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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _________

Commission File Number 001-37419
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13049301&doc=10
PDC ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
95-2636730
(State of incorporation)
(I.R.S. Employer Identification No.)
1775 Sherman Street, Suite 3000
Denver, Colorado 80203
(Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (303) 860-5800

Securities registered pursuant to Section 12(b) of the Act.
Title of each class
 
Ticker Symbol
 
Name of each exchange on which registered
Common stock, par value $0.01 per share
 
PDCE
 
Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
Accelerated filer 
Non-accelerated filer  
Smaller reporting company 
 
 
Emerging growth company 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 62,597,588 shares of the Company's Common Stock ($0.01 par value) were outstanding as of July 22, 2019.


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PDC ENERGY, INC.


TABLE OF CONTENTS

 
PART I – FINANCIAL INFORMATION
 
Page
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
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." Words such as expect, anticipate, intend, plan, believe, seek, estimate, schedule and similar expressions or variations of such words are intended to identify forward-looking statements herein. Forward-looking statements include, among other things, statements regarding future: production, costs and cash flows; drilling locations, zones and growth opportunities; commodity prices and differentials; capital expenditures and projects, including the number of rigs employed, and that cash flows from operations will exceed expected capital investments in crude oil and natural gas properties for 2019 and 2020; our stock repurchase program, which may be modified or discontinued at any time; potential additional payments from the sale of our midstream assets; financial ratios and compliance with covenants in our revolving credit facility and other debt instruments; impacts of certain accounting and tax changes; timing and adequacy of infrastructure projects of our midstream providers and the related impact on our midstream capacity and related curtailments; fractionation capacity; impacts of Colorado political matters and expected timing of rulemakings; ability to meet our volume commitments to midstream providers; ongoing compliance with our consent decree and expected timing of certain litigation; and reclassification of the Denver Metro/North Front Range NAA ozone classification to serious.

The above statements are not the exclusive means of identifying forward-looking statements herein. Although forward-looking statements contained in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known to us. Forward-looking statements are always subject to risks and uncertainties, and become subject to greater levels of risk and uncertainty as they address matters further into the future. Throughout this report or accompanying materials, we may use the term “projection” or similar terms or expressions, or indicate that we have “modeled” certain future scenarios. We typically use these terms to indicate our current thoughts on possible outcomes relating to our business or our industry in periods beyond the current fiscal year. Because such statements relate to events or conditions further in the future, they are subject to increased levels of uncertainty.

Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:

changes in global 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 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;
difficulties in integrating our operations as a result of any significant acquisitions or acreage exchanges;
increases or changes in costs and expenses;
availability of supplies, materials, contractors and services that may delay the drilling or completion of our wells;
potential losses of acreage due to lease expirations or otherwise;
increases or changes in costs and expenses;
future cash flows, liquidity and financial condition;
competition within the oil and gas industry;
availability and cost of capital;


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our success in marketing crude oil, natural gas and NGLs;
effect of crude oil and natural gas derivative activities;
impact to our operations, personnel retention, strategy, stock price and expenses caused by the actions of activist shareholders;
impact of environmental events, governmental and other third-party responses to such events and our ability to insure adequately against such events;
cost of pending or future litigation;
effect that acquisitions we may pursue have on our capital 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, 2018 filed with the U.S. Securities and Exchange Commission ("SEC") on February 28, 2019 (the "2018 Form 10-K"), our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 filed with the SEC on May 2, 2019 (the "2019 Q1 Form 10-Q") 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" 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.


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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PDC ENERGY, INC.
Condensed Consolidated Balance Sheets
(unaudited; in thousands, except share and per share data)
 
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
1,474

 
$
1,398

Accounts receivable, net
 
277,321

 
181,434

Fair value of derivatives
 
41,425

 
84,492

Prepaid expenses and other current assets
 
5,607

 
7,136

Total current assets
 
325,827

 
274,460

Properties and equipment, net
 
4,196,335

 
4,002,862

Assets held-for-sale, net
 

 
140,705

Fair value of derivatives
 
31,655

 
93,722

Other assets
 
41,087

 
32,396

Total Assets
 
$
4,594,904

 
$
4,544,145

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Liabilities
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
219,158

 
$
181,864

Production tax liability
 
69,951

 
60,719

Fair value of derivatives
 
19,775

 
3,364

Funds held for distribution
 
88,879

 
105,784

Accrued interest payable
 
14,273

 
14,150

Other accrued expenses
 
86,523

 
75,133

Total current liabilities
 
498,559

 
441,014

Long-term debt
 
1,197,744

 
1,194,876

Deferred income taxes
 
183,120

 
198,096

Asset retirement obligations
 
78,909

 
85,312

Liabilities held-for-sale
 

 
4,111

Fair value of derivatives
 
927

 
1,364

Other liabilities
 
257,239

 
92,664

Total liabilities
 
2,216,498

 
2,017,437

 
 
 
 
 
Commitments and contingent liabilities
 

 

 
 
 
 
 
Stockholders' equity
 
 
 
 
Common shares - par value $0.01 per share, 150,000,000 authorized, 63,520,462 and 66,148,609 issued as of June 30, 2019 and December 31, 2018, respectively
 
635

 
661

Additional paid-in capital
 
2,433,974

 
2,519,423

Retained earnings (deficit)
 
(42,901
)
 
8,727

Treasury shares - at cost, 364,780 and 45,220
as of June 30, 2019 and December 31, 2018, respectively
 
(13,302
)
 
(2,103
)
Total stockholders' equity
 
2,378,406

 
2,526,708

Total Liabilities and Stockholders' Equity
 
$
4,594,904

 
$
4,544,145




See accompanying Notes to Condensed Consolidated Financial Statements
1

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PDC ENERGY, INC.
Condensed Consolidated Statements of Operations
(unaudited; in thousands, except per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
 
Crude oil, natural gas and NGLs sales
 
$
338,956

 
$
325,933

 
$
660,055

 
$
631,158

Commodity price risk management gain (loss), net
 
47,349

 
(116,126
)
 
(142,725
)
 
(163,366
)
Other income
 
4,353

 
2,724

 
7,828

 
5,339

Total revenues
 
390,658

 
212,531

 
525,158

 
473,131

Costs, expenses and other
 
 
 
 
 
 
 
 
Lease operating expenses
 
34,328

 
32,260

 
69,549

 
61,896

Production taxes
 
22,642

 
22,604

 
44,810

 
42,773

Transportation, gathering and processing expenses
 
12,208

 
8,964

 
23,632

 
16,277

Exploration, geologic and geophysical expense
 
640

 
875

 
3,283

 
3,521

Impairment of properties and equipment
 
28,979

 
159,554

 
36,854

 
192,742

General and administrative expense
 
42,808

 
37,247

 
82,406

 
72,943

Depreciation, depletion and amortization
 
168,523

 
135,624

 
319,945

 
262,412

Accretion of asset retirement obligations
 
1,563

 
1,285

 
3,147

 
2,573

(Gain) loss on sale of properties and equipment
 
(33,904
)
 
(351
)
 
(34,273
)
 
1,081

Other expenses
 
2,836

 
2,708

 
6,390

 
5,476

Total costs, expenses and other
 
280,623

 
400,770

 
555,743

 
661,694

Income (loss) from operations
 
110,035

 
(188,239
)
 
(30,585
)
 
(188,563
)
Interest expense
 
(18,905
)
 
(17,410
)
 
(35,883
)
 
(34,939
)
Interest income
 
5

 
69

 
15

 
217

Income (loss) before income taxes
 
91,135

 
(205,580
)
 
(66,453
)
 
(223,285
)
Income tax (expense) benefit
 
(22,587
)
 
45,323

 
14,825

 
49,889

Net income (loss)
 
$
68,548

 
$
(160,257
)
 
$
(51,628
)
 
$
(173,396
)
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
1.04

 
$
(2.43
)
 
$
(0.78
)
 
$
(2.63
)
Diluted
 
$
1.04

 
$
(2.43
)
 
$
(0.78
)
 
$
(2.63
)
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
65,815

 
66,066

 
65,998

 
66,012

Diluted
 
65,926

 
66,066

 
65,998

 
66,012

 
 
 
 
 
 
 
 
 


 

See accompanying Notes to Condensed Consolidated Financial Statements
2

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PDC ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited; in thousands)
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(51,628
)
 
$
(173,396
)
Adjustments to net loss to reconcile to net cash from operating activities:
 
 
 
 
Net change in fair value of unsettled commodity derivatives
 
121,080

 
120,920

Depreciation, depletion and amortization
 
319,945

 
262,412

Impairment of properties and equipment
 
36,854

 
192,742

Accretion of asset retirement obligations
 
3,147

 
2,573

Non-cash stock-based compensation
 
12,258

 
10,779

(Gain) loss on sale of properties and equipment
 
(34,273
)
 
1,081

Amortization of debt discount and issuance costs
 
6,731

 
6,372

Deferred income taxes
 
(14,975
)
 
(50,181
)
Other
 
395

 
974

Changes in assets and liabilities
 
42,702

 
6,581

Net cash from operating activities
 
442,236

 
380,857

Cash flows from investing activities:
 
 
 
 
Capital expenditures for development of crude oil and natural gas properties
 
(542,791
)
 
(432,635
)
Capital expenditures for other properties and equipment
 
(10,453
)
 
(2,450
)
Acquisition of crude oil and natural gas properties
 
(4,146
)
 
(181,052
)
Proceeds from sale of properties and equipment
 
1,154

 
1,782

Proceeds from divestitures
 
199,430

 
39,023

Restricted cash
 
8,001

 
1,249

Net cash from investing activities
 
(348,805
)
 
(574,083
)
Cash flows from financing activities:
 
 
 
 
Proceeds from revolving credit facility
 
890,000

 
233,000

Repayment of revolving credit facility
 
(892,500
)
 
(211,000
)
Payment of debt issuance costs
 
(36
)
 
(4,060
)
Purchase of treasury shares
 
(94,113
)
 

Purchase of treasury shares for employee stock-based compensation tax withholding obligations
 
(3,717
)
 
(4,494
)
Other
 
(990
)
 
(719
)
Net cash from financing activities
 
(101,356
)
 
12,727

Net change in cash, cash equivalents and restricted cash
 
(7,925
)
 
(180,499
)
Cash, cash equivalents and restricted cash, beginning of period
 
9,399

 
189,925

Cash, cash equivalents and restricted cash, end of period
 
$
1,474

 
$
9,426




See accompanying Notes to Condensed Consolidated Financial Statements
3

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PDC ENERGY, INC.
Condensed Consolidated Statements of Equity
(unaudited; in thousands, except share data)

 
Three Months Ended June 30, 2019
 
Common Stock
 
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Shares
 
Amount
 
Retained Earnings (Deficit)
 
Total Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2019
66,196,863

 
$
662

 
$
2,521,558

 
(22,635
)
 
$
(1,016
)
 
$
(111,449
)
 
$
2,409,755

Net income

 

 

 

 

 
68,548

 
68,548

Stock-based compensation
148,040

 
1

 
7,574

 

 

 

 
7,575

Purchase of treasury shares for employee stock-based compensation tax withholding obligations

 

 

 
(54,784
)
 
(2,257
)
 

 
(2,257
)
Retirement of treasury shares for employee stock-based compensation tax withholding obligations
(2,182
)
 

 
(78
)
 
2,182

 
78

 

 

Purchase of treasury shares

 

 

 
(3,136,406
)
 
(105,215
)
 

 
(105,215
)
Retirement of treasury shares
(2,822,259
)
 
(28
)
 
(94,085
)
 
2,822,259

 
94,113

 

 

Issuance of treasury shares

 

 
(995
)
 
24,604

 
995

 

 

Balance, June 30, 2019
63,520,462

 
$
635

 
$
2,433,974

 
(364,780
)
 
$
(13,302
)
 
$
(42,901
)
 
$
2,378,406



 
Three Months Ended June 30, 2018
 
Common Stock
 
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Shares
 
Amount
 
Retained Earnings (Deficit)
 
Total Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, March 31, 2018
65,999,010

 
$
660

 
$
2,504,663

 
(29,255
)
 
$
(1,514
)
 
$
(6,435
)
 
$
2,497,374

Net loss

 

 

 

 

 
(160,257
)
 
(160,257
)
Stock-based compensation
134,015

 
1

 
5,517

 

 

 

 
5,518

Purchase of treasury shares for employee stock-based compensation tax withholding obligations

 

 

 
(45,706
)
 
(2,239
)
 

 
(2,239
)
Issuance of treasury shares

 

 
(397
)
 
7,792

 
397

 

 

Other

 

 
(90
)
 

 

 

 
(90
)
Balance, June 30, 2018
66,133,025

 
$
661

 
$
2,509,693

 
(67,169
)
 
$
(3,356
)
 
$
(166,692
)
 
$
2,340,306





















See accompanying Notes to Condensed Consolidated Financial Statements
4

Table of contents


PDC ENERGY, INC.
Condensed Consolidated Statements of Equity
(unaudited; in thousands, except share data)

 
Six Months Ended June 30, 2019
 
Common Stock
 
 
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Shares
 
Amount
 
Retained Earnings (Deficit)
 
Total Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
66,148,609

 
$
661

 
$
2,519,423

 
(45,220
)
 
$
(2,103
)
 
$
8,727

 
$
2,526,708

Net loss

 

 

 

 

 
(51,628
)
 
(51,628
)
Stock-based compensation
196,294

 
2

 
12,256

 

 

 

 
12,258

Purchase of treasury shares for employee stock-based compensation tax withholding obligations

 

 

 
(96,571
)
 
(3,717
)
 

 
(3,717
)
Retirement of treasury shares for employee stock-based compensation tax withholding obligations
(2,182
)
 

 
(78
)
 
2,182

 
78

 

 

Purchase of treasury shares

 

 

 
(3,136,406
)
 
(105,215
)
 

 
(105,215
)
Retirement of treasury shares
(2,822,259
)
 
(28
)
 
(94,085
)
 
2,822,259

 
94,113

 

 

Issuance of treasury shares

 

 
(3,542
)
 
88,976

 
3,542

 

 

Balance, June 30, 2019
63,520,462

 
$
635

 
$
2,433,974

 
(364,780
)
 
$
(13,302
)
 
$
(42,901
)
 
$
2,378,406



 
Six Months Ended June 30, 2018
 
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

 

 

 

 

 
(173,396
)
 
(173,396
)
Stock-based compensation
177,945

 
2

 
10,777

 

 

 

 
10,779

Purchase of treasury shares for employee stock-based compensation tax withholding obligations

 

 

 
(87,063
)
 
(4,494
)
 

 
(4,494
)
Issuance of treasury shares

 

 
(4,288
)
 
78,395

 
4,288

 

 

Non-employee directors' deferred compensation plan

 

 

 
(2,574
)
 
(142
)
 

 
(142
)
Other

 

 
(90
)
 

 

 

 
(90
)
Balance, June 30, 2018
66,133,025

 
$
661

 
$
2,509,693

 
(67,169
)
 
$
(3,356
)
 
$
(166,692
)
 
$
2,340,306




See accompanying Notes to Condensed Consolidated Financial Statements
5

Table of Contents
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)


NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION

PDC Energy, Inc. is a domestic independent exploration and production company that acquires, explores and develops properties for the production of crude oil, natural gas and NGLs, with operations in the Wattenberg Field in Colorado and the Delaware Basin in Texas. Our operations in the Wattenberg Field are focused in the horizontal Niobrara and Codell plays and our Delaware Basin operations are primarily focused in the Wolfcamp zones. We previously operated properties in the Utica Shale in Southeastern Ohio; however, we divested these properties during the first quarter of 2018. As of June 30, 2019, we owned an interest in approximately 2,800 gross productive wells. We are engaged in two operating segments: our oil and gas exploration and production segment and our gas marketing segment. Our 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; 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 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, 2018 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 2018 Form 10-K. Our results of operations and cash flows for the six months ended June 30, 2019 are not necessarily indicative of the results to be expected for the full year or any other future period.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued an accounting update and subsequent amendments 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 “New Lease Standard”). For leases with terms of more than 12 months, the accounting update requires lessees to recognize a right-of-use ("ROU") asset and lease liability for its right to use the underlying asset and the corresponding lease obligation. As provided by practical expedients, we made accounting policy elections to not recognize ROU assets and lease liabilities that arise from short-term leases and to not separate lease and non-lease components for any class of underlying asset. The FASB issued an accounting update which provides an optional transition practical expedient for the adoption of the New Lease Standard that, if elected, permits an organization to not evaluate the accounting for existing land easements that are not accounted for under the previous lease accounting standard. We elected this practical expedient, and accordingly, existing land easements at December 31, 2018 were not assessed. All new or modified land easements entered into after January 1, 2019 are evaluated under the New Lease Standard. The New Lease Standard does not apply to leases of mineral rights to explore for or use crude oil and natural gas. Adoption of the New Lease Standard resulted in increases to other assets of $20.1 million, other accrued expenses of $4.6 million and other liabilities of $15.5 million at January 1, 2019, with no adjustment to the opening balance of retained earnings.

Recently Issued Accounting Standards

In June 2016, the FASB issued an accounting update and subsequent amendments on the impairment of financial instruments. The update adds a new impairment model, known as the current expected credit loss ("CECL") model, which is based upon expected credit losses rather than incurred losses. Under the new guidance, an allowance will be recognized based upon the entity's estimate of lifetime expected credit losses. The update is effective for fiscal years beginning after December

6

Table of contents
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)


15, 2019, including interim periods within those fiscal years and early adoption is permitted. We are currently evaluating the impact these changes may have on our condensed consolidated financial statements.

NOTE 3 - REVENUE RECOGNITION

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 delivered and prices received. We receive payment for sales 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.        

Disaggregated Revenue. The following table presents crude oil, natural gas and NGLs sales disaggregated by
commodity and operating region for the three and six months ended June 30, 2019 and 2018 (in thousands):

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Revenue by Commodity and Operating Region
 
2019
 
2018
 
Percent Change
 
2019
 
2018
 
Percentage Change
Crude oil
 
 
 
 
 
 
 
 
 
 
 
 
Wattenberg Field
 
$
203,548

 
$
189,992

 
7.1
 %
 
$
383,974

 
$
360,299

 
6.6
 %
Delaware Basin
 
70,620

 
62,599

 
12.8
 %
 
121,277

 
116,016

 
4.5
 %
Utica Shale (1)
 

 
 
*

 

 
2,696

 
*

Total
 
$
274,168

 
$
252,591

 
8.5
 %
 
$
505,251

 
$
479,011

 
5.5
 %
 Natural gas
 
 
 
 
 
 
 
 
 
 
 
 
Wattenberg Field
 
$
30,129

 
$
22,640

 
33.1
 %
 
$
76,831

 
$
52,412

 
46.6
 %
Delaware Basin
 
910

 
7,472

 
(87.8
)%
 
6,680

 
15,151

 
(55.9
)%
Utica Shale (1)
 

 

 
*

 

 
1,109

 
*

Total
 
$
31,039

 
$
30,112

 
3.1
 %
 
$
83,511

 
$
68,672

 
21.6
 %
NGLs
 
 
 
 
 
 
 
 
 
 
 
 
Wattenberg Field
 
$
22,677

 
$
30,271

 
(25.1
)%
 
$
50,399

 
$
59,041

 
(14.6
)%
Delaware Basin
 
11,072

 
12,959

 
(14.6
)%
 
20,894

 
23,594

 
(11.4
)%
Utica Shale (1)
 

 

 
*

 

 
840

 
*

Total
 
$
33,749

 
$
43,230

 
(21.9
)%
 
$
71,293

 
$
83,475

 
(14.6
)%
Revenue by Operating Region
 
 
 
 
 
 
 
 
 
 
 
 
Wattenberg Field
 
$
256,354

 
$
242,903

 
5.5
 %
 
$
511,204

 
$
471,752

 
8.4
 %
Delaware Basin
 
82,602

 
83,030

 
(0.5
)%
 
148,851

 
154,761

 
(3.8
)%
Utica Shale (1)
 

 

 
*

 

 
4,645

 
*

Total
 
$
338,956

 
$
325,933

 
4.0
 %
 
$
660,055

 
$
631,158

 
4.6
 %
(1)
In March 2018, we completed the disposition of our Utica Shale properties.



7

Table of contents
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)


NOTE 4 - 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 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.

Our crude oil and natural gas fixed-price swaps are included in Level 2. Our collars 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:
 
June 30, 2019
 
December 31, 2018
 
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)
Total assets
$
48,200

 
$
24,880

 
$
73,080

 
$
118,521

 
$
59,693

 
$
178,214

Total liabilities
(18,326
)
 
(2,376
)
 
(20,702
)
 
(3,364
)
 
(1,364
)
 
(4,728
)
Net asset
$
29,874

 
$
22,504

 
$
52,378

 
$
115,157

 
$
58,329

 
$
173,486

 
 
 
 
 
 
 
 
 
 
 
 


8

Table of contents
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(unaudited)


The following table presents a reconciliation of our Level 3 assets measured at fair value:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
(in thousands)
Fair value of Level 3 instruments, net asset (liability) beginning of period
 
$
12,990

 
$
(8,834
)
 
$
58,329

 
$
(9,687
)
Changes in fair value included in condensed consolidated statement of operations line item:
 
 
 
 
 
 
 
 
Commodity price risk management gain (loss), net
 
10,597

 
(4,701
)
 
(32,923
)