UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended March 31, 2020
or
For the transition period from __________ to _________
Commission File Number 001-37419
(Exact name of registrant as specified in its charter)
(State of incorporation) | (I.R.S. Employer Identification No.) |
(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 | ||
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.
x | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 99,542,924 shares of the Company's Common Stock ($0.01 par value) were outstanding as of April 22, 2020.
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. | |||
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; cash flows from operations relative to future capital investments; our currently suspended stock repurchase program; 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; ability to obtain permits from the Colorado Oil and Gas Conservation Commission ("COGCC") in a timely manner; and ongoing compliance with our consent decree and expected timing of certain litigation.
The above statements are not the exclusive means of identifying forward-looking statements herein. Although forward-looking statements contained in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known to us. Forward-looking statements are always subject to risks and uncertainties, and become subject to greater levels of risk and uncertainty as they address matters further into the future. Throughout this report or accompanying materials, we may use the term “projection” or similar terms or expressions, or indicate that we have “modeled” certain future scenarios. We typically use these terms to indicate our current thoughts on possible outcomes relating to our business or our industry in periods beyond the current fiscal year. Because such statements relate to events or conditions further in the future, they are subject to increased levels of uncertainty.
Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:
• | the COVID-19 pandemic, including its effects on commodity prices, downstream capacity, employee health and safety, business continuity and regulatory matters; |
• | changes in global production volumes and demand, including economic conditions that might impact demand and prices for the products we produce; |
• | geopolitical factors, such as events that may reduce or increase production from particular oil-producing regions and/or from members of the Organization of Petroleum Exporting Countries; |
• | volatility of commodity prices for crude oil, natural gas and natural gas liquids ("NGLs") and the risk of an extended period of depressed prices, including risks relating to decreased revenue, income and cash flow, write-downs and impairments and capital availability; |
• | 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; |
• | impact of recent regulatory developments in Colorado with respect to additional permit scrutiny; |
• | declines in the value of our crude oil, natural gas and NGLs properties resulting in impairments; |
• | changes in estimates of proved reserves; |
• | inaccuracy of reserve estimates and expected production rates; |
• | potential for production decline rates from our wells being greater than expected; |
• | timing and extent of our success in discovering, acquiring, developing and producing reserves; |
• | availability and cost of sufficient pipeline, gathering and other transportation facilities and related infrastructure to process and transport our production and the impact of these facilities and regional capacity on the prices we receive for our production; |
• | 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, including the merger with SRC Energy Inc. ("SRC"), or acreage exchanges; |
• | increases or changes in costs and expenses; |
• | limitations in the availability of supplies, materials, contractors and services that may delay the drilling or completion of our wells; |
• | potential losses of acreage due to lease expirations or otherwise; |
• | future cash flows, liquidity and financial condition; |
• | competition within the oil and gas industry; |
• | availability and cost of capital; |
• | 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, 2019 filed with the U.S. Securities and Exchange Commission ("SEC") on February 26, 2020 (the "2019 Form 10-K"), 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.
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, 2020 | December 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net | ||||||||
Fair value of derivatives | ||||||||
Prepaid expenses and other current assets | ||||||||
Total current assets | ||||||||
Properties and equipment, net | ||||||||
Fair value of derivatives | ||||||||
Other assets | ||||||||
Total Assets | $ | $ | ||||||
Liabilities and Stockholders' Equity | ||||||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Production tax liability | ||||||||
Fair value of derivatives | ||||||||
Funds held for distribution | ||||||||
Accrued interest payable | ||||||||
Other accrued expenses | ||||||||
Total current liabilities | ||||||||
Long-term debt | ||||||||
Deferred income taxes | ||||||||
Asset retirement obligations | ||||||||
Fair value of derivatives | ||||||||
Other liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingent liabilities | ||||||||
Stockholders' equity | ||||||||
Common shares - par value $0.01 per share, 150,000,000 authorized, 99,438,122 and 61,652,412 issued as of March 31, 2020 and December 31, 2019, respectively | ||||||||
Additional paid-in capital | ||||||||
Retained deficit | ( | ) | ( | ) | ||||
Treasury shares - at cost, 20,493 and 34,922 as of March 31, 2020 and December 31, 2019, respectively | ( | ) | ( | ) | ||||
Total stockholders' equity | ||||||||
Total Liabilities and Stockholders' Equity | $ | $ | ||||||
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, | ||||||||
2020 | 2019 | |||||||
Revenues | ||||||||
Crude oil, natural gas and NGLs sales | $ | $ | ||||||
Commodity price risk management gain (loss), net | ( | ) | ||||||
Other income | ||||||||
Total revenues | ||||||||
Costs, expenses and other | ||||||||
Lease operating expenses | ||||||||
Production taxes | ||||||||
Transportation, gathering and processing expenses | ||||||||
Exploration, geologic and geophysical expense | ||||||||
General and administrative expense | ||||||||
Depreciation, depletion and amortization | ||||||||
Accretion of asset retirement obligations | ||||||||
Impairment of properties and equipment | ||||||||
Gain on sale of properties and equipment | ( | ) | ( | ) | ||||
Other expenses | ||||||||
Total costs, expenses and other | ||||||||
Loss from operations | ( | ) | ( | ) | ||||
Interest expense, net | ( | ) | ( | ) | ||||
Loss before income taxes | ( | ) | ( | ) | ||||
Income tax benefit | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Earnings per share: | ||||||||
Basic | $ | ( | ) | $ | ( | ) | ||
Diluted | $ | ( | ) | $ | ( | ) | ||
Weighted-average common shares outstanding: | ||||||||
Basic | ||||||||
Diluted | ||||||||
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, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to net loss to reconcile to net cash from operating activities: | ||||||||
Net change in fair value of unsettled commodity derivatives | ( | ) | ||||||
Depreciation, depletion and amortization | ||||||||
Impairment of properties and equipment | ||||||||
Accretion of asset retirement obligations | ||||||||
Non-cash stock-based compensation | ||||||||
Gain on sale of properties and equipment | ( | ) | ( | ) | ||||
Amortization of debt discount, premium and issuance costs | ||||||||
Deferred income taxes | ( | ) | ( | ) | ||||
Other | ||||||||
Changes in assets and liabilities | ( | ) | ||||||
Net cash from operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Capital expenditures for development of crude oil and natural gas properties | ( | ) | ( | ) | ||||
Capital expenditures for other properties and equipment | ( | ) | ( | ) | ||||
Acquisition of crude oil and natural gas properties | ( | ) | ||||||
Proceeds from sale of properties and equipment | ||||||||
Proceeds from divestitures | ||||||||
Net cash from investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from revolving credit facility | ||||||||
Repayment of revolving credit facility | ( | ) | ( | ) | ||||
Payment of debt issuance costs | ( | ) | ||||||
Purchase of treasury shares | ( | ) | ||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | ( | ) | ( | ) | ||||
Redemption of senior notes | ( | ) | ||||||
Principal payments under financing lease obligations | ( | ) | ( | ) | ||||
Other | ( | ) | ||||||
Net cash from financing activities | ||||||||
Net change in cash, cash equivalents and restricted cash | ( | ) | ||||||
Cash, cash equivalents and restricted cash, beginning of period | ||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
3
PDC ENERGY, INC.
Condensed Consolidated Statements of Equity
(unaudited; in thousands, except share data)
Three Months Ended March 31, 2020 | |||||||||||||||||||||||||
Common Stock | Treasury Stock | ||||||||||||||||||||||||
Shares | Amount | Additional Paid-in Capital | Shares | Amount | Retained Deficit | Total Stockholders' Equity | |||||||||||||||||||
Balance, December 31, 2019 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Net loss | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||
Issuance pursuant to acquisition | — | — | — | ||||||||||||||||||||||
Stock-based compensation | — | — | |||||||||||||||||||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||
Retirement of treasury shares for employee stock-based compensation tax withholding obligations | ( | ) | ( | ) | ( | ) | — | — | |||||||||||||||||
Purchase of treasury shares | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||
Retirement of treasury shares | ( | ) | ( | ) | ( | ) | — | — | |||||||||||||||||
Issuance of treasury shares | ( | ) | — | — | — | ||||||||||||||||||||
Balance, March 31, 2020 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Three Months Ended March 31, 2019 | |||||||||||||||||||||||||
Common Stock | Treasury Stock | ||||||||||||||||||||||||
Shares | Amount | Additional Paid-in Capital | Shares | Amount | Retained Earnings (Deficit) | Total Stockholders' Equity | |||||||||||||||||||
Balance, December 31, 2018 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||
Stock-based compensation | — | — | |||||||||||||||||||||||
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||
Issuance of treasury shares | ( | ) | ( | ) | — | ||||||||||||||||||||
Balance, March 31, 2019 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(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. As of March 31, 2020, we owned an interest in approximately 3,900 gross productive wells.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently Adopted Accounting Standards.
In March 2020, the Securities and Exchange Commission (“SEC”) adopted final rules that amend the financial disclosure requirements for subsidiary issuers and guarantors of registered debt securities in Rule 3-10 of Regulation S-X. The amended rules, which can be found under new Rule 13-01 of Regulation S-X, narrow the circumstances that require separate financial statements of subsidiary issuers and guarantors and streamline the alternative disclosures required in lieu of those statements. The amended rules allow the registrants, among other things, to disclose summarized financial information of the issuer and guarantors on a combined basis and to present only the most recently completed fiscal year and subsequent year-to-date interim period. The rule allows the parent company to omit summarized financial information if it is not material, or if assets, liabilities, and results of operations of the combined issuers and guarantors of the security are not materially different than the amounts in the parent company’s consolidated financial statements. The rule is effective in the first quarter of 2021, but earlier compliance is permitted. We early adopted the rule in the first quarter of 2020 and chose to omit the summarized financial information as the combined financial statements of the issuer and guarantors were not materially different than the amounts in our consolidated financial statements.
NOTE 3 - BUSINESS COMBINATION
In January 2020, we merged with SRC in a transaction valued at $1.7 billion, inclusive of SRC's net debt (the "SRC Acquisition"). Upon closing, we issued approximately 39 million shares of our common stock to SRC shareholders and holders of SRC equity awards, reflecting the issuance of 0.158 of a share of our common stock in exchange for each outstanding share of SRC common stock and the cancellation of outstanding SRC equity awards pursuant to the merger agreement that we entered into with SRC (the "Merger Agreement"). We are accounting for the SRC Acquisition under the acquisition method of accounting for business combinations. During the three months ended March 31, 2020, we recorded transaction costs related to the SRC Acquisition of $20.2 million. These expenses were accounted for separately from the assets and liabilities assumed, and are included in general and administrative expense.
5
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)
The details of the estimated purchase price and the preliminary allocation of the purchase price for the transaction, are as follows:
Three Months Ended March 31, 2020 | |||
(in thousands) | |||
Consideration: | |||
Cash | $ | ||
Retirement of seller's credit facility | |||
Total cash consideration | |||
Common stock issued | |||
Shares withheld in lieu of taxes | |||
Total consideration | $ | ||
Recognized amounts of identifiable assets acquired and liabilities assumed: | |||
Assets acquired: | |||
Current assets | $ | ||
Properties and equipment, net - proved | |||
Properties and equipment, net - unproved | |||
Properties and equipment, net - other | |||
Deferred tax asset | |||
Other assets | |||
Total assets acquired | |||
Liabilities assumed: | |||
Current liabilities | ( | ) | |
Senior notes | ( | ) | |
Asset retirement obligations | ( | ) | |
Other liabilities | ( | ) | |
Total liabilities assumed | ( | ) | |
Total identifiable net assets acquired | $ | ||
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 proved and unproved 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 of 10 percent. These inputs require significant judgments and estimates by management at the time of the valuation. As of the date of this report, we expect that it may take into late 2020 until all post-closing adjustments are finalized.
Pro Forma Information. The results of operations for the SRC Acquisition since the January 14, 2020 closing date have been included in our March 31, 2020 condensed consolidated financial statements and include approximately $103.5 million of total revenue and $13.2 million of income from operations. The following unaudited pro forma financial information represents a summary of the consolidated results of operations for the three months ended March 31, 2019, assuming the acquisition had been completed as of January 1, 2019. The pro forma financial information includes certain non-recurring pro forma adjustments that were directly attributable to the business combination. The pro forma financial information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had been effective as of these dates, or of future results.
6
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(in thousands, except per share data) | ||||||||
Total revenue | $ | $ | ||||||
Net loss | ( | ) | ( | ) | ||||
Earnings per share: | ||||||||
Basic | $ | ( | ) | $ | ( | ) | ||
Diluted | $ | ( | ) | $ | ( | ) | ||
NOTE 4 - 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 months ended March 31, 2020 and 2019:
Three Months Ended March 31, | |||||||||||
Revenue by Commodity and Operating Region | 2020 | 2019 | Percentage Change | ||||||||
(in thousands) | |||||||||||
Crude oil | |||||||||||
Wattenberg Field | $ | $ | % | ||||||||
Delaware Basin | ( | )% | |||||||||
Total | $ | $ | % | ||||||||
Natural gas | |||||||||||
Wattenberg Field | $ | $ | ( | )% | |||||||
Delaware Basin (1) | ( | ) | ( | )% | |||||||
Total | $ | $ | ( | )% | |||||||
NGLs | |||||||||||
Wattenberg Field | $ | $ | ( | )% | |||||||
Delaware Basin | ( | )% | |||||||||
Total | $ | $ | ( | )% | |||||||
Crude oil, natural gas and NGLs | |||||||||||
Wattenberg Field | $ | $ | % | ||||||||
Delaware Basin | ( | )% | |||||||||
Total | $ | $ | ( | )% | |||||||
(1) Negative natural gas revenue was due to the deduction for transportation, gathering
and processing by the purchaser exceeding the average sales price.
7
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)
NOTE 5 - 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 by corroborating the original source of inputs, monitoring changes in valuation methods and assumptions and through the review of counterparty statements and other supporting documentation.
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:
As of March 31, 2020 | As of December 31, 2019 | ||||||||||||||||||||||
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 | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Total liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Net asset | $ | $ | $ | $ | $ | $ | |||||||||||||||||
8
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)
The following table presents a reconciliation of our Level 3 assets measured at fair value:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
(in thousands) | ||||||||
Fair value of Level 3 instruments, net asset beginning of period | $ | $ | ||||||
Changes in fair value included in condensed consolidated statement of operations line item: | ||||||||
Commodity price risk management gain (loss), net | ( | ) | ||||||
Settlements included in condensed consolidated statement of operations line items: | ||||||||
Commodity price risk management gain (loss), net | ( | ) | ( | ) | ||||
Fair value of Level 3 instruments, net asset end of period | $ | $ | ||||||
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 | $ | $ | ( | ) | ||||
The significant unobservable input used in the fair value measurement of our derivative contracts is the implied volatility curve, which is provided by a third-party vendor. A significant increase or decrease in the implied volatility, in isolation, would have a directionally similar effect resulting in a significantly higher or lower fair value measurement of our Level 3 derivative contracts. There has been no change in the methodology we apply to measure the fair value of our Level 3 derivative contracts during the periods covered by the financial statements.
Non-Derivative Financial Assets and Liabilities
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. Unobservable inputs include estimated future crude oil and natural gas production, forward strip commodity pricing curves (adjusted for basis differentials), operating and development costs, future development plans and a discount rate of 17 percent, based on a weighted-average cost of capital (all of which were designated as Level 3 inputs within the fair value hierarchy).
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, 2020 | As of December 31, 2019 | |||||||||||||
Estimated Fair Value | Percent of Par | Estimated Fair Value | Percent of Par | |||||||||||
(in millions) | ||||||||||||||
Senior notes: | ||||||||||||||
2021 Convertible Notes | $ | % | $ | % | ||||||||||
2024 Senior Notes | % | % | ||||||||||||
2025 Senior Notes | % | % | ||||||||||||
2026 Senior Notes | % | % | ||||||||||||
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.
9
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)
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 lenders under our revolving credit facility as counterparties to our commodity derivative contracts. To date, we have had no derivative counterparty default losses. We have evaluated the credit risk of our derivative assets from our counterparties using relevant credit market default rates, giving consideration to amounts outstanding for each counterparty and the duration of each outstanding derivative position. Based on our evaluation, we have determined that the potential impact of nonperformance of our current counterparties on the fair value of our derivative instruments is not significant at March 31, 2020; however, this determination may change given the volatility of current market conditions.
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, 2020 and December 31, 2019. 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 lenders under our revolving credit facility.
NOTE 6 - 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 and natural gas 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 decreases in commodity prices, they also limit the benefit we might otherwise receive from price 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, 2020, we had derivative instruments, which were comprised of collars, fixed-price swaps and basis protection swaps, in place for a portion of our anticipated 2020, 2021 and 2022 production. Our commodity derivative contracts have been entered into at no upfront cost to us as we hedge our anticipated production at the then-prevailing commodity market prices, without adjustment for premium or discount.
10
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)
As of March 31, 2020, we had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted-average contract price is shown.
Collars | Fixed-Price Swaps | |||||||||||||||||||||
Commodity/ Index/ Maturity Period | Quantity (Crude oil - MBls Natural Gas - BBtu) | Weighted-Average Contract Price | Quantity (Crude Oil - MBbls Gas and Basis- BBtu ) | Weighted- Average Contract Price | Fair Value March 31, 2020 (1) (in thousands) | |||||||||||||||||
Floors | Ceilings | |||||||||||||||||||||
Crude Oil | ||||||||||||||||||||||
NYMEX | ||||||||||||||||||||||
2020 | $ | $ | $ | $ | ||||||||||||||||||
2021 | ||||||||||||||||||||||
2022 | ( | ) | ||||||||||||||||||||
Total Crude Oil | $ | |||||||||||||||||||||
Natural Gas | ||||||||||||||||||||||
NYMEX | ||||||||||||||||||||||
2020 | $ | $ | $ | $ | ||||||||||||||||||
2021 | ( | ) | ||||||||||||||||||||
Total Natural Gas | $ | ( | ) | |||||||||||||||||||
Basis Protection - Natural Gas | ||||||||||||||||||||||
CIG | ||||||||||||||||||||||
2020 | — | $ | — | $ | — | $ | ( | ) | $ | ( | ) | |||||||||||
2021 | — | — | — | ( | ) | ( | ) | |||||||||||||||
Waha | ||||||||||||||||||||||
2020 | — | — | — | ( | ) | ( | ) | |||||||||||||||
Total Basis Protection - Natural Gas | — | $ | ( | ) | ||||||||||||||||||
Commodity Derivatives Fair Value | $ | |||||||||||||||||||||
_____________
(1) | Approximately |
Subsequent to March 31, 2020, we entered into commodity derivative positions covering approximately 21,200
BBtu and 15,600 BBtu of New York Mercantile Exchange ("NYMEX") and CIG basis natural gas production, at average contract prices of $2.00 and $2.43 , respectively, for 2020 and 2021, respectively.
We have not elected to designate any of our derivative instruments as cash flow hedges; therefore, these instruments do not qualify for hedge accounting. Accordingly, changes in the fair value of our derivative instruments are recorded in the condensed consolidated statements of operations.
11
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)
The following table presents the condensed consolidated balance sheet line item and fair value amounts of our derivative instruments as of March 31, 2020 and December 31, 2019:
Fair Value | |||||||||||
Derivative Instruments: | Condensed Consolidated Balance Sheet Line Item | March 31, 2020 | December 31, 2019 | ||||||||
(in thousands) | |||||||||||
Derivative assets: | Current | ||||||||||
Commodity derivative contracts | Fair value of derivatives | $ | $ | ||||||||
Basis protection derivative contracts | Fair value of derivatives | ||||||||||
Non-current | |||||||||||
Commodity derivative contracts | Fair value of derivatives | ||||||||||
Total derivative assets | $ | $ | |||||||||
Derivative liabilities: | Current | ||||||||||
Commodity derivative contracts | Fair value of derivatives | $ | $ | ||||||||
Basis protection derivative contracts | Fair value of derivatives | ||||||||||
Non-current | |||||||||||
Commodity derivative contracts | Fair value of derivatives | ||||||||||
Basis protection derivative contracts | Fair value of derivatives | ||||||||||
Total derivative liabilities | $ | $ | |||||||||
The following table presents the impact of our derivative instruments on our condensed consolidated statements of operations:
Three Months Ended March 31, | ||||||||
Condensed Consolidated Statement of Operations Line Item | 2020 | 2019 | ||||||
(in thousands) | ||||||||
Commodity price risk management gain (loss), net | ||||||||
Net settlements | $ | $ | ( | ) | ||||
Net change in fair value of unsettled derivatives | ( | ) | ||||||
Total commodity price risk management gain (loss), net | $ | $ | ( | ) | ||||
Our financial derivative agreements contain master netting provisions that provide for the net settlement of contracts through a single payment in the event of early termination. We have elected not to offset the fair value positions recorded on our condensed consolidated balance sheets.
The following table reflects the impact of netting agreements on gross derivative assets and liabilities:
As of March 31, 2020 | Derivative Instruments, Gross | Effect of Master Netting Agreements | Derivative Instruments, Net | |||||||||
(in thousands) | ||||||||||||
Asset derivatives: | ||||||||||||