UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20172018
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
PDC ENERGY, INC.
(Exact name of registrant as specified in its charter)
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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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
| Emerging growth company o |
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 o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 65,855,29066,065,856 shares of the Company's Common Stock ($0.01 par value) were outstanding as of April 18, 2017.20, 2018.
PDC ENERGY, INC.
TABLE OF CONTENTS
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| PART I – FINANCIAL INFORMATION | | Page |
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Item 1. | Financial Statements | | |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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PART II – OTHER INFORMATION |
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Item 1. | | | |
Item 1A. | | | |
Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
Item 5. | | | |
Item 6. | | | |
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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"), 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".statements." Words such as expects, anticipates, intends, plans, believes, seeks, estimates,expect, anticipate, intend, plan, believe, seek, estimate, and similar expressions or variations of such words are intended to identify forward-looking statements herein. Forward-looking statements may include, among other things, statements regarding future: reserves, production, costs, and cash flows, and earnings;flows; drilling locations and zones and growth opportunities; commodity prices and differentials; capital investmentsexpenditures and projects, including expected lateral lengths of wells, drill times andthe number of rigs employed; ratesemployed and the number of return; operational enhancements and efficiencies;completion crews; renegotiation of our credit facility; management of lease expiration issues; financial ratios; certain accounting and tax change impacts; midstream capacity and related curtailments.curtailments; our ability to meet our volume commitments to midstream providers; ongoing compliance with our consent decree; and the timing and adequacy of infrastructure projects of our midstream providers.
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 termsterm “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 theour 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:
changes in worldwide production volumes and demand, including economic conditions that might impact demand and prices for the products we produce;
volatility of commodity prices for crude oil, natural gas, and natural gas liquids ("NGLs") and the risk of an extended period of depressed prices;
volatility and widening of differentials;
reductions in the borrowing base under our revolving credit facility;
impact of governmental policies and/or regulations, including changes in environmental and other laws, the interpretation and enforcement of those laws and regulations, liabilities arising thereunder, and the costs to comply with those laws and regulations;
declines in the value of our crude oil, natural gas, and NGLs properties resulting in further impairments;
changes in estimates of proved reserves;
inaccuracy of reserve estimates and expected production rates;
potential for production decline rates from our wells being greater than expected;
timing and extent of our success in discovering, acquiring, developing, and producing reserves;
availability of sufficient pipeline, gathering, and other transportation facilities and related infrastructure to process and transport our production and the impact of these facilities and regional capacity on the prices we receive for our production;
timing and receipt of necessary regulatory permits;
risks incidental to the drilling and operation of crude oil and natural gas wells;
losses from our gas marketing business exceeding our expectations;
difficulties in integrating our operations as a result of any significant acquisitions including our recent acquisitions in the Delaware Basin;and acreage exchanges;
increases or changes in operating costs, severanceexpenses;
availability of supplies, materials, contractors, and ad valorem taxes, and increasesservices that may delay the drilling or changes in drilling, completion and facilities costs;of our wells;
potential losses of acreage due to lease expirations or otherwise;
increases or adverse changes in construction costs and procurement costs associated with future build out of midstream-related assets;
future cash flows, liquidity, and financial condition;
competition within the oil and gas industry;
availability and cost of capital;
our success in marketing crude oil, natural gas, and NGLs;
effect of crude oil and natural gas derivatives 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;
effect that acquisitions we may pursue have on our capital investments;requirements;
our ability to retain or attract senior management and key technical employees; and
success of strategic plans, expectations, and objectives for our future operations.
Further, we urge you to carefully review and consider the cautionary statements and disclosures, specifically those under the heading "Risk Factors," made in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 20162017 (the "2016"2017 Form 10-K"), filed with the U.S. Securities and Exchange Commission ("SEC") on February 28, 2017,27, 2018 and amended on May 1, 2018, and our other filings with the 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""our," or "ours" refer to the registrant, PDC Energy, Inc. and all subsidiaries consolidated for the purposes of its financial statements, including our proportionate share of the financial position, results of operations, cash flows and operating activities of our affiliated partnerships.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PDC ENERGY, INC.
Condensed Consolidated Balance Sheets
(unaudited; in thousands, except share and per share data)
| | | | March 31, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 207,624 |
| | $ | 244,100 |
| | $ | 45,923 |
| | $ | 180,675 |
|
Short-term investments | — |
| 49,890 |
| | — |
| |
Accounts receivable, net | | 122,484 |
| | 143,392 |
| | 181,025 |
| | 197,598 |
|
Fair value of derivatives | | 27,047 |
| | 8,791 |
| | 28,610 |
| | 14,338 |
|
Prepaid expenses and other current assets | | 4,726 |
| | 3,542 |
| | 8,897 |
| | 8,613 |
|
Total current assets | | 411,771 |
| | 399,825 |
| | 264,455 |
| | 401,224 |
|
Properties and equipment, net | | 4,098,463 |
| | 4,008,266 |
| | 4,231,257 |
| | 3,933,467 |
|
Fair value of derivatives | | 13,921 |
| | 2,386 |
| |
Goodwill | | 56,058 |
| | 62,041 |
| |
Assets held-for-sale, net | | | 1,647 |
| | 40,084 |
|
Other assets | | 12,917 |
| | 13,324 |
| | 24,798 |
| | 45,116 |
|
Total Assets | | $ | 4,593,130 |
| | $ | 4,485,842 |
| | $ | 4,522,157 |
| | $ | 4,419,891 |
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| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Liabilities | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 144,440 |
| | $ | 66,322 |
| | $ | 195,703 |
| | $ | 150,067 |
|
Production tax liability | | 25,065 |
| | 24,767 |
| | 36,650 |
| | 37,654 |
|
Fair value of derivatives | | 26,495 |
| | 53,595 |
| | 110,683 |
| | 79,302 |
|
Funds held for distribution | | 76,067 |
| | 71,339 |
| | 97,611 |
| | 95,811 |
|
Accrued interest payable | | 18,977 |
| | 15,930 |
| | 13,760 |
| | 11,815 |
|
Other accrued expenses | | 26,938 |
| | 38,625 |
| | 33,777 |
| | 42,987 |
|
Total current liabilities | | 317,982 |
| | 270,578 |
| | 488,184 |
| | 417,636 |
|
Long-term debt | | 1,046,461 |
| | 1,043,954 |
| | 1,154,528 |
| | 1,151,932 |
|
Deferred income taxes | | 427,205 |
| | 400,867 |
| | 187,183 |
| | 191,992 |
|
Asset retirement obligations | | 78,162 |
| | 82,612 |
| | 73,905 |
| | 71,006 |
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Fair value of derivatives | | 4,302 |
| | 27,595 |
| | 26,426 |
| | 22,343 |
|
Other liabilities | | 47,841 |
| | 37,482 |
| | 94,557 |
| | 57,333 |
|
Total liabilities | | 1,921,953 |
| | 1,863,088 |
| | 2,024,783 |
| | 1,912,242 |
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Commitments and contingent liabilities | |
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| |
| |
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Stockholders' equity | | | | | | | | |
Common shares - par value $0.01 per share, 150,000,000 authorized, 65,797,748 and 65,704,568 issued as of March 31, 2017 and December 31, 2016, respectively | | 658 |
| | 657 |
| |
Common shares - par value $0.01 per share, 150,000,000 authorized, 65,999,010 and 65,955,080 issued as of March 31, 2018 and December 31, 2017, respectively | | | 660 |
| | 659 |
|
Additional paid-in capital | | 2,492,276 |
| | 2,489,557 |
| | 2,504,663 |
| | 2,503,294 |
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Retained earnings | | 180,354 |
| | 134,208 |
| |
Treasury shares - at cost, 34,433 and 28,763 as of March 31, 2017 and December 31, 2016, respectively | | (2,111 | ) | | (1,668 | ) | |
Retained earnings (deficit) | | | (6,435 | ) | | 6,704 |
|
Treasury shares - at cost, 29,255 and 55,927 as of March 31, 2018 and December 31, 2017, respectively | | | (1,514 | ) | | (3,008 | ) |
Total stockholders' equity | | 2,671,177 |
| | 2,622,754 |
| | 2,497,374 |
| | 2,507,649 |
|
Total Liabilities and Stockholders' Equity | | $ | 4,593,130 |
| | $ | 4,485,842 |
| | $ | 4,522,157 |
| | $ | 4,419,891 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
1
PDC ENERGY, INC.
Condensed Consolidated Statements of Operations
(unaudited; in thousands, except per share data)
| | | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2018 | | 2017 |
Revenues | | | | | | | | |
Crude oil, natural gas, and NGLs sales | | $ | 189,692 |
| | $ | 75,367 |
| | $ | 305,225 |
| | $ | 189,692 |
|
Commodity price risk management gain, net of settlements | | 80,704 |
| | 11,056 |
| |
Commodity price risk management gain (loss), net | | | (47,240 | ) | | 80,704 |
|
Other income | | 3,311 |
| | 4,408 |
| | 2,615 |
| | 3,311 |
|
Total revenues | | 273,707 |
| | 90,831 |
| | 260,600 |
| | 273,707 |
|
Costs, expenses and other | | | | | | | | |
Lease operating expenses | | 19,789 |
| | 15,330 |
| | 29,636 |
| | 19,789 |
|
Production taxes | | 12,399 |
| | 4,071 |
| | 20,169 |
| | 12,399 |
|
Transportation, gathering and processing expenses | | 5,902 |
| | 4,041 |
| |
Transportation, gathering, and processing expenses | | | 7,313 |
| | 5,902 |
|
Exploration, geologic, and geophysical expense | | | 2,646 |
| | 954 |
|
Impairment of properties and equipment | | | 33,188 |
| | 2,193 |
|
General and administrative expense | | 26,315 |
| | 22,779 |
| | 35,696 |
| | 26,315 |
|
Exploration, geologic, and geophysical expense | | 954 |
| | 210 |
| |
Depreciation, depletion and amortization | | 109,316 |
| | 97,388 |
| |
Impairment of properties and equipment | | 2,193 |
| | 1,001 |
| |
Depreciation, depletion, and amortization | | | 126,788 |
| | 109,316 |
|
Accretion of asset retirement obligations | | 1,768 |
| | 1,812 |
| | 1,288 |
| | 1,768 |
|
Gain on sale of properties and equipment | | (160 | ) | | (84 | ) | |
Provision for uncollectible notes receivable | | — |
| | 44,738 |
| |
(Gain) loss on sale of properties and equipment | | | 1,432 |
| | (160 | ) |
Other expenses | | 3,528 |
| | 2,578 |
| | 2,768 |
| | 3,528 |
|
Total costs, expenses and other | | 182,004 |
| | 193,864 |
| | 260,924 |
| | 182,004 |
|
Income (loss) from operations | | 91,703 |
| | (103,033 | ) | | (324 | ) | | 91,703 |
|
Interest expense | | (19,467 | ) | | (11,894 | ) | | (17,529 | ) | | (19,467 | ) |
Interest income | | 240 |
| | 1,558 |
| | 148 |
| | 240 |
|
Income (loss) before income taxes | | 72,476 |
| | (113,369 | ) | | (17,705 | ) | | 72,476 |
|
Income tax (expense) benefit | | (26,330 | ) | | 41,839 |
| | 4,566 |
| | (26,330 | ) |
Net income (loss) | | $ | 46,146 |
| | $ | (71,530 | ) | | $ | (13,139 | ) | | $ | 46,146 |
|
| | | | | | | | |
Earnings per share: | | | | | | | | |
Basic | | $ | 0.70 |
| | $ | (1.72 | ) | | $ | (0.20 | ) | | $ | 0.70 |
|
Diluted | | $ | 0.70 |
| | $ | (1.72 | ) | | $ | (0.20 | ) | | $ | 0.70 |
|
| | | | | | | | |
Weighted-average common shares outstanding: | | | | | | | | |
Basic | | 65,749 |
| | 41,608 |
| | 65,957 |
| | 65,749 |
|
Diluted | | 66,117 |
| | 41,608 |
| | 65,957 |
| | 66,117 |
|
| | | | | | | | |
See accompanying Notes to Condensed Consolidated Financial Statements
2
PDC ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited; in thousands)
| | | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2018 | | 2017 |
Cash flows from operating activities: | | | | | | | | |
Net income (loss) | | $ | 46,146 |
| | $ | (71,530 | ) | | $ | (13,139 | ) | | $ | 46,146 |
|
Adjustments to net income (loss) to reconcile to net cash from operating activities: | | | | | | | | |
Net change in fair value of unsettled commodity derivatives | | (80,153 | ) | | 55,770 |
| | 21,202 |
| | (80,153 | ) |
Depreciation, depletion and amortization | | 109,316 |
| | 97,388 |
| | 126,788 |
| | 109,316 |
|
Impairment of properties and equipment | | 2,193 |
| | 1,001 |
| | 33,188 |
| | 2,193 |
|
Accretion of asset retirement obligations | | 1,768 |
| | 1,812 |
| | 1,288 |
| | 1,768 |
|
Non-cash stock-based compensation | | 4,454 |
| | 4,682 |
| | 5,261 |
| | 4,454 |
|
Gain on sale of properties and equipment | | (160 | ) | | (84 | ) | |
(Gain) loss on sale of properties and equipment | | | 1,432 |
| | (160 | ) |
Amortization of debt discount and issuance costs | | 3,184 |
| | 1,754 |
| | 3,246 |
| | 3,184 |
|
Deferred income taxes | | 26,280 |
| | (43,372 | ) | | (4,809 | ) | | 26,280 |
|
Provision for uncollectible notes receivable | | — |
| | 44,738 |
| |
Other | | 722 |
| | (1,202 | ) | | 515 |
| | 722 |
|
Changes in assets and liabilities | | 25,750 |
| | 10,193 |
| | 30,177 |
| | 25,750 |
|
Net cash from operating activities | | 139,500 |
| | 101,150 |
| | 205,149 |
| | 139,500 |
|
Cash flows from investing activities: | | | | | | | | |
Capital expenditures for development of crude oil and natural gas properties | | (129,826 | ) | | (122,309 | ) | | (196,917 | ) | | (129,826 | ) |
Capital expenditures for other properties and equipment | | (821 | ) | | (450 | ) | | (1,066 | ) | | (821 | ) |
Acquisition of crude oil and natural gas properties, including settlement adjustments | | 6,181 |
| | — |
| | (180,825 | ) | | 6,181 |
|
Proceeds from sale of properties and equipment | | 737 |
| | 90 |
| | 20 |
| | 737 |
|
Purchases of short-term investments | | (49,890 | ) | | — |
| |
Proceeds from divestiture | | | 39,023 |
| | — |
|
Restricted cash | | | 1,249 |
| | — |
|
Purchase of short-term investments | | | — |
| | (49,890 | ) |
Net cash from investing activities | | (173,619 | ) | | (122,669 | ) | | (338,516 | ) | | (173,619 | ) |
Cash flows from financing activities: | | | | | | | | |
Proceeds from issuance of equity, net of issuance cost | | (8 | ) | | 296,578 |
| |
Proceeds from revolving credit facility | | — |
| | 85,000 |
| | 35,000 |
| | — |
|
Repayment of revolving credit facility | | — |
| | (122,000 | ) | | (35,000 | ) | | — |
|
Purchase of treasury stock | | | (2,255 | ) | | (2,017 | ) |
Other | | (2,349 | ) | | (364 | ) | | (379 | ) | | (340 | ) |
Net cash from financing activities | | (2,357 | ) | | 259,214 |
| | (2,634 | ) | | (2,357 | ) |
Net change in cash and cash equivalents | | (36,476 | ) | | 237,695 |
| |
Cash and cash equivalents, beginning of period | | 244,100 |
| | 850 |
| |
Cash and cash equivalents, end of period | | $ | 207,624 |
| | $ | 238,545 |
| |
Net change in cash, cash equivalents, and restricted cash | | | (136,001 | ) | | (36,476 | ) |
Cash, cash equivalents, and restricted cash, beginning of period | | | 189,925 |
| | 244,100 |
|
Cash, cash equivalents, and restricted cash, end of period | | | $ | 53,924 |
| | $ | 207,624 |
|
| | | | | | | | |
Supplemental cash flow information: | | | | | | | | |
Cash payments (receipts) for: | | | | | | | | |
Interest, net of capitalized interest | | $ | 13,224 |
| | $ | 599 |
| | $ | 12,343 |
| | $ | 13,224 |
|
Income taxes | | (39 | ) | | — |
| | 193 |
| | (39 | ) |
Non-cash investing and financing activities: | | | | | | | | |
Change in accounts payable related to purchases of properties and equipment | | $ | 69,604 |
| | $ | (23,544 | ) | |
Change in accounts payable related to capital expenditures | | | $ | 51,093 |
| | $ | 69,604 |
|
Change in asset retirement obligations, with a corresponding change to crude oil and natural gas properties, net of disposals | | 1,233 |
| | 404 |
| | 5,354 |
| | 1,233 |
|
Purchase of properties and equipment under capital leases | | 1,190 |
| | 635 |
| | 348 |
| | 1,190 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
3
PDC ENERGY, INC.
Condensed Consolidated Statement of Equity
(unaudited; in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Treasury Stock | | | | |
| Shares | | Amount | | Additional Paid-in Capital | | Shares | | Amount | | Retained Earnings (Deficit) | | Total Stockholders' Equity |
| | | | | | | | | | | | | |
Balance, December 31, 2017 | 65,955,080 |
| | $ | 659 |
| | $ | 2,503,294 |
| | (55,927 | ) | | $ | (3,008 | ) | | $ | 6,704 |
| | $ | 2,507,649 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (13,139 | ) | | (13,139 | ) |
Purchase of treasury shares | — |
| | — |
| | — |
| | (41,357 | ) | | (2,255 | ) | | — |
| | (2,255 | ) |
Issuance of treasury shares | — |
| | — |
| | (3,891 | ) | | 70,603 |
| | 3,891 |
| | — |
| | — |
|
Non-employee directors' deferred compensation plan | — |
| | — |
| | — |
| | (2,574 | ) | | (142 | ) | | — |
| | (142 | ) |
Issuance of stock awards, net of forfeitures | 43,930 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Stock-based compensation expense | — |
| | — |
| | 5,261 |
| | — |
| | — |
| | — |
| | 5,261 |
|
Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance, March 31, 2018 | 65,999,010 |
| | $ | 660 |
| | $ | 2,504,663 |
| | (29,255 | ) | | $ | (1,514 | ) | | $ | (6,435 | ) | | $ | 2,497,374 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
4
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
PDC Energy, Inc. ("PDC", the "Company," "we," "us," or "our") is a domestic independent exploration and production company that produces,acquires, explores, and develops and exploresproperties for the production of crude oil, natural gas, and NGLs, with primary operations in the Wattenberg Field in Colorado and beginning in December 2016, the Delaware Basin in Reeves and Culberson Counties, Texas. We also have operations in the Utica Shale in Southeastern Ohio, although management expects to begin the process of divesting these properties later in 2017. Texas. Our operations in the Wattenberg Field are focused in the horizontal Niobrara and Codell plays and our Delaware Basin operations are currently focused in the Wolfcamp zones. We previously operated properties in the Utica Shale in Southeastern Ohio; however, we divested these properties during the three months ended March 31, 2018. As of March 31, 2017,2018, we owned an interest in approximately 2,9003,000 gross productive wells. We are engaged in two operating segments: our oil and gas exploration and production segment and our gas marketing segment. Beginning with the first quarter of 2017, ourOur gas marketing segment does not meet the quantitative thresholds to require disclosure as a separate reportable segment. All of our material operations are attributable to our exploration and production business and,business; therefore, all of our operations are presented as a single segment for all periods presented.
The accompanying unaudited condensed consolidated financial statements include the accounts of PDC, our wholly-owned subsidiaries, and our proportionate share of our four affiliated partnerships. Pursuant to the proportionate consolidation method, our accompanying condensed consolidated financial statements include our pro rata share of assets, liabilities, revenues, and expenses of the entities which we proportionately consolidate. 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 our financial statements for interim periods 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, 20162017 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 20162017 Form 10-K. Our results of operations and cash flows for the three months ended March 31, 2017,2018 are not necessarily indicative of the results to be expected for the full year or any other future period.
Certain immaterial reclassifications have been made to our prior period statement of operations to conform to the current period presentation. The reclassifications had no impact on previously reported cash flows, net earnings, earnings per share or stockholders' equity.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently IssuedAdopted Accounting StandardsStandard
In May 2014, the FASBFinancial Accounting Standards Board ("FASB") and the International Accounting Standards Board issued their converged standard on revenue recognition that provides a single, comprehensive model that entities will apply to determine the measurement of revenue and timing of when it is recognized. The standard has been updated and now includes technical corrections. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard outlines a five-step approach to apply the underlying principle: (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to separate performance obligations, and (5) recognize revenue when or as each performance obligation is satisfied. We adopted the standard effective January 1, 2018. In Marchorder to evaluate the impact that the adoption of the revenue standard had on our consolidated financial statements, we performed a comprehensive review of our significant revenue streams. The focus of this review included, among other things, the identification of the significant contracts and other arrangements we have with our customers to identify performance obligations and principal versus agent considerations, and factors affecting the determination of the transaction price. We also reviewed our current accounting policies, procedures, and controls with respect to these contracts and arrangements to determine what changes, if any, would be required by the adoption of the revenue standard. We determined that we would adopt the standard under the modified retrospective method. Upon adoption, no adjustment to our opening balance of retained earnings was deemed necessary.
In November 2016, the FASB issued an accounting update on statements of cash flows to the standard intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations when recognizing revenue. In December 2016, the FASB issued technical corrections and improvements to the standard. The revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The revenue standard can be adopted under the full retrospective method or simplified transition method. Entities are permitted to adopt the revenue standard early, beginning with annual reporting periods after December 15, 2016. We areaddress diversity in practice in the processclassification and presentation of assessing potential impactschanges in restricted cash. The accounting update requires that the statement of cash flows explain the new standard on our existing revenue recognition criteria,change during the period in the total of cash, cash equivalents, and amounts generally described as wellrestricted cash or restricted cash equivalents. Therefore, amounts generally described as on related revenue recognition disclosures.
restricted cash or restricted cash equivalents
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
should be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period amounts shown on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The adoption of this standard impacted our condensed consolidated statements of cash flows. The following table provides a reconciliation of cash and cash equivalents and restricted cash reported on the condensed consolidated balance sheets at March 31, 2018 and December 31, 2017, which sum to the total of cash, cash equivalents, and restricted cash in the condensed consolidated statements of cash flows:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (in thousands) |
| | | |
Cash and cash equivalents | $ | 45,923 |
| | $ | 180,675 |
|
Restricted cash | 8,001 |
| | 9,250 |
|
Cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | 53,924 |
| | $ | 189,925 |
|
Restricted cash is included in other assets on the condensed consolidated balance sheets at March 31, 2018 and December 31, 2017. We did not have any cash classified as restricted cash at March 31, 2017 or December 31, 2016.
Recently Issued Accounting Standards
In February 2016, the FASB issued an accounting update aimed at increasing the transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about related leasing arrangements. The standard has been updated and now includes amendments. For leases with terms of more than 12 months, the accounting update requires lessees to recognize a right-of-use asset and lease liability for its right to use the underlying asset and the corresponding lease obligation. Both the lease asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend upon the classification of the lease as either a finance or operating lease. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted, and is to be applied as of the beginning of the earliest period presented using a modified retrospective approach. The update does not apply to leases of mineral rights to explore for or use crude oil and natural gas. We are in the process of assessingcurrently evaluating the impact these changes may have on our condensed consolidated financial statements.
In August 2016,2017, the FASB issued an accounting update on statementsto provide guidance for various components of cash flows to address diversity in practice in how certain cash receipts and cash payments are presented and classifiedhedge accounting, including hedge ineffectiveness, the expansion of types of permissible hedging strategies, reduced complexity in the statementapplication of cash flows. The update addresses eight specific cash flow issues with the objectivelong-haul method for fair value hedges and reduced complexity in assessment of reducing the existing diversity in practice.effectiveness. The guidance is effective for fiscal years beginning after December 15, 2017,2018, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact these changes may have on our condensed consolidated financial statements.
In January 2017, the FASB issued an accounting update clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance is to be applied using a prospective method and is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact these changes may have on our consolidated financial statements.
In January 2017, the FASB issued an accounting update to simplify the subsequent measurement of goodwill. The update eliminates a step in the determination of whether goodwill should be considered impaired. The annual and/or interim assessments are still required to be completed. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact these changes may have on our consolidated financial statements.
NOTE 3 - BUSINESS COMBINATION
Delaware Basin Acquisition. On December 6, 2016,In January 2018, we closed on anthe acquisition which has been accountedof properties from Bayswater Exploration and Production LLC (the "Bayswater Acquisition") for as a business combination. The transaction was for the purchase of approximately 57,900 net acres, approximately 30 wells and related midstream infrastructure in Reeves and Culberson Counties, Texas, for an aggregate consideration to the sellers of approximately $1.64 billion, comprised of approximately $946.0$201.8 million in cash, including the payment of $40.0$21.0 million of debt of the seller at closingdeposited into an escrow account in September 2017, subject to certain customary post-closing adjustments. The $21.0 million deposit was included in other assets on our December 31, 2017 condensed consolidated balance sheet. We acquired approximately 7,400 net acres, approximately 220 gross drilling locations, and other purchase price adjustments, and 9.4 million shares of our common stock valued at approximately $690.7 million24 operated horizontal wells that were either drilled uncompleted wells ("DUCs") or in-process wells at the time the acquisition closed. The estimated fair value of assets acquired and liabilities assumed in the acquisition presented below are preliminary and subject to customary additional post-closing adjustments as more detailed analysis associated with the acquired properties is completed. As of the date of this report, the final settlement statement has been agreed upon with the sellers. We are in the process of finalizing the fair values of the assets acquired and liabilities assumed and expect to keep the transaction open through the second quarter of 2017 to ensure that any post-closing adjustments associated with the period through final settlement are appropriately reflected in the final purchase price allocation.closing.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
The details of the estimated purchase price and the preliminary allocation of the purchase price for the transaction, which reflects certain post-closing adjustments, are presented below (in thousands):
| | | March 31, 2017 | March 31, 2018 |
Acquisition costs: | | |
Cash, net of cash acquired | $ | 905,962 |
| |
Retirement of seller's debt | 40,000 |
| |
Cash | | $ | 171,091 |
|
Deposit made in prior period | | 21,000 |
|
Total cash consideration | 945,962 |
| 192,091 |
|
Common stock, 9.4 million shares | 690,702 |
| |
Other purchase price adjustments | 1,025 |
| 9,734 |
|
Total acquisition costs | $ | 1,637,689 |
| $ | 201,825 |
|
| | |
Recognized amounts of identifiable assets acquired and liabilities assumed: | | |
Assets acquired: | | |
Current assets | $ | 7,173 |
| $ | 517 |
|
Crude oil and natural gas properties - proved | 216,000 |
| 208,279 |
|
Crude oil and natural gas properties - unproved | 1,721,334 |
| |
Infrastructure, pipeline, and other | 33,695 |
| |
Construction in progress | 12,148 |
| |
Goodwill | 56,058 |
| |
Other assets | | 2,796 |
|
Total assets acquired | 2,046,408 |
| 211,592 |
|
Liabilities assumed: | | |
Current liabilities | (24,519 | ) | (5,080 | ) |
Asset retirement obligations | (4,248 | ) | (4,687 | ) |
Deferred tax liabilities, net | (379,952 | ) | |
Total liabilities assumed | (408,719 | ) | (9,767 | ) |
Total identifiable net assets acquired | $ | 1,637,689 |
| $ | 201,825 |
|
This acquisition was accounted for under the acquisition method. Accordingly, we conducted assessments of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisition were expensed as incurred. The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market, and therefore represent Level 3 inputs. The fair values of crude oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of crude oil and natural gas properties include estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows, lease terms and expirations, and a market-based weighted-average cost of capital rate. Within the unproved properties, the allocation of the value to the underlying leases also requires significant judgment and is based on a combination of comparable market transactions, the term and conditions associated with the individual leases, our ability and intent to develop specific leases, and our initial assessment of the underlying relative value of the leases given our knowledge of the geology at the time of closing. These inputs require significant judgments and estimates by management at the time of the valuation and arewere the most sensitive and subject to change.
This acquisition was accountedThe results of operations for underthe Bayswater Acquisition for the three months ended March 31, 2018 have been included in our condensed consolidated financial statements. Pro forma results of operations for the Bayswater Acquisition showing results as if the acquisition method. Accordingly, we conducted assessmentshad been completed as of net assets acquired and recognized amountsJanuary 1, 2017 would not have been material to our condensed consolidated financial statements for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisition were expensed as incurred.three months ended March 31, 2017.
NOTE 4 - REVENUE RECOGNITION
Goodwill. GoodwillOn January 1, 2018, we adopted the new accounting standard that was issued by the FASB and the International Accounting Standards Board that converged their standard on revenue recognition and provides a single, comprehensive model to determine the measurement of revenue and timing of when it is calculated asrecognized and all the excessrelated amendments (“new revenue standard”) using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Based upon our review, we determined that the adoption of the purchase price over the fair value of net assets acquiredstandard would have reduced our crude oil, natural gas, and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an element of a workforce and the expected value from operations of the Delaware Basin acquisition to be derivedNGLs sales by approximately $2.5 million in the future. The amountfirst quarter of goodwill recorded related to the Delaware Basin acquisition has decreased as compared to the initial amount recorded as of December 31, 2016, due to customary purchase price allocations. Such amounts will be finalized2017 with final purchase accounting. Any value assigned to goodwill is not expected to be deductible for income tax purposes.a corresponding decrease in transportation, gathering, and processing expenses and no impact on net earnings. To
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
determine the impact on our crude oil, natural gas, and NGLs sales and our transportation, processing, and gathering expenses for the three months ended March 31, 2017, we applied the new guidance to contracts that were not completed as of December 31, 2017. We do not expect adoption of the new standard to have a significant impact on our net income going forward.
Crude oil, natural gas, and NGLs revenues are recognized when we have transferred control of crude oil, natural gas, or NGLs production to the purchaser. We consider the transfer of control to have occurred when the purchaser has the ability to direct the use of, and obtain substantially all of the remaining benefits, from the crude oil, natural gas, or NGLs production. We record sales revenue based on an estimate of the volumes delivered at estimated prices as determined by the applicable sales agreement. We estimate our sales volumes based on company-measured volume readings. We then adjust our crude oil, natural gas, and NGLs sales in subsequent periods based on the data received from our purchasers that reflects actual volumes and prices received. We receive payment for sales from one to two months after actual delivery has occurred. The differences in sales estimates and actual sales are recorded one to two months later. Historically, these differences have not been material. We account for natural gas imbalances using the sales method. For the three months ended March 31, 2018 and 2017 the impact of any natural gas imbalances was not significant. If a sale is deemed uncollectible, an allowance for doubtful collection is recorded.
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 proceeds based on a percent of the proceeds or have fixed our sales price at index less specified deductions. The net-back method results in the recognition of a net sales price that is lower than the indices for 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 transport 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 expenses.
Based on our evaluation of when control of crude oil and natural gas sales are transferred to the customer under the guidance of the new revenue recognition standard, certain crude oil sales in the Wattenberg Field that were recognized using the gross method prior to the adoption of the new revenue standard will be recognized using the net-back method. In the Delaware Basin, certain crude oil and natural gas sales that were recognized using the gross method prior to the adoption of the new revenue standard will be recognized using the net-back method.
As discussed above, we enter into agreements for the sale, transportation, gathering, and processing of our production. The terms of these agreements can result in variances in the per unit realized prices that we receive for our crude oil, natural gas and NGLs. For crude oil, the average NYMEX prices are based upon average daily prices throughout each month and our natural gas average NYMEX pricing is based upon first-of-the-month index prices as this is how the majority of each of these commodities is sold pursuant to terms of the respective sales agreements. For NGLs, we use the NYMEX crude oil price as a reference for presentation purposes.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
Disaggregated Revenue.The following table presents crude oil, natural gas, and NGLs sales disaggregated by commodity and operating region for the three months ended March 31, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | |
| | Three Months Ended March 31, |
Revenue by Commodity and Operating Region | | 2018 | | 2017 (2) | | Percentage Change |
Crude oil | | | | | | |
Wattenberg Field | | $ | 170,306 |
| | $ | 105,188 |
| | 61.9 | % |
Delaware Basin | | 53,418 |
| | 13,538 |
| | 294.6 | % |
Utica Shale (1) | | 2,696 |
| | 4,270 |
| | (36.9 | )% |
Total | | $ | 226,420 |
| | $ | 122,996 |
| | 84.1 | % |
Natural gas | | | | | | |
Wattenberg Field | | $ | 29,772 |
| | $ | 32,614 |
| | (8.7 | )% |
Delaware Basin | | 7,679 |
| | 2,468 |
| | 211.1 | % |
Utica Shale (1) | | 1,110 |
| | 1,860 |
| | (40.3 | )% |
Total | | $ | 38,561 |
| | $ | 36,942 |
| | 4.4 | % |
NGLs | | | | | | |
Wattenberg Field | | $ | 28,770 |
| | $ | 25,318 |
| | 13.6 | % |
Delaware Basin | | 10,635 |
| | 2,947 |
| | 260.9 | % |
Utica Shale (1) | | 839 |
| | 1,489 |
| | (43.7 | )% |
Total | | $ | 40,244 |
| | $ | 29,754 |
| | 35.3 | % |
Revenue by Operating Region | | | | | | |
Wattenberg Field | | $ | 228,848 |
| | $ | 163,120 |
| | 40.3 | % |
Delaware Basin | | 71,732 |
| | 18,953 |
| | 278.5 | % |
Utica Shale (1) | | 4,645 |
| | 7,619 |
| | (39.0 | )% |
Total | | $ | 305,225 |
| | $ | 189,692 |
| | 60.9 | % |
________________
(1) In March 2018, we completed the sale of our Utica Shale properties.
(2) As we have elected the modified retrospective method of adoption, revenues for the three months ended
March 31, 2017 have not been restated for the new revenue recognition standard. Such amounts would not
have been material.
Contract Assets. Contract assets include material contributions in aid of construction ("CIAC"), which are common in purchase/purchase and processing agreements with midstream service providers that are our customers. Generally, the intent of the payments is to reimburse the customer for actual costs incurred related to the construction of its gathering and processing infrastructure. Contract assets that are classified as current assets are included in prepaid expenses and other current assets on our condensed consolidated balance sheet. Contract assets that are classified as long-term are included in other assets on our condensed consolidated balance sheet. The contract assets will be amortized as a reduction to crude oil, natural gas, or NGLs sales revenue during the periods that the related production is transferred to the customer.
The following table presents the changes in goodwill:carrying amounts of the contract assets associated with our crude oil, natural gas, and NGLs sales revenue for the three months ended March 31, 2018:
|
| | | |
| Amount |
| (in thousands) |
| |
Balance at beginning of period, January 1, 2017 | $ | 62,041 |
|
Purchase price adjustments, net of tax | (5,983 | ) |
Balance at end of period, March 31, 2017 | $ | 56,058 |
|
|
| | | |
| Amount |
| (in thousands) |
| |
Beginning balance, January 1, 2018 | $ | 4,446 |
|
Contract assets amortized as a reduction to crude oil, natural gas, and NGLs sales | (1,233 | ) |
Ending balance, March 31, 2018 | $ | 3,213 |
|
With the creationCustomer Accounts Receivable. Our accounts receivable include amounts billed and currently due from sales of goodwillour crude oil, natural gas, and NGLs production. Our gross accounts receivable balance from this transaction,crude oil, natural gas, and NGLs sales at March 31, 2018 and December 31, 2017 was $145.3 million and $154.3 million, respectively. Historically, we will perform our annual evaluation of goodwill for impairment on an annual basis or when a triggering event occurs, beginning in 2017. We evaluate goodwill for impairment by either performing a qualitative evaluation or a two-step quantitative test, which involves comparing the estimated fair value to the carrying value. In either case, the valuation of goodwill will behave not recorded a significant estimate as such methods incorporate forward-looking assumptionsamount of write-offs related to our accounts receivable from sales of our crude oil, natural gas, and estimates.NGLs
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
sales, therefore; we did not record an allowance for doubtful accounts for these receivables at March 31, 2018 or December 31, 2017.
NOTE 45 - PROPERTIES AND EQUIPMENTFAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the componentsDetermination of properties and equipment, net of accumulated depreciation, depletion, and amortization ("DD&A"):Fair Value
|
| | | | | | | |
| March 31, 2017 | | December 31, 2016 |
| (in thousands) |
Properties and equipment, net: | | | |
Crude oil and natural gas properties | | | |
Proved | $ | 3,675,076 |
| | $ | 3,499,718 |
|
Unproved | 1,874,552 |
| | 1,874,671 |
|
Total crude oil and natural gas properties | 5,549,628 |
| | 5,374,389 |
|
Infrastructure, pipeline, and other | 74,046 |
| | 62,093 |
|
Land and buildings | 14,896 |
| | 12,165 |
|
Construction in progress | 132,776 |
| | 122,591 |
|
Properties and equipment, at cost | 5,771,346 |
| | 5,571,238 |
|
Accumulated DD&A | (1,672,883 | ) | | (1,562,972 | ) |
Properties and equipment, net | $ | 4,098,463 |
| | $ | 4,008,266 |
|
| | | |
Our fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The three levels of inputs that may be used to measure fair value are defined as:
The following table presents impairment charges recordedLevel 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means.
Level 3 – Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity.
Derivative Financial Instruments
We measure the fair value of our 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 properties:forward curves, discount rates such as the LIBOR curve for a similar duration of each outstanding position, 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 swap rates and the duration of each outstanding derivative position.
We validate our fair value measurement through the review of counterparty statements and other supporting documentation, determination that the source of the inputs is valid, corroboration of the original source of inputs through access to multiple quotes, if available, or other information, and monitoring changes in valuation methods and assumptions. While we use common industry practices to develop our valuation techniques and believe our valuation method is appropriate and consistent with those used by other market participants, changes in our pricing methodologies or the underlying assumptions could result in significantly different fair values.
Our crude oil and natural gas fixed-price swaps are included in Level 2. Our collars and propane fixed-price swaps are included in Level 3. Our basis swaps are included in Level 2 and Level 3. The following table presents, for each applicable level within the fair value hierarchy, our derivative assets and liabilities, including both current and non-current portions, measured at fair value on a recurring basis:
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
| (in thousands) |
| | | |
Impairment of proved and unproved properties | $ | 2,102 |
| | $ | 969 |
|
Amortization of individually insignificant unproved properties | 91 |
| | 32 |
|
Total impairment of properties and equipment | $ | 2,193 |
| | $ | 1,001 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| 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) |
Assets: | | | | | | | | | | | |
Total assets | $ | 22,467 |
| | $ | 6,143 |
| | $ | 28,610 |
| | $ | 12,949 |
| | $ | 1,389 |
| | $ | 14,338 |
|
Total liabilities | 122,133 |
| | 14,976 |
| | 137,109 |
| | 90,569 |
| | 11,076 |
| | 101,645 |
|
Net liability | $ | (99,666 | ) | | $ | (8,833 | ) | | $ | (108,499 | ) | | $ | (77,620 | ) | | $ | (9,687 | ) | | $ | (87,307 | ) |
| | | | | | | | | | | |
The following table presents a reconciliation of our Level 3 assets measured at fair value:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
| | (in thousands) |
Fair value of Level 3 instruments, net liability beginning of period | | $ | (9,687 | ) | | $ | (9,574 | ) |
Changes in fair value included in condensed consolidated statement of operations line item: | | | | |
Commodity price risk management gain (loss), net | | (2,152 | ) | | 13,360 |
|
Settlements included in condensed consolidated statement of operations line items: | | | | |
Commodity price risk management gain (loss), net | | 3,006 |
| | (1,470 | ) |
Fair value of Level 3 instruments, net asset (liability) end of period | | $ | (8,833 | ) | | $ | 2,316 |
|
| | | | |
Net change in fair value of Level 3 unsettled derivatives included in condensed consolidated statement of operations line item: | | | | |
Commodity price risk management gain (loss), net | | $ | 1,205 |
| | $ | 11,427 |
|
| | | | |
The significant unobservable input used in the fair value measurement of our derivative contracts is the implied volatility curve, which is provided by a third-party vendor. A significant increase or decrease in the implied volatility, in isolation, would have a directionally similar effect resulting in a significantly higher or lower fair value measurement of our Level 3 derivative contracts. There has been no change in the methodology we apply to measure the fair value of our Level 3 derivative contracts during the periods covered by this report.
Non-Derivative Financial Assets and Liabilities
The carrying value of the financial instruments included in current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.
We utilize fair value on a nonrecurring basis to review our proved crude oil and natural gas properties for possible impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such assets. The fair value of the properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production and prices at which we reasonably expect the crude oil and natural gas will be sold.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
The portion of our long-term debt related to our revolving credit facility approximates fair value due to the variable nature of related interest rates. We have not elected to account for the portion of our debt related to our senior notes under the fair value option; however, we have determined an estimate of the fair values based on measurements of trading activity and broker and/or dealer quotes, respectively, which are published market prices, and therefore are Level 2 inputs. The table below presents these estimates of the fair value of the portion of our long-term debt related to our senior notes and convertible notes as of March 31, 2018.
|
| | | | | | | |
| | Estimated Fair Value | | Percent of Par |
| | (in millions) | | |
Senior notes: | | | |
| 2021 Convertible Notes | $ | 194.0 |
| | 97.0 | % |
| 2024 Senior Notes | 409.0 |
| | 102.3 | % |
| 2026 Senior Notes | 593.3 |
| | 98.9 | % |
The carrying value of our capital lease obligations approximates fair value due to the variable nature of the imputed interest rates and the duration of the related vehicle lease.
Concentration of Risk
Derivative Counterparties. A portion of our liquidity relates to commodity derivative instruments that enable us to manage a portion of our exposure to price volatility from producing crude oil and natural gas. These arrangements expose us to credit risk of nonperformance by our counterparties. We primarily use financial institutions who are also major lenders under our revolving credit facility as counterparties to our commodity derivative contracts. An insignificant portion of our commodity derivative instruments may be with other counterparties. To date, we have had no derivative counterparty default losses. We have evaluated the credit risk of our derivative assets from our counterparties using relevant credit market default rates, giving consideration to amounts outstanding for each counterparty and the duration of each outstanding derivative position. Based on our evaluation, we have determined that the potential impact of nonperformance of our current counterparties on the fair value of our derivative instruments is not significant at March 31, 2018, taking into account the estimated likelihood of nonperformance.
Cash and Cash Equivalents. We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents potentially subject us to a concentration of credit risk as substantially all of our deposits held in financial institutions were in excess of the FDIC insurance limits at March 31, 2018 and December 31, 2017. We maintain our cash and cash equivalents in the form of money market and checking accounts with financial institutions that we believe are creditworthy and are also major lenders under our revolving credit facility.
NOTE 56 - COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS
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, natural gas, and propane, which is an element of our NGLs, we enter into commodity derivative contracts to protect against price declines in future periods. While we structure these commodity derivatives to reduce our exposure to changesdecreases in price associated with the derivative commodity prices, they also limit the benefit we might otherwise have receivedreceive from price increases in the physical market.increases.
We believe our commodity derivative instruments continue to be effective in achieving the risk management objectives for which they were intended. As of March 31, 2017,2018, we had derivative instruments, which were comprised of collars, fixed-
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(unaudited)
pricefixed-price swaps, and basis protection swaps, in place for a portion of our anticipated production through 2018 for a total of 13,912 MBbls of crude oil,75,615 BBtu of natural gas, and 536MBbls of propane.2019 production. Our commodity derivative contracts have been entered into at no cost to us as we hedge our anticipated production at the then-prevailing commodity market prices, without adjustment for premium or discount.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
As of March 31, 2018, we had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Collars | | Fixed-Price Swaps | | |
Commodity/ Index/ Maturity Period | | Quantity (Gas - BBtu Oil - MBbls) | | Weighted-Average Contract Price | | Quantity (Oil - MBbls Gas and Basis- BBtu Propane - MBbls) | | Weighted- Average Contract Price | | Fair Value March 31, 2018 (1) (in millions) |
| | Floors | | Ceilings | | | |
Crude Oil | | | | | | | | | | | | |
NYMEX | | | | | | | | | | | | |
2018 | | 1,784.0 |
| | $ | 46.64 |
| | $ | 57.53 |
| | 7,704.0 |
| | $ | 52.54 |
| | $ | (91.4 | ) |
2019 | | 400.0 |
| | 50.00 |
| | 60.67 |
| | 7,800.0 |
| | 53.20 |
| | (42.9 | ) |
Total Crude Oil | | 2,184.0 |
| | | | | | 15,504.0 |
| | | | $ | (134.3 | ) |
| | | | | | | | | | | | |
Natural Gas | | | | | | | | | | | | |
NYMEX | | | | | | | | | | | | |
2018 | | 2,735.0 |
| | $ | 3.00 |
| | $ | 3.56 |
| | 40,335.0 |
| | $ | 2.94 |
| | $ | 5.1 |
|
2019 | | — |
| | — |
| | — |
| | 4,004.0 |
| | 2.77 |
| | (0.1 | ) |
Total Natural Gas | | 2,735.0 |
| | | | | | 44,339.0 |
| | | | $ | 5.0 |
|
| | | | | | | | | | | | |
Basis Protection - Crude Oil | | | | | | | | | | | | |
Midland Cushing | | | | | | | | | | | | |
2018 | | — |
| | $ | — |
| | $ | — |
| | 1,456.1 |
| | $ | (0.10 | ) | | $ | 5.4 |
|
Total Basis Protection - Crude Oil | | — |
| | | | | | 1,456.1 |
| | | | $ | 5.4 |
|
| | | | | | | | | | | | |
Basis Protection - Natural Gas | | | | | | | | | | | | |
CIG | | | | | | | | | | | | |
2018 | | — |
| | $ | — |
| | $ | — |
| | 31,409.9 |
| | $ | (0.43 | ) | | $ | 12.3 |
|
2019 | | — |
| | — |
| | — |
| | 4,004.0 |
| | (0.88 | ) | | (0.1 | ) |
Waha | | | | | | | | | | | | |
2018 | | — |
| | — |
| | — |
| | 4,923.8 |
| | (0.50 | ) | | 3.4 |
|
El Paso | | | | | | | | | | | | |
2018 | | — |
| | — |
| | — |
| | 2,450.0 |
| | (0.62 | ) | | 1.6 |
|
Total Basis Protection - Natural Gas | | — |
| | | | | | 42,787.7 |
| | | | $ | 17.2 |
|
| | | | | | | | | | | | |
Propane | | | | | | | | | | | | |
Mont Belvieu | | | | | | | | | | | | |
2018 | | — |
| | $ | — |
| | $ | — |
| | 714.4 |
| | $ | 32.52 |
| | $ | — |
|
Total Propane | | — |
| | | | | | 714.4 |
| | | | $ | — |
|
| | | | | | | | | | | | |
Rollfactor (2) | | | | | | | | | | | | |
Crude Oil CMA | | | | | | | | | | | | |
2018 | | — |
| | $ | — |
| | $ | — |
| | 4,192 |
| | $ | 0.12 |
| | $ | (1.8 | ) |
Total Rollfactor | | — |
| | | | | | 4,192 |
| | | | $ | (1.8 | ) |
| | | | | | | | | | | | |
Commodity Derivatives Fair Value | | | | | | | | $ | (108.5 | ) |
_____________
| |
(1) | Approximately 21.5 percent of the fair value of our commodity derivative assets and 10.9 percentof the fair value of our commodity derivative liabilities were measured using significant unobservable inputs (Level 3). |
| |
(2) | These positions hedge the timing risk associated with our physical sales. We generally sell crude oil for the delivery month at a sales price based on the average NYMEX West Texas Intermediate price during that month, plus an adjustment calculated as a spread between the weighted average prices of the delivery month, the next month and the following month during the period when the delivery month is the first month. |
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
We have not elected to designate any of our derivative instruments as cash flow hedges, and therefore these instruments do not qualify for use under hedge accounting. Accordingly, changes in the fair value of our derivative instruments are recorded in the condensed consolidated statements of operations.
The following table presents the balance sheet location and fair value amounts of our derivative instruments on the condensed consolidated balance sheets:
| | | | Fair Value | | Fair Value |
Derivative instruments: | Derivative instruments: | | Condensed consolidated balance sheet line item | | March 31, 2017 | | December 31, 2016 | Derivative instruments: | | Condensed consolidated balance sheet line item | | March 31, 2018 | | December 31, 2017 |
| | (in thousands) | | (in thousands) |
Derivative assets: | Current | | | | | Current | | | | |
| Commodity derivative contracts | | Fair value of derivatives | | $ | 24,437 |
| | $ | 8,490 |
| |
| Basis protection derivative contracts | | Fair value of derivatives | | 2,610 |
| | 301 |
| |
| | 27,047 |
| | 8,791 |
| |
| Non-current | | | | | Commodity derivative contracts | | Fair value of derivatives | | $ | 5,958 |
| | $ | 7,340 |
|
| Commodity derivative contracts | | Fair value of derivatives | | 11,279 |
| | 1,123 |
| Basis protection derivative contracts | | Fair value of derivatives | | 22,652 |
| | 6,998 |
|
| Basis protection derivative contracts | | Fair value of derivatives | | 2,642 |
| | 1,263 |
| | 28,610 |
| | 14,338 |
|
| | 13,921 |
| | 2,386 |
| Non-current | | — |
| | — |
|
Total derivative assets | Total derivative assets | | $ | 40,968 |
| | $ | 11,177 |
| Total derivative assets | | $ | 28,610 |
| | $ | 14,338 |
|
| | | | | | | | |
Derivative liabilities: | Current | | | | | Current | | | | |
| Commodity derivative contracts | | Fair value of derivatives | | $ | 26,489 |
| | $ | 53,565 |
| Commodity derivative contracts | | Fair value of derivatives | | 108,763 |
| | 77,999 |
|
| Basis protection derivative contracts | | Fair value of derivatives | | 6 |
| | 30 |
| Basis protection derivative contracts | | Fair value of derivatives | | 122 |
| | 234 |
|
| | 26,495 |
| | 53,595 |
| Rollfactor derivative contracts | | Fair value of derivatives | | 1,798 |
| | 1,069 |
|
| Non-current | | | | | | 110,683 |
| | 79,302 |
|
| Commodity derivative contracts | | Fair value of derivatives | | 4,302 |
| | 27,595 |
| Non-current | | | | |
| | 4,302 |
| | 27,595 |
| Commodity derivative contracts | | Fair value of derivatives | | 26,447 |
| | 22,343 |
|
| | Basis protection derivative contracts | | Fair value of derivatives | | (21 | ) | | — |
|
| | | 26,426 |
| | 22,343 |
|
Total derivative liabilities | Total derivative liabilities | | $ | 30,797 |
| | $ | 81,190 |
| Total derivative liabilities | | $ | 137,109 |
| | $ | 101,645 |
|
The following table presents the impact of our derivative instruments on our condensed consolidated statements of operations:
| | | | Three Months Ended March 31, | | Three Months Ended March 31, |
Condensed consolidated statement of operations line item | | 2017 | | 2016 | | 2018 | | 2017 |
| | (in thousands) | | (in thousands) |
Commodity price risk management gain, net | | | | | |
Commodity price risk management gain (loss), net | | | | | |
Net settlements | | $ | 551 |
| | $ | 66,831 |
| | $ | (26,038 | ) | | $ | 551 |
|
Net change in fair value of unsettled derivatives | | 80,153 |
| | (55,775 | ) | | (21,202 | ) | | 80,153 |
|
Total commodity price risk management gain, net | | $ | 80,704 |
| | $ | 11,056 |
| |
Total commodity price risk management gain (loss), net | | | $ | (47,240 | ) | | $ | 80,704 |
|
| | | | | | | | |
Net settlements of commodity derivatives and net change in fair value of unsettled derivatives decreased significantly for the three months ended March 31, 2017,2018 as compared to the three months ended March 31, 2016. We entered into agreements for2017 as a result of the derivative instruments that settled throughout 2016 prior toincrease in future commodity prices becoming depressed in late 2014. Substantially allduring the first quarter of these agreements settled by the end of 2016. Net settlements for the three months ended March 31, 2017 reflect derivative instruments entered into since mid-2014 which approximate recent realized prices. Based upon the forward strip pricing at March 31, 2017, we expect that settlements will be substantially lower on a relative basis as2018 compared to periods in 2016.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(unaudited)
2017.
All of our financial derivative agreements contain master netting provisions that provide for the net settlement of all 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 March 31, 2017 | | Derivative instruments, recorded in condensed consolidated balance sheet, gross | | Effect of master netting agreements | | Derivative instruments, net |
| | (in thousands) |
Asset derivatives: | | | | | | |
Derivative instruments, at fair value | | $ | 40,968 |
| | $ | (22,720 | ) | | $ | 18,248 |
|
| | | | | | |
Liability derivatives: | | | | | | |
Derivative instruments, at fair value | | $ | 30,797 |
| | $ | (22,720 | ) | | $ | 8,077 |
|
| | | | | | |
|
| | | | | | | | | | | | |
As of December 31, 2016 | | Derivative instruments, recorded in condensed consolidated balance sheet, gross | | Effect of master netting agreements | | Derivative instruments, net |
| | (in thousands) |
Asset derivatives: | | | | | | |
Derivative instruments, at fair value | | $ | 11,177 |
| | $ | (10,930 | ) | | $ | 247 |
|
| | | | | | |
Liability derivatives: | | | | | | |
Derivative instruments, at fair value | | $ | 81,190 |
| | $ | (10,930 | ) | | $ | 70,260 |
|
| | | | | | |
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Determination of Fair Value
Our fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The three levels of inputs that may be used to measure fair value are defined as:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means.
Level 3 – Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity.
Derivative Financial Instruments
We measure the fair value of our 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 such as the LIBOR curve for a similar duration of each outstanding position, volatility factors,
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
The following table reflects the impact of netting agreements on gross derivative assets 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 swap rates and the duration of each outstanding derivative position.liabilities:
|
| | | | | | | | | | | | |
As of March 31, 2018 | | Derivative instruments, recorded in condensed consolidated balance sheet, gross | | Effect of master netting agreements | | Derivative instruments, net |
| | (in thousands) |
Asset derivatives: | | | | | | |
Derivative instruments, at fair value | | $ | 28,610 |
| | $ | (27,971 | ) | | $ | 639 |
|
| | | | | | |
Liability derivatives: | | | | | | |
Derivative instruments, at fair value | | $ | 137,109 |
| | $ | (27,971 | ) | | $ | 109,138 |
|
| | | | | | |
|
| | | | | | | | | | | | |
As of December 31, 2017 | | Derivative instruments, recorded in condensed consolidated balance sheet, gross | | Effect of master netting agreements | | Derivative instruments, net |
| | (in thousands) |
Asset derivatives: | | | | | | |
Derivative instruments, at fair value | | $ | 14,338 |
| | $ | (14,173 | ) | | $ | 165 |
|
| | | | | | |
Liability derivatives: | | | | | | |
Derivative instruments, at fair value | | $ | 101,645 |
| | $ | (14,173 | ) | | $ | 87,472 |
|
| | | | | | |
We validate our fair value measurement through the review of counterparty statements and other supporting documentation, the determination that the source of the inputs is valid, the corroboration of the original source of inputs through access to multiple quotes, if available, or other information and monitoring changes in valuation methods and assumptions. While we use common industry practices to develop our valuation techniques and believe our valuation method is appropriate and consistent with those used by other market participants, changes in our pricing methodologies or the underlying assumptions could result in significantly different fair values.NOTE 7 - PROPERTIES AND EQUIPMENT
Our basis swapsThe following table presents the components of properties and equipment, net of accumulated depreciation, depletion, and amortization ("DD&A"):
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (in thousands) |
Properties and equipment, net: | | | |
Crude oil and natural gas properties | | | |
Proved | $ | 4,706,258 |
| | $ | 4,356,922 |
|
Unproved | 1,055,774 |
| | 1,097,317 |
|
Total crude oil and natural gas properties | 5,762,032 |
| | 5,454,239 |
|
Infrastructure, pipeline, and other | 125,529 |
| | 109,359 |
|
Land and buildings | 12,679 |
| | 10,960 |
|
Construction in progress | 294,311 |
| | 196,024 |
|
Properties and equipment, at cost | 6,194,551 |
| | 5,770,582 |
|
Accumulated DD&A | (1,963,294 | ) | | (1,837,115 | ) |
Properties and equipment, net | $ | 4,231,257 |
| | $ | 3,933,467 |
|
| | | |
The following table presents impairment charges recorded for crude oil and natural gas fixed-price swaps are included in Level 2 and our collars, physical sales, and propane fixed-price swaps 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:properties:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2017 | | December 31, 2016 |
| 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) |
Assets: | | | | | | | | | | | |
Total assets | $ | 33,483 |
| | $ | 7,485 |
| | $ | 40,968 |
| | $ | 6,350 |
| | $ | 4,827 |
| | $ | 11,177 |
|
Total liabilities | (25,628 | ) | | (5,169 | ) | | (30,797 | ) | | (66,789 | ) | | (14,401 | ) | | (81,190 | ) |
Net asset (liability) | $ | 7,855 |
| | $ | 2,316 |
| | $ | 10,171 |
| | $ | (60,439 | ) | | $ | (9,574 | ) | | $ | (70,013 | ) |
| | | | | | | | | | | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
| (in thousands) |
| | | |
Impairment of proved and unproved properties | $ | 33,130 |
| | $ | 2,102 |
|
Amortization of individually insignificant unproved properties | 58 |
| | 91 |
|
Impairment of crude oil and natural gas properties
| $ | 33,188 |
| | $ | 2,193 |
|
The following table presents a reconciliation of our Level 3 assets measured at fair value:
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2017 | | 2016 |
| | (in thousands) |
Fair value of Level 3 instruments, net asset (liability) beginning of period | | $ | (9,574 | ) | | $ | 91,288 |
|
Changes in fair value included in condensed consolidated statement of operations line item: | | | | |
Commodity price risk management gain, net | | 13,360 |
| | 6,165 |
|
Settlements included in statement of operations line items: | | | | |
Commodity price risk management gain, net | | (1,470 | ) | | (24,258 | ) |
Fair value of Level 3 instruments, net asset end of period | | $ | 2,316 |
| | $ | 73,195 |
|
| | | | |
Net change in fair value of Level 3 unsettled derivatives included in condensed consolidated statement of operations line item: | | | | |
Commodity price risk management gain, net | | $ | 11,427 |
| | $ | 4,185 |
|
| | | | |
The significant unobservable input used in the fair value measurement of our derivative contracts is the implied volatility curve, which is provided by a third-party vendor. A significant increase or decrease in the implied volatility, in isolation, would have a directionally similar effect resulting in a significantly higher or lower fair value measurement of our Level 3 derivative contracts. There has been no change in the methodology we apply to measure the fair value of our Level 3 derivative contracts during the periods covered by this report.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
Short-term InvestmentsDuring the three months ended March 31, 2018, we recorded impairment charges of $26.9 million, primarily related to certain unproved Delaware Basin leasehold positions that expired during the three months ended March 31, 2018.
We categorizeAdditionally, we corrected an error in our short-term investments as held-to-maturity ascalculation of the unproved properties and goodwill impairment originally reported in the quarter ended September 30, 2017. The correction of the error resulted in an additional impairment charge of $6.3 million, recorded in the three months ended March 31, 2018, which we have the positive intent and ability to hold the securities to maturity. We have invested in commercial paper with entities with financial ratingsincluded in the A1/P1 category. Atimpairment of properties and equipment expense line in our condensed consolidated statement of operations. We evaluated the error under the guidance of Accounting Standards Codification 250, Accounting Changes and Error Corrections ("ASC 250"). Based on the guidance in ASC 250, we determined that the impact of the error did not have a material impact to our previously-issued financial statements or those of the period of correction.
Utica Shale Divestiture. In March 2018, we completed the sale of our Utica Shale properties (the "Utica Shale Divestiture") for net cash proceeds of approximately $39.0 million, subject to certain customary post-closing adjustments. We recorded a loss on sale of properties and equipment of $1.4 million for the three months ended March 31, 2017, all of our held-to-maturity securities had maturities within one year2018. The divestiture of the balance sheet date andUtica Shale properties did not represent a strategic shift in our operations or have a significant impact on our operations or financial results; therefore, we did not realize any losses. Short-term investments in marketable securities potentially subject us toaccount for it as a concentration of credit risk as substantially all of our debt securities are held with one counterparty. We hold our marketable securities with major corporations with high credit standings. The carrying value of our short-term investments approximates fair value due to the short-term maturities of these investments. The amortized cost of our held-to-maturity securities at March 31, 2017 was $49.9 million. We did not hold any short-term investments at December 31, 2016.discontinued operation.
Non-Derivative FinancialClassification of Assets and Liabilities
The carrying value of the financial instruments included in current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.
We utilize fair value on a nonrecurring basis to review our crude oil and natural gas properties and goodwill for possible impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such assets. The fair value of the properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production and prices at which we reasonably expect the crude oil and natural gas will be sold. The fair value of the goodwill is determined using either a qualitative method or a quantitative method, both of which utilize market data, a Level 2 input, in the derivation of the value estimation.
The portion of our long-term debt related to our revolving credit facility approximates fair value due to the variable nature of related interest rates. We have not elected to account for the portion of our debt related to our senior notes under the fair value option; however, we have determined an estimate of the fair values based on measurements of trading activity and broker and/or dealer quotes, respectively, which are published market prices, and therefore are Level 2 inputs. The table below presents these estimates of the fair value of the portion of our long-term debt related to our senior notes and convertible notesas Held-for-Sale. Assets held-for-sale as of March 31, 2017.
|
| | | | | | | |
| | Estimated Fair Value | | Percent of Par |
| | (in millions) | | |
Senior notes: | | | |
| 2021 Convertible Notes | $ | 206.0 |
| | 103.0 | % |
| 2022 Senior Notes | 530.0 |
| | 106.0 | % |
| 2024 Senior Notes | 416.0 |
| | 104.0 | % |
2018 were$1.6 million for a field office facility. We subsequently sold the field office facility in April 2018 for $1.9 million and will record a gain on sale of properties and equipment of $0.3 million during the second quarter of 2018. Assets held-for-sale as of December 31, 2017 included $36.8 million and $3.3 million, representing our Utica Shale properties and field office facilities and a separate parcel of land, respectively.
The carrying value of our capital lease obligations approximates fair value duefollowing table presents balance sheet data related to assets held-for-sale. Assets held-for-sale represents the variable nature of the imputed interest rates and the duration of the related vehicle lease.
Concentration of Risk
Derivative Counterparties. A portion of our liquidity relates to commodity derivative instrumentsassets that enable us to manage a portion of our exposure to price volatility from producing crude oil and natural gas. These arrangements expose us to credit risk of nonperformance by our counterparties. We primarily use financial institutions who are also major lenders under our revolving credit facility as counterparties to our commodity derivative contracts; however, an insignificant portion of our commodity derivative instruments may be with other counterparties. To date, we have had no derivative counterparty default losses. We have evaluated the credit risk of our derivative assets from our counterparties using relevant credit market default rates, giving consideration to amounts outstanding for each counterparty and the duration of each outstanding derivative position. Based on our evaluation, we have determined that the potential impact of nonperformance of our current counterparties on the fair value of our derivative instruments is not significant at March 31, 2017, taking into account the estimated likelihood of nonperformance.
Cash and Cash Equivalents. We consider all highly liquid instruments purchased with an original maturity of three months or lessexpected to be cash equivalents. Cash and cash equivalents potentially subject ussold, net of liabilities that are expected to a concentration of credit risk asbe assumed by the purchasers:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (in thousands) |
Assets | | | |
Properties and equipment, net | $ | 1,647 |
| | $ | 40,583 |
|
Total assets | $ | 1,647 |
| | $ | 40,583 |
|
| | | |
Liabilities | | | |
Asset retirement obligation | $ | — |
| | $ | 499 |
|
Total liabilities | $ | — |
| | $ | 499 |
|
| | | |
Assets held-for-sale, net | $ | 1,647 |
| | $ | 40,084 |
|
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
substantially all of our deposits held in financial institutions were in excess of the FDIC insurance limits at March 31, 2017.
Suspended Well Costs. We maintain our cash and cash equivalentshave spud three wells in the form of money market and checking accountsDelaware Basin for which we are unable to make a final determination regarding whether proved reserves can be associated with financial institutions that we believe are creditworthy, and are also major lenders under our revolving credit facility.
Notes Receivable. In October 2014, we sold our entire 50 percent ownership interest in PDCM to an unrelated third-party. As part of the consideration, we received a promissory note (the “Promissory Note”) for a principal sum of $39.0 million, bearing varying interest rates. The interest was to be paid quarterly, in arrears and at the option of the issuer, could be paid-in-kind (“PIK Interest”) and any such PIK Interest would be subject to the then current interest rate.
We regularly analyze the Promissory Note for evidence of collectability, evaluating factors such as the creditworthiness of the issuer of the Promissory Note and the value of the underlying assets that secure the Promissory Note. Based upon this analysis, during the quarter ended March 31, 2016, we recognized a provision and recorded an allowance for uncollectible notes receivable for the $44.0 million accumulated outstanding balance, including interest. Commencing in the second quarter of 2016, we ceased recognizing interest income on the Promissory Note and began accounting for the interest on the Promissory Note under the cash basis method.
We performed this analysiswells as of March 31, 2017 and, based upon2018 as the evaluation of preliminary 2016 year-end financial statements and related information of the issuer and existing market conditions for natural gas, it was determined that collection of the Promissory Note and PIK Interest continued to be doubtful and the full valuation allowance on the Promissory Note remained appropriatewells had not been completed as of that date. This evaluation assumed repaymentTherefore, we have classified the capitalized costs of the Promissory Note would be satisfied exclusively from the existing operationswells as suspended well costs as of the issuer of the Promissory Note based on the latest available information.
At the end of April 2017, PDC entered into an agreement to sell the Promissory Note to an unrelated third-party buyer. Such agreement transferred all of the Company’s legal right to collect from the issuer of the Promissory Note. The sale of the Promissory Note was for cash consideration of approximately $40.3 million. The transaction closed and all funds were collected simultaneously on the date the definitive agreement to sell the Promissory Note was signed. As an agreement to sell the Promissory Note was not in effect and did not exist at March 31, 2017, this transaction has been deemed2018 while we continue to be a subsequent eventconduct completion and testing operations to be recorded indetermine the second quarterexistence of 2017. Accordingly, the Company reversed $40.3 million of the provision for uncollectible notes receivable in April 2017.
NOTE 7 - INCOME TAXES
We evaluate and update our estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of our actual annual earnings compared to annual projections, our effective tax rate may vary quarterly and may make quarterly comparisons not meaningful. The quarterly income tax provision is generally comprised of tax expense on income or benefit on loss at the most recent estimated annual effective tax rate, adjusted for the effect of discrete items.proved reserves.
The effective tax rate forfollowing table presents the capitalized exploratory well cost pending determination of proved reserves and included in properties and equipment, net on the condensed consolidated balance sheets:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (in thousands, except for number of wells) |
| | | |
Beginning balance | $ | 15,448 |
| | $ | — |
|
Additions to capitalized exploratory well costs pending the determination of proved reserves | 17,143 |
| | 51,776 |
|
Reclassifications to proved properties | — |
| | (36,328 | ) |
Ending balance | $ | 32,591 |
| | $ | 15,448 |
|
| | | |
Number of wells pending determination at period end | 3 |
| | 3 |
|
Exploration, geologic, and geophysical expense. Exploration, geologic, and geophysical expense of $2.6 million during the three months ended March 31, 2018 was primarily related to the purchase of seismic data related to unproved acreage and lease costs associated with certain delayed drilling in the Delaware Basin. Exploration, geologic, and geophysical expense of $1.0 million during the three months ended March 31, 2017 was 36.3 percent expense on income comparedprimarily related to 36.9 percent benefit on loss for the three months ended March 31, 2016. The effective tax rate for the three months ended March 31, 2017, includes discrete tax benefits of $1.6 million relating to the excess tax basis recognized with the vesting of stock awards during the three months ended March 31, 2017, which resulted in a 2.2 percent reduction to our effective tax rate.
The effective tax rate for the three months ended March 31, 2017, is based upon a full year forecasted tax provision on income and is greater than the statutory federal tax rate, primarily due to state taxes, nondeductible officers’ compensation and nondeductible lobbying expenses, partially offset by stock-based compensation tax deductions. We anticipate the potential for increased periodic volatility in future effective tax rates from the impact of stock-based compensation tax deductions as they are treated as discrete tax items. The effective tax rate for the three months ended March 31, 2016 was based upon a full year forecasted tax benefit on loss and is greater than the statutory federal tax rate, primarily due to state taxes and percentage depletion, partially offset by nondeductible officers’ compensation and nondeductible lobbying expenses. There were no significant discrete tax items recorded during the three months ended March 31, 2016.
As of March 31, 2017, there is no liability for unrecognized 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. We continue to voluntarily participatedrilling pilot holes in the Internal Revenue Service's Compliance Assurance Program for the 2016 and 2017Delaware Basin.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
tax years,NOTE 8 - OTHER ACCRUED EXPENSES AND OTHER LIABILITIES
Other Accrued Expenses. The following table presents the components of other accrued expenses as of:
|
| | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
| | (in thousands) |
| | | | |
Employee benefits | | $ | 10,901 |
| | $ | 22,383 |
|
Asset retirement obligations | | 15,944 |
| | 15,801 |
|
Environmental expenses | | 2,074 |
| | 1,374 |
|
Short-term deferred oil gathering credit | | 2,010 |
| | — |
|
Other | | 2,848 |
| | 3,429 |
|
Other accrued expenses | | $ | 33,777 |
| | $ | 42,987 |
|
| | | | |
Other Liabilities. The following table presents the components of other liabilities as of:
|
| | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
| | (in thousands) |
| | | | |
Production taxes | | $ | 63,454 |
| | $ | 50,476 |
|
Long-term deferred oil gathering credit | | 21,608 |
| | — |
|
Other | | 9,495 |
| | 6,857 |
|
Other liabilities | | $ | 94,557 |
| | $ | 57,333 |
|
| | | | |
On January 31, 2018, we received a payment of $24.1 million from Saddle Butte Rockies Midstream, LLC for the execution of an amendment to an existing crude oil purchase and received final acceptancesale agreement signed in December 2017. The amendment was effective contingent upon certain events which occurred in late January 2018. The amendment, among other things, dedicates crude oil from the majority of our 2015 federal income tax returnWattenberg Field acreage to Saddle Butte's gathering lines and closureextends the term of the 2015 tax year duringagreement through December 2029. Subsequent to the receipt of this payment, Saddle Butte was purchased by Black Diamond Gathering, LLC. The short-term portion of the deferred oil gathering credit is included in other accrued expenses and the long-term portion is included in other liabilities on our condensed consolidated balance sheet as of March 31, 2018. The payment will be amortized using the straight-line method over the life of the amendment. Amortization charges totaling approximately $0.4 million for the three months ended March 31, 2017.2018 related to the deferred oil gathering credit are included as a reduction to transportation, gathering, and processing expenses on our condensed consolidated statements of operations.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
NOTE 89 - LONG-TERM DEBT
Long-term debt consisted of the following as of:
| | | March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (in thousands) | (in thousands) |
Senior notes: | | | | | | |
1.125% Convertible Notes due 2021: | | | | | | |
Principal amount | $ | 200,000 |
| | $ | 200,000 |
| $ | 200,000 |
| | $ | 200,000 |
|
Unamortized discount | (35,727 | ) | | (37,475 | ) | (28,478 | ) | | (30,328 | ) |
Unamortized debt issuance costs | (4,346 | ) | | (4,584 | ) | (3,371 | ) | | (3,615 | ) |
1.125% Convertible Notes due 2021, net of unamortized discount and debt issuance costs | 159,927 |
| | 157,941 |
| 168,151 |
| | 166,057 |
|
| | | | | | |
7.75% Senior Notes due 2022: | | | | |
5.75% Senior Notes due 2026: | | | | |
Principal amount | 500,000 |
| | 500,000 |
| 600,000 |
| | 600,000 |
|
Unamortized debt issuance costs | (6,162 | ) | | (6,443 | ) | (7,298 | ) | | (7,555 | ) |
7.75% Senior Notes due 2022, net of unamortized debt issuance costs | 493,838 |
| | 493,557 |
| |
5.75% Senior Notes due 2026, net of unamortized debt issuance costs | | 592,702 |
| | 592,445 |
|
| | | | | | |
6.125% Senior Notes due 2024: | | | | | | |
Principal amount | 400,000 |
| | 400,000 |
| 400,000 |
| | 400,000 |
|
Unamortized debt issuance costs | (7,304 | ) | | (7,544 | ) | (6,325 | ) | | (6,570 | ) |
6.125% Senior Notes due 2024, net of unamortized debt issuance costs | 392,696 |
| | 392,456 |
| 393,675 |
| | 393,430 |
|
| | | | | | |
Total senior notes | 1,046,461 |
| | 1,043,954 |
| 1,154,528 |
| | 1,151,932 |
|
| | | | | | |
Revolving credit facility | — |
| | — |
| — |
| | — |
|
Total long-term debt, net of unamortized discount and debt issuance costs | $ | 1,046,461 |
| | $ | 1,043,954 |
| $ | 1,154,528 |
| | $ | 1,151,932 |
|
Senior Notes
2021 Convertible Notes. In September 2016, we issued $200.0$200 million of 1.125% convertible senior notes due 2021 (the "2021 Convertible Notes") in a public offering. The maturity for the payment of principal is September 15, 2021. Interest at the rate of 1.125% per year is payable in cash semiannually in arrears on each March 15 and September 15, commencing on March 15, 2017.15. The conversion stock price at maturity is $85.39 per share. We allocated the gross proceeds of the 2021 Convertible Notes between the liability and equity components of the debt. The initial $160.5 million liability component was determined based on the fair value of similar debt instruments, excluding the conversion feature, for similar terms and priced on the same day we issued the 2021 Convertible Notes. Approximately $4.8 million in costs associated with the issuance of the 2021 Convertible NoteNotes have been capitalized as debt issuance costs. As of March 31, 2017,2018, the unamortized debt discount will be amortized over the remaining contractual term to maturity of the 2021 Convertible Notes using an effective interest rate of 5.8 percent.
Upon conversion, the 2021 Convertible Notes may be settled, at our sole election, in shares of our common stock, cash, or a combination of cash and shares of our common stock. We have initially elected a combination settlement method to satisfy our conversion obligation, which allows us to settle the principal amount of the 2021 Convertible Notes in cash and to settle the excess conversion value, if any, in shares as well asof our common stock, with cash paid in lieu of fractional shares.
2022 Senior Notes. In October 2012, we issued $500.0 million aggregate principal amount 7.75% senior notes due October 15, 2022 (the “2022 Senior Notes”). The 2022 Senior Notes accrue interest from the date of issuance and interest is payable semi-annually in arrears on April 15 and October 15. Approximately $11.0 million in costs associated with the
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(unaudited)
issuance of the 2022 Senior Notes have been capitalized as debt issuance costs and are being amortized as interest expense over the life of the notes using the effective interest method.
2024 Senior Notes. In September 2016, we issued $400.0$400 million aggregate principal amount of 6.125% senior notes due September 15, 2024 (the “2024 Senior Notes”) in a private placement to qualified institutional buyers. In May 2017, in accordance with the registration rights agreement that we entered into with the initial purchasers when we issued the 2024 Senior Notes, we filed a registration statement with the SEC relating to an offer to exchange the 2024 Senior Notes for registered notes with substantially identical terms, and we completed the exchange offer in September 2017. The 2024 Senior Notes accrue interest from the date of issuance and interest is payable semi-annually in arrears on March 15 and September 15, commencing on March 15, 2017.15. Approximately $7.8 million in costs associated with the issuance of the 2024 Senior Notes have been capitalized as debt issuance costs and are being amortized as interest expense over the life of the notes using the effective interest method.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
2026 Senior Notes. In JanuaryNovember 2017, pursuantwe issued $600 million aggregate principal amount of 5.75% senior notes due May 15, 2026, in a private placement to qualified institutional buyers. The 2026 Senior Notes are governed by an indenture dated November 29, 2017 between us and the filingU.S. Bank National Association, as trustee. The maturity for the payment of supplemental indentures forprincipal is May 15, 2026. Interest at the rate of 5.75% per year is payable in cash semiannually in arrears on each May 15 and November 15, commencing on May 15, 2018. Approximately $7.6 million in costs associated with the issuance of the 2026 Senior Notes have been capitalized as debt issuance costs and are being amortized as interest expense over the life of the notes using the effective interest method.
Our wholly-owned subsidiary PDC Permian, Inc. guarantees our obligations under the 2021 Convertible Notes, 2022the 2026 Senior Notes, and the 2024 Senior Notes (the(collectively, the "Notes"), our wholly-owned subsidiary, PDC Permian, Inc., became a guarantor of our obligations under the Notes.. Accordingly, condensed consolidating financial information for PDC and PDC Permian, Inc. is presented in the footnote titled Subsidiary Guarantor.
As of March 31, 2017,2018, we were in compliance with all covenants related to the Notes, and expect to remain in compliance throughout the next 12-month period.
Revolving Credit Facility
Revolving Credit Facility. The revolving credit facility is available for working capital requirements, capital investments, acquisitions, general corporate purposes and to support letters of credit. The revolving credit facility matures in May 2020 and provides for a maximum of $1$1.0 billion in allowable borrowing capacity, subject to the borrowing base and certain limitations under our senior notes. The borrowing base amount available under the revolving credit facility 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. The revolving credit facility is secured by a pledge of the stock of certain of our subsidiaries, mortgages of certain producing crude oil and natural gas properties and substantially all of our and such subsidiaries' other assets. Our affiliated partnerships are not guarantors of our obligations under
In May and October 2017, we entered into the Fifth and Sixth Amendments, respectively, to the Third Amended and Restated Credit Agreement to amend the revolving credit facility.facility to reflect increases in the borrowing base. The currentFifth amendment reflected an increase of the borrowing base from $700 million to $950 million and aggregate commitments under the Sixth Amendment amended the revolving credit facility areto allow the borrowing base to increase above the borrowing capacity of $1.0 billion. In addition, the Fifth Amendment made changes to certain of the covenants in the existing agreement as well as other administrative changes. We elected to increase the borrowing base to $1.1 billion for our November 2017 borrowing base redetermination and have elected to maintain a $700 million. The May 1, 2017 redetermination has not been finalizedmillion commitment level as of the date of this report.
In April 2018, we began negotiations with our bank group to enter into the Fourth Amended and Restated Credit Agreement, and we anticipate closing to occur by the end of May 2018. This agreement is expected to replace the Third Amended and Restated Credit Agreement. Following the amendment and restatement, the facility is expected to mature in May 2023.
As of March 31, 20172018 and December 31, 2016,2017, debt issuance costs related to our revolving credit facility were $8.1$5.5 million and $8.8$6.2 million, respectively, and are included in other assets on the condensed consolidated balance sheets. We had no outstanding balance on our revolving credit facility as of March 31, 20172018 or December 31, 2016.2017. 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 JPMorgan Chase Bank, N.A.'s prime rate, the federal funds rate plus a premium and the rate for dollar deposits in the London interbank market (“LIBOR”) for one month plus a premium), or at our election, a rate equal to LIBOR for certain time periods. Additionally, commitment fees, interest margin, and other bank fees, charged as a component of interest, vary with our utilization of the facility. As of March 31, 2017,2018, the applicable interest margin is 1.25 percent for the alternate base rate option or 2.25 percent for the LIBOR option, and the unused commitment fee is 0.500.5 percent. No principalPrincipal payments are generally not required until the revolving credit facility expires in May 2020 or in the event thatunless the borrowing base falls below the outstanding balance.
The revolving credit facility contains covenants customary for agreements of this type, with the most restrictive being certain financial tests on a quarterly basis. The financial tests, as defined per the revolving credit facility, include requirements to: (a) maintain a minimum current ratio of 1.0:1.0 and (b) not exceed a maximum leverage ratio of 4.0:1.0. As of March 31, 2017,2018, we were in compliance with all the revolving credit facility covenants and expect to remain in compliance throughout the next 12-month period. As defined by the revolving credit facility, our current ratio was 3.7and our leverage ratio was 2.0as of March 31, 2017.
As of March 31, 2017, we had an irrevocable standby letter of credit of approximately $11.7 million in favor of a third-party transportation service provider to secure a firm transportation obligation. As of March 31, 2017, the available funds under our revolving credit facility, including the reduction for the $11.7 million letter of credit, was $688.3 million.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
NOTE 9 - OTHER ACCRUED EXPENSES
Other Accrued Expenses. The following table presentscompliance throughout the componentsnext 12-month period. As defined by the revolving credit facility, our leverage ratio was 1.7 and our current ratio was 2.5 as of other accrued expenses:
|
| | | | | | | |
| March 31, 2017 | | December 31, 2016 |
| (in thousands) |
| | | |
Employee benefits | $ | 7,659 |
| | $ | 22,282 |
|
Asset retirement obligations | 12,937 |
| | 9,775 |
|
Environmental expenses | 4,624 |
| | 4,438 |
|
Other | 1,718 |
| | 2,130 |
|
Other accrued expenses | $ | 26,938 |
| | $ | 38,625 |
|
| | | |
March 31, 2018.
NOTE 10 - CAPITAL LEASES
We periodically enter into non-cancelable lease agreements for vehicles utilized by our operations and field personnel. These leases are being accounted for as capital leases, as the present value of minimum monthly lease payments, including the residual value guarantee, exceeds 90 percent of the fair value of the leased vehicles at inception of the lease.
The following table presents vehicles under capital lease as of March 31, 2017:of:
| |
| | March 31, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
| | (in thousands) | | (in thousands) |
Vehicles | | $ | 4,126 |
| | $ | 2,975 |
| | $ | 6,500 |
| | $ | 6,249 |
|
Accumulated depreciation | | (973 | ) | | (776 | ) | | (2,271 | ) | | (1,882 | ) |
| | $ | 3,153 |
| | $ | 2,199 |
| | $ | 4,229 |
| | $ | 4,367 |
|
Future minimum lease payments by year and in the aggregate, under non-cancelable capital leases with terms of one year or more, consist of the following:
| | For the Twelve Months Ending March 31, | | Amount | | Amount |
| | (in thousands) | | (in thousands) |
2018 | | $ | 1,413 |
| |
2019 | | 1,376 |
| | $ | 1,952 |
|
2020 | | 946 |
| | 2,061 |
|
2021 | | | 1,247 |
|
| | 3,735 |
| | 5,260 |
|
Less executory cost | | (155 | ) | | (400 | ) |
Less amount representing interest | | (402 | ) | | (501 | ) |
Present value of minimum lease payments | | $ | 3,178 |
| | $ | 4,359 |
|
| | |
| | |
|
Short-term capital lease obligations | | $ | 1,108 |
| | $ | 1,789 |
|
Long-term capital lease obligations | | 2,070 |
| | 2,570 |
|
| | $ | 3,178 |
| | $ | 4,359 |
|
Short-term capital lease obligations are included in other accrued expenses on the condensed consolidated balance sheets. Long-termsheets and long-term capital lease obligations are included in other liabilities on the condensed consolidated balance sheets.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
NOTE 11 - INCOME TAXES
We evaluate and update our estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of our actual annual earnings compared to annual projections, our effective tax rate may vary quarterly and may make quarterly comparisons not meaningful. The quarterly income tax provision is generally comprised of tax expense on income or benefit on loss at the most recent estimated annual effective income tax rate, adjusted for the effect of discrete items.
The effective income tax rate for the three months ended March 31, 2018 was a 25.8 percent benefit on loss compared to a 36.3 percent expense on income for the three months ended March 31, 2017. The effective income tax rate for the three months ended March 31, 2018, is based upon a full year forecasted tax expense on income. The effective income tax rate for the three months ended March 31, 2018 includes discrete income tax benefits of $0.2 million relating to the excess tax benefit recognized with the vesting of stock awards during the three months ended March 31, 2018, which resulted in a 1.2 percent increase to our effective tax rate. The federal corporate statutory income tax rate decreased from 35 percent in 2017 to 21 percent in 2018 resulting from the 2017 Tax Cuts and Jobs Act (the "2017 Tax Act").
The effective income tax rate for the three months ended March 31, 2018 is based upon a full year forecasted tax expense on income and is greater than the statutory federal tax rate, primarily due to state taxes, nondeductible officers’ compensation, and nondeductible lobbying expenses, partially offset by stock-based compensation tax deductions. We anticipate the potential for increased periodic volatility in future effective tax rates from the impact of stock-based compensation tax deductions as they are treated as discrete tax items. The effective tax rate for the three months ended March 31, 2017 is based upon a full year forecasted tax expense on income and is greater than the statutory federal tax rate, primarily due to state taxes, nondeductible officers’ compensation and nondeductible lobbying expenses, partially offset by stock-based compensation tax deductions.
As of March 31, 2018, 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. We continue to voluntarily participate in the Internal Revenue Service's ("IRS") Compliance Assurance Program for the 2017 and 2018 tax years. We have received final acceptance of our 2016 federal income tax return from the IRS; however, this return is going through the Joint Tax Committee review process due to tax refunds requested.
NOTE 1112 - 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:
| | | Amount | Amount |
| (in thousands) | (in thousands) |
| | |
Balance at beginning of period, January 1, 2017 | $ | 92,387 |
| |
Balance at December 31, 2017 | | $ | 87,306 |
|
Obligations incurred with development activities | 1,232 |
| 620 |
|
Obligations incurred with acquisition | | 4,687 |
|
Accretion expense | 1,768 |
| 1,288 |
|
Obligations discharged with asset retirements | (4,288 | ) | |
Balance at end of period, March 31, 2017 | 91,099 |
| |
Revisions in estimated cash flows | | 50 |
|
Obligations discharged with asset retirements and divestiture | | (4,102 | ) |
Balance at March 31, 2018 | | 89,849 |
|
Less current portion | (12,937 | ) | (15,944 | ) |
Long-term portion | $ | 78,162 |
| $ | 73,905 |
|
| | |
Our estimated asset retirement obligations liability is based on historical experience in plugging and abandoning wells, estimated economic lives and estimated plugging and abandonment costcosts considering federal and state regulatory requirements in effect. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised. As of March 31, 2017,2018, the credit-adjusted risk-free rates used to discount our plugging and abandonment liabilities ranged from 6.5 percent to 8.27.5 percent. In periods subsequent to initial measurement of the liability, we must recognize period-to-period changes in the liability resulting from the passage of time, revisions to either the amount of the original estimate of undiscounted cash flows or changes in inflation factors, and changes to our credit-adjusted risk-free rate as market conditions
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
warrant. Short-term asset retirement obligations are included in other accrued expenses on the condensed consolidated balance sheets.
NOTE 1213 - COMMITMENTS AND CONTINGENCIES
Firm Transportation Processing, and SalesProcessing Agreements. We enter into contracts that provide firm transportation sales, and processing agreements on pipeline systems through which we transport or sell crude oil and natural gas. Satisfaction of the volume requirements includes volumes produced by us, purchased from third parties, and produced by our affiliated partnerships and other third-party working, royalty, and overriding royalty interest owners whose volumes we market on their behalf. Our condensed consolidated statements of operations reflect our share of these firm transportation and processing costs. These contracts require us to pay these transportation and processing charges whether or not the required volumes are delivered.
The following table presents gross volume information related to our long-term firm transportation sales and processing agreements for pipeline capacity:
| | | | For the Twelve Months Ending March 31, | | | | | For the Twelve Months Ending March 31, | | | |
Area | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 and Through Expiration | | Total | | Expiration Date | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 and Through Expiration | | Total | | Expiration Date |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Natural gas (MMcf) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Wattenberg Field | | — |
| | 5,845 |
| | 18,849 |
| | 18,798 |
| | 84,666 |
| | 128,158 |
| | September 30, 2025 | | 7,416 |
| | 27,794 |
| | 31,025 |
| | 31,025 |
| | 114,272 |
| | 211,532 |
| | April 30, 2026 |
Delaware Basin | | 13,400 |
| | 14,600 |
| | 14,640 |
| | 11,000 |
| | — |
| | 53,640 |
| | December 31, 2020 | | 25,520 |
| | 25,600 |
| | 11,000 |
| | — |
| | — |
| | 62,120 |
| | December 31, 2020 |
Gas Marketing | | 7,117 |
| | 7,117 |
| | 7,136 |
| | 7,117 |
| | 9,796 |
| | 38,283 |
| | August 31, 2022 | | 7,117 |
| | 7,136 |
| | 7,117 |
| | 6,965 |
| | 2,830 |
| | 31,165 |
| | August 31, 2022 |
Utica Shale | | 2,737 |
| | 2,737 |
| | 2,745 |
| | 2,737 |
| | 6,391 |
| | 17,347 |
| | July 22, 2023 | |
Total | | 23,254 |
| | 30,299 |
| | 43,370 |
| | 39,652 |
| | 100,853 |
| | 237,428 |
| | | 40,053 |
| | 60,530 |
| | 49,142 |
| | 37,990 |
| | 117,102 |
| | 304,817 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Crude oil (MBbls) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Wattenberg Field | | 2,413 |
| | 2,413 |
| | 2,420 |
| | 602 |
| | — |
| | 7,848 |
| | June 30, 2020 | | 7,438 |
| | 8,062 |
| | 5,085 |
| | 4,563 |
| | 4,937 |
| | 30,085 |
| | April 30, 2023 |
Delaware Basin | | | 4,493 |
| | 8,227 |
| | 8,580 |
| | 7,392 |
| | 14,080 |
| | 42,772 |
| | December 31, 2023 |
Total | | | 11,931 |
| | 16,289 |
| | 13,665 |
| | 11,955 |
| | 19,017 |
| | 72,857 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollar commitment (in thousands) | | $ | 18,726 |
| | $ | 24,216 |
| | $ | 36,799 |
| | $ | 26,211 |
| | $ | 86,280 |
| | $ | 192,232 |
| | | $ | 64,690 |
| | $ | 99,560 |
| | $ | 69,434 |
| | $ | 65,060 |
| | $ | 160,183 |
| | $ | 458,927 |
| |
In March 2018, we completed the sale of our Utica Shale properties. Upon closing, the related commitment was assumed by the purchaser of the Utica Shale properties.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(unaudited)
In December 2016, inIn anticipation of our future drilling activities in the Wattenberg Field, we have entered into atwo facilities expansion agreementagreements with our primary midstream provider to expand and improve its natural gas gathering pipelines and processing facilities. The midstream provider is expected to construct atwo new 200 MMcfd cryogenic plant.plants. We will be bound to the volume requirements in this agreementthese agreements on the first day of the calendar month afterfollowing the actual in-service datedates of the plant,plants, which, as reflected in the above table, is estimatedare currently scheduled to be September 30, 2018. The agreement requires ain the third quarter of 2018 for the first plant and the second quarter of 2019 for the second plant. Both agreements require baseline volume commitment,commitments, consisting of our gross wellhead volume delivered in November 2016, to this midstream provider, and an incremental wellhead volume commitmentcommitments of 51.5 MMcfd and 33.5 MMcfd for the first and second agreements, respectively, for seven years. We may be required to pay a shortfall feefees for any volumes under the 51.5 MMcfd and 33.5 MMcfd incremental commitment.commitments. Any shortfall of thisin these volume commitmentcommitments may be offset by additional third partyother producers’ volumes sold to the midstream provider that are greater thenthan a certain total baseline volume. We are also required for the first three years of the contractcontracts to guarantee a certain target profit margin to the midstream provider on these incremental volumes. We currently expect that our future development planplans will supportmeet both the utilization ofbaseline and incremental volumes, and we believe that capacity.the contractual target profit margin will be achieved without additional payment from us.
WeIn April 2018, we entered into a five-year firm transportation service agreement, for delivery of 40,000 dekatherms per day of our Delaware Basin natural gas production to the Waha market hub in West Texas. The contract is effective May 1, 20172018, with a third-party crude oil pipeline company to transport 12,500 barrels of crude oil per day from our Wattenberg Field via pipeline to Cushing, Oklahoma and other area refineries. This agreement is reflected in effectthe pipeline capacity commitment table above.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
In May 2018, we entered into a firm sales agreement that is effective from June 1, 2018 through December 31, 2020. 2023 for an initial 11,400 barrels of crude oil per day and incrementally increasing to 26,400 barrels of crude oil per day with a large integrated marketing company for our crude oil production in the Delaware Basin. This agreement is expected to provide price diversification through realization of export market pricing via a Corpus Christi terminal and exposure to Brent-weighted prices. The fixed transportation charge associated with this agreement is reflected in the pipeline capacity commitment table above.
For each of the three months ended March 31, 20172018, commitments for long-term transportation volumes, net to our interest, for Wattenberg Field crude oil and Delaware Basin natural gas were $2.6 million, and in accordance with the guidance in the new revenue recognition standard, were netted against our crude oil and natural gas sales in our condensed consolidated statements of operations. For the three months ended March 31, 2016,2017, commitments for long-term transportation volumes for Wattenberg Field crude oil and Utica Shale natural gas were $0.9$2.2 million and were recorded in transportation, gathering, and processing expense in our condensed consolidated statements of operations. During the three months ended March 31, 2017 and March 31, 2016, long-term firm transportation costs for our gas marketing business associated with the commitments shown above were $2.2 million and $2.4 million, respectively, and were recorded in other expenses in our condensed consolidated statements of operations.
Litigation and Legal Items. The Company isWe are involved in various legal proceedings. The Company reviewsWe 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 theour best interests of the Company. Management hasinterests. We have provided the necessary estimated accruals in the accompanying 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.
Action Regarding Partnerships. In December 2017, we received an action entitled Dufresne, et al. v. PDC Energy, et al., filed in the United States District Court for the District of Colorado. The complaint states that it is a derivative action brought by a number of limited partner investors seeking to assert claims on behalf of our two affiliated partnerships, Rockies Region 2006 LP and Rockies Region 2007 LP, against PDC and includes claims for breach of fiduciary duty and breach of contract. The plaintiffs also included claims against two of our senior officers for alleged breach of fiduciary duty. The lawsuit accuses PDC, as the managing general partner of the two partnerships, of, among other things, failing to maximize the productivity of the partnerships’ crude oil and natural gas wells. We filed a motion to dismiss the lawsuit on February 1, 2018, on the grounds that the complaint is deficient, including because the plaintiffs failed to allege that PDC refused a demand to take action on their claims. On March 14, 2018, the motion was denied as moot by the court because the plaintiffs requested leave to amend their complaint. In late April 2018, the plaintiffs filed an amendment to their complaint. Such amendment primarily alleges additional facts to support the plaintiffs’ claims and purports to add direct class action claims in addition to the original derivative claims. The amendment also adds three new individual defendants, all of which are independent members of our Board of Directors. We are currently unable to estimate any potential damages as a result of this lawsuit.
Environmental.Due to the nature of the natural gas and oil 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 March 31, 20172018 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 the condensed consolidated balance sheets. The liability ultimately incurred with respect to a matter may exceed the related accrual.
Clean Air Act Tentative Agreement and Related Consent Decree.In August 2015, we received a Clean Air Act Section 114 Information Request (the "Information Request") from the U.S. Environmental Protection Agency ("EPA"). The Information Request sought, among other things, information related to the design, operation, and maintenance of our Wattenberg Field production facilities in the Denver-Julesburg Basin of Colorado.Colorado ("DJ Basin"). The Information Request focusesfocused on historical operation and design information for 46 of our production facilities and asks that we conductrequested sampling and analyses at the identified 46 facilities. We responded to the Information Request with the requested data in January 2016. In December 2016, we received a draft consent decree from the EPA.
In addition, in December 2015, we received a Compliance Advisory pursuant to C.R.S. 25-7-115(2) from the Colorado Department of Public Health and Environment's (“CDPHE”) Air Quality Control Commission's Air Pollution Control Division alleging that we failed to design, operate, and maintain certain condensate collection, storage, processing, and handling operations to minimize leakage of volatile organic compounds at 65 facilities consistent with applicable standards under Colorado law. This matter has been combined with the matter discussed above. We have ongoing discussions with the EPA, U.S. Department of Justice, and Colorado Department of Public Health and Environment regarding these matters. The ultimate outcome related to these combined actions has not been determined at this time.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
operations to minimize leakage of volatile organic compounds at 65 facilities consistent with applicable standards under Colorado law.
In June 2017, the U.S. Department of Justice, on behalf of the EPA and the state of Colorado, filed a complaint against us in the U.S. District Court for the District of Colorado, claiming that we failed to operate and maintain certain condensate collection facilities at 65 facilities so as to minimize leakage of volatile organic compounds in compliance with applicable law. In October 2017, we entered into a consent decree to resolve the lawsuit. Pursuant to the consent decree, we agreed to implement a variety of operational enhancements and mitigation and similar projects, including vapor control system modifications and verification, increased inspection and monitoring, and installation of tank pressure monitors. The three primary elements of the consent decree are: (i) fine/supplemental environmental projects ($1.5 million cash fine, plus $1 million in supplemental environmental projects) of which the cash fines were paid in the first quarter of 2018 and the environmental projects have been accrued in other accrued expenses on our consolidated balance sheet as of March 31, 2018 (ii) injunctive relief with an estimated cost of approximately $18 million, primarily representing capital enhancements to our operations; and (iii) mitigation with an estimated cost of $1.7 million. We continue to incur costs associated with these activities. If we fail to comply fully with the requirements of the consent decree with respect to those matters, we could be subject to additional liability. In addition, we could be the subject of other enforcement actions by regulatory authorities in the future relating to our past, present or future operations. We do not believe that the expenditures resulting from the settlement will have a material adverse effect on our consolidated financial statements.
Since our entry into the consent decree we have implemented a comprehensive program to comply with all of its requirements. As of the date of the filing of this report, all aspects of the consent decree compliance program are on or ahead of schedule.
NOTE 1314 - COMMON STOCK
Stock-Based Compensation Plans
The following table provides a summary of the impact of our outstanding stock-based compensation plans on the results of operations for the periods presented:
| | | | Three Months Ended March 31, | | Three Months Ended March 31, |
| | 2017 | | 2016 | | 2018 | | 2017 |
| | (in thousands) | | (in thousands) |
| | | | | | | | |
Stock-based compensation expense | | $ | 4,453 |
| | $ | 4,682 |
| | $ | 5,261 |
| | $ | 4,453 |
|
Income tax benefit | | (1,666 | ) | | (1,782 | ) | | (1,261 | ) | | (1,666 | ) |
Net stock-based compensation expense | | $ | 2,787 |
| | $ | 2,900 |
| | $ | 4,000 |
| | $ | 2,787 |
|
| | | | | | | | |
Stock Appreciation Rights ("SARs")
The SARsstock appreciation right ("SARs") vest ratably over a three-year period and may be exercised at any point after vesting through ten years from the date of issuance. Pursuant to the terms of the awards, upon exercise, the executive officers will receive, in shares of common stock, the excess of the market price of the award on the date of exercise over the market price of the award on the date of issuance.
The Compensation Committee of our Board of Directors No SARs were awarded SARs to our executive officersor expired during the three months ended March 31, 2017 and 2016. The fair value of each SAR award was estimated on the date of grant using a Black-Scholes pricing model using the following assumptions:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
| | | |
Expected term of award (in years) | 6 |
| | 6 |
|
Risk-free interest rate | 2.0 | % | | 1.8 | % |
Expected volatility | 53.3 | % | | 54.5 | % |
Weighted-average grant date fair value per share | $ | 38.58 |
| | $ | 26.96 |
|
The expected term of the award was estimated using historical stock option exercise behavior data. The risk-free interest rate was based on the U.S. Treasury yields approximating the expected life of the award in effect at the time of grant. Expected volatilities were based on our historical volatility. We do not expect to pay or declare dividends in the foreseeable future.2018.
The following table presents the changes in our SARs for the three months ended March 31, 2017:
|
| | | | | | | | | | | | | |
| Number of SARs | | Weighted-Average Exercise Price | | Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at December 31, 2016 | 244,078 |
| | $ | 41.36 |
| | 6.9 |
| | $ | 7,620 |
|
Awarded | 54,142 |
| | 74.57 |
| | — |
| | — |
|
Outstanding at March 31, 2017 | 298,220 |
| | 47.39 |
| | 7.2 |
| | 5,123 |
|
Exercisable at March 31, 2017 | 186,248 |
| | 39.38 |
| | 6.1 |
| | 4,279 |
|
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(unaudited)
Total compensation cost related to non-vested SARs granted and not yet recognized in our condensed consolidated statement of operations as of March 31, 2017,2018 was $3.2$1.4 million. The cost is expected to be recognized over a weighted-average period of 2.31.52 years.
Restricted Stock Awards
Time-Based Awards. The fair value of the time-based restricted shares is amortized ratably over the requisite service period, primarily three years. The time-based shares generally vest ratably on each anniversary following the grant date provided that a participant is continuously employed.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
The following table presents the changes in non-vested time-based awards to all employees, including executive officers, for the three months ended March 31, 2017:2018:
| | | Shares | | Weighted-Average Grant Date Fair Value | Shares | | Weighted-Average Grant Date Fair Value per Share |
| | | | | | |
Non-vested at December 31, 2016 | 479,642 |
| | $ | 56.09 |
| |
Non-vested at December 31, 2017 | | 472,132 |
| | $ | 60.23 |
|
Granted | 106,401 |
| | 73.28 |
| 136,256 |
| | 50.94 |
|
Vested | (48,656 | ) | | 50.46 |
| (66,253 | ) | | 58.16 |
|
Forfeited | (2,244 | ) | | 72.58 |
| (5,800 | ) | | 68.18 |
|
Non-vested at March 31, 2017 | 535,143 |
| | 59.95 |
| |
Non-vested at March 31, 2018 | | 536,335 |
| | 58.04 |
|
| | | | | | |
The following table presents the weighted-average grant date fair value per share and related information as of/for the periods presented:
| | | As of/Three Months Ended March 31,
| As of/Three Months Ended March 31,
|
| 2017 | | 2016 | 2018 | | 2017 |
| (in thousands, except per share data) | (in thousands, except per share data) |
| | | | | | |
Total intrinsic value of time-based awards vested | $ | 3,602 |
| | $ | 3,072 |
| $ | 3,530 |
| | $ | 3,602 |
|
Total intrinsic value of time-based awards non-vested | 33,366 |
| | 32,687 |
| 26,297 |
| | 33,366 |
|
Market price per common share as of March 31, | 62.35 |
| | 59.45 |
| |
Market price per share as of March 31, | | 49.03 |
| | 62.35 |
|
Weighted-average grant date fair value per share | 73.28 |
| | 51.74 |
| 50.94 |
| | 73.28 |
|
Total compensation cost related to non-vested time-based awards and not yet recognized in our condensed consolidated statements of operations as of March 31, 2017,2018 was $21.5 million$20.6 million. This cost is expected to be recognized over a weighted-average period of 2.12.0 years.
Market-Based Awards. The fair value of the market-based restricted shares is amortized ratably over the requisite service period, primarily three years. The market-based shares vest if the participant is continuously employed throughout the performance period and the market-based performance measure is achieved, with a maximum vesting period of three years. All compensation cost related to the market-based awards will be recognized if the requisite service period is fulfilled, even if the market condition is not achieved.
The Compensation Committee of our Board of Directors awarded a total of 28,06990,778 market-based restricted shares to our executive officers during the three months ended March 31, 2017.2018. In addition to continuous employment, the vesting of these shares is contingent on our total stockholder return ("TSR"), which is essentially our stock price change including any dividends as compared to the TSR of a group of peer companies. The shares are measured over a three-year period ending on December 31, 2019,2020, and can result in a payout between 0 percent and 200 percent of the total shares awarded. The weighted-average grant date fair value per market-based share for these awards was computed using the Monte Carlo pricing model using the following assumptions:
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(unaudited)
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
| | | | | | |
Expected term of award (in years) | 3 |
| | 3 |
| 3 |
| | 3 |
|
Risk-free interest rate | 1.4 | % | | 1.2 | % | 2.4 | % | | 1.4 | % |
Expected volatility | 51.4 | % | | 52.3 | % | 42.3 | % | | 51.4 | % |
Weighted-average grant date fair value per share | $ | 94.02 |
| | $ | 72.54 |
| $ | 69.98 |
| | $ | 94.02 |
|
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 historical volatility.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
The following table presents the change in non-vested market-based awards during the three months ended March 31, 2017:2018:
|
| | | | | | | |
| | Shares
| | Weighted-Average Grant Date Fair Value per Share
|
| | | | |
Non-vested at December 31, 2016
| | 48,420 |
| | $ | 64.97 |
|
Granted
| | 28,069 |
| | 94.02 |
|
Non-vested at March 31, 2017
| | 76,489 |
| | 75.63 |
|
| | | | |
|
| | | | | | | |
| | Shares
| | Weighted-Average Grant Date Fair Value per Share
|
| | | | |
Non-vested at December 31, 2017
| | 52,349 |
| | $ | 84.06 |
|
Granted
| | 90,778 |
| | 69.98 |
|
Forfeited
| | (4,128 | ) | | 94.02 |
|
Non-vested at March 31, 2018 | | 138,999 |
| | 74.57 |
|
| | | | |
The following table presents the weighted-average grant date fair value per share and related information as of/for the periods presented:
| | | As of /Three Months Ended March 31, | As of Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
| (in thousands, except per share data) | (in thousands, except per share data) |
| | | | | | |
Total intrinsic value of market-based awards non-vested | $ | 4,769 |
| | $ | 5,697 |
| $ | 6,815 |
| | $ | 4,769 |
|
Market price per common share as of March 31, | 62.35 |
| | 59.45 |
| 49.03 |
| | 62.35 |
|
Weighted-average grant date fair value per share | 94.02 |
| | 72.54 |
| 69.98 |
| | 94.02 |
|
Total compensation cost related to non-vested market-based awards not yet recognized in our condensed consolidated statements of operations as of March 31, 2017,2018 was $3.8$7.9 million. This cost is expected to be recognized over a weighted-average period of 2.32.5 years.
Preferred Stock
We are authorized pursuant to stockholder approval in 2008, 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. As ofThrough March 31, 2017 and December 31, 2016,2018, no preferred shares hadhave been issued.
NOTE 1415 - 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 restricted stock, outstanding SARs, stock options, convertible notes, and shares held pursuant to our non-employee director deferred compensation plan, if including such potential shares of common stock is dilutive.
The following table presents a reconciliation of the weighted-average diluted shares outstanding:
|
| | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
| (in thousands) |
| | | |
Weighted-average common shares outstanding - basic | 65,957 |
| | 65,749 |
|
Dilutive effect of: | | | |
Restricted stock | — |
| | 211 |
|
Convertible notes | — |
| | 157 |
|
Weighted-average common shares and equivalents outstanding - diluted | 65,957 |
| | 66,117 |
|
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
The following table presents a reconciliation of the weighted-average diluted shares outstanding:
|
| | | | | |
| Three Months Ended March 31, |
| 2017 | | 2016 |
| (in thousands) |
| | | |
Weighted-average common shares outstanding - basic | 65,749 |
| | 41,608 |
|
Dilutive effect of: | | | |
Restricted stock | 211 |
| | — |
|
Other equity-based awards | 157 |
| | — |
|
Weighted-average common shares and equivalents outstanding - diluted | 66,117 |
| | 41,608 |
|
| | | |
We reported a net loss for the three months ended March 31, 2016.2018. As a result, our basic and diluted weighted-average common shares outstanding were the same for that period because the effect of the common share equivalents was anti-dilutive.
The following table presents the weighted-average common share equivalents excluded from the calculation of diluted earnings per share due to their anti-dilutive effect:
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
| (in thousands) | (in thousands) |
| | | | | | |
Weighted-average common share equivalents excluded from diluted earnings | | | | |
per share due to their anti-dilutive effect: | | | | |
Weighted-average common share equivalents excluded from diluted earnings per share due to their anti-dilutive effect: | | | | |
Restricted stock | 76 |
| | 723 |
| 491 |
| | 76 |
|
Convertible notes | — |
| | 508 |
| — |
| | — |
|
Other equity-based awards | 18 |
| | 100 |
| 198 |
| | 18 |
|
Total anti-dilutive common share equivalents | 94 |
| | 1,331 |
| 689 |
| | 94 |
|
| | | | | | |
In September 2016, we issued the 2021 Convertible Notes, which give the holders, at our election, the right to convert the aggregate principal amount into 2.3 million shares of our common stock at a conversion price of $85.39 per share. The 2021 Convertible Notes could be included in the diluted earnings per share calculation using the treasury stock method if the average market share price exceeds the $85.39 conversion price during the periods presented.
In November 2010, we issued $115.0 million aggregate principal amount of 3.25% convertible senior notes that were due in 2016 ("2016 Convertible Notes"), which gave During the holdersthree months ended March 31, 2018 and 2017, the right to convert the aggregate principal amount into 2.7 million sharesaverage market price of our common stock at adid not exceed the conversion price of $42.40 per share. The 2016 Convertible Notes matured in May 2016. Prior to maturity, the 2016 Convertible Notes were included in the diluted earnings per share calculation using the treasury stock method when the average market share price exceeded the $42.40 conversion price during the periods presented.
Sharesprice; therefore, shares issuable upon conversion of the 2021 Convertible Notes and 2016 Convertible Notes were excluded fromnot included in the diluted earnings per share calculation for the applicable periods as the effect would be anti-dilutive to our earnings per share.calculation.
NOTE 1516 - SUBSIDIARY GUARANTOR
Our subsidiary PDC Permian, Inc., our wholly-owned subsidiary, guarantees our obligations under our publicly-registered Notes.senior notes. The following presents the condensed consolidating financial information separately for:
|
| |
(i) | PDC Energy, Inc. ("Parent"), the issuer of the guaranteed obligations, including non-material subsidiaries; |
(ii) | PDC Permian, Inc., the guarantor subsidiary ("Guarantor"), as specified in the indentures related to our Notes;senior notes; |
(iii) | Eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent, Guarantor, and our other subsidiaries and (b) eliminate the investments in our subsidiaries; and |
(iv) | Parent and subsidiaries on a consolidated basis ("Consolidated"). |
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(unaudited)
The Guarantor is 100%100 percent owned by the Parent beginning in December 2016.Parent. The Notessenior notes are fully and unconditionally guaranteed on a joint and several basis by the Guarantor. The guarantee is subject to release in limited circumstances only upon the occurrence of certain customary conditions. Each entity in the condensed consolidating financial information follows the same accounting policies as described in the notes to the condensed consolidated financial statements.
The following condensed consolidating financial statements have been prepared on the same basis of accounting as our condensed consolidated financial statements. Investments in subsidiaries are accounted for under the equity method. Accordingly, the entries necessary to consolidate the Parent and Guarantor are reflected in the eliminations column.
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Balance Sheets |
| | March 31, 2017 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
Assets | | | | | | | | |
Current assets | | $ | 397,276 |
| | $ | 14,495 |
| | $ | — |
| | $ | 411,771 |
|
Properties and equipment, net | | 1,923,981 |
| | 2,174,482 |
| | — |
| | 4,098,463 |
|
Intercompany receivable | | 43,550 |
| | — |
| | (43,550 | ) | | — |
|
Investment in subsidiaries | | 1,765,386 |
| | — |
| | (1,765,386 | ) | | — |
|
Goodwill | | — |
| | 56,058 |
| | — |
| | 56,058 |
|
Noncurrent assets | | 26,653 |
| | 185 |
| | — |
| | 26,838 |
|
Total Assets | | $ | 4,156,846 |
| | $ | 2,245,220 |
| | $ | (1,808,936 | ) | | $ | 4,593,130 |
|
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Current liabilities | | $ | 266,368 |
| | $ | 51,614 |
| | $ | — |
| | $ | 317,982 |
|
Intercompany payable | | — |
| | 43,550 |
| | (43,550 | ) | | — |
|
Long-term debt | | 1,046,461 |
| | — |
| | — |
| | 1,046,461 |
|
Other noncurrent liabilities | | 172,840 |
| | 384,670 |
| | — |
| | 557,510 |
|
Stockholders' equity | | 2,671,177 |
| | 1,765,386 |
| | (1,765,386 | ) | | 2,671,177 |
|
Total Liabilities and Stockholders' Equity | | $ | 4,156,846 |
| | $ | 2,245,220 |
| | $ | (1,808,936 | ) | | $ | 4,593,130 |
|
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Balance Sheets |
| | December 31, 2016 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
Assets | | | | | | | | |
Current assets | | $ | 387,309 |
| | $ | 12,516 |
| | $ | — |
| | $ | 399,825 |
|
Properties and equipment, net | | 1,889,419 |
| | 2,118,847 |
| | — |
| | 4,008,266 |
|
Intercompany receivable | | 9,415 |
| | — |
| | (9,415 | ) | | — |
|
Investment in subsidiaries | | 1,765,092 |
| | — |
| | (1,765,092 | ) | | — |
|
Goodwill | | — |
| | 62,041 |
| | — |
| | 62,041 |
|
Noncurrent assets | | 15,539 |
| | 171 |
| | — |
| | 15,710 |
|
Total Assets | | $ | 4,066,774 |
| | $ | 2,193,575 |
| | $ | (1,774,507 | ) | | $ | 4,485,842 |
|
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Current liabilities | | $ | 235,121 |
| | $ | 35,457 |
| | $ | — |
| | $ | 270,578 |
|
Intercompany payable | | — |
| | 9,415 |
| | (9,415 | ) | | — |
|
Long-term debt | | 1,043,954 |
| | — |
| | — |
| | 1,043,954 |
|
Other noncurrent liabilities | | 164,945 |
| | 383,611 |
| | — |
| | 548,556 |
|
Stockholders' equity | | 2,622,754 |
| | 1,765,092 |
| | (1,765,092 | ) | | 2,622,754 |
|
Total Liabilities and Stockholders' Equity | | $ | 4,066,774 |
| | $ | 2,193,575 |
| | $ | (1,774,507 | ) | | $ | 4,485,842 |
|
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 20172018
(unaudited)
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Statements of Operations |
| | Three Months Ended March 31, 2017 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
| | | | | | | | |
Operating and other revenues | | $ | 254,740 |
| | $ | 18,967 |
| | $ | — |
| | $ | 273,707 |
|
Operating expenses | | 37,499 |
| | 6,681 |
| | — |
| | 44,180 |
|
General and administrative | | 23,529 |
| | 2,786 |
| | — |
| | 26,315 |
|
Depreciation depletion and amortization | | 101,738 |
| | 7,578 |
| | — |
| | 109,316 |
|
Impairment of properties and equipment | | 604 |
| | 1,589 |
| | — |
| | 2,193 |
|
Interest (expense) income | | (19,357 | ) | | 130 |
| | — |
| | (19,227 | ) |
Income before income taxes | | 72,013 |
| | 463 |
| | — |
| | 72,476 |
|
Income tax expense | | (26,162 | ) | | (168 | ) | | — |
| | (26,330 | ) |
Net income | | $ | 45,851 |
| | $ | 295 |
| | $ | — |
| | $ | 46,146 |
|
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Balance Sheets |
| | March 31, 2018 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
| | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 45,923 |
| | $ | — |
| | $ | — |
| | $ | 45,923 |
|
Accounts receivable, net | | 143,250 |
| | 37,775 |
| | — |
| | 181,025 |
|
Fair value of derivatives | | 28,610 |
| | — |
| | — |
| | 28,610 |
|
Prepaid expenses and other current assets | | 7,116 |
| | 1,781 |
| | — |
| | 8,897 |
|
Total current assets | | 224,899 |
| | 39,556 |
| | — |
| | 264,455 |
|
Properties and equipment, net | | 2,139,471 |
| | 2,091,786 |
| | — |
| | 4,231,257 |
|
Assets held-for-sale, net | | 1,647 |
| | — |
| | — |
| | 1,647 |
|
Intercompany receivable | | 294,476 |
| | — |
| | (294,476 | ) | | — |
|
Investment in subsidiaries | | 1,605,330 |
| | — |
| | (1,605,330 | ) | | — |
|
Other assets | | 23,339 |
| | 1,459 |
| | — |
| | 24,798 |
|
Total Assets | | $ | 4,289,162 |
| | $ | 2,132,801 |
| | $ | (1,899,806 | ) | | $ | 4,522,157 |
|
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Liabilities | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 113,529 |
| | $ | 82,174 |
| | $ | — |
| | $ | 195,703 |
|
Production tax liability | | 35,309 |
| | 1,341 |
| | — |
| | 36,650 |
|
Fair value of derivatives | | 110,683 |
| | — |
| | — |
| | 110,683 |
|
Funds held for distribution | | 80,203 |
| | 17,408 |
| | — |
| | 97,611 |
|
Accrued interest payable | | 13,756 |
| | 4 |
| | — |
| | 13,760 |
|
Other accrued expenses | | 33,136 |
| | 641 |
| | — |
| | 33,777 |
|
Total current liabilities | | 386,616 |
| | 101,568 |
| | — |
| | 488,184 |
|
Intercompany payable | | — |
| | 294,476 |
| | (294,476 | ) | | — |
|
Long-term debt | | 1,154,528 |
| | — |
| | — |
| | 1,154,528 |
|
Deferred income taxes | | 62,088 |
| | 125,095 |
| | — |
| | 187,183 |
|
Asset retirement obligations | | 67,922 |
| | 5,983 |
| | — |
| | 73,905 |
|
Fair value of derivatives | | 26,426 |
| | — |
| | — |
| | 26,426 |
|
Other liabilities | | 94,208 |
| | 349 |
| | — |
| | 94,557 |
|
Total liabilities | | 1,791,788 |
| | 527,471 |
| | (294,476 | ) | | 2,024,783 |
|
| | | | | | | | |
Commitments and contingent liabilities | | | | | | | | |
| | | | | | | | |
Stockholders' Equity | | | | | | | | |
Stockholders' equity | | | | | | | | |
Common shares | | 660 |
| | — |
| | — |
| | 660 |
|
Additional paid-in capital | | 2,504,663 |
| | 1,766,777 |
| | (1,766,777 | ) | | 2,504,663 |
|
Retained earnings | | (6,435 | ) | | (161,447 | ) | | 161,447 |
| | (6,435 | ) |
Treasury shares | | (1,514 | ) | | — |
| | — |
| | (1,514 | ) |
Total stockholders' equity | | 2,497,374 |
| | 1,605,330 |
| | (1,605,330 | ) | | 2,497,374 |
|
Total Liabilities and Stockholders' Equity | | $ | 4,289,162 |
| | $ | 2,132,801 |
| | $ | (1,899,806 | ) | | $ | 4,522,157 |
|
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Statements of Cash Flows |
| | Three Months Ended March 31, 2017 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
| | | | | | | | |
Cash flows from operating activities | | $ | 131,661 |
| | $ | 7,839 |
| | $ | — |
| | $ | 139,500 |
|
Cash flows from investing activities: | | | | | | | | |
Capital expenditures for development of crude oil and natural properties | | (82,489 | ) | | (47,337 | ) | | — |
| | (129,826 | ) |
Capital expenditures for other properties and equipment | | (890 | ) | | 69 |
| | — |
| | (821 | ) |
Acquisition of crude oil and natural gas properties, including settlement adjustments | | — |
| | 6,181 |
| | — |
| | 6,181 |
|
Proceeds from sale of properties and equipment | | 737 |
| | — |
| | — |
| | 737 |
|
Purchases of short-term investments | | (49,890 | ) | | — |
| | — |
| | (49,890 | ) |
Intercompany transfers | | (33,795 | ) | | — |
| | 33,795 |
| | — |
|
Net cash from investing activities | | (166,327 | ) | | (41,087 | ) | | 33,795 |
| | (173,619 | ) |
Cash flows from financing activities: | | | | | | | | |
Proceeds from issuance of equity, net of issuance costs | | (8 | ) | | — |
| | — |
| | (8 | ) |
Other | | (2,339 | ) | | (10 | ) | | — |
| | (2,349 | ) |
Intercompany transfers | | — |
| | 33,795 |
| | (33,795 | ) | | — |
|
Net cash from financing activities | | (2,347 | ) | | 33,785 |
| | (33,795 | ) | | (2,357 | ) |
Net change in cash and cash equivalents | | (37,013 | ) | | 537 |
| | — |
| | (36,476 | ) |
Cash and cash equivalents, beginning of period | | 240,487 |
| | 3,613 |
| | — |
| | 244,100 |
|
Cash and cash equivalents, end of period | | $ | 203,474 |
| | $ | 4,150 |
| | $ | — |
| | $ | 207,624 |
|
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Balance Sheets |
| | December 31, 2017 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
| | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 180,675 |
| | $ | — |
| | $ | — |
| | $ | 180,675 |
|
Accounts receivable, net | | 160,490 |
| | 37,108 |
| | — |
| | 197,598 |
|
Fair value of derivatives | | 14,338 |
| | — |
| | — |
| | 14,338 |
|
Prepaid expenses and other current assets | | 8,284 |
| | 329 |
| | — |
| | 8,613 |
|
Total current assets | | 363,787 |
| | 37,437 |
| | — |
| | 401,224 |
|
Properties and equipment, net | | 1,891,314 |
| | 2,042,153 |
| | — |
| | 3,933,467 |
|
Assets held-for-sale, net | | 40,084 |
| | — |
| | — |
| | 40,084 |
|
Intercompany receivable | | 250,279 |
| | — |
| | (250,279 | ) | | — |
|
Investment in subsidiaries | | 1,617,537 |
| | — |
| | (1,617,537 | ) | | — |
|
Other assets | | 42,547 |
| | 2,569 |
| | — |
| | 45,116 |
|
Total Assets | | $ | 4,205,548 |
| | $ | 2,082,159 |
| | $ | (1,867,816 | ) | | $ | 4,419,891 |
|
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Liabilities | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 85,000 |
| | $ | 65,067 |
| | $ | — |
| | $ | 150,067 |
|
Production tax liability | | 35,902 |
| | 1,752 |
| | — |
| | 37,654 |
|
Fair value of derivatives | | 79,302 |
| | — |
| | — |
| | 79,302 |
|
Funds held for distribution | | 83,898 |
| | 11,913 |
| | — |
| | 95,811 |
|
Accrued interest payable | | 11,812 |
| | 3 |
| | — |
| | 11,815 |
|
Other accrued expenses | | 42,543 |
| | 444 |
| | — |
| | 42,987 |
|
Total current liabilities | | 338,457 |
| | 79,179 |
| | — |
| | 417,636 |
|
Intercompany payable | | — |
| | 250,279 |
| | (250,279 | ) | | — |
|
Long-term debt | | 1,151,932 |
| | — |
| | — |
| | 1,151,932 |
|
Deferred income taxes | | 62,857 |
| | 129,135 |
| | — |
| | 191,992 |
|
Asset retirement obligations | | 65,301 |
| | 5,705 |
| | — |
| | 71,006 |
|
Fair value of derivatives | | 22,343 |
| | — |
| | — |
| | 22,343 |
|
Other liabilities | | 57,009 |
| | 324 |
| | — |
| | 57,333 |
|
Total liabilities | | 1,697,899 |
| | 464,622 |
| | (250,279 | ) | | 1,912,242 |
|
| | | | | | | | |
Commitments and contingent liabilities | | | | | | | | |
| | | | | | | | |
Stockholders' Equity | | | | | | | | |
Stockholders' equity | | | | | | | | |
Common shares | | 659 |
| | — |
| | — |
| | 659 |
|
Additional paid-in capital | | 2,503,294 |
| | 1,766,775 |
| | (1,766,775 | ) | | 2,503,294 |
|
Retained earnings | | 6,704 |
| | (149,238 | ) | | 149,238 |
| | 6,704 |
|
Treasury shares | | (3,008 | ) | | — |
| | — |
| | (3,008 | ) |
Total stockholders' equity | | 2,507,649 |
| | 1,617,537 |
| | (1,617,537 | ) | | 2,507,649 |
|
Total Liabilities and Stockholders' Equity | | $ | 4,205,548 |
| | $ | 2,082,159 |
| | $ | (1,867,816 | ) | | $ | 4,419,891 |
|
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Statements of Operations |
| | Three Months Ended March 31, 2018 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
| | | | | | | | |
Revenues | | | | | | | | |
Crude oil, natural gas, and NGLs sales | | $ | 233,494 |
| | $ | 71,731 |
| | $ | — |
| | $ | 305,225 |
|
Commodity price risk management loss, net | | (47,240 | ) | | — |
| | — |
| | (47,240 | ) |
Other income | | 2,516 |
| | 99 |
| | — |
| | 2,615 |
|
Total revenues | | 188,770 |
| | 71,830 |
| | — |
| | 260,600 |
|
Costs, expenses and other | | | | | | | | |
Lease operating expenses | | 21,362 |
| | 8,274 |
| | — |
| | 29,636 |
|
Production taxes | | 16,081 |
| | 4,088 |
| | — |
| | 20,169 |
|
Transportation, gathering, and processing expenses | | 3,231 |
| | 4,082 |
| | — |
| | 7,313 |
|
Exploration, geologic, and geophysical expense | | 313 |
| | 2,333 |
| | — |
| | 2,646 |
|
Impairment of properties and equipment | | 6 |
| | 33,182 |
| | — |
| | 33,188 |
|
General and administrative expense | | 31,559 |
| | 4,137 |
| | — |
| | 35,696 |
|
Depreciation, depletion and amortization | | 94,376 |
| | 32,412 |
| | — |
| | 126,788 |
|
Accretion of asset retirement obligations | | 1,200 |
| | 88 |
| | — |
| | 1,288 |
|
Loss on sale of properties and equipment | | 1,432 |
| | — |
| | — |
| | 1,432 |
|
Other expenses | | 2,768 |
| | — |
| | — |
| | 2,768 |
|
Total costs, expenses and other | | 172,328 |
| | 88,596 |
| | — |
| | 260,924 |
|
Income (loss) from operations | | 16,442 |
| | (16,766 | ) | | — |
| | (324 | ) |
Interest expense | | (18,097 | ) | | 568 |
| | — |
| | (17,529 | ) |
Interest income | | 148 |
| | — |
| | — |
| | 148 |
|
Loss before income taxes | | (1,507 | ) | | (16,198 | ) | | — |
| | (17,705 | ) |
Income tax benefit | | 577 |
| | 3,989 |
| | — |
| | 4,566 |
|
Equity in loss of subsidiary | | (12,209 | ) | | — |
| | 12,209 |
| | — |
|
Net loss | | $ | (13,139 | ) | | $ | (12,209 | ) | | $ | 12,209 |
| | $ | (13,139 | ) |
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Statements of Operations |
| | Three Months Ended March 31, 2017 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
| | | | | | | | |
Revenues | | | | | | | | |
Crude oil, natural gas, and NGLs sales | | $ | 170,739 |
| | $ | 18,953 |
| | $ | — |
| | $ | 189,692 |
|
Commodity price risk management gain, net | | 80,704 |
| | — |
| | — |
| | 80,704 |
|
Other income | | 3,297 |
| | 14 |
| | — |
| | 3,311 |
|
Total revenues | | 254,740 |
| | 18,967 |
| | — |
| | 273,707 |
|
Costs, expenses and other | | | | | | | | |
Lease operating expenses | | 15,816 |
| | 3,973 |
| | — |
| | 19,789 |
|
Production taxes | | 11,144 |
| | 1,255 |
| | — |
| | 12,399 |
|
Transportation, gathering, and processing expenses | | 5,215 |
| | 687 |
| | — |
| | 5,902 |
|
Exploration, geologic, and geophysical expense | | 271 |
| | 683 |
| | — |
| | 954 |
|
Impairment of properties and equipment | | 604 |
| | 1,589 |
| | — |
| | 2,193 |
|
General and administrative expense | | 23,529 |
| | 2,786 |
| | — |
| | 26,315 |
|
Depreciation, depletion and amortization | | 101,738 |
| | 7,578 |
| | — |
| | 109,316 |
|
Accretion of asset retirement obligations | | 1,685 |
| | 83 |
| | — |
| | 1,768 |
|
Gain on sale of properties and equipment | | (160 | ) | | — |
| | — |
| | (160 | ) |
Other expenses | | 3,528 |
| | — |
| | — |
| | 3,528 |
|
Total costs, expenses and other | | 163,370 |
| | 18,634 |
| | — |
| | 182,004 |
|
Income from operations | | 91,370 |
| | 333 |
| | — |
| | 91,703 |
|
Interest expense | | (19,597 | ) | | 130 |
| | — |
| | (19,467 | ) |
Interest income | | 240 |
| | — |
| | — |
| | 240 |
|
Income before income taxes | | 72,013 |
| | 463 |
| | — |
| | 72,476 |
|
Income tax expense | | (26,162 | ) | | (168 | ) | | — |
| | (26,330 | ) |
Equity in income of subsidiary | | 295 |
| | — |
| | (295 | ) | | — |
|
Net income | | $ | 46,146 |
| | $ | 295 |
| | $ | (295 | ) | | $ | 46,146 |
|
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Statements of Cash Flows |
| | Three Months Ended March 31, 2018 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
| | | | | | | | |
Cash flows from operating activities | | $ | 149,009 |
| | $ | 56,140 |
| | $ | — |
| | $ | 205,149 |
|
Cash flows from investing activities: | | | | | | | | |
Capital expenditures for development of crude oil and natural gas properties | | (97,286 | ) | | (99,631 | ) | | — |
| | (196,917 | ) |
Capital expenditures for other properties and equipment | | (701 | ) | | (365 | ) | | — |
| | (1,066 | ) |
Acquisition of crude oil and natural gas properties, including settlement adjustments | | (180,825 | ) | | — |
| | — |
| | (180,825 | ) |
Proceeds from sale of properties and equipment | | 20 |
| | — |
| | — |
| | 20 |
|
Proceeds from divestiture | | 39,023 |
| | — |
| | — |
| | 39,023 |
|
Restricted cash | | 1,249 |
| | — |
| | — |
| | 1,249 |
|
Intercompany transfers | | (43,891 | ) | | — |
| | 43,891 |
| | — |
|
Net cash from investing activities | | (282,411 | ) | | (99,996 | ) | | 43,891 |
| | (338,516 | ) |
Cash flows from financing activities: | | | | | | | | |
Proceeds from revolving credit facility | | 35,000 |
| | — |
| | — |
| | 35,000 |
|
Repayment of revolving credit facility | | (35,000 | ) | | — |
| | — |
| | (35,000 | ) |
Purchase of treasury stock | | (2,255 | ) | | — |
| | — |
| | (2,255 | ) |
Other | | (344 | ) | | (35 | ) | | — |
| | (379 | ) |
Intercompany transfers | | — |
| | 43,891 |
| | (43,891 | ) | | — |
|
Net cash from financing activities | | (2,599 | ) | | 43,856 |
| | (43,891 | ) | | (2,634 | ) |
Net change in cash, cash equivalents, and restricted cash | | (136,001 | ) | | — |
| | — |
| | (136,001 | ) |
Cash, cash equivalents, and restricted cash, beginning of period | | 189,925 |
| | — |
| | — |
| | 189,925 |
|
Cash, cash equivalents, and restricted cash, end of period | | $ | 53,924 |
| | $ | — |
| | $ | — |
| | $ | 53,924 |
|
|
| | | | | | | | | | | | | | | | |
| | Condensed Consolidating Statements of Cash Flows |
| | Three Months Ended March 31, 2017 |
| | Parent | | Guarantor | | Eliminations | | Consolidated |
| | (in thousands) |
| | | | | | | | |
Cash flows from operating activities | | $ | 131,661 |
| | $ | 7,839 |
| | $ | — |
| | $ | 139,500 |
|
Cash flows from investing activities: | | | | | | | | |
Capital expenditures for development of crude oil and natural gas properties | | (82,489 | ) | | (47,337 | ) | | — |
| | (129,826 | ) |
Capital expenditures for other properties and equipment | | (890 | ) | | 69 |
| | — |
| | (821 | ) |
Acquisition of crude oil and natural gas properties, including settlement adjustments | | — |
| | 6,181 |
| | — |
| | 6,181 |
|
Proceeds from sale of properties and equipment | | 737 |
| | — |
| | — |
| | 737 |
|
Purchase of short-term investments | | (49,890 | ) | | — |
| | — |
| | (49,890 | ) |
Intercompany transfers | | (33,795 | ) | | — |
| | 33,795 |
| | — |
|
Net cash from investing activities | | (166,327 | ) | | (41,087 | ) | | 33,795 |
| | (173,619 | ) |
Cash flows from financing activities: | | | | | | | | |
Purchase of treasury stock | | (2,017 | ) | | — |
| | — |
| | (2,017 | ) |
Other | | (330 | ) | | (10 | ) | | — |
| | (340 | ) |
Intercompany transfers | | — |
| | 33,795 |
| | (33,795 | ) | | — |
|
Net cash from financing activities | | (2,347 | ) | | 33,785 |
| | (33,795 | ) | | (2,357 | ) |
Net change in cash, cash equivalents, and restricted cash | | (37,013 | ) | | 537 |
| | — |
| | (36,476 | ) |
Cash, cash equivalents, and restricted cash, beginning of period | | 240,487 |
| | 3,613 |
| | — |
| | 244,100 |
|
Cash, cash equivalents, and restricted cash, end of period | | $ | 203,474 |
| | $ | 4,150 |
| | $ | — |
| | $ | 207,624 |
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis, as well as other sections in this report, should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report. Further, we encourage you to review the Special Note Regarding Forward-Looking Statements.
EXECUTIVE SUMMARY
Production and Financial Overview
Production volumes increased to 6.68.9 MMboe for the three months ended March 31, 2017,2018, representing an increase of 4634 percent as compared to the three months ended March 31, 2016. The increase in production volumes was primarily attributable to the continued success of our horizontal Niobrara and Codell drilling program in the Wattenberg Field and our first full quarter of production from the newly-acquired Delaware Basin properties.2017. Crude oil production increased 3251 percentfor the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Crude oil production comprised approximately 43 percent and 38 percent of total production for the three months ended March 31, 2018 and 2017, respectively. NGLs production increased 20 percent for the three months ended March 31, 20172018 compared to the three months ended March 31, 2016. Crude oil production comprised approximately 38 percent of total production in the three months ended March 31, 2017. Natural gas production increased 4626 percent infor the three months ended March 31, 20172018 compared to the three months ended March 31, 2016.2017. NGL production increased 75 percent for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. While our oil production has increased at a meaningful level, our middle core wells in the Wattenberg Field have performed even better, with wet gas production that has outpaced oil and contributed to the growth of gas and NGLs production at a relatively higher rate. On a combined basis, total liquids production comprised 63 percent of our total production during the three months ended March 31, 2018 and 61 percent of total production during each of the three months ended March 31, 2017 and March 31, 2016. For the month ended March 31, 2017, we maintained an average quarterly production rate of approximately 73,900 Boe per day, up from approximately 50,200 Boe per day for the three months ended March 31, 2016.2017.
On a sequential quarterly basis, total production and crude oil production volumes for the three months ended March 31, 2017,2018 as compared to the three months ended December 31, 2016,2017 increased slightly by four percent. The modestthree percent and two percent, respectively. Continued high line pressures, fewer production days, gathering line freezing issues, and unexpected gathering system facility downtime in the Wattenberg Field have temporarily tempered the growth rate in the field. These operating challenges do not impact our expected full year 2018 production outlook as discussed under 2018 Operational and Financial Outlook. High line pressures in the Wattenberg Field are expected to remain a concern until our primary third-party midstream provider completes the construction of additional processing facilities. We expect significant production growth in the Wattenberg Field during the second half of 2018 once an additional facility is completed and on line, which is expected to occur in the third quarter of 2018. We expect our company-wide production to increase modestly in the second quarter of 2018, led by the continued successful development of our Delaware Basin properties. However, our production was primarily relatedand realized prices in the Delaware Basin may be negatively impacted by ongoing increased crude oil and natural gas takeaway capacity constraints and widening differentials. Such constraints could hinder production growth and result in further widening of price differentials for our commodities in the basin; however, we are currently investigating various options to the scheduled 46 wells turned-in-linemitigate this risk. In an effort to address these issues, in May 2018, we entered into an agreement for pipeline capacity for a portion of our Delaware Basin crude oil production. See Results of Operations - Crude Oil, Natural Gas, and NGLs Production for further details of this agreement.
Crude oil, natural gas, and NGLs sales revenue increased to $305.2 million for the three months ended March 31, 2017 occurring in the later portion of the quarter as well completion activity resumed in January 2017 following a period in November and December 2016 in which no wells were completed. The decision to delay well completions created a two to three month delay in wells being turned-in-line, which resulted in the relatively flat production on a sequential basis. We expect the timing of wells to be turned-in-line to sales during the remainder of 2017 to be relatively steady. When this trend is combined with our increased level of capital investment, we expect to have more substantial increases in sequential quarterly production volumes throughout the remainder of 2017 as2018 compared to that of$189.7 million for the three months ended March 31, 2017, versus the three months ended December 31, 2016.
Crude oil, natural gas, and NGLs sales increased to $189.7 million in the three months ended March 31, 2017, compared to $75.4 million in the three months ended March 31, 2016. This 1522017. The 61 percent increase in sales revenues was driven by the 73a 34 percent increase in realized commodity pricesproduction and a 4620 percent increase in production. We had netaverage realized commodity price risk management gainsprices. The adoption of $80.7 millionthe new revenue recognition standard at January 1, 2018 did not significantly impact the change in our crude oil, natural gas, and $11.1 million, of which $0.5 million and $66.8 million were positive net settlements,NGLs sales revenue for the three months ended March 31, 2017 and2018 as compared to the same period in 2017. See the footnote titled Revenue Recognition to our condensed consolidated financial statements included elsewhere in this report foradditional information regarding the new revenue recognition standard.
We had negative net settlements from our commodity derivative contracts of $26.0 million for the three months ended March 31, 2016, respectively. 2018 as compared to positive net settlements of $0.5 million for the three months ended March 31, 2017. See Results of Operations - Commodity Price Risk Management, Net for further details of our settlements of derivatives and changes in the fair value of unsettled derivatives.
The combined revenue from crude oil, natural gas, and NGLs sales and net settlements received on our commodity derivative instruments increased 3447 percent to $190.2$279.2 million in the three months ended March 31, 2017, from $142.2 million in the three months ended March 31, 2016.
Net settlements of derivatives decreased significantly for the three months ended March 31, 2017, as compared to the three months ended March 31, 2016. We entered into agreements for the derivative instruments that settled throughout 2016 prior to commodity prices becoming depressed in late 2014. Substantially all of these high-value derivatives settled by the end of 2016. Net settlements2018 from $190.2 million for the three months ended March 31, 2017, reflect derivative instruments entered into since mid-2014 which approximate recent realized prices. Based upon the forward strip pricing at March 31, 2017, we expect that settlements will be substantially lower on a relative basis as compared to periods in 2016.2017.
InDuring the three months ended March 31, 2017,2018, we recorded impairment charges totaling $33.2 million, primarily related to certain unproved Delaware Basin leasehold positions that expired during the three months ended March 31, 2018.
For the three months ended March 31, 2018, we generated a net incomeloss of $46.1$13.1 million or $0.70$0.20 per diluted share. Our net loss was most negatively impacted by the commodity price risk management loss and the aforementioned Delaware Basin leasehold impairments. During thisthe same period, our adjusted EBITDAX, a non-U.S. GAAP financial measure, was $130.2$190.1 million, and we invested $199.4 million inup 46 percent from the development and exploration of our oil and natural gas properties, exclusive ofthree months ended March 31, 2017. For the change in accounts payable related to capital expenditures. Beginning inthree months ended March 31, 2017, we have included non-cash stock-based compensation and exploration, geologic and geophysical expense to our adjusted EBITDAX calculation. In prior periods, we included adjusted EBITDA, a non-U.S. GAAP financial measure, that did not include these adjustments. All prior periods have been conformed for comparability of this updated presentation. In the same period of 2016, our net lossincome per diluted share was $1.72$0.70 and our adjusted EBITDAX was $130.2 million. The increase in our adjusted EBITDAX for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 was primarily due to the increase in crude oil, natural gas, and NGLs sales of $115.5 million. These increases were partially offset by an increase in operating costs of $28.4 million and a non-GAAP financial measure, was $57.8decrease in commodity derivative settlements of $26.6 million. Our cash flowflows from operations was $139.5were $205.1 million and our adjusted cash flow from operations, a non-U.S. GAAP financial measure, was $113.7$174.9 million infor the three months ended March 31, 2017.2018. 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.
Other significant changes impacting our results of operations for the three months ended March 31, 2017, include the following:
Positive net change in the fair value of unsettled derivatives for the three months ended March 31, 2017 was $80.2 million, compared to a negative net change in the fair value of unsettled derivatives for the three months ended March 31, 2016 of $55.7 million. The increase in the fair value of unsettled derivatives is largely driven by a downward shift in the crude oil forward curve during the three months ended March 31, 2017, as compared to an upward shift in the crude oil forward curve during the three months ended March 31, 2016.
Depreciation, depletion, and amortization expense increased to $109.3 million during the three months ended March 31, 2017, as compared to $97.4 million in the three months ended March 31, 2016. The increase was primarily due to the increase in production and an increase in the property balance during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. The increase in the property balance is due to our Delaware Basin acquisitions. Our depreciation, depletion, and amortization expense decreased to $16.44 per Boe during the three months ended March 31, 2017 from $21.31 per Boe during the three months ended March 31, 2016 because of our increased proved reserve profile;Liquidity
Available liquidity as of March 31, 2017,2018, was $945.8$745.9 million, compared to $932.4 million as of December 31, 2016. Available liquidity as of March 31, 2017 iswhich was comprised of $207.6$45.9 million of cash and cash equivalents $49.9 million of short-term investments, and $688.3$700 million available for borrowing under our revolving credit facility. Our liquidityfacility at our current commitment level. Based on our current production forecast for the remainder of 2018 and assuming averages of approximately $62.00 NYMEX crude oil price for the year and a $2.85 NYMEX natural gas price, less the associated differential, we expect 2018 capital investments to exceed our 2018 cash flows from operations by approximately $65 million. We anticipate that the proceeds received from the sale of our Utica Shale assets and an amendment to a midstream dedication agreement will be impacted by our planned 2017fund this outspend. We expect this outspend to occur during the first half of 2018, with cash flows exceeding capital investment activities. Weduring the second half of the year. As a result, we expect decreases into be undrawn on our cash balances over the course of 2017 as we continue development in the core Wattenberg Field and the expected capital investment in our Delaware Basin assets.credit facility at December 31, 2018.
We intend to continue to manage our liquidity position by a variety of means, including through the generation of cash flowflows from our operations, investment in projects with attractive 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 our borrowing capacity under our revolving credit facility, and whenif warranted, the utilization of capital markets transactions from time to time.
Acquisitions and Divestitures
Bayswater Acquisition. In January 2018, we closed the Bayswater Acquisition for $201.8 million, subject to certain customary post-closing adjustments. See the footnote titled Business Combination to our condensed consolidated financial statements included elsewhere in this report for further details regarding the Bayswater Acquisition.
Utica Shale Divestiture. In March 2018, we completed the Utica Shale Divestiture for net cash proceeds of approximately $39 million, subject to certain customary post-closing adjustments. We do not believe the divestiture of these assets will have a material impact on our results of operations or reserves. See the footnote titled Properties and Equipment to our condensed consolidated financial statements included elsewhere in this report for further details regarding the Utica Shale Divestiture.
Operational Overview
During the three months ended March 31, 2017,2018, we continued to execute our strategic plan to grow production while preserving our financial strength and liquidity. During the three months endended March 31, 2017,2018, we operatedran three drilling rigs in the Wattenberg Field and two increasing to threebriefly ran four drilling rigs in the Delaware Basin.Basin while we swapped out a rig to focus on improved drill times before returning to three rigs. We did not haveexpect to maintain a drillingthree rig operatingcount in both the Utica ShaleWattenberg Field and the Delaware Basin during the period.remainder of 2018.
The following tabletables summarizes our drilling and completion activity for the three months ended March 31, 2017:2018:
|
| | | | | | | | | | | | | | | | | | |
| | Wattenberg Field | | Delaware Basin | | Total |
| | Gross | | Net | | Gross | | Net | | Gross | | Net |
In-process as of December 31, 2016 | | 76 |
| | 55.5 |
| | 5 |
| | 4.8 |
| | 81 |
| | 60.3 |
|
Wells spud during the period | | 42 |
| | 26.2 |
| | 7 |
| | 6.7 |
| | 49 |
| | 32.9 |
|
Wells turned-in-line to sales | | (43 | ) | | (32.7 | ) | | (3 | ) | | (3.0 | ) | | (46 | ) | | (35.7 | ) |
In-process as of March 31, 2017 | | 75 |
| | 49.0 |
| | 9 |
| | 8.5 |
| | 84 |
| | 57.5 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Wells Operated by PDC |
| | Wattenberg Field | | Delaware Basin | | Total |
| | Gross | | Net | | Gross | | Net | | Gross | | Net |
In-process as of December 31, 2017 | | 87 |
| | 80.1 |
| | 13 |
| | 12.2 |
| | 100 |
| | 92.3 |
|
Wells spud | | 35 |
| | 32.7 |
| | 8 |
| | 6.8 |
| | 43 |
| | 39.5 |
|
Acquired DUCs (1) | | 12 |
| | 11.0 |
| | — |
| | — |
| | 12 |
| | 11.0 |
|
Wells turned-in-line | | (29 | ) | | (26.8 | ) | | (7 | ) | | (6.5 | ) | | (36 | ) | | (33.3 | ) |
In-process as of March 31, 2018 | | 105 |
| | 97.0 |
| | 14 |
| | 12.5 |
| | 119 |
| | 109.5 |
|
|
| | | | | | | | | | | | | | | | | | |
| | Wells Operated by Others |
| | Wattenberg Field | | Delaware Basin | | Total |
| | Gross | | Net | | Gross | | Net | | Gross | | Net |
In-process as of December 31, 2017 | | 14 |
| | 2.6 |
| | 8 |
| | 1.0 |
| | 22 |
| | 3.6 |
|
Wells spud | | 22 |
| | 3.7 |
| | 3 |
| | 0.1 |
| | 25 |
| | 3.8 |
|
Acquired DUCs (operated at March 31, 2018) (1) | | (3 | ) | | (1.5 | ) | | — |
| | — |
| | (3 | ) | | (1.5 | ) |
Wells turned-in-line | | (4 | ) | | (0.3 | ) | | (2 | ) | | (0.7 | ) | | (6 | ) | | (1.0 | ) |
In-process as of March 31, 2018 | | 29 |
| | 4.5 |
| | 9 |
| | 0.4 |
| | 38 |
| | 4.9 |
|
______________
(1) Represents DUCs that we acquired with the Bayswater Acquisition in January 2018.
Our in-process wells represent wells that are in the process of being drilled and/or have been drilled and are waiting to be fractured and/or for gas pipeline connection. We do not have a practiceOur DUCs are generally completed and turned in-line to sales within three to nine months of inventorying our drilled but uncompleted wells. The majority of these in-process wells at each period end are drilled but not completed as we do not begin the completion process until the entire well pad is drilled. All appropriate costs incurred through the end of the period have been capitalized, while the capital investment to complete the wells will be incurred in the period in which the wells are completed.drilling.
20172018 Operational and Financial Outlook
WeAs previously announced thatdisclosed, we expect our production for the full year 20172018 to range between 30.038 MMBoe and 42 MMBoe, or approximately 104,000 Boe to 33.0 MMBoe. Based on the timing and estimated productivity of wells associated with our capital investment program, we115,000 Boe per day. We currently believe that our production will come in at levels in the top third of the range. We expect that approximately 4142 to 45 percent of our 20172018 production will be crude oil and approximately 19 to 22 percent will be NGLs, for total liquids of approximately 63 percent of our 2017 production.61 to 67 percent. Our 2018 capital forecast of between $725$850 million and $775$920 million is focused on continued developmentexecution in the core Wattenberg Field and the continued integration and development of the core Delaware Basin assets. with three drilling rigs and one completion crew in each basin throughout the year.
We addedbelieve that we maintain significant operational flexibility to control the third rigpace of our capital spending. As we execute our capital investment program, we continually monitor, among other things, commodity prices, development costs, midstream capacity, and offset and continuous drilling obligations. While we have started to experience service cost increases, certain drilling efficiencies are helping to offset these increases. Should commodity pricing or the operating environment deteriorate, we may determine that an adjustment to our development plan is appropriate. We believe we have ample opportunities to reduce capital spending in order to stay within the range of our capital investment plan, including but not limited to reducing the number of rigs being utilized in our drilling program and/or managing our completion schedule. This flexibility is more limited in the Delaware Basin sooner than originally anticipated and have adjusted the costs per
well in the Delaware Basin up from our initial estimates to reflect higher service costs during the first quarter of 2017. Our total capital investment program will vary based on the number of wells ultimately drilled and completed. Based on the current operating plan and current cost estimates, we expect that our 2017 capital investment program will be in the upper half of the range.given leasehold maintenance requirements.
Wattenberg Field. The 2017We are drilling in the Niobrara and Codell plays within the field and anticipate spudding and turning-in-line approximately 135 to 150 operated wells in 2018. Our 2018 capital investment forecast ofprogram is estimated to be approximately $470 million to $500 million in the Wattenberg Field, anticipates a three to four-rig drilling program based on our current commodity price outlook. Approximately $460 million of our 2017 capital investment programwhich approximately 90 percent is expectedanticipated to be allocated to development activities, comprised of approximately $440 million for ourinvested in operated drilling program and approximately $20 million for wells drilled and operated by others.completion activity. The remainder of the Wattenberg Field capital investment program is expected to be used for non-operated wells and miscellaneous well equipmentworkover and capital projects. Wells in the Wattenberg Field typically have productive horizons at a depth of approximately 6,500 to 7,500 feet below the surface. In 2017, we anticipate spudding approximately 139 and turning-in-line approximately 139 horizontal operated wells with lateral lengths of 4,000 to 10,000 feet.
Delaware Basin. Our 2017 investment forecast contemplates the operation of a two-rig to four-rig program in the Delaware Basin from time to time during the year. Total capital investment in the Delaware Basin in 2018 is estimated to be $290approximately $380 million to $420 million, of which approximately $225 million75 percent is allocated to both spud 32 and turn-in-line an estimated 23 wells. Ofapproximately 25 to 30 operated wells targeting the 23 planned turn-in-lines, 11 are expected to have laterals of approximately 10,000 horizontal feet with an estimated 70 to 75 completion stages per well. Similarly spaced completion stages are anticipated for the remaining 12 turn-in-lines. Wells in the Delaware Basin typically have productive horizons at a depth of approximately 9,000 to 11,000 feet below the surface.Wolfcamp formation. Based on the timing of our operations and the requirements to hold acreage, we may adapt our capital investment program to drill wells different from or in addition to those currently anticipated, as we are continuing to analyze the terms of the leaseholds related to our recent acquisitions of properties in the basin.relevant leases. We plan to invest approximately $30 million10 percent of our capital for leasing, non-operated capital, seismic, and technical studies, with an additional $35 millionapproximately 15 percent for midstream-related projects including gas connections, salt water disposal wells, and surface location infrastructure.
We will incur costs associated with the purchase36
projects, including oil and pilot hole exploratory workgas gathering systems and water supply and disposal systems. In addition, we are in the Delaware Basin, which will be accounted for as exploration, geologic, and geophysical expense. We anticipate that this will result in approximately $5 million to $10 millionprocess of exploration expense in 2017.
Utica Shale. As a result of our evaluation ofevaluating our strategic alternatives with respect to our Utica Shale position,midstream assets in the Delaware Basin.
Financial Guidance.
The following table provides projected financial guidance for the year ended December 31, 2018:
|
| | | | | | | |
| Low | | High |
Operating Expenses |
Lease operating expenses ($/Boe) | $ | 2.75 |
| | $ | 3.00 |
|
Transportation, gathering, and processing expenses ("TGP") ($/Boe) | $ | 0.60 |
| | $ | 0.80 |
|
Production taxes (% of crude oil, natural gas, and NGLs sales) | 6 | % | | 8 | % |
General and administrative expense ($/Boe) | $ | 3.40 |
| | $ | 3.70 |
|
| | | |
Estimated Price Realizations (% of NYMEX, excludes TGP) |
Crude oil | 91% | | 95% |
Natural gas | 55% | | 60% |
NGLs | 30% | | 35% |
Colorado Ballot Initiative Update
As previously disclosed, certain interest groups opposed to oil and natural gas development generally, and hydraulic fracturing in particular, from time to time advance various ballot initiatives in Colorado that, if implemented, would significantly limit or prevent oil and natural gas development in the state. See “Item 1A. Risk Factors - Risks Relating to Our Business and the Industry-Changes in laws and regulations applicable to us could increase our costs, impose additional operating restrictions or have other adverse effects on us” in our Annual Report on Form 10-K for the year ended December 31, 2017. In particular, we expectare aware of a potential “setback” initiative that would require all new oil and gas development facilities, including wells, to divest these properties during 2017. As of March 31, 2017, these assets didbe located at least 2,500 feet away from any occupied structures or other designated areas. Another initiative would increase severance taxes on oil and natural gas production in Colorado. We do not know whether either initiative will meet the accounting criteria to be classified as held for sale; therefore, they continuesignature requirements to be included in properties and equipment on our condensed consolidated balance sheets. We will continue to evaluate the classification of these assets in future quarters. Minimal capital is expected to be committed to our Utica Shale assets in 2017.November ballot.
26
Results of Operations
Summary Operating Results
The following table presents selected information regarding our operating results:
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2017 | | 2016 | | Percentage Change | 2018 | | 2017 | | Percentage Change |
| (dollars in millions, except per unit data) | (dollars in millions, except per unit data) |
Production | | | | | | | | | | |
Crude oil (MBbls) | 2,508 |
| | 1,908 |
| | 31.5 | % | 3,798 |
| | 2,508 |
| | 51.4 | % |
Natural gas (MMcf) | 15,584 |
| | 10,678 |
| | 45.9 | % | 19,587 |
| | 15,584 |
| | 25.7 | % |
NGLs (MBbls) | 1,543 |
| | 882 |
| | 74.8 | % | 1,846 |
| | 1,543 |
| | 19.6 | % |
Crude oil equivalent (MBoe) | 6,648 |
| | 4,570 |
| | 45.5 | % | 8,908 |
| | 6,648 |
| | 34.0 | % |
Average Boe per day | 73,866 |
| | 50,216 |
| | 47.1 | % | |
Average Boe per day (Boe) | | 98,980 |
| | 73,866 |
| | 20.1 | % |
Crude Oil, Natural Gas and NGLs Sales | | | | | | | | | | |
Crude oil | $ | 123.0 |
| | $ | 54.0 |
| | 127.8 | % | $ | 226.4 |
| | $ | 123.0 |
| | 84.1 | % |
Natural gas | 36.9 |
| | 14.9 |
| | 147.7 | % | 38.6 |
| | 36.9 |
| | 4.6 | % |
NGLs | 29.8 |
| | 6.5 |
| | 358.5 | % | 40.2 |
| | 29.8 |
| | 34.9 | % |
Total crude oil, natural gas, and NGLs sales | $ | 189.7 |
| | $ | 75.4 |
| | 151.6 | % | $ | 305.2 |
| | $ | 189.7 |
| | 60.9 | % |
| | | | | | | | | | |
Net Settlements on Commodity Derivatives (1) | | | | | | | | | | |
Crude oil | $ | (3.2 | ) | | $ | 53.3 |
| | * |
| $ | (27.0 | ) | | $ | (3.2 | ) | | * |
|
Natural gas | 3.7 |
| | 13.5 |
| | (72.6 | )% | 2.7 |
| | 3.7 |
| | (27.0 | )% |
NGLs (propane portion) | | (1.7 | ) | | — |
| | * |
|
Total net settlements on derivatives | $ | 0.5 |
| | $ | 66.8 |
| | (99.3 | )% | $ | (26.0 | ) | | $ | 0.5 |
| | * |
|
| | | | | | | | | | |
Average Sales Price (excluding net settlements on derivatives) | | | | | | Average Sales Price (excluding net settlements on derivatives) | | |
Crude oil (per Bbl) | $ | 49.04 |
| | $ | 28.29 |
| | 73.3 | % | $ | 59.62 |
| | $ | 49.04 |
| | 21.6 | % |
Natural gas (per Mcf) | 2.37 |
| | 1.39 |
| | 70.5 | % | 1.97 |
| | 2.37 |
| | (16.9 | )% |
NGLs (per Bbl) | 19.29 |
| | 7.37 |
| | 161.7 | % | 21.80 |
| | 19.29 |
| | 13.0 | % |
Crude oil equivalent (per Boe) | 28.53 |
| | 16.49 |
| | 73.0 | % | 34.26 |
| | 28.53 |
| | 20.1 | % |
| | | | | | | | | | |
Average Costs and Expenses (per Boe) | | | | | | | | | | |
Lease operating expenses | $ | 2.98 |
| | $ | 3.35 |
| | (11.0 | )% | $ | 3.33 |
| | $ | 2.98 |
| | 11.7 | % |
Production taxes | 1.87 |
| | 0.89 |
| | 110.1 | % | 2.26 |
| | 1.87 |
| | 20.9 | % |
Transportation, gathering and processing expenses | 0.89 |
| | 0.88 |
| | 1.1 | % | |
Transportation, gathering, and processing expenses | | 0.82 |
| | 0.89 |
| | (7.9 | )% |
General and administrative expense | 3.96 |
| | 4.98 |
| | (20.5 | )% | 4.01 |
| | 3.96 |
| | 1.3 | % |
Depreciation, depletion and amortization | 16.44 |
| | 21.31 |
| | (22.9 | )% | |
Depreciation, depletion, and amortization | | 14.23 |
| | 16.44 |
| | (13.4 | )% |
| | | | | | | | | | |
Lease Operating Expenses by Operating Region (per Boe) | | | | | | Lease Operating Expenses by Operating Region (per Boe) | | | | |
Wattenberg Field | $ | 2.66 |
| | $ | 3.40 |
| | (21.8 | )% | $ | 3.02 |
| | $ | 2.66 |
| | 13.5 | % |
Delaware Basin | 6.48 |
| | — |
| | * |
| 4.44 |
| | 6.48 |
| | (31.5 | )% |
Utica Shale | 1.60 |
| | 2.50 |
| | (36.0 | )% | |
Utica Shale (1) | | 3.46 |
| | 1.60 |
| | 116.3 | % |
| |
* | Percentage change is not meaningful. |
Amounts may not recalculate due to rounding.
_______________________________
| |
(1) | Represents net settlements on derivatives related to crude oil, natural gas and natural gas basis. |
(1) In March 2018, we completed the sale of our Utica Shale properties.
Crude Oil, Natural Gas, and NGLs Sales
For the three months ended March 31, 2017,2018, crude oil, natural gas, and NGLs sales revenue increased compared to the three months ended March 31, 20162017 due to the following (in millions):
| | | | Three Months Ended |
| | March 31, 2018 |
| | | | (in millions) |
Increase in production | $ | 28.7 |
| $ | 78.6 |
|
Increase in average crude oil price | 52.0 |
| 40.2 |
|
Increase in average natural gas price | 15.2 |
| |
Decrease in average natural gas price | | (7.9 | ) |
Increase in average NGLs price | 18.4 |
| 4.6 |
|
Total increase in crude oil, natural gas and NGLs sales revenue | $ | 114.3 |
| $ | 115.5 |
|
Crude Oil, Natural Gas, and NGLs Production
The following tables presenttable presents crude oil, natural gas, and NGLs production. Our acquisitions of assets in the Delaware Basin closed in December 2016; therefore, there is no comparative data for the quarter ended March 31, 2016:
| | | | Three Months Ended March 31, | | Three Months Ended March 31, |
Production by Operating Region | | 2017 | | 2016 | | Percentage Change | | 2018 | | 2017 | | Percentage Change |
Crude oil (MBbls) | | | | | | | | | | | | |
Wattenberg Field | | 2,142 |
| | 1,818 |
| | 17.8 | % | | 2,881 |
| | 2,142 |
| | 34.5 | % |
Delaware Basin | | 275 |
| | — |
| | * |
| | 871 |
| | 275 |
| | * |
|
Utica Shale | | 91 |
| | 90 |
| | 2.3 | % | |
Utica Shale (1) | | | 46 |
| | 91 |
| | (49.5 | )% |
Total | | 2,508 |
| | 1,908 |
| | 31.5 | % | | 3,798 |
| | 2,508 |
| | 51.4 | % |
Natural gas (MMcf) | | | | | | | | | | | | |
Wattenberg Field | | 13,714 |
| | 10,170 |
| | 34.8 | % | | 15,524 |
| | 13,714 |
| | 13.2 | % |
Delaware Basin | | 1,246 |
| | — |
| | * |
| | 3,649 |
| | 1,246 |
| | * |
|
Utica Shale | | 624 |
| | 508 |
| | 23.0 | % | |
Utica Shale (1) | | | 414 |
| | 624 |
| | (33.7 | )% |
Total | | 15,584 |
| | 10,678 |
| | 45.9 | % | | 19,587 |
| | 15,584 |
| | 25.7 | % |
NGLs (MBbls) | | | | | | | | | | | | |
Wattenberg Field | | 1,358 |
| | 840 |
| | 61.7 | % | | 1,428 |
| | 1,358 |
| | 5.2 | % |
Delaware Basin | | 131 |
| | — |
| | * |
| | 383 |
| | 131 |
| | * |
|
Utica Shale | | 54 |
| | 42 |
| | 27.3 | % | |
Utica Shale (1) | | | 35 |
| | 54 |
| | (35.2 | )% |
Total | | 1,543 |
| | 882 |
| | 74.8 | % | | 1,846 |
| | 1,543 |
| | 19.6 | % |
Crude oil equivalent (MBoe) | | | | | | | | | | | | |
Wattenberg Field | | 5,786 |
| | 4,354 |
| | 32.9 | % | | 6,896 |
| | 5,786 |
| | 19.2 | % |
Delaware Basin | | 613 |
| | — |
| | * |
| | 1,862 |
| | 613 |
| | * |
|
Utica Shale | | 249 |
| | 216 |
| | 15.3 | % | |
Utica Shale (1) | | | 150 |
| | 249 |
| | (39.8 | )% |
Total | | 6,648 |
| | 4,570 |
| | 45.5 | % | | 8,908 |
| | 6,648 |
| | 34.0 | % |
Average crude oil equivalent per day (Boe) | | Average crude oil equivalent per day (Boe) | | | | |
Wattenberg Field | | | 76,623 |
| | 64,288 |
| | 19.2 | % |
Delaware Basin | | | 20,690 |
| | 6,811 |
| | * |
|
Utica Shale (1) | | | 1,667 |
| | 2,767 |
| | (39.8 | )% |
Total | | | 98,980 |
| | 73,866 |
| | 34.0 | % |
* Percentage change is not meaningful.
Amounts may not recalculate due to rounding.
_________________
(1) In March 2018, we completed the sale of our Utica Shale properties.
The following table presents our crude oil, natural gas, and NGLs production ratio by operating region:
|
| | | | | | | | |
Three Months Ended March 31, 2018 |
| | | | | | | | |
| | Crude Oil | | Natural Gas | | NGLs | | Total |
Wattenberg Field | | 42% | | 37% | | 21% | | 100% |
Delaware Basin | | 47% | | 32% | | 21% | | 100% |
| | | | | | | | |
Three Months Ended March 31, 2017 |
| | | | | | | | |
| | Crude Oil | | Natural Gas | | NGLs | | Total |
Wattenberg Field | | 37% | | 40% | | 23% | | 100% |
Delaware Basin | | 45% | | 34% | | 21% | | 100% |
From timeWattenberg Field. In the Wattenberg Field, we rely on third-party midstream service providers to time,construct gathering, compression, and processing facilities to keep pace with our and the overall field's natural gas production growth. During the three months ended March 31, 2018, our production was adversely affectedimpacted by high line pressures in the naturalon gas gathering facilities, primarily due to increases in the Wattenberg Field. This situation improved significantly in 2015 as a result of the investment in additional field processing by the primary midstream service provider in the basin.field-wide production volumes, gathering line freezes that occur more often at higher line pressures, and unexpected facility downtime. Line pressures did not materially affect our production during the threemonths endedMarch 31, 2017 or 2016 due to the aforementioned investment by our midstream providers and a decrease in development activity by certain producers in the Wattenberg Field.2017. During the threemonths endedMarch 31, 2018 and 2017, and 2016, approximately 9197 percent and 8891 percent, respectively, of our production in the Wattenberg Field was delivered from horizontal wells, with the remaining production coming from vertical wells. HorizontalThe horizontal wells typicallyare less prone to curtailments than the vertical wells because they are newer and have greater producing capacity and higher wellformation pressures and therefore tend to be more resilient to gas system pressure issues; however, all of our wells in the negative impactsfield are currently experiencing some impact. We expect to continue to operate in a constrained environment into the third quarter of high line pressures as compared2018, at which time additional processing capacity is scheduled to vertical wells.be brought into operation by DCP Midstream, LP ("DCP").
We rely on our third-party midstream service providers to construct compression, gathering, and processing facilities to keep pace with our and the overall field's production growth. We anticipate gathering system pressures to vary throughout the year, with increases coinciding with the warmer summer months and expected field-wide production increases. We also expect that with our increased production and the development activities of other producers in the region,
pressures will increase somewhat during 2017. Accordingly, we have reflected estimates of this impact in our forecast range for production. In order to manage this situation, we, along with other operators in the Wattenberg Field, continue to work closely with our third-party midstream providers in an effort to ensure that adequate midstream system capacity is available going forward as evidenced byin the Wattenberg Field. We, along with other operators, have made a recent commitment with DCP to support its construction of DCP Midstream, LP ("DCP") to buildtwo additional processing facilities with associated gathering and processingcompression in the field. This expansion of gathering and processing facilities isThese expansions are expected to improve natural gas gathering pipelines and processing facilities andincrease DCP's system capacity, assist in the control of line pressures in the Wattenberg Field. In December 2016, in anticipation of our future drilling activities in the Wattenberg Field, we entered into a facilities expansion agreement with DCP to expand and improveon its natural gas gathering pipelinesfacilities, and processing facilities.reduce production curtailments in the field. We will be bound to the incremental volume requirements in this agreementthese agreements for a period of seven years beginning on the first day of the calendar month after the actual in-service datedates of the plant,plants, which is estimatedare currently scheduled to be currently September 30, 2018.occur in the third quarter of 2018 and in the second quarter of 2019, respectively. The agreement requiresagreements impose a baseline volume commitment. We are also required for the first three years of the contract tocommitment and guarantee a certain target profit margin to DCP on those volumes during the midstream provider on these volumes sold.initial three years of the contracts. Under our current drilling plans and in the current commodity pricing environment, we expect to meet both the baseline and incremental volume commitments. Usingcommitments, and we believe that the NYMEX forward pricing strip at March 31, 2017, thecontractual target profit margin wouldwill be achieved without an additional payment from us. See the footnote titled Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this report for additional details regarding the agreement.agreements. In addition, we have begun early discussions with DCP with respect to further increasing its processing facilities in the Wattenberg Field. We also continue to work with our other midstream service providers in the field in an effort to ensure all of the existing infrastructure is fully utilized and that all options for system expansions are evaluated and implemented, where possible. The ultimate timing and availability of adequate infrastructure is not within our control and if our midstream provider'sservice providers' construction projects are delayed, we could experience higher gathering line pressures that maywould negatively impact our ability to fulfillmeet our growth plans. Total system infrastructure needs may also be affected by a number of factors, including potential increases in production from the Wattenberg Field and warmer than expected weather.targets.
Delaware Basin. Due to prolific development and the resulting increased production in the Delaware Basin, product takeaway infrastructure downstream of in-field gathering and processing is nearing capacity. We are dependent upon third parties to construct additional facilities. This has the potential to lead to near term production constraints until new capacity is added, which we expect to occur in the second half of 2019. As a result, our production may be negatively impacted from time to time. We have the option to transport a portion of our crude oil production via truck or rail; however, doing so would decrease the realized prices we receive. A current trucking shortage in the basin could result in increased differentials. In May 2018, we executed a firm sales agreement for a significant portion of our Delaware Basin crude oil production with the marketing division of a large international energy company. The agreement is effective June 1, 2018 and runs through December 31, 2023 and provides for firm physical takeaway for approximately 85 percent of our forecasted 2018 and 2019 Delaware Basin crude oil volumes. The agreement is expected to provide us with price diversification through realization of export market pricing via a Corpus Christi terminal and exposure to Brent-weighted prices. Taking the effect of this agreement into account, we currently expect to realize between 88 and 92 percent of NYMEX pricing for our Delaware Basin production through 2018 and 2019, after including transportation, gathering, and processing expenses.
Crude Oil, Natural Gas, and NGLs Pricing
Our results of operations depend upon many factors. Key factors particularlyinclude the price of crude oil, natural gas, and NGLs and our ability to market our production effectively. Crude oil, natural gas, and NGLNGLs prices have a high degree of volatility and our realizations can change substantially. Our realizedsales prices for crude oil natural gas, and NGLs increased significantly during the first quarter of 2017three months ended March 31, 2018 compared to the first quarter of 2016.three months ended March 31, 2017. NYMEX average daily crude oil prices increased 21 percent and NYMEX first-of-the-month natural gas prices increased 55 decreased 12percent and 59 percent, respectively, as compared to the first quarter of 2016.three months ended March 31, 2017.
The following tables present weighted-average sales priceprices of crude oil, natural gas, and NGLs for the periods presented. Our acquisitions of assets in the Delaware Basin closed in December 2016; therefore, there is no comparative data for the quarter ended March 31, 2016:
|
| | | | | | | | | | | |
| | Three Months Ended March 31, |
Weighted-Average Realized Sales Price by Operating Region | | | | | | Percentage Change |
(excluding net settlements on derivatives) | | 2017 | | 2016 | |
Crude oil (per Bbl) | | | | | | |
Wattenberg Field | | $ | 49.12 |
| | $ | 28.37 |
| | 73.1 | % |
Delaware Basin | | 49.28 |
| | — |
| | * |
|
Utica Shale | | 46.55 |
| | 26.69 |
| | 74.4 | % |
Weighted-average price | | 49.04 |
| | 28.29 |
| | 73.3 | % |
Natural gas (per Mcf) | | | | | | |
Wattenberg Field | | $ | 2.38 |
| | $ | 1.39 |
| | 71.2 | % |
Delaware Basin | | 1.98 |
| | — |
| | * |
|
Utica Shale | | 2.98 |
| | 1.43 |
| | 108.4 | % |
Weighted-average price | | 2.37 |
| | 1.39 |
| | 70.5 | % |
NGLs (per Bbl) | | | | | | |
Wattenberg Field | | $ | 18.64 |
| | $ | 7.18 |
| | 159.6 | % |
Delaware Basin | | 22.58 |
| | — |
| | * |
|
Utica Shale | | 27.75 |
| | 11.24 |
| | 146.9 | % |
Weighted-average price | | 19.29 |
| | 7.37 |
| | 161.7 | % |
Crude oil equivalent (per Boe) | | | | | | |
Wattenberg Field | | $ | 28.19 |
| | $ | 16.49 |
| | 71.0 | % |
Delaware Basin | | 30.93 |
| | — |
| | * |
|
Utica Shale | | 30.55 |
| | 16.60 |
| | 84.0 | % |
Weighted-average price | | 28.53 |
| | 16.49 |
| | 73.0 | % |
* Percentage change is not meaningful. |
| | | | | | | | | | | |
| | Three Months Ended March 31, |
Weighted-Average Realized Sales Price by Operating Region | | | | | | Percentage Change |
(excluding net settlements on derivatives) | | 2018 | | 2017 | |
Crude oil (per Bbl) | | | | | | |
Wattenberg Field | | $ | 59.13 |
| | $ | 49.12 |
| | 20.4 | % |
Delaware Basin | | 61.34 |
| | 49.28 |
| | 24.5 | % |
Utica Shale (1) | | 58.10 |
| | 46.55 |
| | 24.8 | % |
Weighted-average price | | 59.62 |
| | 49.04 |
| | 21.6 | % |
Natural gas (per Mcf) | | | | | | |
Wattenberg Field | | $ | 1.92 |
| | $ | 2.38 |
| | (19.3 | )% |
Delaware Basin | | 2.10 |
| | 1.98 |
| | 6.1 | % |
Utica Shale (1) | | 2.68 |
| | 2.98 |
| | (10.1 | )% |
Weighted-average price | | 1.97 |
| | 2.37 |
| | (16.9 | )% |
NGLs (per Bbl) | | | | | | |
Wattenberg Field | | $ | 20.14 |
| | $ | 18.64 |
| | 8.0 | % |
Delaware Basin | | 27.76 |
| | 22.58 |
| | 22.9 | % |
Utica Shale (1) | | 24.29 |
| | 27.75 |
| | (12.5 | )% |
Weighted-average price | | 21.80 |
| | 19.29 |
| | 13.0 | % |
Crude oil equivalent (per Boe) | | | | | | |
Wattenberg Field | | $ | 33.18 |
| | $ | 28.19 |
| | 17.7 | % |
Delaware Basin | | 38.52 |
| | 30.93 |
| | 24.5 | % |
Utica Shale (1) | | 30.98 |
| | 30.55 |
| | 1.4 | % |
Weighted-average price | | 34.26 |
| | 28.53 |
| | 20.1 | % |
Amounts may not recalculate due to rounding.
_________________
(1) In March 2018, we completed the sale of our Utica Shale properties.
Crude oil, natural gas, and NGLs revenues are recognized when we have transferred control of crude oil, natural gas, or NGLs production to the purchaser. We consider the transfer of control to have occurred when the purchaser has the ability to direct the use of, and obtain substantially all of the remaining benefits, from the crude oil, natural gas, or NGLs production. We record sales revenue based on an estimate of the volumes delivered at estimated prices as determined by the applicable sales agreement. We estimate our sales volumes based on company-measured volume readings. We then adjust our crude oil, natural gas, and NGLs sales in subsequent periods based on the data received from our purchasers that reflects actual volumes and prices received.
Our crude oil, natural gas, and NGLs sales are recorded underusing either the “net-back” or "gross" method of accounting, depending upon the related purchase agreement. We use the net-back method when control of accounting forthe crude oil, natural gas, andor NGLs as well as the majority of our crude oil production from the Wattenberg Field, for all commodities in the Delaware Basin, and for crude oil from the Utica Shale, ashas been transferred to the purchasers of these commodities also providethat are providing transportation, gathering, andor processing services. In these situations, the purchaser pays us proceeds based on a percent of the proceeds or have fixed our sales price at index less a specified deduction. We sell our commodities at the wellhead, or what is equivalent to the wellhead in situations where we gather multiple wells into larger pads, and collect a price and recognize revenues based on the wellhead sales price, as transportation and processing costs downstream of the wellhead are incurred by the purchaser and therefore embedded in the wellhead price.deductions. The net-back method results in the recognition of a net sales price that is lower than the indices for which the production is based because the operating costs and profit of the midstream facilities are embedded in the net price we earn. are paid.
We use the gross method of accounting for Wattenberg Fieldwhen control of the crude oil, delivered through the White Cliffs and Saddle Butte pipelines, and for natural gas, andor NGLs sales relatedis not transferred to production from the Utica Shale, as the purchasers doand the purchaser does not provide transportation, gathering, or processing services as a function of the price we earn.receive. Rather, we contract separately with the midstream providerproviders for the applicable transport and processing based on a per unit basis. Under this method, we recognize revenues based on the gross selling price and recognize transportation, gathering, and processing expenses.
We adopted a new revenue recognition accounting standard effective January 1, 2018. Under the guidance of the new revenue recognition standard, certain crude oil sales in the Wattenberg Field that were recognized using the gross method prior to the adoption of the new revenue standard will be recognized using the net-back method. In the Delaware Basin, certain crude oil and natural gas sales that were recognized using the gross method prior to the adoption of the new revenue standard will be recognized using the net-back method. If we had adopted the standard on January 1, 2017, we estimate that the average realization percentage before transportation, gathering, and processing expenses for the three months ended March 31, 2017 would have been 93 percent, 71 percent, and 37 percent for crude oil, natural gas, and NGLs, respectively, as $2.5 million in expenses currently recorded in transportation, gathering, and processing expense on our condensed consolidated statements of operations for that period would, in that case, have been reflected as a reduction to the sales price. However, the net realized price would remain unchanged.
As discussed above, we enter into agreements for the sale and transportation, gathering, and processing of our production, the terms of which can result in variances in the per unit realized prices that we receive for our crude oil, natural gas and NGLs. Information related to the components and classifications in the condensed consolidated statements of operations is shown below. For crude oil, the average NYMEX prices shown below are based upon average daily prices throughout each month and our natural gas average NYMEX pricing is based upon first-of-the-month index prices as this is howthe method used to sell the majority of each of these commodities are sold pursuant to terms of the respective sales agreements. For NGLs, we use the NYMEX crude oil price as a reference for presentation purposes. The average realized price both before and after transportation, gathering, and processing expenses shown in the table below represents our approximate composite per barrel price for NGLs.
|
| | | | | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2018 | | Average NYMEX Price | | Average Realized Price Before Transportation, Gathering and Processing Expenses | | Average Realization Percentage Before Transportation, Gathering and Processing Expenses | | Average Transportation, Gathering and Processing Expenses | | Average Realized Price After Transportation, Gathering and Processing Expenses | | Average Realization Percentage After Transportation, Gathering, and Processing Expenses |
Crude oil (per Bbl) | | $ | 62.87 |
| | $ | 59.62 |
| | 95 | % | | $ | 0.67 |
| | $ | 58.95 |
| | 94 | % |
Natural gas (per MMBtu) | | 3.00 |
| | 1.97 |
| | 66 | % | | 0.22 |
| | 1.75 |
| | 58 | % |
NGLs (per Bbl) | | 62.87 |
| | 21.80 |
| | 35 | % | | 0.24 |
| | 21.56 |
| | 34 | % |
Crude oil equivalent (per Boe) | | 46.43 |
| | 34.26 |
| | 74 | % | | 0.82 |
| | 33.44 |
| | 72 | % |
| | | | | | | | | | | | |
For the three months ended March 31, 2017 | | Average NYMEX Price | | Average Realized Price Before Transportation, Gathering and Processing Expenses | | Average Realization Percentage Before Transportation, Gathering and Processing Expenses | | Average Transportation, Gathering and Processing Expenses | | Average Realized Price After Transportation, Gathering and Processing Expenses | | Average Realization Percentage After Transportation, Gathering, and Processing Expenses |
Crude oil (per Bbl) | | $ | 51.92 |
| | $ | 49.04 |
| | 94 | % | | $ | 1.58 |
| | $ | 47.46 |
| | 91 | % |
Natural gas (per MMBtu) | | 3.32 |
| | 2.37 |
| | 71 | % | | 0.06 |
| | 2.31 |
| | 70 | % |
NGLs (per Bbl) | | 51.92 |
| | 19.29 |
| | 37 | % | | 0.22 |
| | 19.07 |
| | 37 | % |
Crude oil equivalent (per Boe) | | 39.42 |
| | 28.53 |
| | 72 | % | | 0.89 |
| | 27.64 |
| | 70 | % |
|
| | | | | | | | | | | | | | | | | | | |
For the three months ended March 31, 2017 | | Average NYMEX Price | | Average Realization Percentage Before Transportation, Gathering and Processing Expenses | | Average Realized Price Before Transportation, Gathering and Processing Expenses | | Average Transportation, Gathering and Processing Expenses | | Average Realized Price After Transportation, Gathering and Processing Expenses |
Crude oil (per Bbl) | | $ | 51.92 |
| | 94 | % | | $ | 49.04 |
| | $ | 1.58 |
| | $ | 47.46 |
|
Natural gas (per MMBtu) | | 3.32 |
| | 71 | % | | 2.37 |
| | 0.06 |
| | 2.31 |
|
NGLs (per Bbl) | | 51.92 |
| | 37 | % | | 19.29 |
| | 0.22 |
| | 19.07 |
|
Crude oil equivalent (per Boe) | | 39.42 |
| | 72 | % | | 28.53 |
| | 0.89 |
| | 27.64 |
|
| | | | | | | | | | |
For the three months ended March 31, 2016 | | Average NYMEX Price | | Average Realization Percentage Before Transportation, Gathering and Processing Expenses | | Average Realized Price Before Transportation, Gathering and Processing Expenses | | Average Transportation, Gathering and Processing Expenses | | Average Realized Price After Transportation, Gathering and Processing Expenses |
Crude oil (per Bbl) | | $ | 33.45 |
| | 85 | % | | $ | 28.29 |
| | $ | 1.55 |
| | $ | 26.74 |
|
Natural gas (per MMBtu) | | 2.09 |
| | 67 | % | | 1.39 |
| | 0.07 |
| | 1.32 |
|
NGLs (per Bbl) | | 33.45 |
| | 22 | % | | 7.37 |
| | 0.31 |
| | 7.06 |
|
Crude oil equivalent (per Boe) | | 25.31 |
| | 65 | % | | 16.49 |
| | 0.88 |
| | 15.61 |
|
Commodity Price Risk Management, Net
We use commodity derivative instruments to manage fluctuations in crude oil, natural gas, and NGLs prices. We have in place a variety of collars, fixed-price swaps, and basis swaps on a portion of our estimated crude oil, natural gas, and propane production. Because we sell all of our crude oil, natural gas, and NGLs production at prices related to the indexes inherent in our underlying derivative instruments, we ultimately realize value related to our collars of no less than the floor and no more than the ceiling and, forFor our commodity swaps, we ultimately realize the fixed price value related to the swaps. See the footnote titled Commodity Derivative Financial Instruments to our condensed consolidated financial statements included elsewhere in this report for a detailed presentation of our derivative positions as of March 31, 2017.2018.
Commodity price risk management, net, includes cash settlements upon maturity of our derivative instruments, andas well as the change in fair value of unsettled commodity derivatives related to our crude oil, natural gas, and propane production. Commodity price risk management, net, does not include derivative transactions related to our gas marketing, which are included in other income and other expenses.
Net settlements of commodity derivative instruments are based on the difference between the crude oil, natural gas, and propane 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 value 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 corresponding impact of settlement of the commodity derivative instruments during the period is included in net settlements for the period. The net change in fair value of unsettled commodity derivatives during the period is primarily related to shifts in the crude oil, natural gas, and NGLs forward curves and changes in certain differentials.
The following table presents net settlements and net change in fair value of unsettled derivatives included in commodity price risk management, net:
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
| (in millions) | (in millions) |
Commodity price risk management gain, net: | | | | |
Commodity price risk management gain (loss), net: | | | | |
Net settlements of commodity derivative instruments: | | | | | | |
Crude oil fixed price swaps and collars | $ | (3.2 | ) | | $ | 53.3 |
| $ | (26.8 | ) | | $ | (3.2 | ) |
Crude oil basis protection swaps | | (0.2 | ) | | — |
|
Natural gas fixed price swaps and collars | 3.6 |
| | 13.5 |
| 0.1 |
| | 3.6 |
|
Natural gas basis protection swaps | 0.1 |
| | — |
| 2.6 |
| | 0.1 |
|
NGLs (propane portion) fixed price swaps | | (1.7 | ) | | — |
|
Total net settlements of commodity derivative instruments | 0.5 |
| | 66.8 |
| (26.0 | ) | | 0.5 |
|
Change in fair value of unsettled commodity derivative instruments: | | | | | | |
Reclassification of settlements included in prior period changes in fair value of commodity derivative instruments | 9.1 |
| | (58.9 | ) | 20.3 |
| | 9.1 |
|
Crude oil fixed price swaps and collars | 56.2 |
| | (4.2 | ) | |
Crude oil fixed price swaps, collars, and rollfactors | | (52.6 | ) | | 56.2 |
|
Natural gas fixed price swaps and collars | 11.2 |
| | 7.8 |
| (0.8 | ) | | 11.2 |
|
Natural gas basis swaps | 3.3 |
| | (0.4 | ) | |
Propane fixed price swaps | 0.4 |
| | — |
| |
Natural gas basis protection swaps | | 10.6 |
| | 3.3 |
|
NGLs (propane portion) fixed price swaps | | 1.3 |
| | 0.4 |
|
Net change in fair value of unsettled commodity derivative instruments | 80.2 |
| | (55.7 | ) | (21.2 | ) | | 80.2 |
|
Total commodity price risk management gain, net | $ | 80.7 |
| | $ | 11.1 |
| |
Total commodity price risk management gain (loss), net | | $ | (47.2 | ) | | $ | 80.7 |
|
Net settlements of commodity derivatives decreased significantly for the three months ended March 31, 20172018 as compared to the three months ended March 31, 2016. We entered into agreements for the derivative instruments that settled throughout 2016 prior to commodity prices becoming depressed in late 2014. Substantially all of these agreements had settled by the end of 2016. Net settlements for the three months ended March 31, 2017 reflect derivative instruments entered into since mid-2014 which approximate recent realized prices. Based upon the forward strip pricing at March 31, 2017, we expect that settlements will be substantially lower on a relative basis as compared to periods in 2016.2017.
Lease Operating Expenses
Lease operating expenses decreased 11 percent to $2.98 per Boe duringwere $29.6 million in the three months ended March 31, 2017,2018 compared to $3.35 per Boe during$19.8 million in the three months ended March 31, 2016.The decrease in lease operating expense per Boe was predominately driven by the production growth of 46 percent, which was partially offset by a higher lease operating expense of $6.48 per Boe in the Delaware Basin.2017. Aggregate lease operating expenses during the three months ended March 31, 20172018 increased $4.5$9.8 million as compared to the three months ended March 31, 2016, primarily due to increases of $3.7 million related to operations in the Delaware Basin, $1.2$1.9 million for payroll and employee benefits duerelated to a 13increases in headcount, $1.7
million related to midstream expense in the Delaware Basin, $1.1 million related to additional compressor rentals, $0.9 million for environmental remediation expenses, $0.8 million related to chemical treatment programs, $0.6 million for expenses related to non-operated wells, $0.6 million related to oil inventory valuation, $0.5 million for produced water disposal, and $0.3 million for increased workover projects. Lease operating expense per Boe increased by 12 percent average increase in headcountto $3.33 for the three months ended March 31, 2017, as compared to2018 from $2.98 for the three months ended March 31, 2016, and $0.7 million for workover projects. We expect continued increases in our headcount through the remainder of 2017 as we build out our Delaware Basin production team. We expect much of this increased cost of personnel will be offset by increases in our production. These increases were partially offset by a decrease of $1.2 million related to environmental project costs.2017.
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. Production taxesFrom time to time, there are comprised mainly of severance tax and ad valorem tax. There are a number of adjustments to the statutory rates for these taxes based onupon certain credits that are determined based onupon activity levels and relative commodity prices from year-to-year. The $8.3$7.8 million increase in production taxes during the three months ended March 31, 2017,2018 compared to the three months ended March 31, 2016 was2017 were primarily related to the 15261 percent increase in crude oil, natural gas, and NGLs salessales.
Transportation, Gathering, and Processing Expenses
Transportation, gathering, and processing expenses increased $1.4 million during the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was mainly attributable to a $1.3 million increase in oil transportation costs due to additional volumes delivered through pipelines in the Wattenberg Field and an increase of $2.8 million related to natural gas gathering and transportation operations in the Delaware Basin, partially offset by a $2.8 million decrease resulting from the adoption of the new revenue standard on January 1, 2018 whereby we record certain portions of our effective tax ratecurrent transportation, gathering, and processing expense as a reduction to approximately seven percentthe sales price. Transportation, gathering, and processing expenses per Boe decreased to $0.82 for the three months ended March 31, 2017 as compared to six percent for the three months ended March 31, 2016. These increases were partially offset by year-end return adjustments.Production taxes per Boe increased to $1.87 for the three months ended March 31, 20172018 compared to $0.89 for the three months ended March 31, 2016.2017.
Transportation, Gathering,As discussed in Crude Oil, Natural Gas, and Processing Expenses
NGLs PricingThe $1.9 million increase in, whether transportation, gathering, and processing expensescosts are presented separately or are reflected as a reduction to net revenue is a function of the terms of the relevant marketing contract.
Exploration, Geologic, and Geophysical Expense
Exploration, geological and geophysical expense increased $1.7 million to $2.7 million during the three months ended March 31, 2017,2018 compared to the three months ended March 31, 2016, was mainly attributable to a $1.0 million increase in oil transportation costs due to increased volumes delivered through the Saddle Butte pipeline in the Wattenberg Field and a $0.7 million increase related to compressor rentals for our Delaware Basin properties. The use of pipelines allows us to deliver crude oil to the Cushing, Oklahoma market, where we benefit from the liquidity associated with the purchasers’ delivery point. Additional benefits of utilization of pipelines are decreased field truck traffic and decreased air emissions. Transportation, gathering, and processing expenses per Boe increased to $0.89 for the three months ended March 31, 2017 compared to $0.88 for2017. The increase in the three months ended March 31, 2016. 2018 was primarily related to the purchase of seismic data related to unproved acreage and lease costs associated with certain delayed drilling in the Delaware Basin, which was partially offset by a decrease in costs related to drilling pilot holes in the Delaware Basin during the three months ended March 31, 2017.
Impairment of Properties and Equipment
Impairment of proved and unproved properties. Amounts represent the retirement of certain leases that were no longer part of our development plan or that we are not able to extend prior to termination of the lease. Deterioration of commodity prices or other operating circumstances could result in additional impairment charges.
The following table sets forth the major components of our impairment of properties and equipment expense:
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
| (in millions) | (in millions) |
| | | | | | |
Impairment of proved and unproved properties | $ | 2.1 |
| | $ | 0.9 |
| $ | 33.1 |
| | $ | 2.1 |
|
Amortization of individually insignificant unproved properties | 0.1 |
| | 0.1 |
| 0.1 |
| | 0.1 |
|
Total impairment of properties and equipment | $ | 2.2 |
| | $ | 1.0 |
| |
Impairment of crude oil and natural gas properties
| | $ | 33.2 |
| | $ | 2.2 |
|
During the three months ended March 31, 2018, we recorded impairment charges primarily related to certain unproved Delaware Basin leasehold positions that expired during the three months ended March 31, 2018.
General and Administrative Expense
General and administrative expense increased $3.5 million to $26.3$9.4 million for the three months ended March 31, 2017 compared to $22.8 million for the three months ended March 31, 2016. The increase was primarily attributable to a $2.3 million increase in payroll and employee benefits due to a 13 percent average increase in headcount for the three months ended March 31, 20172018, as compared to the three months ended March 31, 2016,2017. The increase of $9.4 million was primarily attributable to a $6.1 million increase in payroll and $0.5employee benefits and a $2.1 million of professional services feesincrease related to the Delaware Basin acquisitions. We expect continued increases in our headcount through the remainderprofessional services.
Depreciation, Depletion and Amortization Expense
Crude oil and natural gas properties. 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 $124.8 million for the three months ended March 31, 2018 compared to $107.8 million for the three months ended March 31, 2017 compared to $96.3 million for the three months ended March 31, 2016. 2017.
The period-over-period change in DD&A expense related to crude oil and natural gas properties was primarily due to the following (in millions):
following:
| | | | | Three Months Ended |
| | | March 31, 2018 |
| | | | | (in thousands) |
Increase in production | | $ | 38.4 |
| | $ | 32,005 |
|
Decrease in weighted-average depreciation, depletion and amortization rates | | (26.9 | ) | |
Decrease in weighted-average depreciation, depletion, and amortization rates | | | (15,035 | ) |
Total increase in DD&A expense related to crude oil and natural gas properties | �� | $ | 11.5 |
| | $ | 16,970 |
|
The following table presents our per Boe DD&A expense rates for crude oil and natural gas properties:
|
| | | | | | | | |
| | Three Months Ended March 31, |
Operating Region/Area | | 2018 | | 2017 |
| | (per Boe) |
Wattenberg Field | | $ | 13.53 |
| | $ | 16.94 |
|
Delaware Basin | | 16.91 |
| | 11.46 |
|
Utica Shale (1) | | — |
| | 11.24 |
|
Total weighted-average | | $ | 14.01 |
| | $ | 16.22 |
|
(1) The Utica Shale properties were classified as held-for-sale during the third quarter of 2017;
therefore, we did not record DD&A expense on these properties for the three months |
| | | | | | | | |
| | Three Months Ended March 31, |
Operating Region/Area | | 2017 | | 2016 |
| | (per Boe) |
Wattenberg Field | | $ | 16.94 |
| | $ | 21.72 |
|
Delaware Basin | | 11.46 |
| | — |
|
Utica Shale | | 11.24 |
| | 8.19 |
|
Total weighted-average | | 16.22 |
| | 21.08 |
|
ended March 31, 2018.
Non-crude oil and natural gas properties. Depreciation expense for non-crude oil and natural gas properties was $2.0 million for the three months ended March 31, 2018 compared to $1.5 million for the three months ended March 31, 2017 compared to $1.1 million for the three months ended March 31, 2016.
Provision for Uncollectible Notes Receivable
In the first quarter of 2016, we recorded a provision for uncollectible notes receivable of $44.7 million to impair two third-party notes receivable whose collection was not reasonably assured. As described in the footnote titled Fair Value of Financial Instruments, in April 2017, we signed a definitive agreement and simultaneously closed on the sale of one of the associated notes receivable to an unrelated third party. Accordingly, we reversed $40.3 million of the provision for notes receivable in the second quarter of 2017.
Interest Expense
Interest expense increased $7.6decreased $2.0 million to $17.5 million for the three months ended March 31, 2018 compared to $19.5 million for the three months ended March 31, 2017 compared to $11.9 million for the three months ended March 31, 2016.2017. The increase isdecrease was primarily attributablerelated to a $6.3$10.0 million increase in interest relating to the issuance of our 2024 Senior Notes, a $2.6 million increasedecrease in interest expense relating to the net settlement of $500 million 7.75% senior notes in December 2017 and a $0.9 million increase in capitalized interest. The decreases were partially offset by an $8.8 million increase in interest expense related to the issuance of our 2021 Convertible2026 Senior Notes and a $0.7 million increase related to fees for the redetermination of the borrowing base under our revolving credit facility. The increases were offset by a $2.2 million decrease in interest expense from our 2016 Convertible Notes, which were settled in May 2016.November 2017.
Provision for Income Taxes
The effective income tax rate for the three months ended March 31, 20172018 was a 25.8 percent benefit on loss compared to a 36.3 percent expense on income compared to 36.9 percent benefit on loss for the three months ended March 31, 2016.2017. The effective income tax rate for the three months ended March 31, 2017 isrates are based upon a full year forecasted pre-tax income for the year adjusted for permanent differences. The federal corporate statutory income tax rate decreased from 35 percent in 2017 to 21 percent in 2018 resulting from the 2017 Tax Act. The forecasted full year effective income tax rate has been applied to the quarter-to-date pre-tax income,loss, resulting in aan income tax expensebenefit for the period. Because the estimate of full-year income or loss may change from quarter to quarter, the effective income tax rate for any particular quarter may not have a meaningful relationship to pre-tax income or loss for the quarter or the actual annual effective income tax rate that is determined at the end of the year. The additionaleffective income tax rate for the three months ended March 31, 2018 includes discrete income tax benefits of $0.2 million related to the excess tax benefit for stock-based compensationrecognized with the vesting of stock awards, which resulted in a 1.2 percent increase to our effective tax rate. The excess tax benefit recognized with the vesting of stock awards was the only discrete tax item reported for the three months ended March 31, 2017 and resulted in a 2.2 percent reduction to our effective tax rate. There were no significant discrete tax items recorded during the three months ended March 31, 2016.
Net Income (Loss)/Adjusted Net Income (Loss)
The factors resulting in changes in net loss in the three months ended March 31, 2018 of $13.1 million and net income in the three months ended March 31, 2017 of $46.1 million andare discussed above. Adjusted net income, a net loss innon-U.S. GAAP financial measure, was $3.0 million for the three months ended March 31, 2016 of $71.5 million are discussed above. These same reasons similarly impacted2018 and adjusted net loss, a non-U.S. GAAP financial measure, withwas $4.1 million for the three months ended March 31, 2017. With the exception of the tax affected net change in fair value of unsettled derivatives adjustedof $16.1 million for taxes, ofthe three months ended March 31, 2018 and $50.2 million and $34.5 million for the three months ended March 31, 2017, and March 31, 2016, respectively. Adjustedthese same factors impacted adjusted net income (loss), a non-U.S. GAAP financial measure, was adjusted net loss of $4.1 million and $37.0 million for the three months ended March 31, 2017 and 2016, respectively.measure. See Reconciliation of Non-U.S. GAAP Financial Measures below for a more detailed discussion of thisthese non-U.S. GAAP financial measuremeasures and a reconciliation of this measurethese measures to the most comparable U.S. GAAP measure.measures.
Financial Condition, Liquidity and Capital Resources
Historically, ourOur primary sources of liquidity have beenare cash flows from operating activities, our revolving credit facility, proceeds raised in debt and equity capital market transactions, and asset sales. For the three months ended March 31, 2017,2018, our primary sources of liquidity were the net cash flows from operating activities of $139.5were $205.1 million.
Our primary source of cash flows from operating activities is the sale of crude oil, natural gas, and NGLs. Fluctuations in our operating cash flows are substantiallyprincipally 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 derivative instruments. We enter into commodity derivative instruments with maturities of no greater than five years from the date of the instrument. TheOur revolving credit agreementfacility 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 significant fluctuations in our cash flows from operating activities due to the remaining non-hedged portion of our future production. Based upon our hedge position and assuming forward strip pricing as of March 31, 2017,2018, our derivatives may notare expected to be a significant source of net cash flowoutflow in the near term, and may result in cash outflows in 2017 and 2018. During the three months ended March 31, 2017, we had $0.5 million of positive cash flows from operations related to net settlements of commodity derivative instruments, compared to $66.8 million for the three months ended March 31, 2016. As of March 31, 2017, the fair value of our derivatives was a net asset of $10.1 million, of which $4.1 million will settle in the remaining nine months of 2017 based upon forward strip pricing as of that date at the current price.term.
Our working capital fluctuates for various reasons, including, but not limited to, changes in the fair value of our commodity derivative instruments and changes in our cash and cash equivalents due to our practice of utilizing excess cash to reduce the outstanding borrowings under our revolving credit facility. At March 31, 2017, weWe had working capital deficits of $93.8$223.7 million compared to $129.2and $16.4 million at March 31, 2018 and December 31, 2016.2017, respectively. The decreaseincrease in working capital deficit as of March 31, 20172018 of $207.3 million is primarily the result of a decrease in cash and cash equivalents of $134.8 million related to the Bayswater Acquisition which was partially offset by the proceeds received from the Utica Divestiture and an amendment to a midstream dedication agreement, an increase in accounts payable of $78.1$45.6 million related to increased development and exploration activity, which was partially offset by an increasea decrease in the net fair value of our unsettled commodity derivative instruments of $45.4$17.1 million, and a decrease in accounts receivable of $16.6 million.
Our cash and cash equivalents were $207.6$45.9 million at March 31, 2017, our short-term investments were $49.9 million,2018 and availability under our revolving credit facility was $688.3$700.0 million, providing for a total liquidity position of $945.8$745.9 million as of March 31, 2017, compared2018. Based on the pricing assumptions described in Executive Summary - Liquidity, we expect our 2018 capital investments to $932.4 millionexceed our 2018 cash flows from operations by approximately $65 million. We anticipate that the proceeds received from the Utica Shale Divestiture and an amendment to a midstream dedication agreement will fund this outspend. We expect this capital investment outspend to occur during the first half of 2018, with cash flows exceeding capital investment during the second half of the year. As a result, we expect to be undrawn on our credit facility at December 31, 2016. The increase in liquidity of $13.4 million, or one percent, was primarily attributable to net cash flows from operating activities of $139.5 million, partially offset by capital investments associated with development and exploration activity of $129.8 million during the three months ended March 31, 2017.2018.
Based on our expected cash flows from operations, our cash and cash equivalent and short-term investments balancesequivalents, and availability under our revolving credit facility, we believe that we will have sufficient capital available to fund our planned activities during 2017. Our liquidity will be further augmented bythrough the $40.3 million12-month period following the filing of proceeds received in the second quarter of 2017 from the sale of a third-party Note, as described previously.this report.
Our revolving credit facility is a borrowing base facility and availability under the facility is subject to redetermination, generally each May and November, based upon a quantification of our proved reserves at each December 31 and June 30, and December 31, respectively. The maturity date of our revolving credit facility is May 2020. As of March 31,
In May and October 2017, we entered into the borrowing base is $700 million. Our abilityFifth and Sixth Amendments, respectively, to borrow underthe Third Amended and Restated Credit Agreement to amend the revolving credit facility is limited under our 2022 Senior Notes to reflect increases in the greaterborrowing base. The Fifth Amendment reflected an increase of the borrowing base from $700 million orto $950 million and the calculated value under an Adjusted Consolidated Tangible Net Asset test, as defined. The May 2017 redetermination of ourSixth Amendment amended the revolving credit facility to allow the borrowing base has not been finalizedto increase above the borrowing capacity of $1.0 billion. In addition, the Fifth Amendment made changes to certain of the covenants in the existing agreement as well as other administrative changes. We elected to increase the borrowing base to $1.1 billion for our November 2017 borrowing base redetermination and have elected to maintain a $700 million commitment level as of the date of this report.
In April 2018, we began negotiations with our bank group to enter into the Fourth Amended and Restated Credit Agreement, and we anticipate closing to occur by the end of May 2018. This agreement is expected to replace the Third Amended and Restated Credit Agreement. Following the amendment and restatement, the facility is expected to mature in May 2023.
Amounts borrowed under the revolving credit facility bear interest at either an alternate base rate option or a LIBOR option as defined in the revolving credit facility plus an applicable margin, depending on the percentage of the commitment that has been utilized. As of March 31, 2017,2018, the applicable margin is 1.25 percent for the alternate base rate option or 2.25 percent for the LIBOR option, and the unused commitment fee is 0.500.5 percent.
We had no balance outstanding on our revolving credit facility as of March 31, 2017. As of March 31,2018. In May 2017, we had anreplaced our $11.7 million irrevocable standby letter of credit of approximately $11.7 millionthat we held in favor of a third-party transportation service provider to secure a firm transportation obligation.obligation with a cash deposit, which is classified as restricted cash and is included in other assets on the condensed consolidated balance sheet. As of March 31, 2018 and December 31, 2017, we had $8.0 million and $9.3 million in restricted cash, respectively. As of March 31, 2018, the available funds under our revolving credit facility including the reduction for the $11.7were $700 million letter of credit, was $688.3 million.based on our elected commitment level.
Our revolving credit facility contains financial maintenance covenants. The covenants require that we maintain (i) a leverage ratio defined as total debt of less than 4.0 times the trailing 12 months earnings before interest, taxes, depreciation, depletion and amortization, change in fair value of unsettled commodity derivatives, exploration expense,
gains (losses) on sales of assets and other non-cash gains (losses) and (ii) an adjusted current ratio of at least 1.0:1.0. Our adjusted current ratio is adjusted by eliminating the impact on our current assets and liabilities of recording the fair value of crude oil and natural gas commodity derivative instruments. Additionally, available borrowings under our revolving credit facility are added to the current asset calculation and the current portion of our revolving credit facility debt is eliminated from the current liabilities calculation. At March 31, 2017,2018, we were in compliance with all debt covenants with a leverage ratio as defined by the revolving credit agreement, of 2.0times1.7 and a3.7:1.0current ratio.ratio of 2.5. We expect to remain in compliance throughout the next 12-month period.period following the filing of this report.
The indentures governing our 20222024 Senior Notes and 20242026 Senior Notes contain customary restrictive covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: (a) incur additional debt including under our revolving credit facility, (b) make certain investments or pay dividends or distributions on our capital stock or purchase, redeem, or retire capital stock, (c) sell assets, including capital stock of our restricted subsidiaries, (d) restrict the payment of dividends or other payments by restricted subsidiaries to us, (e) create liens that secure debt, (f) enter into transactions with affiliates, and (g) merge or consolidate with another company. At March 31, 2017,2018, we were in compliance with all covenants and expect to remain in compliance throughout the next 12-month period.
In January 2017, pursuant to the filing of the supplemental indentures for the 2021 Convertible Senior Notes the 2022 Senior Notes, and the 2024 Senior Notes, our subsidiary PDC Permian, Inc. became a subsidiary guarantor of the notes. PDC Permian, Inc. is also the guarantor of our 2026 Senior Notes issued in November 2017.
Cash Flows
Operating Activities. Our net cash flows from operating activities are primarily impacted by commodity prices, production volumes, net settlements from our commodity derivative positions, operating costs, and general and administrative expenses. Cash flows from operating activities increased by $38.4$65.6 million to $205.1 million for the three months ended March 31, 20172018 compared to the three months ended March 31, 2016,2017, primarily due to increases in crude oil, natural gas and NGLs sales of $114.3 million and an$115.5 million. This increase in changes in assets and liabilities of $15.6 million related to the timing of cash payments and receipts. These increases werewas offset in part by a decrease in commodity derivative settlements of $66.3$26.6 million and increases in lease operating expenses of $4.5 million, production taxes of $8.3$9.8 million, general and administrative expenses of $3.5$9.4 million, and interest expenseproduction taxes of $7.6$7.8 million.
Adjusted cash flows from operations, a non-U.S. GAAP financial measure, increased $22.7by $61.2 million to $174.9 million during the three months ended March 31, 20172018 compared to the three months ended March 31, 2016.2017. The increase was primarily due to the same 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 EBITDAX, a non-U.S. GAAP financial measure, increased by $72.4$59.9 million during the three months ended March 31, 2017,2018, compared to the three months ended March 31, 2016.2017. The increase was primarily the result of increasesan increase in
crude oil, natural gas and NGLs sales of $114.3 million and the recording of a provision for uncollectible notes receivable of $44.7 million during the three months ended March 31, 2016. These increases were$115.5 million. This increase was partially offset by a decrease in commodity derivative settlements of $66.3$26.6 million and increases in lease operating expenses of $4.5$9.8 million, production taxes of $8.3 million, and general and administrative expenses of $3.5$9.4 million, and production taxes of $7.8 million.
See Reconciliation of Non-U.S. GAAP Financial Measures, below, for a more detailed discussion of non-U.S. GAAP financial measures.
Investing Activities. Because crude oil and natural gas production from a well declines rapidly in the first few years of production, we need to continue to commit significant amounts of capital in order to maintain and grow our production and replace our reserves. If capital is not available or is constrained in the future, we will be limited to our cash flows from operations and liquidity under our revolving credit facility as the sources for funding our capital investments.
Cash flows from investing activities primarily consist of the acquisition, exploration, and development of crude oil and natural gas properties, net of dispositions of crude oil and natural gas properties. Net cash used in investing activities of $173.6$338.5 million during the three months ended March 31, 2017,2018 was primarily related to cash utilized fortoward the purchase price of the Bayswater Acquisition of $180.8 million and our drilling operations, includingand completion activities of $129.8 million and purchases of short-term investments of $49.9$196.9 million. Partially offsetting these investments was the receipt of approximately $6.2$39.0 million related to post-closing settlements of properties acquired in 2016.Utica Shale Divestiture.
Financing Activities. Net cash fromused in financing activities forof $2.6 million during the three months ended March 31, 2017 decreased by approximately $261.6 million compared2018 was primarily related to the three months ended March 31, 2016. Certain capital markets and financing activities occurred in 2016 including the $296.6 million received from the issuancepurchases of our commontreasury stock. These amounts were partially offset by net payments of approximately $37.0 million to pay down amounts borrowed under our revolving credit facility in the first quarter of 2016.
Off-Balance Sheet Arrangements
At March 31, 2017,2018, we had no off-balance sheet arrangements, as defined under SEC rules, thatwhich have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital investments, or capital resources.
Commitments and Contingencies
See the footnote titled Commitments and Contingencies to the accompanying condensed consolidated financial statements included elsewhere in this report.
Recent Accounting Standards
See the footnote titled Summary of Significant Accounting Policies to the accompanying condensed consolidated financial statements included elsewhere in this report.
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 condensed consolidated financial statements and accompanying notes contained in our 20162017 Form 10-K filed with the SEC on February 28, 2017.27, 2018 and amended on May 1, 2018.
Reconciliation of Non-U.S. GAAP Financial Measures
We use "adjusted cash flows from operations," "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, providing public guidance on possible future results. Beginning in 2017, we have included non-cash stock-based compensation and exploration, geologic and geophysical expense to our adjusted EBITDAX calculation. In prior periods, we included adjusted EBITDA, a non-U.S. GAAP financial measure, that did not include these adjustments. All prior periods have been
conformed for comparability of this information. These 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. Also, in the future, we may disclose different non-U.S. GAAP financial measures in
order to help 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 not rely on any single financial measure.
Adjusted cash flows from operations. We define adjusted cash flows from operations as the cash flows earned or incurred from operating activities, without regard to changes in operating assets and liabilities. We believe it is important to consider adjusted cash flows from operations, as well as cash flows from operations, as we believe it often provides more transparency into what drives the changes in our operating trends, such as production, prices, operating costs, and related operational factors, without regard to whether the related asset or liability was received or paid during the same period. We also use this measure because the timing of cash received from our assets, cash paid to obtain an asset or payment of our obligations has generally been only a timing issue from one period to the next as we have not had significant accounts receivable collection problems, nor been unable to purchase assets or pay our obligations.
Adjusted net income (loss). We define adjusted net income (loss) as net income (loss), plus loss on commodity derivatives, less gain on commodity derivatives, and net settlements on commodity derivatives, each adjusted for tax effect. We believe it is important to consider adjusted net income (loss), as well as net income (loss). We believe this measure often provides more transparency into our operating trends, such as production, prices, operating costs, net settlements from derivatives, and related factors, without regard to changes in our net income (loss) from our mark-to-market adjustments resulting from net changes in the fair value of unsettled derivatives. Additionally, other items which are not indicative of future results may be excluded to clearly identify operating trends.
Adjusted EBITDAX. We define adjusted EBITDAX as net income (loss), plus loss on commodity derivatives, interest expense, net of interest income, income taxes, impairment of properties and equipment, exploration, geologic, and geophysical expense, depreciation, depletion and amortization expense, accretion of asset retirement obligations, and non-cash stock-based compensation, less gain on commodity derivatives and net settlements on commodity derivatives. Adjusted EBITDAX is not a measure of financial performance or liquidity under U.S. GAAP and should be considered in addition to, not as a substitute for, net income (loss), and should not be considered an indicator of cash flows reported in accordance with U.S. GAAP. Adjusted EBITDAX includes certain non-cash costs incurred by us and does not take into account changes in operating assets and liabilities. Other companies in our industry may calculate adjusted EBITDAX differently than we do, limiting its usefulness as a comparative measure. We believe adjusted EBITDAX is relevant because it is a measure of our operational and financial performance, as well as a measure of our liquidity, and is used by our management, investors, commercial banks, research analysts, and others to analyze such things as:
operating performance and return on capital as compared to our peers;
financial performance of our assets and our valuation without regard to financing methods, capital structure, or historical cost basis;
our ability to generate sufficient cash to service our debt obligations; and
the viability of acquisition opportunities and capital expenditure projects, including the related rate of return.
The following table presents a reconciliation of each of our non-U.S. GAAP financial measures to its most comparable U.S. GAAP measure:
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2017 | | 2016 | 2018 | | 2017 |
| (in millions) | (in millions) |
Adjusted cash flows from operations: | | | | | | |
Net cash from operating activities | $ | 139.5 |
| | $ | 101.2 |
| $ | 205.1 |
| | $ | 139.5 |
|
Changes in assets and liabilities | (25.8 | ) | | (10.2 | ) | (30.2 | ) | | (25.8 | ) |
Adjusted cash flows from operations | $ | 113.7 |
| | $ | 91.0 |
| $ | 174.9 |
| | $ | 113.7 |
|
| | | | | | |
Adjusted net income (loss): | | | | | | |
Net income (loss) | $ | 46.1 |
| | $ | (71.5 | ) | $ | (13.1 | ) | | $ | 46.1 |
|
Gain on commodity derivative instruments | (80.7 | ) | | (11.1 | ) | |
(Gain) loss on commodity derivative instruments | | 47.2 |
| | (80.7 | ) |
Net settlements on commodity derivative instruments | 0.5 |
| | 66.8 |
| (26.0 | ) | | 0.5 |
|
Tax effect of above adjustments | 30.0 |
| | (21.2 | ) | (5.1 | ) | | 30.0 |
|
Adjusted net income (loss) | $ | (4.1 | ) | | $ | (37.0 | ) | $ | 3.0 |
| | $ | (4.1 | ) |
| | | | | | |
Net income (loss) to adjusted EBITDAX: | | | | | | |
Net income (loss) | $ | 46.1 |
| | $ | (71.5 | ) | $ | (13.1 | ) | | $ | 46.1 |
|
Gain on commodity derivative instruments | (80.7 | ) | | (11.1 | ) | |
(Gain) loss on commodity derivative instruments | | 47.2 |
| | (80.7 | ) |
Net settlements on commodity derivative instruments | 0.5 |
| | 66.8 |
| (26.0 | ) | | 0.5 |
|
Non-cash stock-based compensation | 4.5 |
| | 4.7 |
| 5.3 |
| | 4.5 |
|
Interest expense, net | 19.2 |
| | 10.3 |
| 17.4 |
| | 19.2 |
|
Income tax expense (benefit) | 26.3 |
| | (41.8 | ) | (4.6 | ) | | 26.3 |
|
Impairment of properties and equipment | 2.2 |
| | 1.0 |
| 33.2 |
| | 2.2 |
|
Exploration, geologic, and geophysical expense | 1.0 |
| | 0.2 |
| 2.6 |
| | 1.0 |
|
Depreciation, depletion, and amortization | 109.3 |
| | 97.4 |
| 126.8 |
| | 109.3 |
|
Accretion of asset retirement obligations | 1.8 |
| | 1.8 |
| 1.3 |
| | 1.8 |
|
Adjusted EBITDAX | $ | 130.2 |
| | $ | 57.8 |
| $ | 190.1 |
| | $ | 130.2 |
|
| | | | | | |
Cash from operating activities to adjusted EBITDAX: | | | | | | |
Net cash from operating activities | $ | 139.5 |
| | $ | 101.2 |
| $ | 205.1 |
| | $ | 139.5 |
|
Interest expense, net | 19.2 |
| | 10.3 |
| 17.4 |
| | 19.2 |
|
Amortization of debt discount and issuance costs | (3.2 | ) | | (1.8 | ) | (3.2 | ) | | (3.2 | ) |
Gain on sale of properties and equipment | 0.2 |
| | 0.1 |
| |
Gain (loss) on sale of properties and equipment | | (1.4 | ) | | 0.2 |
|
Exploration, geologic, and geophysical expense | 1.0 |
| | 0.2 |
| 2.6 |
| | 1.0 |
|
Other | (0.7 | ) | | (42.0 | ) | (0.2 | ) | | (0.7 | ) |
Changes in assets and liabilities | (25.8 | ) | | (10.2 | ) | (30.2 | ) | | (25.8 | ) |
Adjusted EBITDAX | $ | 130.2 |
| | $ | 57.8 |
| $ | 190.1 |
| | $ | 130.2 |
|
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. We have established risk management processes to monitor and manage these market risks.
Interest Rate Risk
Changes in interest rates affect the amount of interest we earn on our interest bearing cash, cash equivalents, and restricted cash accounts and the interest we pay on borrowings under our revolving credit facility. Our 2021 Convertible Notes, 2024 Senior Notes, 2022and 2026 Senior Notes and short-term investments have fixed rates, and therefore near-term changes in interest rates do not expose us to risk of earnings or cash flow loss; however, near-term changes in interest rates may affect the fair value of our fixed-rate debt.
As of March 31, 2017,2018, our interest-bearing deposit accounts included money market accounts certificates of deposit, and checking and savings accounts with various banks. The amount of our interest-bearing cash, cash equivalents, and restricted cash as of March 31, 20172018 was $169.1$12.8 million with a weighted-average interest rate of 0.51.4 percent. Based on a sensitivity analysis of our interest-bearing deposits as of March 31, 20172018 and assuming we had $169.1$12.8 million outstanding throughout the period, we estimate that a 1one percent increase in interest rates would have increased interest income for the three months ended March 31, 20172018 by approximately $1.7$0.1 million.
As of March 31, 2017,2018, we had no outstanding balance on our revolving credit facility.
Commodity Price Risk
We are exposed to the potential risk of loss from adverse changes in the market price of crude oil, natural gas, natural gas basis, and NGLs. 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, natural gas, natural gas basis, and propane 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.
The following table presents our commodity and basis derivative positions related to crude oil, natural gas, and propane in effect as of March 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Collars | | Fixed-Price Swaps | | |
Commodity/ Index/ Maturity Period | | Quantity (Gas - BBtu Oil - MBbls) | | Weighted-Average Contract Price | | Quantity (Oil - MBbls Gas and Basis- BBtu Propane - MBbls) | | Weighted- Average Contract Price | | Fair Value March 31, 2017 (1) (in millions) |
| | Floors | | Ceilings | | | |
Crude Oil | | | | | | | | | | | | |
NYMEX | | | | | | | | | | | | |
2017 | | 1,848.0 |
| | $ | 49.54 |
| | $ | 62.32 |
| | 5,480.5 |
| | $ | 50.11 |
| | $ | (5.1 | ) |
2018 | | 1,512.0 |
| | 41.85 |
| | 54.31 |
| | 5,072.0 |
| | 53.85 |
| | 6.2 |
|
Total Crude Oil | | 3,360.0 |
| | | | | | 10,552.5 |
| | | | $ | 1.1 |
|
| | | | | | | | | | | | |
Natural Gas | | | | | | | | | | | | |
NYMEX | | | | | | | | | | | | |
2017 | | 8,550.3 |
| | $ | 3.40 |
| | $ | 4.05 |
| | 20,555.0 |
| | $ | 3.50 |
| | $ | 6.3 |
|
2018 | | 1,230.0 |
| | 3.00 |
| | 3.67 |
| | 45,280.0 |
| | 2.94 |
| | (3.0 | ) |
Total Natural Gas | | 9,780.3 |
| | | | | | 65,835.0 |
| | | | $ | 3.3 |
|
| | | | | | | | | | | | |
Basis Protection | | | | | | | | | | | | |
2017 | | — |
| | — |
| | — |
| | 21,104.0 |
| | $ | (0.29 | ) | | 2.5 |
|
2018 | | — |
| | — |
| | — |
| | 18,200.0 |
| | (0.29 | ) | | 2.8 |
|
Total Basis Protection | | — |
| | | | | | 39,304.0 |
| | | | $ | 5.3 |
|
| | | | | | | | | | | | |
Propane | | | | | | | | | | | | |
Mont Belvieu | | | | | | | | | | | | |
2017 | | — |
| | — |
| | — |
| | 535.7 |
| | $ | 26.78 |
| | $ | 0.4 |
|
Commodity Derivatives Fair Value | | | | | | | | $ | 10.1 |
|
| | | | | | | | | | | | |
____________
| |
(1) | Approximately 18.4 percent of the fair value of our commodity derivative assets and 16.9 percent of the fair value of our commodity derivative liabilities were measured using significant unobservable inputs (Level 3). |
In addition to ouropen commodity derivative positions as ofat March 31, 2017, we entered into the following commodity derivative positions related to natural gas subsequent to March 31, 2017 that are effective as of April 18, 2017:2018.
|
| | | | | | | | | | | | | | | | | | | |
| | Collars | | Fixed-Price Swaps |
Commodity/ Index/ Maturity Period | | Quantity (Gas - BBtu Oil - MBbls) | | Weighted-Average Contract Price | | Quantity (Oil - MBbls Gas and Basis- BBtu Propane - MBbls) | | Weighted- Average Contract Price |
| | Floors | | Ceilings | | |
Natural Gas | | | | | | | | | | |
NYMEX | | | | | | | | | | |
2017 | | — |
| | $ | — |
| | $ | — |
| | 7,000.0 |
| | $ | 3.42 |
|
2018 | | 4,000.0 |
| | 3.00 |
| | 3.50 |
| | — |
| — |
| — |
|
Total Natural Gas | | 4,000.0 |
| | | | | | 7,000.0 |
| | |
| | | | | | | | | | |
Basis Protection | | | | | | | | | | |
2017 | | — |
| | — |
| | — |
| | 14,000.0 |
| | $ | (0.39 | ) |
2018 | | — |
| | — |
| | — |
| | 6,000.0 |
| | (0.41 | ) |
Total Basis Protection |
| — |
| | | | | | 20,000.0 |
| | |
Our realized prices vary regionally based on local market differentials and our transportation agreements. The following table presents average market index prices for crude oil and natural gas for the periods identified, as well as the average sales prices we realized for our crude oil, natural gas, and NGLs production:
| | | Three Months Ended | | Year Ended | Three Months Ended | | Year Ended |
| March 31, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
Average NYMEX Index Price: | | | | | | |
Crude oil (per Bbl) | $ | 51.92 |
| | $ | 43.32 |
| $ | 62.87 |
| | $ | 50.95 |
|
Natural gas (per MMBtu) | 3.32 |
| | 2.46 |
| 3.00 |
| | 3.11 |
|
| | | | | | |
Average Sales Price Realized: | | | | | | |
Excluding net settlements on commodity derivatives | | | | Excluding net settlements on commodity derivatives | | |
Crude oil (per Bbl) | $ | 49.04 |
| | $ | 39.96 |
| $ | 59.62 |
| | $ | 48.45 |
|
Natural gas (per Mcf) | 2.37 |
| | 1.77 |
| 1.97 |
| | 2.21 |
|
NGLs (per Bbl) | 19.29 |
| | 11.80 |
| 21.80 |
| | 18.59 |
|
Based on a sensitivity analysis as of March 31, 2017,2018, we estimate that a ten percent increase in natural gas, crude oil, 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 a decrease in the fair value of our derivative positions of $87.6$113.0 million, whereas a 10ten percent decrease in prices would have resulted in an increase in fair value of $87.6$111.6 million.
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 and entering into transactions with high-quality counterparties. 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.
Our oil and gas exploration and production business's 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.
Amounts due to our gas marketing business are from a diverse group of entities, including major upstream and midstream energy companies, financial institutions, and end-users in various industries. The underlying operations of these entities are geographically concentrated in the same region, which increases the credit risk associated with this business. As natural gas prices continue to remain depressed, certain third-party producers relating to our gas marketing business continue to
experience financial distress, which has led to certain contractual defaults and litigation; however, to date, we have had no material counterparty default losses. We have initiated several legal actions for breach of contract, collection and related claims against certain third-party producers that are delinquent in their payment obligations, which have to date resulted in two default judgments. We expect this trend to continue for this business.
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. See the footnote titled Commodity Derivative Financial Instruments to our condensed consolidated financial statements included elsewhere in this report for more detail on our commodity derivative financial instruments.
Disclosure of Limitations
Because the information above included only those exposures that existed at March 31, 2017,2018, 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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2017,2018, we carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and the PrincipalChief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e).
Based on the results of this evaluation, the Chief Executive Officer and the PrincipalChief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2018 because of the material weaknesses in our internal control over financial reporting described below.
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
During 2017, we did not maintain a sufficient complement of personnel within the Land Department as a result of increased volume of leases, which contributed to the ineffective design and maintenance of controls to verify the completeness and accuracy of land administrative records associated with unproved leases, which are used in verifying the completeness, accuracy, valuation, rights and obligations over the accounting of properties and equipment, sales and accounts receivable, and costs and expenses. These control deficiencies resulted in immaterial adjustments of our unproved properties, impairment of unproved properties, sales, accounts receivable, and depletion expense accounts and related disclosures during 2017.
Additionally, these control deficiencies could result in misstatements of substantially all accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, our management has determined that these control deficiencies constitute material weaknesses.
Remediation Plan for Material Weaknesses
In response to the identified material weaknesses, our management, with the oversight of the Audit Committee of our Board of Directors, has begun the process of assessing a number of different remediation initiatives to improve our internal control over financial reporting for the year ended December 31, 2018. We are currently in the process of evaluating the material weaknesses and are developing a plan of remediation to strengthen our overall controls over the sufficient complement of personnel within the Land Department and the completeness and accuracy of land administration records. We are committed to continuing to improve our internal control processes and will continue to review, optimize, and enhance our internal control environment. These material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2017,2018, we made no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are a party to variousInformation regarding our legal proceedings can found in the ordinary course of business. We are not currently a party to any litigation that we believe would have a materially adverse effect on our business, financial condition, results of operations, or liquidity.
footnote titled Commitments and Contingencies -
EnvironmentalLitigation and Legal Items
Due to the nature of the natural gas and oil 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 environmental claims existing as of March 31, 2017 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 past non-compliance with environmental laws will not be discovered on our properties. Accrued environmental liabilities are recorded in other accrued expenses on the condensed consolidated balance sheets.
In August 2015, we received a Clean Air Act Section 114 Information Request (the "Information Request") from the U.S. Environmental Protection Agency ("EPA"). The Information Request sought, among other things, information related to the design, operation, and maintenance of our Wattenberg Field production facilitiesfinancial statements included elsewhere in the Denver-Julesburg Basin of Colorado. The Information Request focuses on historical operation and design information for 46 of our production facilities and asks that we conduct sampling and analyses at the identified 46 facilities. We responded to the Information Request in January 2016. In December 2016, we received a draft consent decree from the EPA.
In addition, in December 2015, we received a Compliance Advisory pursuant to C.R.S. 25-7-115(2) from the Colorado Department of Public Health and Environment's Air Quality Control Commission's Air Pollution Control Division alleging that we failed to design, operate, and maintain certain condensate collection, storage, processing, and handling operations to minimize leakage of volatile organic compounds at 65 facilities consistent with applicable standards under Colorado law. This matter has been combined with the matter discussed above. We have ongoing discussions with the EPA, U.S. Department of Justice, and Colorado Department of Public Health and Environment regarding these matters. The ultimate outcome related to these combined actions has not been determined at this time.
Action Regarding Firm Transportation Contractsreport.
In June 2016, a group of 42 independent West Virginia natural gas producers filed a lawsuit in Marshall County, West Virginia, naming Dominion Transmission, Inc. ("Dominion"), certain entities affiliated with Dominion, and our subsidiary RNG as defendants, alleging various contractual, fiduciary and related claims against the defendants, all of which are associated with firm transportation contracts entered into by plaintiffs and relating to pipelines owned and operated by Dominion and its affiliates. The case has been transferred to the Business Court Division of the Circuit Court of Marshall County, West Virginia, and the parties are awaiting that court's ruling on previously-filed pre-trial pleadings. RNG is unable to estimate any potential damages associated with the claims, but believes the complaint is without merit and intends to vigorously pursue its defenses.
ITEM 1A. RISK FACTORS
We face many risks. Factors that could materially adversely affect our business, financial condition, operating results, or liquidity and the trading price of our common stock are described under Item 1A, Risk Factors, of our 20162017 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 20162017 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|
| | | | | | | |
Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share |
| | | | |
January 1 - 31, 2017 | | 27,514 |
| | $ | 74.34 |
|
February 1 - 28, 2017 | | — |
| | — |
|
March 1 - 31, 2017 | | — |
| | — |
|
Total first quarter 2017 purchases | | 27,514 |
| | $ | 74.34 |
|
| | | | |
|
| | | | | | | |
Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share |
| | | | |
January 1 - 31, 2018 | | 34,846 |
| | $ | 55.37 |
|
February 1 - 28, 2018 | | 6,511 |
| | 50.04 |
|
March 1 - 31, 2018 | | — |
| | — |
|
Total first quarter 2018 purchases | | 41,357 |
| | $ | 54.53 |
|
| | | | |
__________
| |
(1) | Purchases primarily represent shares purchased from employees for the payment of their tax liabilities related to the vesting of securities issued pursuant to our stock-based compensation plans. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4. MINE SAFETY DISCLOSURES - Not applicable.
ITEM 5. OTHER INFORMATION - None.
ITEM 6. EXHIBITS
|
| | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | SEC File Number | | Exhibit | | Filing Date | | Filed Herewith |
| | | | | | | | | | | | |
31.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
31.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
32.1* | | | | | | | | | | | | |
| | | | | | | | | | | | |
99.1 | | Fourth Amendment to Third Amendment and Restated Credit | | | | | | | | | | X |
| | | | | | | | | | | | |
99.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
99.3 | | | | | | | | | | | | X |
| | | | | | | | | | | | |
101.INS | | XBRL Instance 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 |
| | | | | | | | | | | | |
|
* Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| |
| PDC Energy, Inc. |
| (Registrant) |
| |
| |
| |
| |
Date: May 5, 20172, 2018 | /s/ Barton R. Brookman |
| Barton R. Brookman |
| President and Chief Executive Officer |
| (principal executive officer) |
| |
| /s/ David W. HoneyfieldR. Scott Meyers |
| David W. HoneyfieldR. Scott Meyers |
| Senior Vice President and Chief Financial Officer |
| (principal financial officer) |
| |
| |
| |
| |
| |