Forward-looking statements may include statements about:
We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to the development, production, gathering and sale of oil and natural gas. These risks include, but are not limited to, commodity price volatility, inflation, lack of availability of drilling and production equipment and services, environmental risks, drilling and other operating risks, regulatory changes, the uncertainty inherent in estimating reserves and in projecting future rates of production, cash flow and access to capital, the timing of development expenditures and the other risks described under Part I, Item 1A. Risk Factors.
Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions would change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of oil and natural gas that are ultimately recovered.
Should one or more of the risks or uncertainties described in this Annual Report on Form 10-K occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Annual Report on Form 10-K are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Annual Report on Form 10-K.
8
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Overview
Centennial Resource Development, Inc. (the “Company,” “Centennial,” “we,” “us,” or “our”) is an independent oil and natural gas company focused on the development of unconventional oil and associated liquids-rich natural gas reserves in the Permian Basin. Our assets are concentrated in the Delaware Basin, a sub-basin of the Permian Basin, and our properties consist of large, contiguous acreage blocks primarily in Reeves County in West Texas and Lea County in New Mexico.
Our principal business objective is to increase shareholder value by building a premier development company focused on horizontal drilling in the Delaware Basin. We intend to grow our production and oil and natural gas reserves by developing our acreage with an increased focus on optimizing completions, improving drilling results and drilling extended laterals. We also intend to grow production and reserves through selective acquisitions that meet our strategic and financial objectives.
Presentation of Financial and Operating Data
On October 11, 2016, the Company consummated the acquisition of approximately 89% of the outstanding membership interests in Centennial Resource Production, LLC, a Delaware limited liability company (“CRP” and such acquisition, the “Business Combination”). The Company currently owns an approximate 94% membership interest in CRP due to various equity transactions. The financial statement presentation distinguishes CRP as an accounting “Predecessor” for periods prior to the Business Combination. Centennial is the “Successor” for periods after the Business Combination, which includes consolidation of CRP subsequent to the Business Combination. Except as the context otherwise requires, references in the following discussion to the “Company,” “Centennial,” “we,” “us,” or “our” with respect to periods prior to the closing of the Business Combination are to CRP and its operations before the Business Combination.
Organizational Structure
The following diagram illustrates the current ownership structure of the company:
Description of Our Properties
As of December 31, 2017, we operated 181 producing horizontal wells. We have established commercial production on our acreage from eight distinct zones: the Avalon Shale, 1st Bone Spring, 2nd Bone Spring, 3rd Bone Spring, Upper Wolfcamp A, Lower Wolfcamp A, Wolfcamp B and Wolfcamp C. As a result, we are able to efficiently develop our drilling inventory and focus
on maximizing returns to our stakeholders. As of December 31, 2017, we had six operated rigs running on our acreage, five of which are in Reeves County and one of which is in Lea County.
As of December 31, 2017, we have leased or acquired approximately 84,718 net acres, approximately 91% of which we operate. In addition, we own 1,521 net mineral acres in the Delaware Basin. Approximately 85% of our total acreage as of December 31, 2017 was located in Texas, primarily Reeves County, in the southern portion of the Delaware Basin and approximately 15% is located in New Mexico, primarily in Lea County, in the northern portion of the Delaware Basin. As of December 31, 2017, over 64% of our net acreage is held by production. The relatively high proportion of our operated acreage that is held by production gives us significant operational control and capital spending flexibility. This allows us to execute our development program with significant control over the timing and allocation of capital expenditures and application of the optimal drilling and completion techniques to efficiently develop our resource base. Our development drilling plan is comprised exclusively of horizontal drilling with an ongoing focus on optimizing completions, improving drilling results and managing costs.
Proved Oil and Gas Reserves
Reserve estimates are inherently imprecise and estimates for new discoveries and undeveloped locations are more imprecise than reserve estimates for producing oil and gas properties. Accordingly, these estimates are expected to change as new information becomes available. The pre-tax PV 10% amounts shown in the following table are not intended to represent the current market value of our estimated proved reserves. The actual quantities and present value of our estimated proved reserves may be more or less than we have estimated. The following table should be read along with Part I, Item 1A. Risk Factors in this Annual Report on Form 10-K.
The following table summarizes estimated proved reserves, pre-tax 10%, and standardized measure of discounted future cash flows as of December 31, 2017 (Successor), December 31, 2016 (Successor), and December 31, 2015 (Predecessor):
Successor
Predecessor
December 31, 2017
December 31, 2016
December 31, 2015
Proved developed reserves:
Oil (MBbls)
41,786
14,551
9,347
Natural gas (MMcf)
126,065
42,190
12,711
NGL (MBbls)
12,133
3,618
1,603
Total proved developed reserves (MBoe)
74,929
25,200
13,068
Proved undeveloped reserves:
59,147
31,914
13,852
201,147
106,154
19,731
18,853
8,152
2,248
Total proved undeveloped reserves (MBoe)
111,525
57,759
19,389
Total proved reserves:
100,933
46,466
23,199
327,212
148,344
32,442
30,986
11,770
3,851
Total proved reserves (MBoe)
186,454
82,959
32,457
Proved developed reserves %
40
%
30
Proved undeveloped reserves %
60
70
Reserve values (in millions):
Standard measure of discounted future net cash flows
$
1,503.3
375.1
135.1
Discounted future income tax expense
244.8
52.4
10.4
Total proved pre-tax PV 10% (1)
1,748.1
427.5
145.5