — | 7,296 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | — | — | — | (101) | (7,657) | — | (7,657) | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares for employee stock-based compensation tax withholding obligations | (101) | (1) | (7,635) | 101 | 7,636 | — | — | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares | (2,946) | (29) | (214,123) | 2,946 | 214,152 | — | — | ||||||||||||||||||||||||||||||||||
Issuance of treasury shares | — | — | — | 5 | — | — | — | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares under stock repurchase program | — | — | — | (2,966) | (214,706) | — | (214,706) | ||||||||||||||||||||||||||||||||||
Dividends declared ($0.35 per share) | — | — | (34,658) | — | — | — | (34,658) | ||||||||||||||||||||||||||||||||||
Balance, June 30, 2022 | 97,047 | $ | 970 | $ | 3,096,523 | (120) | $ | (7,239) | $ | 380,467 | $ | 3,470,721 | |||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Deficit | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||
Balance, January 1, 2021 | 99,759 | $ | 998 | $ | 3,387,754 | (38) | $ | (949) | $ | (772,265) | $ | 2,615,538 | |||||||||||||||||||||||||||||
Net income (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 | — | — | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares | (568) | (6) | (21,061) | 568 | 21,067 | — | — | ||||||||||||||||||||||||||||||||||
Issuance of treasury shares | — | — | — | 65 | — | — | — | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares under stock repurchase program | — | — | — | (598) | (22,098) | — | (22,098) | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2021 | 99,367 | 994 | 3,369,272 | (51) | (1,897) | (781,301) | 2,587,068 | ||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (87,037) | (87,037) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 295 | 3 | 5,742 | — | 750 | — | 6,495 | ||||||||||||||||||||||||||||||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | — | — | — | (92) | (3,300) | — | (3,300) | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares for employee stock-based compensation tax withholding obligations | (78) | (1) | (2,807) | 78 | 2,808 | — | — | ||||||||||||||||||||||||||||||||||
Retirement of treasury shares | (677) | (7) | (26,922) | 684 | 27,235 | — | 306 | ||||||||||||||||||||||||||||||||||
Issuance of treasury shares | — | — | — | 22 | — | — | |||||||||||||||||||||||||||||||||||
Purchase of treasury shares | — | — | — | (661) | (26,509) | — | (26,509) | ||||||||||||||||||||||||||||||||||
Dividends declared ($0.12 per share) | — | — | (12,117) | — | — | — | (12,117) | ||||||||||||||||||||||||||||||||||
Balance, June 30, 2021 | 98,907 | $ | 989 | $ | 3,333,168 | (20) | $ | (913) | $ | (868,338) | $ | 2,464,906 | |||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
5
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(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 June 30, 2022, we owned an interest in approximately 4,200 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, 2021 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 2021 Form 10-K. Our results of operations and cash flows for the six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year or any other future period.
NOTE 2 - BUSINESS COMBINATION
On May 6, 2022, we completed the acquisition of Great Western Petroleum, LLC (“Great Western”), for approximately $1.4 billion, inclusive of Great Western’s net debt (the “Great Western Acquisition”). Great Western was an independent oil and gas company focused on the exploration, production and development of crude oil and natural gas in the Wattenberg Field of Colorado. The consideration paid was $542.5 million in cash and approximately $4.0 million shares of our common stock, valued at $293.3 million on the acquisition date. In addition, we paid off the Great Western secured credit facility totaling $235.8 million and irrevocably deposited $361.2 million on Great Western’s behalf to pay and discharge on May 20, 2022 Great Western’s 12 percent senior secured notes due 2025, inclusive of unpaid accrued interest and a premium for early termination. The cash portion of the purchase price and the termination of Great Western’s debt were funded through a combination of cash on hand and availability under our revolving credit facility.
Purchase Price Allocation
The Great Western Acquisition has been accounted for using the acquisition method under Accounting Standards Codification (“ASC”) 805, Business Combinations, with PDC being treated as the accounting acquirer. Accordingly, we conducted assessments of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated fair values, while transaction and integration costs associated with the acquisition were expensed as incurred.
6
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
The following table presents our preliminary allocation of the total purchase price of Great Western to the identifiable assets acquired and liabilities assumed based on the fair values as of the acquisition date:
(in thousands, except share and per share data) | ||||||||
Consideration: | ||||||||
Cash | $ | 542,500 | ||||||
Retirement of Great Western’s credit facility | 235,822 | |||||||
Extinguishment of Great Western’s secured senior notes | 361,231 | |||||||
Total cash consideration | 1,139,553 | |||||||
Common stock issued | 4,007,018 | |||||||
Fair value of PDC common stock on May 6, 2022 | $ | 73.20 | ||||||
Total fair value of common stock issued | 293,314 | |||||||
Total consideration | $ | 1,432,867 | ||||||
Assets acquired: | ||||||||
Cash | $ | 63,183 | ||||||
Accounts receivable | 164,433 | |||||||
Other current assets | 3,684 | |||||||
Properties and equipment, net - proved | 2,088,927 | |||||||
Properties and equipment, net - other | 7,035 | |||||||
Other noncurrent assets | 21,888 | |||||||
Total assets acquired | $ | 2,349,150 | ||||||
Liabilities assumed: | ||||||||
Accounts payable | $ | (131,376) | ||||||
Production tax liability | (110,940) | |||||||
Funds held for distribution | (162,945) | |||||||
Other current liabilities | (3,903) | |||||||
Fair value of derivatives | (319,600) | |||||||
Asset retirement obligations | (22,926) | |||||||
Deferred tax liabilities | (31,518) | |||||||
Other liabilities | (32,802) | |||||||
Total liabilities assumed | (816,010) | |||||||
Total identifiable net assets acquired | $ | 1,533,140 | ||||||
Gain on bargain purchase | 100,273 | |||||||
Purchase price consideration | $ | 1,432,867 |
Determining the fair values of the assets and liabilities of Great Western requires judgement and certain assumptions to be made, the most significant of these being related to the valuation of crude oil and natural gas properties. The majority of the 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 14.25 percent. These inputs require significant judgments and estimates by management at the time of the valuation. Due to this, the final purchase price allocation is considered an ongoing process and we anticipate the measurement period may extend into the fourth quarter of 2022.
ASC 805, Business Combinations, requires that any excess of purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill and any excess of fair value of acquired net
7
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
assets, including identifiable intangible assets over the acquisition consideration, results in a gain from bargain purchase. Prior to recording a gain, the acquiring entity must reassess whether all assets acquired and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed have been properly valued. The Great Western Acquisition resulted in a gain on bargain purchase due to the estimated fair value of the identifiable net assets acquired exceeding the purchase consideration transferred by $100.3 million and is shown as a gain on bargain purchase on our condensed consolidated statement of operations, net of related income taxes of $31.5 million. Upon completion of our assessment, we concluded that recording a gain on bargain purchase was appropriate and required under ASC 805. The bargain purchase was primarily attributable to the increase in commodity price forecasts from the date we entered into the definitive purchase agreement with Great Western, February 26, 2022, to the closing date of the acquisition, May 6, 2022, when the fair value of crude oil and natural gas reserves acquired were determined. Additionally, the majority of the acquisition consideration was fixed and therefore did not fluctuate in the event of market increases or decreases between the date of entry into the agreement through the closing date.
The results of operations for the Great Western Acquisition since the closing date have been included on our condensed consolidated financial statements for the three and six months ended June 30, 2022 and include approximately $191.0 million of total revenue and $133.3 million of income from operations. During the three and six months ended June 30, 2022, we recognized total transaction costs of $10.6 million, which are included in general and administrative expense on the condensed consolidated statement of operations.
Pro Forma Information. The following unaudited pro forma financial information represents a summary of the condensed consolidated results of operations for the three and six months ended June 30, 2022, assuming the acquisition had been completed as of January 1, 2021. 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.
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) our common stock issued to the owners of Great Western, (ii) the increase in depletion reflecting the relative fair values and production volumes attributable to Great Western’s properties and the revision to the depletion rate reflecting the reserve volumes acquired, (iii) adjustments to interest expense as a result of payoff of Great Western’s credit facility and secured senior notes, (iv) the adjustment to reflect the gain on bargain purchase, and (v) the estimated tax impacts of the pro forma adjustments. In addition, pro forma earnings were adjusted to exclude acquisition-related costs incurred by us and Great Western totaling approximately $25.3 million and $28.5 million for the three and six months ended June 30, 2022, respectively, and included the total costs of $28.5 million for the six months ended June 30, 2021.
Three months ended June 30 | Six months ended June 30 | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||
Total revenue | $ | 1,154,220 | $ | 254,588 | $ | 1,506,567 | $ | 618,988 | ||||||||||||||||||
Net income (loss) | 574,887 | (160,895) | 491,127 | (121,460) | ||||||||||||||||||||||
Earnings (loss) per share: | ||||||||||||||||||||||||||
Basic | $ | 5.83 | $ | (1.56) | $ | 4.94 | $ | (1.17) | ||||||||||||||||||
Diluted | 5.76 | (1.56) | 4.87 | (1.17) |
8
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
Revenue by Commodity and Operating Region | 2022 | 2021 | Percent Change | 2022 | 2021 | Percent Change | ||||||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||
Crude oil | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | $ | 599,162 | $ | 291,551 | 106 | % | $ | 1,051,073 | $ | 527,514 | 99 | % | ||||||||||||||||||||||||||
Delaware Basin | 141,671 | 59,148 | 140 | % | 239,509 | 96,836 | 147 | % | ||||||||||||||||||||||||||||||
Total | $ | 740,833 | $ | 350,699 | 111 | % | 1,290,582 | 624,350 | 107 | % | ||||||||||||||||||||||||||||
Natural gas | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | $ | 237,713 | $ | 74,664 | 218 | % | 381,412 | 171,686 | 122 | % | ||||||||||||||||||||||||||||
Delaware Basin | 40,004 | 11,139 | 259 | % | 59,429 | 19,763 | 201 | % | ||||||||||||||||||||||||||||||
Total | $ | 277,717 | $ | 85,803 | 224 | % | 440,841 | 191,449 | 130 | % | ||||||||||||||||||||||||||||
NGLs | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | $ | 181,552 | $ | 83,505 | 117 | % | 320,427 | 161,282 | 99 | % | ||||||||||||||||||||||||||||
Delaware Basin | 37,578 | 13,134 | 186 | % | 68,208 | 24,179 | 182 | % | ||||||||||||||||||||||||||||||
Total | $ | 219,130 | $ | 96,639 | 127 | % | 388,635 | 185,461 | 110 | % | ||||||||||||||||||||||||||||
Crude oil, natural gas and NGLs | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | $ | 1,018,427 | $ | 449,720 | 126 | % | 1,752,912 | 860,482 | 104 | % | ||||||||||||||||||||||||||||
Delaware Basin | 219,253 | 83,421 | 163 | % | 367,146 | 140,778 | 161 | % | ||||||||||||||||||||||||||||||
Total | $ | 1,237,680 | $ | 533,141 | 132 | % | $ | 2,120,058 | $ | 1,001,260 | 112 | % |
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 for the six months ended June 30, 2022:
(in thousands) | |||||
Beginning balance | $ | 15,472 | |||
Reductions to assets previously recognized (1) | (12,307) | ||||
Amortized as a reduction to crude oil, natural gas and NGLs sales | (429) | ||||
Ending balance | $ | 2,736 |
_____________
(1) The reductions to our contract asset amounts previously recognized is due to the continued improvements in natural gas prices in 2022, which resulted in us receiving reimbursements from our third party gas processor during 2022 as part of our long-term gas processing agreement.
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 use our counterparties’ valuations to assess reasonableness of our fair value measurement.
9
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
Our crude oil and natural gas fixed-price exchanges and basis exchanges are included in Level 2. Our collars are included in 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:
June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
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 | $ | 2,555 | $ | 12,088 | $ | 14,643 | $ | — | $ | 17,909 | $ | 17,909 | ||||||||||||||||||||||||||||
Non-current | Fair value of derivatives | 8,378 | 18,589 | 26,967 | 605 | 14,572 | 15,177 | ||||||||||||||||||||||||||||||||||
Total | $ | 10,933 | $ | 30,677 | $ | 41,610 | $ | 605 | $ | 32,481 | $ | 33,086 | |||||||||||||||||||||||||||||
Derivative liabilities | |||||||||||||||||||||||||||||||||||||||||
Current | Fair value of derivatives | $ | (526,359) | $ | (175,970) | $ | (702,329) | $ | (230,695) | $ | (74,175) | $ | (304,870) | ||||||||||||||||||||||||||||
Non-current | Fair value of derivatives | (175,402) | (60,228) | (235,630) | (74,715) | (20,846) | (95,561) | ||||||||||||||||||||||||||||||||||
Total | $ | (701,761) | $ | (236,198) | $ | (937,959) | $ | (305,410) | $ | (95,021) | $ | (400,431) |
The following table presents a reconciliation of our Level 3 assets and liabilities measured at fair value for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Fair value of Level 3 instruments, net asset (liability) beginning of period | $ | (226,211) | $ | (36,234) | $ | (62,540) | $ | (8,427) | ||||||||||||||||||
Changes in fair value included on condensed consolidated statements of operations line item: | ||||||||||||||||||||||||||
Commodity price risk management gain (loss), net | (63,157) | (94,131) | (272,928) | (127,520) | ||||||||||||||||||||||
Settlements included on condensed consolidated statement of operations line items: | ||||||||||||||||||||||||||
Commodity price risk management gain (loss), net | 83,848 | 12,380 | 129,948 | 17,962 | ||||||||||||||||||||||
Fair value of Level 3 instruments, net asset (liability) end of period | $ | (205,520) | $ | (117,985) | $ | (205,520) | $ | (117,985) | ||||||||||||||||||
Net change in fair value of Level 3 unsettled derivatives included on condensed consolidated statements of operations line item: | ||||||||||||||||||||||||||
Commodity price risk management gain (loss), net | $ | (39,192) | $ | (81,417) | $ | (150,253) | $ | (93,867) |
The significant unobservable input used in the fair value measurement of our derivative contracts is the implied volatility curve. 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.
10
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
Nonrecurring Fair Value Measurements
Acquisitions and Impairment of Long-lived Assets. We measure fair value using 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 elected not 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 as of the dates indicated:
June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||
Nominal Interest | Estimated Fair Value | Percent of Par | Estimated Fair Value | Percent of Par | ||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||
Senior Notes: | ||||||||||||||||||||||||||||||||
2024 Senior Notes | 6.125 | % | 198,800 | 99.4 | % | $ | 202.8 | 101.4 | % | |||||||||||||||||||||||
2026 Senior Notes | 5.75 | % | 704,250 | 93.9 | % | 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 crude oil and natural 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 June 30, 2022, we had derivative instruments in place for a portion of our anticipated production in 2022 through 2025. 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.
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 for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
Condensed Consolidated Statement of Operations Line Item | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Commodity price risk management gain (loss), net | ||||||||||||||||||||||||||
Net settlements | $ | (298,661) | $ | (55,135) | $ | (460,254) | $ | (85,786) | ||||||||||||||||||
Net change in fair value of unsettled derivatives | 196,685 | (253,118) | (209,777) | (403,723) | ||||||||||||||||||||||
Total commodity price risk management gain (loss), net | $ | (101,976) | $ | (308,253) | $ | (670,031) | $ | (489,509) |
11
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
Commodity Derivative Contracts. As of June 30, 2022, we had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is presented:
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 June 30, 2022 (in thousands) | |||||||||||||||||||||||||||||||||
Floors | Ceilings | |||||||||||||||||||||||||||||||||||||
Crude Oil | ||||||||||||||||||||||||||||||||||||||
NYMEX | ||||||||||||||||||||||||||||||||||||||
2022 | 2,736 | $ | 53.18 | $ | 67.33 | 6,852 | $ | 58.35 | $ | (362,341) | ||||||||||||||||||||||||||||
2023 | 5,937 | 61.27 | 83.11 | 9,804 | 66.42 | (258,320) | ||||||||||||||||||||||||||||||||
2024 | 825 | 65.91 | 89.58 | 6,126 | 70.59 | (46,487) | ||||||||||||||||||||||||||||||||
2025 | — | — | — | 2,640 | 75.10 | 3,851 | ||||||||||||||||||||||||||||||||
Total Crude Oil | 9,498 | 25,422 | (663,297) | |||||||||||||||||||||||||||||||||||
Natural Gas | ||||||||||||||||||||||||||||||||||||||
NYMEX | ||||||||||||||||||||||||||||||||||||||
2022 | 21,063 | 3.13 | 4.65 | 29,642 | 2.95 | (112,700) | ||||||||||||||||||||||||||||||||
2023 | 17,227 | 3.17 | 4.86 | 41,825 | 3.05 | (82,080) | ||||||||||||||||||||||||||||||||
2024 | — | — | — | 26,160 | 3.54 | (20,566) | ||||||||||||||||||||||||||||||||
2025 | — | — | — | 4,980 | 4.84 | 2,420 | ||||||||||||||||||||||||||||||||
38,290 | 102,607 | (212,926) | ||||||||||||||||||||||||||||||||||||
CIG | ||||||||||||||||||||||||||||||||||||||
2023 | — | — | — | 8,760 | 3.39 | (9,279) | ||||||||||||||||||||||||||||||||
2025 | — | — | — | 4,800 | 3.10 | (3,756) | ||||||||||||||||||||||||||||||||
— | 13,560 | (13,035) | ||||||||||||||||||||||||||||||||||||
Total Natural Gas | 38,290 | 116,167 | (225,961) | |||||||||||||||||||||||||||||||||||
Basis Protection - Natural Gas | ||||||||||||||||||||||||||||||||||||||
CIG | ||||||||||||||||||||||||||||||||||||||
2022 | 50,430 | (0.27) | 2,137 | |||||||||||||||||||||||||||||||||||
2023 | 57,782 | (0.29) | (6,844) | |||||||||||||||||||||||||||||||||||
2024 | 26,160 | (0.39) | (2,113) | |||||||||||||||||||||||||||||||||||
2025 | 4,980 | (0.37) | (271) | |||||||||||||||||||||||||||||||||||
Total Basis Protection - Natural Gas | 139,352 | (7,091) | ||||||||||||||||||||||||||||||||||||
Commodity Derivatives Fair Value | $ | (896,349) |
12
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
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 June 30, 2022:
Total Gross Amount Presented on the Balance Sheet | Effect of Master Netting Agreements | Total Net Amount | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||
Derivative instruments, at fair value | $ | 41,610 | $ | (41,610) | $ | — | ||||||||||||||
Derivative liabilities: | ||||||||||||||||||||
Derivative instruments, at fair value | $ | 937,959 | $ | (41,610) | $ | 896,349 |
Derivative Counterparties. Our commodity derivative instruments expose us to the risk of non-performance by our counterparties. We 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 June 30, 2022; 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:
June 30, 2022 | December 31, 2021 | ||||||||||
(in thousands) | |||||||||||
Properties and equipment, net: | |||||||||||
Crude oil and natural gas properties | |||||||||||
Proved | $ | 10,729,089 | $ | 8,310,018 | |||||||
Unproved | 285,926 | 306,181 | |||||||||
Total crude oil and natural gas properties | 11,015,015 | 8,616,199 | |||||||||
Equipment and other | 76,505 | 63,099 | |||||||||
Land and buildings | 25,406 | 19,928 | |||||||||
Construction in progress | 567,100 | 371,968 | |||||||||
Properties and equipment, at cost | 11,684,026 | 9,071,194 | |||||||||
Accumulated DD&A | (4,596,254) | (4,256,329) | |||||||||
Properties and equipment, net | $ | 7,087,772 | $ | 4,814,865 |
Impairment of Oil and Gas Properties. There were no significant impairment charges recognized related to our proved and unproved properties during the six months ended June 30, 2022 and 2021.
13
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
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:
Six Months Ended June 30, 2022 | Year Ended December 31, 2021 | |||||||||||||
(in thousands, except for number of wells) | ||||||||||||||
Beginning balance | $ | — | $ | 7,459 | ||||||||||
Additions to capitalized exploratory well costs pending the determination of proved reserves | 9,613 | 5,902 | ||||||||||||
Reclassifications to proved properties | — | (13,361) | ||||||||||||
Ending balance | $ | 9,613 | $ | — | ||||||||||
Number of wells pending determination at period-end | 1 | — |
As of June 30, 2022, there were no exploratory well costs that were capitalized for more than one year.
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:
June 30, 2022 | December 31, 2021 | ||||||||||
(in thousands) | |||||||||||
Crude oil, natural gas and NGLs sales | $ | 683,787 | $ | 368,991 | |||||||
Joint interest billings | 30,766 | 24,860 | |||||||||
Other | 15,069 | 10,809 | |||||||||
Allowance for doubtful accounts | (6,207) | (6,055) | |||||||||
Accounts receivable, net | $ | 723,415 | $ | 398,605 |
Other Accrued Expenses. The following table presents the components of other accrued expenses as of the dates indicated:
June 30, 2022 | December 31, 2021 | |||||||||||||
(in thousands) | ||||||||||||||
Employee benefits | $ | 18,801 | $ | 29,319 | ||||||||||
Asset retirement obligations | 31,913 | 32,146 | ||||||||||||
Environmental expenses | 13,342 | 11,942 | ||||||||||||
Operating and finance leases | 7,189 | 7,197 | ||||||||||||
Other | 13,776 | 10,805 | ||||||||||||
Other accrued expenses | $ | 85,021 | $ | 91,409 |
Other Liabilities. The following table presents the components of other liabilities as of the dates indicated:
June 30, 2022 | December 31, 2021 | |||||||||||||
(in thousands) | ||||||||||||||
Deferred midstream gathering credits | $ | 154,700 | $ | 159,788 | ||||||||||
Deferred oil gathering credits | 15,075 | 16,080 | ||||||||||||
Production taxes | 154,895 | 131,865 | ||||||||||||
Operating and finance leases | 33,602 | 6,274 | ||||||||||||
Other | 2,883 | 762 | ||||||||||||
Other liabilities | $ | 361,155 | $ | 314,769 |
Deferred Midstream Gathering Credits. In 2019, we entered into agreements 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
14
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
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 on a units-of-production basis. The amortization rates are assessed on an annual basis for changes in estimated future production.
The following table presents the amortization charges related to our deferred credits recognized on the condensed consolidated statements of operations for the periods indicated:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Transportation, gathering and processing expense | $ | 2,228 | $ | 1,779 | $ | 4,222 | $ | 3,300 | ||||||||||||||||||
Lease operating expense | 859 | 647 | 1,467 | 1,085 |
NOTE 8 - LONG-TERM DEBT
Long-term debt, net of unamortized discounts, premiums, and debt issuance costs totaling $7.0 million and $7.9 million as of June 30, 2022 and December 31, 2021, respectively, consists of the following:
June 30, 2022 | December 31, 2021 | ||||||||||
(in thousands) | |||||||||||
Revolving credit facility due November 2026 | $ | 755,000 | $ | — | |||||||
6.125% Senior Notes due September 2024 | 198,919 | 198,674 | |||||||||
5.75% Senior Notes due May 2026 | 744,128 | 743,410 | |||||||||
Total debt, net of unamortized discount, premium and debt issuance costs | $ | 1,698,047 | $ | 942,084 | |||||||
Revolving Credit Facility
In November 2021, we entered into a Fifth Amended and Restated Credit Agreement (the “Restated Credit Agreement”), which provides for a maximum credit amount of $2.5 billion, subject to certain limitations, an initial borrowing base of $2.4 billion and an elected commitment of $1.5 billion. The Restated Credit Agreement matures on the earlier to occur of (i) the end of the five-year term on November 2, 2026 or (ii) the date that is 91 days prior to the scheduled maturity of the 2026 Senior Notes if the aggregate outstanding principal amount of those notes exceeds $500 million and our commitment utilization exceeds 50%.
The revolving credit facility is available for working capital requirements, capital investments, acquisitions, to support letters of credit and for general business 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 Restated Credit Agreement includes an investment grade period election pursuant to which we have an option to remove our borrowing base limitations and terminate the liens securing the Restated Credit Agreement when certain debt ratings are achieved.
As of June 30, 2022, we had a borrowing base of $3.0 billion, an elected commitment of $1.5 billion and availability under our revolving credit facility of $724.6 million, net of $20.4 million of letters of credit outstanding.
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 Secured Overnight Financing Rate (“SOFR”) for one month, plus a premium) or, at our election, a rate equal to SOFR 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 June 30, 2022, the applicable interest
15
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
margin is 1.25 percent for the alternate base rate option or 2.25 percent for the SOFR option, and the unused commitment fee is 0.50 percent. Principal payments are generally not required until the maturity date of the revolving credit facility, unless the borrowing base falls below the outstanding balance. The Restated Credit Agreement also includes the ability to add certain sustainability-linked key performance indicators to be agreed upon between us, the administrative agent and a majority of the lenders and that may impact the applicable margin and commitment fee rate.
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 3.5:1.0; (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 June 30, 2022, we were in compliance with all covenants related to our revolving credit facility.
As of June 30, 2022 and December 31, 2021, debt issuance costs related to our revolving credit facility were $15.2 million and $16.9 million, respectively, and are included in other assets on our condensed consolidated balance sheets.
Senior Notes
The following table summarizes the face values, interest rates, maturity dates, semi-annual interest payment dates, and optional redemption periods related to our outstanding senior note obligations as of June 30, 2022:
2024 Senior Notes | 2026 Senior Notes | |||||||||||||
Outstanding principal amounts (in thousands) | $ | 200,000 | $ | 750,000 | ||||||||||
Interest rate | 6.125 | % | 5.75 | % | ||||||||||
Maturity date | September 15, 2024 | May 15, 2026 | ||||||||||||
Interest payment dates | March 15, September 15 | May 15, November 15 | ||||||||||||
Redemption periods (1) | September 15, 2022 | May 15, 2024 |
(1) At any time prior to the indicated dates, we have the option to redeem all or a portion of our senior notes of the applicable series at the redemption amounts specified in the respective senior note indenture plus accrued and unpaid interest to the date of redemption. On or after the indicated dates, we may redeem all or a portion of the senior notes at a redemption amount equal to 100% of the principal amount of the senior notes being redeemed plus accrued and unpaid interest to the date of redemption.
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.
Upon the occurrence of a “change of control”, as defined in the indentures for the 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 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 accrued and unpaid interest to the date of purchase.
The indentures governing the Senior Notes contain covenants and restricted payment provisions 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 June 30, 2022, we were in compliance with all covenants and all restricted payment provisions related to our Senior Notes.
Our wholly-owned subsidiaries, PDC Permian, Inc. and Pioneer Water Pipeline LLC (acquired in connection with the Great Western Acquisition), are each a guarantor of our obligations under the 2024 Senior Notes and the 2026 Senior Notes (collectively, the “Senior Notes”) and our credit facility.
16
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
NOTE 9 - LEASES
We have operating leases for office space and well equipment, and finance leases for vehicles. Our leases have remaining lease terms ranging from one to eleven years. We had short-term lease costs of $80.8 million and $71.4 million for the three months ended June 30, 2022 and June 30, 2021, respectively, and $155.5 million and $110.2 million for the six months ended June 30, 2022 and June 30, 2021, 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.
The following table presents the balance sheet classification of our leases as of the dates indicated:
Leases | Condensed Consolidated Balance Sheet Line Item | June 30, 2022 | December 31, 2021 | |||||||||||||||||
(in thousands) | ||||||||||||||||||||
Operating lease right-of-use assets | Other assets | $ | 16,198 | $ | 7,630 | |||||||||||||||
Finance lease right-of-use assets | Properties and equipment, net | 6,352 | 3,483 | |||||||||||||||||
Total right-of-use assets | $ | 22,550 | $ | 11,113 | ||||||||||||||||
Operating lease obligation - current | Other accrued expenses | 5,123 | 5,937 | |||||||||||||||||
Operating lease obligation - non-current | Other liabilities | 29,298 | 4,044 | |||||||||||||||||
Finance lease obligation - current | Other accrued expenses | 2,066 | 1,260 | |||||||||||||||||
Finance lease obligation - non-current | Other liabilities | 4,304 | 2,230 | |||||||||||||||||
Total lease liabilities | $ | 40,791 | $ | 13,471 | ||||||||||||||||
Weighted average remaining lease term (years) | 7.6 | 2.8 | ||||||||||||||||||
Weighted average discount rate | 5.0 | % | 4.8 | % |
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 six months ended June 30, 2022:
(in thousands) | |||||
Asset retirement obligations at beginning of period | $ | 159,672 | |||
Obligations incurred with development activities and other | 2,744 | ||||
Obligations incurred with acquisition | 22,926 | ||||
Accretion expense | 6,339 | ||||
Revisions in estimated cash flows | (284) | ||||
Obligations discharged with asset retirements and divestitures | (13,464) | ||||
Asset retirement obligations at end of period | 177,933 | ||||
Current portion (1) | (31,913) | ||||
Long-term portion | $ | 146,020 |
(1) The current portion of the asset retirement obligation is included in other accrued expenses on our condensed consolidated balance sheets.
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 the time that the obligation is incurred. 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.
17
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
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 six months ended June 30, 2022, other than the commitments assumed as a result of the Great Western Acquisition, which included certain sales, transportation, gathering and processing contractual obligations. The aggregate committed volume and related amounts acquired as of June 30, 2022 are presented in the table below:
Period ending June 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | Expiration Date for Thereafter | |||||||||||||||||||||||||||||||||||||||||||
Natural gas (MMcf) | 17,086 | 17,133 | 17,086 | 17,086 | 17,086 | 38,525 | 124,002 | September 30, 2029 | ||||||||||||||||||||||||||||||||||||||||||
Natural gas (MMBtu) | 6,726 | 6,726 | 6,744 | 6,726 | 6,726 | 1,695 | 35,343 | September 30, 2027 | ||||||||||||||||||||||||||||||||||||||||||
Crude oil (MBbls) | 14,174 | 13,847 | 11,111 | 7,300 | 1,840 | — | 48,272 | N/A | ||||||||||||||||||||||||||||||||||||||||||
Dollar commitment (in thousands) | $ | 77,197 | 76,447 | $ | 66,815 | $ | 56,545 | $ | 44,492 | $ | 57,362 | $ | 378,858 |
For details of our existing commitments excluding the Great Western Acquisition, refer to Note 13 - Commitments and Contingencies in Item 8. Financial Statements and Supplementary Data included in our Form 10-K for the year ended December 31, 2021.
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 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.
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”) to 7,050,000 shares. As of June 30, 2022, there were 3,829,031 shares available for grant under the 2018 Plan.
2010 Long-Term Equity Compensation Plan. Our Amended and Restated 2010 Long-Term Equity Compensation Plan, approved in 2013 (the “2010 Plan”), remains outstanding and we 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 June 30, 2022, there were 248,843 shares available for grant under the 2010 Plan.
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 June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
General and administrative expense | $ | 6,738 | $ | 6,113 | $ | 11,920 | $ | 10,941 | ||||||||||||||||||
Lease operating expense | 558 | 382 | 850 | 574 | ||||||||||||||||||||||
Total stock-based compensation expense | $ | 7,296 | $ | 6,495 | $ | 12,770 | $ | 11,515 |
18
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
Restricted Stock Units
The following table presents the changes in non-vested time-based RSUs to eligible employees, including executive officers, for the six months ended June 30, 2022:
Shares | Weighted Average Grant-Date Fair Value per Share | ||||||||||
Non-vested at beginning of period | 1,165,187 | $ | 25.33 | ||||||||
Granted | 344,106 | 70.58 | |||||||||
Vested | (538,750) | 25.78 | |||||||||
Forfeited | (32,552) | 38.87 | |||||||||
Non-vested at end of period | 937,991 | 41.21 |
The weighted average grant-date fair value of restricted stock units was $70.58 and $33.32 for the six months ended June 30, 2022 and 2021, respectively. The total grant-date fair value of restricted stock units that vested for the six months ended June 30, 2022 and 2021 was $13.9 million and $12.9 million, respectively. Total compensation cost related to non-vested time-based awards and not yet recognized on our condensed consolidated statements of operations as of June 30, 2022 was $33.5 million. This cost is expected to be recognized over a weighted average period of 1.8 years.
Performance Stock Units
The Compensation Committee awarded a total of 102,098 market-based PSUs to our executive officers during the six months ended June 30, 2022. 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, 2024, 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, as well as that of our peer group.
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:
Six Months Ended June 30, | |||||||||||
2022 | 2021 | ||||||||||
Expected term of award (in years) | 2.9 | 2.9 | |||||||||
Risk-free interest rate | 1.7% | 0.2% | |||||||||
Expected volatility | 86.3% | 84.6% | |||||||||
Weighted average grant date fair value per share | $107.85 | $54.01 |
19
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
The following table presents the change in non-vested market-based awards during the six months ended June 30, 2022:
Shares | Weighted Average Grant-Date Fair Value per Share | |||||||||||||
Non-vested at beginning of period | 439,229 | $ | 43.21 | |||||||||||
Granted | 102,098 | 107.85 | ||||||||||||
Granted for performance multiple (1) | 241,183 | 43.10 | ||||||||||||
Released (1) | (241,183) | 43.10 | ||||||||||||
Non-vested at end of period | 541,327 | 55.40 |
(1) Upon completion of the performance period for the PSUs granted in 2019 and a portion of the PSUs granted in 2020, a performance multiple of 190% was applied to each of the grants resulting in additional grants of PSUs in January 2022.
Total compensation cost related to non-vested market-based awards not yet recognized on our condensed consolidated statements of operations as of June 30, 2022 was $16.9 million. This cost is expected to be recognized over a weighted average period of 1.3 years.
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 our board of directors from time to time. Through June 30, 2022, no shares of preferred stock have been issued.
Stock Repurchase Program
In 2019, our board of directors approved a program pursuant to which we may acquire shares of our common stock from time to time. At December 31, 2021, $187.3 million of the approved $525.0 million remained available for repurchase under the stock repurchase program. In February 2022, our board of directors approved a new stock repurchase program that reset the total repurchase value to $1.25 billion, which we currently anticipate fully utilizing by December 31, 2023. The stock repurchase program does not require any specific number of shares to be acquired and can be modified or discontinued by our board of directors at any time. Repurchases under the program can be made in open markets at our discretion and in compliance with safe harbor provisions, or in privately negotiated transactions. Pursuant to the program, we repurchased 4.3 million and 1.3 million shares of outstanding common stock at a cost of $300.0 million and $48.6 million during the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, $978.1 million remained available under the program for repurchases of our outstanding common stock.
Dividends
During the first and second quarters of 2022, our board of directors approved the declaration and payment of quarterly cash dividends of $0.25 and $0.35 per share of common stock, respectively. For the six months ended June 30, 2022, our dividends totaled $59.1 million or $0.60 per share of outstanding common stock. All RSUs and PSUs receive a dividend equivalent per unit, recognized as a liability included in other liabilities on our condensed consolidated balance sheets, until the recipients receive the equivalents upon vesting. Dividends declared were recorded as a reduction of additional paid-in capital as there were no retained earnings as of the date of declaration. Future dividend payments must be approved by our board of directors and will depend on our liquidity, financial requirements, and other factors considered relevant by our board.
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 our 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. At each reporting period, management considers the available taxes in carryback periods, the future reversals of existing taxable temporary differences, tax planning strategies and
20
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
projected future taxable income in making this assessment. Our oil and gas property impairments and cumulative pre-tax losses were key considerations that led us to provide a valuation allowance against our DTAs beginning January 1, 2020 since we previously could not conclude that it is more likely than not that our DTAs will be fully realized in future periods.
During the period ended June 30, 2022, sufficient positive evidence became available that allowed us to reach a conclusion that it is more likely than not that our DTAs will be realized and the valuation allowance is no longer be needed. As we previously disclosed in our 2021 Form 10-K, we maintained a valuation allowance on our net federal deferred tax assets and would continue to do so until sufficient positive evidence exists to support a reversal of the allowance. In the second quarter, continued higher commodity prices have increased our income, resulting in the reversal of objective negative evidence of cumulative loss in recent years, and we determined that we have sufficient positive evidence to release the valuation allowance. As a result, we released $22.4 million of the valuation allowance against our deferred income tax assets and recognized a corresponding decrease to income tax expense in the period ended June 30, 2022. The remainder of the valuation allowance of $34.2 million will be recognized as a decrease to income tax expense over the second half of 2022.
The effective income tax rates for the three and six months ended June 30, 2022, excluding our discrete gain on bargain purchase of $100.3 million, were 18.5 percent and 19.6 percent, respectively, and 0.2 percent and 0.1 percent provision on the respective pre-tax losses for the three and six months ended June 30, 2021, respectively. The effective tax rates differ from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21 percent to the pre-tax loss due to the valuation allowance or changes in the valuation allowance against our deferred income tax assets.
As of June 30, 2022, 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 accepted our 2020 federal income tax return with no tax adjustments. We continue to voluntarily participate in the IRS CAP program for the review of our 2021 tax year. Participation in the IRS CAP Program has enabled us to have minimal uncertain tax benefits associated with our federal tax return filings.
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 stock-based employee awards 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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Weighted average common shares outstanding - basic | 96,982 | 99,187 | 96,632 | 99,445 | |||||||||||||||||||
Dilutive effect of: | |||||||||||||||||||||||
RSUs and PSUs | 1,235 | — | 1,488 | — | |||||||||||||||||||
Other equity-based awards | 29 | — | 30 | — | |||||||||||||||||||
Weighted average common shares and equivalents outstanding - diluted | 98,246 | 99,187 | 98,150 | 99,445 | |||||||||||||||||||
We reported a net loss for the three and six months ended June 30, 2021. 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.
21
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
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 June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||
Weighted average common share equivalents excluded from diluted earnings per share due to their anti-dilutive effect: | |||||||||||||||||||||||
RSUs and PSUs | 225 | 2,818 | 113 | 2,642 | |||||||||||||||||||
Other stock-based awards | 33 | 172 | 33 | 185 | |||||||||||||||||||
Total anti-dilutive common share equivalents | 258 | 2,990 | 146 | 2,827 |
NOTE 15 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Six Months Ended June 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||
Supplemental cash flow information: | ||||||||||||||
Cash payments (receipts) for: | ||||||||||||||
Interest, net of capitalized interest | $ | 23,614 | $ | 30,855 | ||||||||||
Income taxes | 157 | (1,125) | ||||||||||||
Non-cash investing and financing activities: | ||||||||||||||
Change in accounts payable related to capital expenditures | $ | (25,671) | $ | 61,310 | ||||||||||
Change in asset retirement obligations, with a corresponding change to crude oil and natural gas properties, net of disposals | 1,114 | (1,729) | ||||||||||||
Issuance of common stock for acquisition of an exploration and production business | 293,314 | — | ||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
Operating cash flows from operating leases | $ | 3,611 | $ | 4,054 | ||||||||||
Operating cash flows from finance leases | 123 | 65 | ||||||||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||
Operating leases (1) | $ | 11,121 | $ | 1,066 | ||||||||||
Finance leases | 3,846 | 1,466 |
(1) Includes $3.1 million operating lease acquired from Great Western.
Cash, cash equivalents and restricted cash presented in the condensed consolidated statements of cash flow is comprised of the following:
June 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
(in thousands) | ||||||||||||||
Cash and cash equivalents | $ | 38,528 | $ | 109,749 | ||||||||||
Restricted cash (1) | 8,130 | — | ||||||||||||
$ | 46,658 | $ | 109,749 |
(1) Included in Other assets on our condensed consolidated balance sheets.
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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
June 30, 2022 Financial Overview of Operations and Liquidity
Market Conditions
The crude oil and natural gas industry is cyclical and commodity prices are inherently volatile. Commodity prices reflect global supply and demand dynamics as well as the geopolitical and macroeconomic environment.
Crude Oil Markets
In 2021, the global economy continued to recover due to the partial containment of COVID-19, which resulted in an increase in crude oil demand. Recovery has generally continued in 2022 despite a variety of economic headwinds, including outbreaks of COVID-19 variants. Overall production from OPEC+ has not increased at the same pace as demand, creating upward pressure on crude oil prices and tightening of global oil inventories. In February 2022, Russia, a major global crude oil exporter, attacked and invaded Ukraine, driving the United States (“U.S.”) and other Western countries to apply sanctions over crude oil imports from Russia. Additionally, many crude oil purchasers are boycotting Russian crude oil in response to the attacks on Ukraine. All of these factors have led to lower global oil supply and significantly higher crude oil prices in the first six months of 2022 when compared to 2021.
During 2022, the U.S. has experienced the highest inflation rates since 1981 resulting mainly from the global recovery from COVID-19, supply chain disruptions, higher labor costs and the invasion of Ukraine by Russia. The U.S. Federal Reserve has responded to the rise in inflation by increasing the benchmark federal funds interest rate. The magnitude and overall effectiveness of these actions remains uncertain, but such monetary policy changes can increase the risk of economic slowdown or lead to a recession. A slowdown or recession can cause a decrease or shift in short-term or long-term demand for crude oil, resulting in industry oversupply and the potential for lower commodity prices.
Natural Gas and NGL Markets
In addition to the crude oil market drivers noted above, natural gas and NGL prices are also affected by structural changes in supply and demand, growth in levels of liquified natural gas exports and deviations from seasonally normal weather. Lower inventory levels and lack of reinvestment in supply growth have driven natural gas and NGL prices higher.
Financial Matters
Three months ended June 30, 2022 compared to three months ended March 31, 2022
•Production volumes increased to 21.4 MMboe in the second quarter of 2022, an increase of 19 percent compared to 17.9 MMboe in the first quarter, primarily driven by the production volumes from the Great Western Acquisition.
•Crude oil, natural gas and NGLs sales increased to $1,237.7 million compared to $882.4 million in the first quarter of 2022 primarily due to a 17 percent increase in weighted average realized commodity prices and a 19 percent increase in production volumes between periods.
•Negative net settlements from our commodity derivative contracts increased to $298.7 million in the second quarter of 2022 compared to $161.6 million in the first quarter of 2022 due to a continued increase in commodity prices between periods and additional commodity derivatives acquired from Great Western.
•Combined revenue from crude oil, natural gas and NGLs sales and net settlements from our commodity derivative instruments increased 30 percent to $939.0 million from $720.8 million in the first quarter of 2022.
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•Generated net income of $662.4 million, or $6.74 per diluted share, for the second quarter of 2022 and a net loss of $32.0 million, or $0.33 per diluted share, for the first quarter of 2022 primarily due to (i) an increase in crude oil, natural gas and NGLs sales of $355.3 million, (ii) a $466.1 million decrease in commodity risk management loss between periods, and (iii) a gain on bargain purchase from the Great Western Acquisition of $100.3 million, partially offset by an increase in income tax expense of $128.0 million between periods.
•Adjusted EBITDAX, a non-U.S. GAAP financial measure, increased to $814.3 million compared to $549.3 million for the first quarter of 2022, primarily due to an increase in sales of $218.2 million, net of negative net derivative settlements, and a $100.3 million gain on bargain purchase recognized in the second quarter of 2022, partially offset by an increase in costs experienced in operations.
•Cash flows from operations increased to $747.4 million compared to $489.0 million in the first quarter of 2022. Adjusted cash flows from operations, a non-U.S. GAAP financial measure, increased to $694.7 million compared to $538.8 million in the first quarter of 2022. Adjusted free cash flows, a non-U.S. GAAP financial measure, increased to $403.8 million from $318.7 million in the first quarter of 2022.
Six months ended June 30, 2022 compared to six months ended June 30, 2021
•Production volumes increased to 39.3 MMboe in 2022, an increase of 19 percent compared to 33.2 MMboe in 2021, primarily driven by production volumes from Great Western Acquisition and as a result of our turn-in-line activities.
•Crude oil, natural gas and NGLs sales increased to $2.1 billion compared to $1.0 billion in 2021 primarily due to a 79 percent increase in weighted average realized commodity prices and a 19 percent increase in production volumes between periods.
•Negative net settlements from our commodity derivative contracts increased to $460.3 million in 2022 compared to $85.8 million in 2021 due to improvements in commodity pricing year over year and additional commodity derivatives acquired from Great Western.
•Combined revenue from crude oil, natural gas and NGLs sales and net settlements from our commodity derivative instruments increased 81 percent to $1,659.8 million from $915.5 million in 2021.
•Generated net income of $630.4 million, or $6.42 per diluted share, in the 2022 period and a net loss of $96.1 million, or $0.97 per diluted share, in the 2021 period, primarily due to an increase in crude oil, natural gas and NGLs sales of $1,118.8 million and a gain on bargain purchase from the Great Western Acquisition of $100.3 million, partially offset by a $180.5 million increase in commodity risk management loss and a $129.3 million increase in income tax expense between periods .
•Adjusted EBITDAX, a non-U.S. GAAP financial measure, increased to $1,363.5 million in 2022 compared to $674.1 million in 2021, primarily due to an increase in sales of $744.3 million, net of negative net derivative settlements, and a $100.3 million gain on bargain purchase recognized in 2022, partially offset by an increase in costs experienced in operations between periods.
•Cash flows from operations increased to $1,236.4 million in 2022 compared to $577.4 million in 2021. Adjusted cash flows from operations, a non-U.S. GAAP financial measure, increased to $1,233.5 million in 2022 compared to $643.0 million in 2021. Adjusted free cash flows, a non-U.S. GAAP financial measure, increased to $722.5 million in 2022 from $341.4 million in 2021.
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.
24
Great Western Acquisition
On May 6, 2022, we completed the acquisition of Great Western, for approximately $1.4 billion, inclusive of Great Western’s net debt. Great Western was an independent oil and gas company focused on the exploration, production and development of crude oil and natural gas in the Wattenberg Field of Colorado. The consideration paid was $542.5 million in cash and approximately 4.0 million shares of our common stock, valued at $293.3 million on the acquisition date. In addition, we paid off Great Western’s secured credit facility totaling $235.8 million, and paid $361.2 million to terminate Great Western’s 12% senior secured notes due 2025, inclusive of unpaid accrued interest and a premium for early termination. The cash portion of the purchase price and the termination of Great Western’s debt were funded through a combination of cash on hand and availability under our revolving credit facility. As a result of the Great Western Acquisition, we acquired approximately 54,000 net acres in the core Wattenberg Field and production of approximately 50,000 Boe per day.
Drilling and Completion Overview
In the Wattenberg Field, we operated one full-time drilling rig and one full-time completion crew during the first half of 2022, added a second full-time drilling rig in mid-March 2022 and added a third full-time drilling rig upon closing the Great Western Acquisition. In addition, we operated one full-time drilling rig and one completion crew during the first half of 2022 in the Delaware Basin. Our total capital investments in crude oil and natural gas properties for the six months ended June 30, 2022 were $508.1 million.
The following table summarize our drilling and completion activities for the six months ended June 30, 2022:
Operated Wells | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | Delaware Basin | Total | ||||||||||||||||||||||||||||||||||||
Gross | Net | Gross | Net | Gross | Net | |||||||||||||||||||||||||||||||||
In-process as of December 31, 2021 | 143 | 133.0 | 21 | 20.6 | 164 | 153.6 | ||||||||||||||||||||||||||||||||
Wells spud | 74 | 69.5 | 10 | 9.9 | 84 | 79.4 | ||||||||||||||||||||||||||||||||
Wells acquired in-process (1) | 48 | 44.6 | — | — | 48 | 44.6 | ||||||||||||||||||||||||||||||||
Wells turned-in-line | (73) | (68.9) | (18) | (17.8) | (91) | (86.7) | ||||||||||||||||||||||||||||||||
In-process as of June 30, 2022 | 192 | 178.2 | 13 | 12.7 | 205 | 190.9 |
(1) Represents in-process wells we obtained as part of the Great Western Acquisition.
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.
Capital Returns
Stock Repurchase Program. In February 2022, our board of directors approved a new stock repurchase program that reset the total repurchase value to $1.25 billion, which we currently anticipate fully utilizing by December 31, 2023. We repurchased 4.3 million shares of outstanding common stock at a cost of $300.0 million for the six months ended June 30, 2022. As of June 30, 2022, $978.1 million remained available for repurchases under the program.
Dividends. Our board of directors approved the declaration and payment of a quarterly cash dividend of $0.25 per share of common stock in the first quarter of 2022 and increased our base quarterly dividend to $0.35 per share of common stock in the second quarter of 2022. For the six months ended June 30, 2022, our dividends totaled $59.1 million or $0.60 per share of outstanding common stock.
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PDC ENERGY, INC.
2022 Operational and Financial Outlook
Upon completion of the Great Western Acquisition we provided updated guidance in late May 2022. Based on our current operating results from the first half of the year, we now expect full-year 2022 production to range between 230,000 Boe to 240,000 Boe per day, of which approximately 73,000 Bbls to 77,000 Bbls is expected to be crude oil. Our planned 2022 capital investments in crude oil and natural gas properties are now expected to be between $1.025 and $1.075 billion and is focused on continued execution of our development plans in the Wattenberg Field and the Delaware Basin. Our capital budget and operating costs for 2022 will continue to be impacted by cost inflation if crude oil and natural gas prices remain at current levels or continue to increase.
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 to best meet our short- and long-term corporate strategy. We may revise our 2022 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, the cost of services for drilling and well completion activities, drilling results, changes in our borrowing capacity, a significant change in cash flows, regulatory matters and acquisition and divestiture opportunities.
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, Summit and Range development areas. Our 2022 capital investment program for the Wattenberg Field represents approximately 80 percent of our expected total capital investments in crude oil and natural gas properties. In 2022, the majority of the wells we plan to drill are 1.5 mile and 2.0 mile lateral wells. Our plan includes spudding and turning-in-line approximately 150 to 175 operated wells. To meet our development plan, we intend on running three full-time horizontal rigs and one full-time plus an intermittent completion crew for the rest of the year.
Delaware Basin. Total capital investments in crude oil and natural gas properties in the Delaware Basin for 2022 are expected to be approximately 20 percent of our total capital investments. In 2022, we anticipate spudding 16 operated wells and turning-in-line 20 operated wells with the majority of the wells being 2.0 mile lateral wells. We completed our 2022 completion program in late May and are currently running one full-time drilling rig.
We are committed to our disciplined approach to managing our development plans. Based on our current production forecast for 2022, we expect 2022 cash flows from operations to exceed our capital investments in crude oil and natural gas properties. Our first priority is to pay our quarterly base dividend of $0.35 per share. Then we expect to use approximately 60% or more of our remaining adjusted free cash flows, a non-U.S. GAAP financial measure, for share repurchases and special dividends, as needed. Any remaining adjusted free cash flows will be used for reducing debt, building cash on our consolidated balance sheet or other general corporate purposes.
Regulatory and Political Updates
In Colorado, certain interest groups opposed to oil and natural gas development 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. Pursuant to SB 19-181, a series of rulemaking hearings were conducted, which focused on issues such as permitting requirements, setbacks and siting requirements, and financial assurance, resulting in the adoption of new regulatory requirements. We anticipate that future hearings will be conducted by the COGCC on permit fees, the interaction between the state and local governments, and well site reclamation. These proceedings could result in new rules that impose increased costs and regulations on our operations.
A key component of SB 19-181 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. As of January 2021, 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 an overview of oil and gas development over a larger area over a longer period of time, including a comprehensive cumulative impact analysis, an alternative location analysis, and extensive communication with both local elected officials and communities. A CAP will include multiple OGDPs within its boundaries. As both CAPs and OGDPs are new processes and the COGCC staff is working to develop the appropriate requirements and adjusting to their new operating plan, the time needed to
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PDC ENERGY, INC.
obtain a permit has been prolonged. COGCC rules provide that the permitting process could range between six to twelve months or more from submission to approval.
In addition to the changes to the permitting process, the COGCC conducted a rulemaking concerning financial assurance to be provided by operators in Colorado. The rulemaking was designed to address and reduce the number of wells that have not been properly plugged by their operators (“orphan wells”) due to financial constraints or bankruptcy. As part of that rulemaking, tiers of operators were established based on identified metrics with operators in different tiers being obligated to provide different levels of financial assurance. For our tier, a bond of $40 million will be required in the second half of 2022 and will be secured through our existing surety bond program. In addition to the financial assurance, operators will be assessed an annual fixed fee per existing well that will fund the plugging and abandonment of orphan wells identified by the COGCC. We do not anticipate a material effect on our financial condition or results of operations with meeting the outlined financial assurance requirements.
We cannot predict whether future ballot initiatives or other legislation or regulation will be proposed that would limit the areas of the state in which drilling is permitted to occur or impose other requirements or restrictions.
Wattenberg Permits Update. In June 2022, the COGCC granted PDC unanimous approval for a 69-well OGDP and a 30-well OGDP, our second and third approvals under the new permitting process. Combined, these two approvals provided us approximately 100 additional permits for our 2024 drilling and completion plan.
In December 2021, PDC submitted our first CAP. The application proposes approximately 450 wells spread amongst 22 surface locations, to be developed over several years. We conducted a comprehensive analysis of potential impacts and have committed to transport all water and commodity production via pipeline and to provide electrical infrastructure to all locations. These commitments will lessen the impact of traffic, noise, light and emissions, while also improving our ESG metrics. Additionally, we developed a dashboard to analyze disproportionately impacted communities in the area and developed a robust communication plan designed to encourage communication with and garner feedback from these key stakeholders. We worked with COGCC on comments received on this CAP, submitted updated plans in June 2022 and received the completeness determination on August 2, 2022. We anticipate a COGCC determination on approval of our CAP by year end 2022 or early 2023, recognizing that there may be delays in this new process. Together, these applications represent our planned Wattenberg Field turn-in-line activity past 2028.
Environmental, Social and Governance (“ESG”)
We are committed to a meaningful and measurable ESG strategy. Our mission to be a cleaner, safer and more socially responsible company begins with a sound strategy, is supported in the boardroom and is overseen by our Environmental, Social, Governance and Nominating Committee at the board of directors and is considered at every level of our business.
On March 31, 2022, we completed our initial U.S. Environmental Protection Agency (“EPA”) annual filing for 2021 and we reported an approximate 12% reduction in greenhouse gas (“GHG”) emissions and an approximate 17% reduction in methane emissions intensity from 2020 baseline levels (each on a per unit of production basis), putting the Company on track to meet its 60% and 50% GHG and methane reduction goals by 2025, respectively.
Additionally, in May 2022, our board of directors approved quantitative metrics for GHG and methane emissions reductions for our 2022 short-term incentive program, including 15% GHG and 30% methane emissions reduction targets from 2021 to 2022, respectively. As noted above, this supports the Company’s previously announced sustainability goals. In total, over 25% of our short-term incentive program is tied to ESG and Environmental, Health and Safety initiatives. Additional information on our ESG practices, including sustainability goals, key metrics and progress achieved, can be found in our Sustainability Report available on our website at www.pdce.com and is not incorporated by reference in this report.
The SEC and other regulatory bodies are proposing a number of climate-change focused and broader ESG reporting requirements focused on emission reduction. When adopted, we will modify our disclosures accordingly.
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PDC ENERGY, INC.
Results of Operations
Summary of Operating Results
The following table presents selected information regarding our operating results:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
June 30, 2022 | March 31, 2022 | Percent Change | June 30, 2022 | June 30, 2021 | Percent Change | ||||||||||||||||||||||||||||||
(dollars in millions, except per unit data) | |||||||||||||||||||||||||||||||||||
Production: | |||||||||||||||||||||||||||||||||||
Crude oil (MBbls) | 6,844 | 5,853 | 17 | % | 12,697 | 10,248 | 24 | % | |||||||||||||||||||||||||||
Natural gas (MMcf) | 49,817 | 43,119 | 16 | % | 92,936 | 83,512 | 11 | % | |||||||||||||||||||||||||||
NGLs (MBbls) | 6,263 | 4,885 | 28 | % | 11,148 | 8,997 | 24 | % | |||||||||||||||||||||||||||
Crude oil equivalent (MBoe) | 21,410 | 17,924 | 19 | % | 39,335 | 33,164 | 19 | % | |||||||||||||||||||||||||||
Average Boe per day (Boe) | 235,275 | 199,156 | 18 | % | 217,320 | 183,227 | 19 | % | |||||||||||||||||||||||||||
Crude Oil, Natural Gas and NGLs Sales: | |||||||||||||||||||||||||||||||||||
Crude oil | $ | 740.9 | $ | 549.7 | 35 | % | $ | 1,290.6 | $ | 624.3 | 107 | % | |||||||||||||||||||||||
Natural gas | 277.7 | 163.1 | 70 | % | 440.8 | 191.4 | 130 | % | |||||||||||||||||||||||||||
NGLs | 219.1 | 169.6 | 29 | % | 388.7 | 185.6 | 109 | % | |||||||||||||||||||||||||||
Total crude oil, natural gas and NGLs sales | $ | 1,237.7 | $ | 882.4 | 40 | % | $ | 2,120.1 | $ | 1,001.3 | 112 | % | |||||||||||||||||||||||
Net Settlements on Commodity Derivatives | ` | ||||||||||||||||||||||||||||||||||
Crude oil | $ | (231.4) | $ | (131.1) | 77 | % | $ | (362.5) | $ | (68.4) | * | ||||||||||||||||||||||||
Natural gas | (67.3) | (30.5) | 121 | % | (97.8) | (17.4) | * | ||||||||||||||||||||||||||||
Total net settlements on derivatives | $ | (298.7) | $ | (161.6) | 85 | % | $ | (460.3) | $ | (85.8) | * | ||||||||||||||||||||||||
Average Sales Price (excluding net settlements on derivatives): | |||||||||||||||||||||||||||||||||||
Crude oil (per Bbl) | $ | 108.24 | $ | 93.93 | 15 | % | $ | 101.64 | $ | 60.92 | 67 | % | |||||||||||||||||||||||
Natural gas (per Mcf) | 5.57 | 3.78 | 47 | % | 4.74 | 2.29 | 107 | % | |||||||||||||||||||||||||||
NGLs (per Bbl) | 34.99 | 34.70 | 1 | % | 34.86 | 20.61 | 69 | % | |||||||||||||||||||||||||||
Crude oil equivalent (per Boe) | 57.81 | 49.23 | 17 | % | 53.90 | 30.19 | 79 | % | |||||||||||||||||||||||||||
Average Costs and Expenses (per Boe): | |||||||||||||||||||||||||||||||||||
Lease operating expense | $ | 3.30 | $ | 3.02 | 9 | % | $ | 3.17 | $ | 2.54 | 25 | % | |||||||||||||||||||||||
Production taxes | 4.17 | 3.51 | 19 | % | 3.87 | 1.70 | 128 | % | |||||||||||||||||||||||||||
Transportation, gathering and processing expense | 1.38 | 1.56 | (12) | % | 1.46 | 1.44 | 1 | % | |||||||||||||||||||||||||||
General and administrative expense | 2.13 | 1.90 | 12 | % | 2.03 | 1.98 | 3 | % | |||||||||||||||||||||||||||
Depreciation, depletion and amortization | 8.92 | 8.43 | 6 | % | 8.70 | 9.32 | (7) | % | |||||||||||||||||||||||||||
Lease Operating Expense by Operating Region (per Boe) | |||||||||||||||||||||||||||||||||||
Wattenberg Field | $ | 2.85 | $ | 2.42 | 18 | % | $ | 2.65 | $ | 2.23 | 19 | % | |||||||||||||||||||||||
Delaware Basin | 5.98 | 6.67 | (10) | % | 6.29 | 4.77 | 32 | % |
* Percent change is not meaningful.
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PDC ENERGY, INC.
As a result of non-recurring costs incurred during the second quarter of 2022 to acquire Great Western and integrate it into our operations, our results of operations are not indicative of future results of operations for the second half of 2022. Additionally, we anticipate increases in production volumes and production cost per Boe as the integration of Great Western continues. Further, we expect increases in DD&A per Boe due to the fair value of Great Western’s crude oil and natural gas properties and a decrease in general and administrative expenses as acquisition transaction and transition costs wind down after the integration. Lastly, we expect interest expense to increase in the second half of 2022 as a result of our increased level of borrowings under our revolving credit facility resulting from the funding of the Great Western Acquisition and an overall increase in market interest rates.
Crude Oil, Natural Gas and NGLs Sales
The change in crude oil, natural gas and NGLs sales for the three months ended June 30, 2022 compared to the three months ended March 31, 2022 and the six months ended June 30, 2022 compared to the six months ended June 30, 2021 were due to the following:
Change Between | |||||||||||
March 31, 2022 - June 30, 2022 | June 30, 2021 - June 30, 2022 | ||||||||||
(in millions) | |||||||||||
Change in: | |||||||||||
Production | $ | 166.3 | $ | 215.1 | |||||||
Average crude oil price | 97.9 | 517.1 | |||||||||
Average natural gas price | 89.3 | 227.8 | |||||||||
Average NGLs price | 1.8 | 158.8 | |||||||||
Total change in crude oil, natural gas and NGLs sales revenue | $ | 355.3 | $ | 1,118.8 |
Crude Oil, Natural Gas and NGLs Production
The following table presents crude oil, natural gas and NGLs production for the periods presented:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||
Production by Operating Region | June 30, 2022 | March 31, 2022 | Percent Change | June 30, 2022 | June 30, 2021 | Percent Change | ||||||||||||||||||||||||||||||||
Crude oil (MBbls) | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | 5,545 | 4,832 | 15 | % | 10,377 | 8,670 | 20 | % | ||||||||||||||||||||||||||||||
Delaware Basin | 1,299 | 1,021 | 27 | % | 2,320 | 1,578 | 47 | % | ||||||||||||||||||||||||||||||
Total | 6,844 | 5,853 | 17 | % | 12,697 | 10,248 | 24 | % | ||||||||||||||||||||||||||||||
Natural gas (MMcf) | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | 43,244 | 37,663 | 15 | % | 80,907 | 73,742 | 10 | % | ||||||||||||||||||||||||||||||
Delaware Basin | 6,573 | 5,456 | 20 | % | 12,029 | 9,770 | 23 | % | ||||||||||||||||||||||||||||||
Total | 49,817 | 43,119 | 16 | % | 92,936 | 83,512 | 11 | % | ||||||||||||||||||||||||||||||
NGLs (MBbls) | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | 5,575 | 4,291 | 30 | % | 9,866 | 8,153 | 21 | % | ||||||||||||||||||||||||||||||
Delaware Basin | 688 | 594 | 16 | % | 1,282 | 844 | 52 | % | ||||||||||||||||||||||||||||||
Total | 6,263 | 4,885 | 28 | % | 11,148 | 8,997 | 24 | % | ||||||||||||||||||||||||||||||
Crude oil equivalent (MBoe) | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | 18,328 | 15,400 | 19 | % | 33,728 | 29,113 | 16 | % | ||||||||||||||||||||||||||||||
Delaware Basin | 3,082 | 2,524 | 22 | % | 5,607 | 4,051 | 38 | % | ||||||||||||||||||||||||||||||
Total | 21,410 | 17,924 | 19 | % | 39,335 | 33,164 | 19 | % | ||||||||||||||||||||||||||||||
Average crude oil equivalent per day (Boe) | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | 201,407 | 171,111 | 18 | % | 186,342 | 160,846 | 16 | % | ||||||||||||||||||||||||||||||
Delaware Basin | 33,868 | 28,045 | 21 | % | 30,978 | 22,381 | 38 | % | ||||||||||||||||||||||||||||||
Total | 235,275 | 199,156 | 18 | % | 217,320 | 183,227 | 19 | % |
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PDC ENERGY, INC.
Net production volumes for oil, natural gas and NGLs increased 19 percent during the three months ended June 30, 2022 compared to the three months ended March 31, 2022 primarily due to 3.0 MMboe of additional production volumes from the Great Western Acquisition and the net impact of turn-in-line activities in both basins during the second quarter of 2022.
Net production volumes for oil, natural gas and NGLs increased 19 percent during the six months ended June 30, 2022 compared to the same period in 2021. The increase in production volume between periods was primarily due to 3.0 MMboe of additional production volumes from the Great Western Acquisition and the net impact of turn-in-line activities in both basins since the second quarter of 2021.
The following table presents our crude oil, natural gas and NGLs production ratio by operating region for the periods presented:
Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||
Crude Oil | Natural Gas | NGLs | Total | |||||||||||||||||||||||
Wattenberg Field | 30% | 39% | 31% | 100% | ||||||||||||||||||||||
Delaware Basin | 42% | 36% | 22% | 100% | ||||||||||||||||||||||
Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||
Crude Oil | Natural Gas | NGLs | Total | |||||||||||||||||||||||
Wattenberg Field | 31% | 41% | 28% | 100% | ||||||||||||||||||||||
Delaware Basin | 40% | 36% | 24% | 100% | ||||||||||||||||||||||
Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||
Crude Oil | Natural Gas | NGLs | Total | |||||||||||||||||||||||
Wattenberg Field | 31% | 40% | 29% | 100% | ||||||||||||||||||||||
Delaware Basin | 41% | 36% | 23% | 100% | ||||||||||||||||||||||
Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||
Crude Oil | Natural Gas | NGLs | Total | |||||||||||||||||||||||
Wattenberg Field | 30% | 42% | 28% | 100% | ||||||||||||||||||||||
Delaware Basin | 39% | 40% | 21% | 100% |
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.
The ultimate timing and availability of adequate infrastructure remains out of our control. Weather, regulatory developments, preventative routine maintenance 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 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.
Our production from the Wattenberg Field and Delaware Basin was not materially affected by midstream or downstream capacity constraints during the six months ended June 30, 2022. We continuously monitor infrastructure capacities versus producer activity and production volume forecasts. Continued increases in crude oil and natural gas prices through early 2022 have incentivized producers in the Permian Basin to increase the level of drilling and completion activities. The potential increase in production levels may lead to natural gas transportation constraints out of the Permian Basin by the end of 2022 or in 2023, which may result to lower realized Waha natural gas prices. However, a majority of PDC’s gas production in the Delaware Basin is dedicated to Permian Highway Pipeline and is exposed to Houston-based gas pricing.
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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.
The following table presents weighted average sales prices of crude oil, natural gas and NGLs for the periods presented:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||
Weighted Average Realized Sales Price by Operating Region | June 30, 2022 | March 31, 2022 | Percent Change | June 30, 2022 | June 30, 2021 | Percent Change | ||||||||||||||||||||||||||||||||
(excluding net settlements on derivatives) | ||||||||||||||||||||||||||||||||||||||
Crude oil (per Bbl) | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | $ | 108.05 | $ | 93.52 | 16 | % | $ | 101.28 | $ | 60.84 | 66 | % | ||||||||||||||||||||||||||
Delaware Basin | 109.06 | 95.86 | 14 | % | 103.25 | 61.35 | 68 | % | ||||||||||||||||||||||||||||||
Weighted average price | 108.24 | 93.93 | 15 | % | 101.64 | 60.92 | 67 | % | ||||||||||||||||||||||||||||||
Natural gas (per Mcf) | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | $ | 5.50 | $ | 3.82 | 44 | % | $ | 4.71 | $ | 2.33 | 102 | % | ||||||||||||||||||||||||||
Delaware Basin | 6.09 | 3.56 | 71 | % | 4.94 | 2.02 | 145 | % | ||||||||||||||||||||||||||||||
Weighted average price | 5.57 | 3.78 | 47 | % | 4.74 | 2.29 | 107 | % | ||||||||||||||||||||||||||||||
NGLs (per Bbl) | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | $ | 32.56 | $ | 32.37 | 1 | % | $ | 32.48 | $ | 19.78 | 64 | % | ||||||||||||||||||||||||||
Delaware Basin | 54.62 | 51.54 | 6 | % | 53.19 | 28.65 | 86 | % | ||||||||||||||||||||||||||||||
Weighted average price | 34.99 | 34.70 | 1 | % | 34.86 | 20.61 | 69 | % | ||||||||||||||||||||||||||||||
Crude oil equivalent (per Boe) | ||||||||||||||||||||||||||||||||||||||
Wattenberg Field | $ | 55.57 | $ | 47.69 | 17 | % | $ | 51.97 | $ | 29.56 | 76 | % | ||||||||||||||||||||||||||
Delaware Basin | 71.13 | 58.59 | 21 | % | 65.48 | 34.75 | 88 | % | ||||||||||||||||||||||||||||||
Weighted average price | 57.81 | 49.23 | 17 | % | 53.90 | 30.19 | 79 | % |
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.
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 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 (“TGP”) expense.
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Information related to the components and classifications of TGP expense on 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 TGP expense shown in the table below represents our approximate composite per barrel price for NGLs for the periods presented.
Three Months Ended June 30, 2022 | Average NYMEX Price | Average Realized Price Before TGP Expense | Average Realization Percentage Before TGP Expense | Average TGP Expense (1) | Average Realized Price After TGP Expense | Average Realization Percentage After TGP Expense | ||||||||||||||||||||||||||||||||
Crude oil (per Bbl) | $ | 108.41 | $ | 108.24 | 100 | % | $ | 2.37 | $ | 105.87 | 98 | % | ||||||||||||||||||||||||||
Natural gas (per MMBtu) | 7.17 | 5.58 | 78 | % | 0.22 | 5.36 | 75 | % | ||||||||||||||||||||||||||||||
NGLs (per Bbl) | 108.41 | 34.99 | 32 | % | — | 34.99 | 32 | % | ||||||||||||||||||||||||||||||
Crude oil equivalent (per Boe) | 83.05 | 57.81 | 70 | % | 1.26 | 56.55 | 68 | % | ||||||||||||||||||||||||||||||
Three Months Ended March 31, 2022 | Average NYMEX Price | Average Realized Price Before TGP Expense | Average Realization Percentage Before TGP Expense | Average TGP Expense (1) | Average Realized Price After TGP Expense | Average Realization Percentage After TGP Expense | ||||||||||||||||||||||||||||||||
Crude oil (per Bbl) | $ | 94.29 | $ | 93.93 | 100 | % | $ | 2.69 | $ | 91.24 | 97 | % | ||||||||||||||||||||||||||
Natural gas (per MMBtu) | 4.95 | 3.78 | 76 | % | 0.23 | 3.55 | 72 | % | ||||||||||||||||||||||||||||||
NGLs (per Bbl) | 94.29 | 34.70 | 37 | % | — | 34.70 | 37 | % | ||||||||||||||||||||||||||||||
Crude oil equivalent (per Boe) | 68.40 | 49.23 | 72 | % | 1.42 | 47.81 | 70 | % | ||||||||||||||||||||||||||||||
Six Months Ended June 30, 2022 | Average NYMEX Price | Average Realized Price Before TGP Expense | Average Realization Percentage Before TGP Expense | Average TGP Expense (1) | Average Realized Price After TGP Expense | Average Realization Percentage After TGP Expense | ||||||||||||||||||||||||||||||||
Crude oil (per Bbl) | $ | 101.35 | $ | 101.65 | 100 | % | $ | 2.52 | $ | 99.13 | 98 | % | ||||||||||||||||||||||||||
Natural gas (per MMBtu) | 6.06 | 4.74 | 78 | % | 0.22 | 4.52 | 75 | % | ||||||||||||||||||||||||||||||
NGLs (per Bbl) | 101.35 | 34.86 | 34 | % | — | 34.86 | 34 | % | ||||||||||||||||||||||||||||||
Crude oil equivalent (per Boe) | 75.76 | 53.90 | 71 | % | 1.33 | 52.57 | 69 | % | ||||||||||||||||||||||||||||||
Six Months Ended June 30, 2021 | Average NYMEX Price | Average Realized Price Before TGP Expense | Average Realization Percentage Before TGP Expense | Average TGP Expense (1) | Average Realized Price After TGP Expense | Average Realization Percentage After TGP Expense | ||||||||||||||||||||||||||||||||
Crude oil (per Bbl) | $ | 61.96 | $ | 60.92 | 98 | % | $ | 3.32 | $ | 57.60 | 93 | % | ||||||||||||||||||||||||||
Natural gas (per MMBtu) | 2.76 | 2.29 | 83 | % | 0.11 | 2.18 | 79 | % | ||||||||||||||||||||||||||||||
NGLs (per Bbl) | 61.96 | 20.61 | 33 | % | — | 20.61 | 33 | % | ||||||||||||||||||||||||||||||
Crude oil equivalent (per Boe) | 42.91 | 30.19 | 70 | % | 1.32 | 28.87 | 67 | % |
(1)Average TGP expense excludes unutilized firm transportation fees of $0.12 per Boe and $0.14 per Boe for the three months ended June 30, 2022 and March 31, 2022, respectively, and 0.13 and $0.12 per Boe for the six months ended June 30, 2022 and 2021, respectively.
Our average realization percentages for crude oil, natural gas and NGLs were relatively flat for the three months ended June 30, 2022 as compared to the three months ended March 31, 2022.
Our average realization percentage for crude oil increased for the six months ended June 30, 2022 as compared to the same period in 2021 primarily due to an increased demand for crude oil, global supply disruptions and geopolitical issues. In
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addition, we realized improved differentials from our 2022 crude oil sales contracts. Average realization percentage for natural gas decreased for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to strong pricing in February 2021 as a result of 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 June 30, 2022.
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 | Six Months Ended | ||||||||||||||||||||||
June 30, 2022 | March 31, 2022 | June 30, 2022 | June 30, 2021 | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Commodity price risk management gain (loss), net: | |||||||||||||||||||||||
Net settlements of commodity derivative instruments: | |||||||||||||||||||||||
Crude oil collars and fixed price exchanges | $ | (231.4) | $ | (131.1) | $ | (362.5) | $ | (68.4) | |||||||||||||||
Natural gas collars and fixed price exchanges | (75.7) | (28.1) | (103.8) | (7.5) | |||||||||||||||||||
Natural gas basis protection exchanges | 8.4 | (2.3) | 6.1 | (9.9) | |||||||||||||||||||
Total net settlements of commodity derivative instruments | (298.7) | (161.5) | (460.2) | (85.8) | |||||||||||||||||||
Change in fair value of unsettled commodity derivative instruments: | |||||||||||||||||||||||
Reclassification of settlements included in prior period changes in fair value of commodity derivative instruments | 173.9 | 100.2 | 174.9 | (5.4) | |||||||||||||||||||
Crude oil collars and fixed price exchanges | (6.6) | (373.6) | (308.0) | (329.5) | |||||||||||||||||||
Natural gas collars and fixed price exchanges | 41.4 | (140.6) | (71.0) | (67.7) | |||||||||||||||||||
Natural gas basis protection exchanges | (12.0) | 7.4 | (5.7) | (1.1) | |||||||||||||||||||
Net change in fair value of unsettled commodity derivative instruments | 196.7 | (406.6) | (209.8) | (403.7) | |||||||||||||||||||
Total commodity price risk management gain (loss), net | $ | (102.0) | $ | (568.1) | $ | (670.0) | $ | (489.5) |
The continued increase in commodity prices during the three months ended June 30, 2022 and March 31, 2022 and during the six months ended June 30, 2022 and June 30, 2021 had an overall unfavorable impact on the fair value and settlements of our commodity derivatives.
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Lease Operating Expense
Lease operating expense (“LOE”) increased by 30 percent to $70.6 million for the three months ended June 30, 2022 compared to $54.2 million for the three months ended March 31, 2022. The period-over-period increase in LOE was primarily attributable to (i) an approximate $7.0 million increase as a result of the Great Western Acquisition, (ii) a $4.8 million increase in water disposal, well and pumper services in both basins as a result of higher commodity prices and inflation and (iii) $1.8 million in additional environmental costs in the Wattenberg basin. LOE per Boe increased 9 percent to $3.30 for the three months ended June 30, 2022 from $3.02 for the three months ended March 31, 2022. The increase in LOE per Boe was primarily due to the additional costs outlined above.
LOE increased by 48 percent to $124.8 million for the six months ended June 30, 2022 compared to $84.2 million for the six months ended June 30, 2021. The period-over-period increase in LOE was primarily due to (i) a $7.0 million increase a as a result of the Great Western Acquisition, (ii) increased activities and payroll costs of $12.8 million resulting from an increase in activities in both basins, (iii) an $11.4 million increase in chemical treatments, water disposal and environmental costs as a result of higher commodity prices and inflation and (iv) a $6.2 million increase in workover expense due to the timing of workover activities focused mainly in the Delaware Basin. LOE per Boe increased 25 percent to $3.17 for the six months ended June 30, 2022 from $2.54 for the six months ended June 30, 2021, an increase that was primarily due to the additional costs outlined above.
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 42 percent to $89.3 million for the three months ended June 30, 2022 compared to $62.9 million for the three months ended March 31, 2022. Production taxes per Boe increased 19 percent to $4.17 for the three months ended June 30, 2022 compared to $3.51 for the three months ended March 31, 2022. The increase in production taxes was primarily due to additional production volumes from the Great Western Acquisition and higher crude oil, natural gas and NGL prices between periods.
Production taxes increased 170 percent to $152.2 million for the six months ended June 30, 2022 compared to $56.5 million for the six months ended June 30, 2021. Production taxes per Boe increased 128 percent to $3.87 for the six months ended June 30, 2022 compared to $1.70 for the six months ended June 30, 2021. The increase in production taxes was primarily due to an increase in crude oil, natural gas and NGLs prices between periods and additional production from the Great Western Acquisition.
Transportation, Gathering and Processing Expense
TGP expense increased 6 percent to $29.6 million for the three months ended June 30, 2022 compared to $28.0 million for the three months ended March 31, 2022. The increase in TGP expense between periods was primarily due to a $1.7 million increase relating to additional production volumes from the Great Western Acquisition. TGP expense per Boe decreased 12 percent to $1.38 for the three months ended June 30, 2022 compared to $1.56 for the three months ended March 31, 2022. The decrease in TGP expense per Boe between periods was primarily due to lower TGP rates on the acquired Great Western production.
TGP expense increased 21 percent to $57.6 million for the six months ended June 30, 2022 compared to $47.7 million for the six months ended June 30, 2021. The increase in TGP expense between periods was primarily due to a $1.7 million increase relating to additional production volumes from the Great Western Acquisition in 2022 and a $10.5 million increase relating to gas processing volumes and rates in the Delaware basin. TGP expense per Boe increased 1 percent to $1.46 for the six months ended June 30, 2022 compared to $1.44 for the six months ended June 30, 2021. TGP expense per Boe for the six months ended June 30, 2022 compared to the same period in 2021 was relatively flat due to the net impact of lower TGP rates on the acquired Great Western production offset by higher gas processing costs.
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Impairment of Properties and Equipment
There were no significant impairment charges recognized related to our proved and unproved oil and gas properties for the three months ended June 30, 2022 or March 31, 2022 or for the six months ended June 30, 2022 or 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.
General and Administrative Expense
General and administrative expense increased 34 percent to $45.6 million for the three months ended June 30, 2022 compared to $34.1 million for the three months ended March 31, 2022, primarily due to $13.0 million in transaction and transition costs recognized in the second quarter of 2022 relating to the Great Western Acquisition.
General and administrative expense increased 22 percent to $79.8 million for the six months ended June 30, 2022 compared to $65.5 million for the six months ended June 30, 2021, primarily due to $13.0 million in transaction and transition costs recognized in the second quarter of 2022 relating to the Great Western Acquisition.
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 $189.1 million for the three months ended June 30, 2022 compared to $149.3 million for the three months ended March 31, 2022. The increase in DD&A expense was primarily due to (i) a 19 percent increase in production volumes between periods, (ii) an increase in the weighted average DD&A expense rate primarily due to the fair value of proved crude oil and natural gas properties acquired from Great Western and (iii) capitalized costs for wells turned-in-line in the second quarter of 2022.
DD&A expense related to crude oil and natural gas properties was $338.4 million for the six months ended June 30, 2022 compared to $305.0 million for the comparable period in 2021. The increase in total DD&A expense was primarily due to a 19 percent increase in production volumes between periods and capitalized costs for wells turned-in-line since the second quarter of 2021 partially offset by a decrease in weighted average DD&A expense rate resulting from our improved reserve quantities as of December 31, 2021.
The period-over-period change in DD&A expense related to crude oil and natural gas properties was primarily due to the following:
Change Between | ||||||||||||||
March 31, 2022 - June 30, 2022 | June 30, 2021 - June 30, 2022 | |||||||||||||
(in millions) | ||||||||||||||
Increase (decrease) in production | $ | 29.2 | $ | 57.4 | ||||||||||
Increase (decrease) in weighted average depreciation, depletion and amortization rates | 10.7 | (24.0) | ||||||||||||
Total increase (decrease) in DD&A expense related to crude oil and natural gas properties | $ | 39.9 | $ | 33.4 |
The following table presents our per Boe DD&A expense rates for crude oil and natural gas properties for the periods presented:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, 2022 | March 31, 2022 | June 30, 2022 | June 30, 2021 | ||||||||||||||||||||
(per Boe) | |||||||||||||||||||||||
Operating Region/Area | |||||||||||||||||||||||
Wattenberg Field | $ | 8.52 | $ | 8.00 | $ | 8.28 | $ | 9.10 | |||||||||||||||
Delaware Basin | 10.68 | 10.33 | 10.52 | 9.89 | |||||||||||||||||||
Total weighted average DD&A expense rate | 8.83 | 8.33 | 8.60 | 9.20 |
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PDC ENERGY, INC.
Interest Expense, net
Interest expense, net increased $4.6 million to $17.6 million for the three months ended June 30, 2022 compared to $12.9 million for the three months ended March 31, 2022. The increase was primarily due to a $5.4 million increase relating to increased borrowings under our revolving credit facility in the second quarter of 2022 to finance the cash portion of the purchase price of the Great Western Acquisition.
Interest expense, net decreased $8.6 million to $30.5 million for the six months ended June 30, 2022 compared to $39.1 million for the six months ended June 30, 2021. The decrease was primarily due to a $6.0 million decrease from the expiration and redemption of our 2021 Convertible Notes in September 2021 and a $9.3 million decrease from the full redemption of our 2025 Senior Notes and a partial redemption of our 2024 Senior Notes in December and November 2021, respectively. The decrease was partially offset by $5.5 million relating to increased borrowings under our revolving credit facility in 2022 to finance the cash portion of the purchase price of the Great Western Acquisition.
Gain on Bargain Purchase
We recognized a $100.3 million gain on the bargain purchase of the Great Western Acquisition, net of related income taxes of $31.5 million, for the three and six months ended June 30, 2022. For additional information, see Note 2 - Business Combination to our condensed consolidated financial statements included elsewhere in this report.
Provision for Income Taxes
We recorded income tax expense of $128.0 million, excluding our discrete gain on bargain purchase of $100.3 million, and $1.2 million for the three months ended June 30, 2022 and March 31, 2022, respectively, resulting in an effective income tax rate of 18.5 percent provision on pre-tax income, and 3.9 percent provision on pre-tax losses, respectively.
We recorded income tax expense of $129.2 million, excluding our discrete gain on bargain purchase of $100.3 million, and $0.1 million for the six months ended June 30, 2022 and June 30, 2021, respectively, resulting in an effective income tax rate of 19.6 percent provision on pre-tax income, and 0.2 percent provision on pre-tax losses, respectively. The effective tax rates differ from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21 percent to pre-tax loss due to the effect of the valuation allowance or changes in the valuation allowance against our deferred income tax assets.
The ultimate realization of deferred tax assets (“DTAs”) is dependent upon the generation of future taxable income during the periods in which those temporary differences became deductible. At each reporting period, management considers the available taxes in carryback periods, the future reversals of existing taxable temporary differences, tax planning strategies and projected future taxable income in making this assessment. Our oil and gas property impairments and cumulative pre-tax losses were key considerations that led us to continue to provide a valuation allowance against our DTAs beginning January 1, 2020, since we previously could not conclude that it is more likely than not that our DTAs will be fully realized in future periods.
During the period ended June 30, 2022, sufficient positive evidence became available that allowed us to reach a conclusion that it is more likely than not that our DTAs will be realized and the valuation allowance is no longer be needed. As we previously disclosed in our 2021 Form 10-K, we maintained a valuation allowance on our net federal deferred tax assets and would continue to do so until sufficient positive evidence exists to support a reversal of the allowance. In the second quarter, continued higher commodity prices have increased our income, resulting in the reversal of objective negative evidence of cumulative loss in recent years, and we determined that we have sufficient positive evidence to release the valuation allowance. As a result, we released $22.4 million of the valuation allowance against our deferred income tax assets and recognized a corresponding decrease to income tax expense in the period ended June 30, 2022. The remainder of the valuation allowance of $34.2 million will be recognized as a decrease to income taxes expense over the second half of 2022.
Given recent improvements in oil and gas prices and assumptions based on our current production forecasts, we estimate that we will incur significant cash federal and state income taxes in 2023.
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Net Income (Loss)/Adjusted Net Income (Loss)
The factors impacting a net income of $662.4 million and a net loss of $32.0 million for the three months ended June 30, 2022 and March 31, 2022, respectively, and a net income of $630.4 million and a net loss of $96.1 million for the six months ended June 30, 2022 and June 30, 2021, respectively, are discussed above.
Adjusted net income, a non-U.S. GAAP financial measure, was $502.1 million and $358.6 million for the three months ended June 30, 2022 and March 31, 2022, respectively, and $798.2 million and $307.6 million for the six months ended June 30, 2022, and June 30, 2021, respectively. With the exception of the tax-affected net change in fair value of unsettled commodity derivatives, when applicable, 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
Overview
Our primary sources of liquidity are cash and cash equivalents, cash flows from operating activities, unused borrowing capacity from our revolving credit facility, proceeds raised in debt and equity capital market transactions, and other sources, such as asset sales.
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, capital returns 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 June 30, 2022 is an indication of a lack of liquidity. We had working capital deficits of $1,090.0 million as of June 30, 2022 and $461.5 million as of December 31, 2021. The increase in working capital deficit since December 31, 2021 was primarily due to an increase in the fair value of net derivative liabilities of $400.7 million and by a net deficit in working capital items as result of the Great Western Acquisition. 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.
From time to time, we may 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.
Liquidity
Our cash and cash equivalents were $38.5 million at June 30, 2022 and availability under our revolving credit facility was $724.6 million, providing for a total liquidity position of $763.1 million as of June 30, 2022. The borrowing base is primarily based on the loan value assigned to the proved reserves attributable to our crude oil and natural gas interests.
Our material short-term and long-term cash requirements consist primarily of capital expenditures, payments of contractual obligations, dividends, share repurchases and working capital obligations. If commodity prices continue to increase, our working capital requirements may increase due to higher operating costs and negative settlements on our outstanding commodity derivative contracts. Funding for these requirements may be provided by any combination of our capital resources previously outlined.
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As a result of the Great Western Acquisition, we paid $361.2 million on Great Western’s behalf to pay and discharge Great Western’s 12% senior secured notes due 2025, inclusive of unpaid accrued interest and a premium for early termination. Additionally, we paid off Great Western’s secured credit facility totaling $235.7 million, inclusive of unpaid accrued interest. The termination of Great Western’s debt was funded through a combination of cash on hand and availability under our revolving credit facility.
Based on our current production forecast for 2022, we expect 2022 cash flows from operations, which are net of expected cash federal and state income taxes, to exceed our capital investments in crude oil and natural gas properties. In addition, 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 fund our planned activities through the 12-month period following the filing of this report. We also believe that we will have sufficient expected cash flows from operations to allow us to execute our capital return plan. Future repurchases of common stock or dividend payments will be subject to approval by our board of directors and will depend on our level of earnings, financial requirements, and other factors considered relevant by our board.
Our material cash requirements greater than twelve months from various contractual and other obligations include debt obligations and interest payments; commodity derivative contract liabilities; production taxes; operating and finance leases; asset retirement obligations; and firm transportation and processing agreements. There are no significant changes to our material cash requirements arising from contractual obligations since December 31, 2021.
In April 2022, as part of our 2022 semi-annual borrowing base redetermination, the borrowing base increased from $2.4 billion to $3.0 billion; however, we maintained our elected commitment amount of $1.5 billion. 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 (a) to maintain a minimum current ratio of 1.0:1.0 and (b) not exceed a maximum leverage ratio of 3.5:1.0. 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 June 30, 2022, we were in compliance with all covenants in the revolving credit facility with a current ratio of 1.3:1.0 and a leverage ratio of 0.7:1.0.
We expect to remain in compliance with the covenants under our credit facility and our Senior Notes throughout the 12-month period following the filing of this report.
Cash Flows
Our cash flows from operating, investing and financing activities are as follows:
Six Months Ended | ||||||||||||||
June 30, 2022 | June 30, 2021 | |||||||||||||
(in thousands) | ||||||||||||||
Cash flows from operating activities | $ | 1,236,381 | $ | 577,366 | ||||||||||
Cash flows from investing activities | (1,606,459) | (236,126) | ||||||||||||
Cash flows from financing activities | 382,907 | (234,114) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 12,829 | $ | 107,126 |
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 by $659.0 million to $1,236.4 million during the six months ended June 30, 2022 compared to $577.4 million during the six months ended June 30, 2021. The increase between periods was primarily due to a $1,118.8 million increase in revenue from crude oil, natural gas and NGLs sales and the timing of vendor payments. These increases were partially offset by a $374.5 million increase in derivative settlement losses, a $95.7 million increase in production taxes and the timing of receivable collections between periods.
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PDC ENERGY, INC.
Adjusted cash flows from operations, a non-U.S. GAAP financial measure, increased by $590.5 million to $1,233.5 million during the six months ended June 30, 2022 from $643.0 million during the six months ended June 30, 2021. 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 $381.1 million during the six months ended June 30, 2022 to $722.5 million compared to $341.4 million during the six months ended June 30, 2021. The increase between periods was primarily due to the increase in cash flows from operating activities, as discussed above, partially offset by an increase in capital investments in crude oil and natural gas properties as a result of our 2022 development plan and the Great Western 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.
Investing Activities. As 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 crude oil and natural 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 $1,606.5 million during the six months ended June 30, 2022 was primarily due to $1,068.2 million related to the closing of the Great Western Acquisition as well as our drilling and completion activities of $533.6 million. Net cash used in investing activities of $236.1 million during the six months ended June 30, 2021 was primarily related to our drilling and completion activities of $240.3 million, partially offset by $4.4 million in proceeds from the sale of certain properties and equipment.
Financing Activities. Net cash used in financing activities of $382.9 million during the six months ended June 30, 2022 was primarily due to (i) net borrowings from our credit facility of $755.0 million to fund the cash portion of the purchase price of the Great Western Acquisition and to terminate Great Western’s debt, (ii) the repurchase of 4.3 shares of our common stock for $295.0 million pursuant to our stock repurchase program and (iii) dividend payments totaling $59.2 million. Repurchases of our common stock may extend through the end of 2023 based on current market conditions, although the board of directors could elect to suspend or terminate the program at any time, including if certain share price parameters are not achieved. As of June 30, 2022, $978.1 million out of the approved $1.25 billion remained available for repurchases under the program. Future repurchases of common stock or dividend payments will be subject to approval by our board of directors and depend on our level of earnings, financial requirements, and other factors considered relevant by our board.
Net cash used in financing activities of $234.1 million during the six months ended June 30, 2021 was primarily due to net repayments to our credit facility of $168.0 million, the repurchase and retirement of 1.3 million shares of our common stock totaling to $47.7 million pursuant to our stock repurchase program and dividend payments totaling $11.9 million.
Subsidiary Guarantors
PDC Permian, Inc., a Delaware corporation (“Permian”), and Pioneer Water Pipeline LLC, a Delaware limited liability company (“Pioneer” and together with “Permian”, the “Guarantors”), each a wholly-owned subsidiary, guarantees our obligations under our 2024 Senior Notes and 2026 Senior Notes (collectively, the “Senior Notes”). The Permian holds our assets located in the Delaware Basin. Pioneer holds certain water midstream assets located in the Wattenberg Basin. The Senior Notes are fully and unconditionally guaranteed on a joint and several basis by the Guarantors. 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: (i) incur additional debt including under our revolving credit facility, (ii) make certain investments or pay dividends or distributions on our capital stock or purchase, redeem or retire capital stock, (ii) sell assets, including capital stock of our restricted subsidiaries, (iv) restrict the payment of dividends or other payments by restricted subsidiaries to us, (v) create liens that secure debt, (vi) enter into transactions with affiliates and (vii) merge or consolidate with another company.
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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/Six Months Ended | As of/Year Ended | |||||||||||||||||||||||||
June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||
Issuer | Guarantors | Issuer | Guarantor | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Current assets | $ | 678.2 | $ | 110.1 | $ | 402.6 | $ | 56.0 | ||||||||||||||||||
Intercompany accounts receivable, guarantor subsidiary | — | 161.8 | — | 40.8 | ||||||||||||||||||||||
Investment in guarantor subsidiary | 1,767.2 | — | 1,767.2 | — | ||||||||||||||||||||||
Properties and equipment, net | 6,070.7 | 1,017.1 | 3,875.0 | 939.9 | ||||||||||||||||||||||
Other non-current assets | 95.0 | 5.2 | 58.5 | 4.8 | ||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||
Current liabilities | $ | 1,786.5 | $ | 91.8 | $ | 862.5 | $ | 57.6 | ||||||||||||||||||
Intercompany accounts payable | 161.8 | — | 27.9 | — | ||||||||||||||||||||||
Long-term debt | 1,698.0 | — | 942.1 | — | ||||||||||||||||||||||
Other non-current liabilities | 760.9 | 168.3 | 392.3 | 172.0 | ||||||||||||||||||||||
Statement of Operations | ||||||||||||||||||||||||||
Crude oil, natural gas and NGLs sales | $ | 1,752.9 | $ | 367.1 | $ | 2,163.1 | $ | 389.5 | ||||||||||||||||||
Commodity price risk management gain (loss), net | (670.0) | — | (701.5) | — | ||||||||||||||||||||||
Total revenues | 1,085.9 | 369.1 | 1,464.5 | 391.4 | ||||||||||||||||||||||
Production costs | 534.5 | 142.1 | 892.4 | 189.0 | ||||||||||||||||||||||
Gross profit (1) | 1,218.4 | 225.0 | 1,270.7 | 200.4 | ||||||||||||||||||||||
Impairment of properties and equipment | 0.6 | 0.9 | 0.4 | — | ||||||||||||||||||||||
Net income (loss) | 408.2 | 222.2 | 327.7 | 194.9 |
(1)Gross profit is calculated as crude oil, natural gas and NGLs sales less production costs.
Recent Accounting Pronouncements
There were no significant new accounting standards adopted or new accounting pronouncements that would have potential effect on us as of June 30, 2022.
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.
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 2021 Form 10-K filed with the SEC on February 28, 2022.
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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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The following table presents a reconciliation of each of our non-U.S. GAAP financial measures to its most comparable U.S. GAAP measure for the periods presented:
Three Months Ended | Six Months Ended | ||||||||||||||||||||||
June 30, 2022 | March 31, 2022 | June 30, 2022 | June 30, 2021 | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Cash flows from operations to adjusted cash flows from operations and adjusted free cash flow: | |||||||||||||||||||||||
Net cash from operating activities | $ | 747.4 | $ | 489.0 | $ | 1,236.4 | $ | 577.4 | |||||||||||||||
Changes in assets and liabilities | (52.7) | 49.8 | (2.9) | 65.6 | |||||||||||||||||||
Adjusted cash flows from operations | 694.7 | 538.8 | 1,233.5 | 643.0 | |||||||||||||||||||
Capital expenditures for development of crude oil and natural gas properties | (346.7) | (187.0) | (533.7) | (240.3) | |||||||||||||||||||
Capital expenditures for midstream assets | (3.0) | — | (3.0) | — | |||||||||||||||||||
Change in accounts payable related to capital expenditures for oil and gas development activities and midstream assets | 58.8 | (33.1) | 25.7 | (61.3) | |||||||||||||||||||
Adjusted free cash flow | $ | 403.8 | $ | 318.7 | $ | 722.5 | $ | 341.4 | |||||||||||||||
Net income (loss) to adjusted net income (loss): | |||||||||||||||||||||||
Net income (loss) | $ | 662.4 | $ | (32.0) | $ | 630.4 | $ | (96.1) | |||||||||||||||
Loss (gain) on commodity derivative instruments | 102.0 | 568.1 | 670.0 | 489.5 | |||||||||||||||||||
Net settlements on commodity derivative instruments | (298.7) | (161.6) | (460.3) | (85.8) | |||||||||||||||||||
Tax effect of above adjustments (1) | 36.4 | (15.9) | (41.9) | — | |||||||||||||||||||
Adjusted net income (loss) | $ | 502.1 | $ | 358.6 | $ | 798.2 | $ | 307.6 | |||||||||||||||
Net income (loss) to adjusted EBITDAX: | |||||||||||||||||||||||
Net income (loss) | $ | 662.4 | $ | (32.0) | $ | 630.4 | $ | (96.1) | |||||||||||||||
Loss (gain) on commodity derivative instruments | 102.0 | 568.1 | 670.0 | 489.5 | |||||||||||||||||||
Net settlements on commodity derivative instruments | (298.7) | (161.6) | (460.3) | (85.8) | |||||||||||||||||||
Non-cash stock-based compensation | 7.2 | 5.5 | 12.8 | 11.5 | |||||||||||||||||||
Interest expense, net | 17.6 | 12.9 | 30.5 | 39.1 | |||||||||||||||||||
Income tax expense (benefit) | 128.0 | 1.2 | 129.2 | (0.1) | |||||||||||||||||||
Impairment of properties and equipment | 0.5 | 0.9 | 1.5 | 0.3 | |||||||||||||||||||
Exploration, geologic and geophysical expense | 0.3 | 0.3 | 0.6 | 0.6 | |||||||||||||||||||
Depreciation, depletion and amortization | 191.1 | 151.1 | 342.1 | 309.0 | |||||||||||||||||||
Accretion of asset retirement obligations | 3.4 | 3.0 | 6.3 | 6.4 | |||||||||||||||||||
Loss (gain) on sale of properties and equipment | 0.5 | (0.1) | 0.4 | (0.3) | |||||||||||||||||||
Adjusted EBITDAX | $ | 814.3 | $ | 549.3 | $ | 1,363.5 | $ | 674.1 | |||||||||||||||
Cash from operating activities to adjusted EBITDAX: | |||||||||||||||||||||||
Net cash from operating activities | $ | 747.4 | $ | 489.0 | $ | 1,236.4 | $ | 577.4 | |||||||||||||||
Gain on bargain purchase | 100.3 | — | 100.3 | — | |||||||||||||||||||
Interest expense, net | 17.6 | 12.9 | 30.5 | 39.1 | |||||||||||||||||||
Amortization and write-off of debt discount, premium and issuance costs | (1.3) | (1.4) | (2.7) | (7.7) | |||||||||||||||||||
Exploration, geologic and geophysical expense | 0.3 | 0.3 | 0.6 | 0.6 | |||||||||||||||||||
Other | 2.7 | (1.3) | 1.3 | (0.9) | |||||||||||||||||||
Changes in assets and liabilities | (52.7) | 49.8 | (2.9) | 65.6 | |||||||||||||||||||
Adjusted EBITDAX | $ | 814.3 | $ | 549.3 | $ | 1,363.5 | $ | 674.1 |
(1)Due to the full valuation allowance recorded against our net deferred tax assets, there is no tax effect for the six months ended June 30, 2021.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market-Sensitive Instruments and Risk Management
We are exposed to market risks associated with interest rate risks, commodity price risk and credit risk. Recent inflationary trends and the possibility of a recession could impact each of these market 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 2024 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 June 30, 2022, we had $755.0 million outstanding borrowings under our revolving credit facility. If market interest rates would have increased or decreased one percent, our interest expense for the six months ended June 30, 2022 would have changed by approximately $1.5 million.
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.
As of June 30, 2022, we had a net liability derivative position of $896.3 million related to our commodity price risk derivatives. Based on a sensitivity analysis as of June 30, 2022, we estimate that a 10 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 $222.7 million, whereas a ten percent decrease in prices would have resulted in a decrease in fair value of our net derivative liabilities of $224.5 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 June 30, 2022, 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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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of June 30, 2022, 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 June 30, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022 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
Additional 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.
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. We conduct periodic reviews and simulated drills to identify changes in our environmental risk profile. 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 June 30, 2022 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 on our condensed consolidated balance sheets.
Following a self-audit of final reclamation activities associated with site retirements, we formally disclosed identified deficiencies to the Colorado Oil and Gas Conservation Commission (“COGCC”) in December 2019. To resolve the matter, in July of 2021, the COGCC and PDC jointly agreed to an Administrative Order by Consent (“AOC”) which assessed penalties in the amount of approximately $500,000, with approximately $350,000 suspended pending PDC meeting certain conditions of the AOC. We are implementing programs to meet the requirements of the AOC and correct any identified deficiencies.
On August 30, 2021 and November 1, 2021, the COGCC issued us a Notice of Alleged Violation (“NOAV”) related to the timing of wellhead pressure test reporting for certain wells in the Wattenberg Field. Pursuant to the NOAV, we have performed a comprehensive audit of our wellhead pressure testing and reporting processes. We have updated and will continue to implement and monitor for effectiveness and efficiency in our processes to mitigate against the possibility of the alleged violations occurring in the future. We do not anticipate a material effect on our financial condition or results of operations. However, the potential penalties may exceed $300,000.
Commencing in early 2020, we conducted a comprehensive air quality compliance audit over the facilities acquired in the SRC Acquisition. Through the self-audit process, we identified certain deficiencies and disclosed them to the Colorado Department of Public Health and Environment (“CDPHE”) and the U.S. Environmental Protection Agency (“EPA”) in July 2021. We do not believe potential penalties and other expenditures associated with the deficiencies identified will have a material effect on our financial condition or results of operations, but such penalties may exceed $300,000.
On July 11, 2022, we received a Notice of Violation/Cease and Desist Order (“NOV”) from the CDPHE, pursuant to a May 2021 Stormwater Permit Audit and subsequent Compliance Advisory, the latter received by Great Western Operating Company on July 25, 2021. Having acquired the subject assets on May 6, 2022, we are working with the CDPHE to ensure ongoing compliance and resolve the NOV. We do not anticipate potential penalties and other expenditures associated with the NOV will have a material effect on our financial condition or results of operations, but such penalties may exceed $300,000.
Clean Air Act Agreement and Related Consent Decree. We continue to implement the requirements of a consent decree entered into with the EPA and CDPHE in 2017. Per the terms of the agreement, we applied for termination in February 2022 and anticipate a response later this year without any further comments or required actions from the EPA. Over the course of executing the consent decree requirements, we have identified certain immaterial deficiencies in our implementation. 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 will have a material effect on our financial condition or results of operations, but they may exceed $300,000.
Further, we could be the subject of other enforcement actions by regulatory authorities in the future relating to our past, present, or future operations.
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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 2021 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 2021 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 three months ended June 30, 2022:
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 (1) (in millions) | ||||||||||||||||||||||
April | / | 714,091 | $ | 74.22 | 613,658 | $ | 1,147.4 | |||||||||||||||||||
May | 1,382,199 | 69.33 | 1,381,407 | 1,051.6 | ||||||||||||||||||||||
June | 970,777 | 75.74 | 970,777 | 978.1 | ||||||||||||||||||||||
Total second quarter 2022 purchases | 3,067,067 | 72.50 | 2,965,842 | 978.1 |
(1)In 2019, our board of directors approved a program pursuant to which we may acquire shares of our common stock from time to time. At December 31, 2021, $187.3 million out of the approved $525 million remained available for repurchase under the stock repurchase program. In February 2022, our board of directors approved a new stock repurchase program that reset the total repurchase value to $1.25 billion, which we currently anticipate fully utilizing by December 31, 2023. The stock repurchase program does not require any specific number of shares to be acquired and can be modified or discontinued by our board of directors at any time.
(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* | ||||||||||||||||||||||||||||||||||||||
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: August 3, 2022 | /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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