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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 March 31, 2020
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
https://cdn.kscope.io/faae4154bd34adddc999f80eb15738fd-logo123114a15.jpg
PDC ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
95-2636730
(State of incorporation)
(I.R.S. Employer Identification No.)
1775 Sherman Street, Suite 3000
Denver, Colorado 80203
(Address of principal executive offices) (Zip code)

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

Securities registered pursuant to Section 12(b) of the Act.
Title of each class
 
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: 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
 
$
61,244

 
$
963

Accounts receivable, net
 
270,012

 
266,354

Fair value of derivatives
 
379,355

 
28,078

Prepaid expenses and other current assets
 
9,800

 
8,635

Total current assets
 
720,411

 
304,030

Properties and equipment, net
 
5,034,494

 
4,095,202

Fair value of derivatives
 
58,094

 
3,746

Other assets
 
66,792

 
45,702

Total Assets
 
$
5,879,791

 
$
4,448,680

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Liabilities
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
223,277

 
$
98,934

Production tax liability
 
121,615

 
76,236

Fair value of derivatives
 
11,620

 
2,921

Funds held for distribution
 
165,247

 
98,393

Accrued interest payable
 
20,349

 
14,284

Other accrued expenses
 
75,333

 
70,462

Total current liabilities
 
617,441

 
361,230

Long-term debt
 
1,896,324

 
1,177,226

Deferred income taxes
 

 
195,841

Asset retirement obligations
 
138,654

 
95,051

Fair value of derivatives
 
14,030

 
692

Other liabilities
 
353,378

 
283,133

Total liabilities
 
3,019,827

 
2,113,173

 
 
 
 
 
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
 
994

 
617

Additional paid-in capital
 
3,372,711

 
2,384,309

Retained deficit
 
(512,960
)
 
(47,945
)
Treasury shares - at cost, 20,493 and 34,922
as of March 31, 2020 and December 31, 2019, respectively
 
(781
)
 
(1,474
)
Total stockholders' equity
 
2,859,964

 
2,335,507

Total Liabilities and Stockholders' Equity
 
$
5,879,791

 
$
4,448,680




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
 
$
320,315

 
$
321,099

Commodity price risk management gain (loss), net
 
434,698

 
(190,074
)
Other income
 
2,017

 
3,475

Total revenues
 
757,030

 
134,500

Costs, expenses and other
 
 
 
 
Lease operating expenses
 
49,534

 
35,221

Production taxes
 
18,470

 
22,168

Transportation, gathering and processing expenses
 
13,496

 
11,424

Exploration, geologic and geophysical expense
 
136

 
2,643

General and administrative expense
 
62,165

 
39,598

Depreciation, depletion and amortization
 
176,157

 
151,422

Accretion of asset retirement obligations
 
2,620

 
1,584

Impairment of properties and equipment
 
881,074

 
7,875

Gain on sale of properties and equipment
 
(179
)
 
(369
)
Other expenses
 
2,144

 
3,554

Total costs, expenses and other
 
1,205,617

 
275,120

Loss from operations
 
(448,587
)
 
(140,620
)
Interest expense, net
 
(24,173
)
 
(16,968
)
Loss before income taxes
 
(472,760
)
 
(157,588
)
Income tax benefit
 
7,745

 
37,412

Net loss
 
$
(465,015
)
 
$
(120,176
)
 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
 
$
(4.94
)
 
$
(1.82
)
Diluted
 
$
(4.94
)
 
$
(1.82
)
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
Basic
 
94,077

 
66,182

Diluted
 
94,077

 
66,182

 
 
 
 
 


 

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
 
$
(465,015
)
 
$
(120,176
)
Adjustments to net loss to reconcile to net cash from operating activities:
 
 
 
 
Net change in fair value of unsettled commodity derivatives
 
(388,875
)
 
181,622

Depreciation, depletion and amortization
 
176,157

 
151,422

Impairment of properties and equipment
 
881,074

 
7,875

Accretion of asset retirement obligations
 
2,620

 
1,584

Non-cash stock-based compensation
 
5,672

 
4,683

Gain on sale of properties and equipment
 
(179
)
 
(369
)
Amortization of debt discount, premium and issuance costs
 
3,640

 
3,349

Deferred income taxes
 
(6,331
)
 
(37,487
)
Other
 
1,011

 
21

Changes in assets and liabilities
 
56,507

 
(35,424
)
Net cash from operating activities
 
266,281

 
157,100

Cash flows from investing activities:
 
 
 
 
Capital expenditures for development of crude oil and natural gas properties
 
(190,768
)
 
(242,187
)
Capital expenditures for other properties and equipment
 
(455
)
 
(4,826
)
Acquisition of crude oil and natural gas properties
 
(139,812
)
 

Proceeds from sale of properties and equipment
 
793

 
102

Proceeds from divestitures
 
62

 

Net cash from investing activities
 
(330,180
)
 
(246,911
)
Cash flows from financing activities:
 
 
 
 
Proceeds from revolving credit facility
 
917,000

 
432,000

Repayment of revolving credit facility
 
(304,000
)
 
(340,500
)
Payment of debt issuance costs
 
(4,666
)
 

Purchase of treasury shares
 
(23,819
)
 

Purchase of treasury shares for employee stock-based compensation tax withholding obligations
 
(7,693
)
 
(1,460
)
Redemption of senior notes
 
(452,153
)
 

Principal payments under financing lease obligations
 
(489
)
 
(494
)
Other
 

 
(21
)
Net cash from financing activities
 
124,180

 
89,525

Net change in cash, cash equivalents and restricted cash
 
60,281

 
(286
)
Cash, cash equivalents and restricted cash, beginning of period
 
963

 
9,399

Cash, cash equivalents and restricted cash, end of period
 
$
61,244

 
$
9,113




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
61,652,412

 
$
617

 
$
2,384,309

 
(34,922
)
 
$
(1,474
)
 
$
(47,945
)
 
$
2,335,507

Net loss

 

 

 

 

 
(465,015
)
 
(465,015
)
Issuance pursuant to acquisition
39,182,045

 
391

 
1,014,921

 

 

 

 
1,015,312

Stock-based compensation
190,279

 
1

 
3,713

 

 
1,958

 

 
5,672

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

 

 

 
(306,185
)
 
(7,693
)
 

 
(7,693
)
Retirement of treasury shares for employee stock-based compensation tax withholding obligations
(251,287
)
 
(3
)
 
(6,425
)
 
251,287

 
6,428

 

 

Purchase of treasury shares

 

 

 
(1,266,000
)
 
(23,819
)
 

 
(23,819
)
Retirement of treasury shares
(1,266,000
)
 
(12
)
 
(23,807
)
 
1,266,000

 
23,819

 

 

Issuance of treasury shares
(69,327
)
 

 

 
69,327

 

 

 

Balance, March 31, 2020
99,438,122

 
$
994

 
$
3,372,711

 
(20,493
)
 
$
(781
)
 
$
(512,960
)
 
$
2,859,964



 
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
66,148,609

 
$
661

 
$
2,519,423

 
(45,220
)
 
$
(2,103
)
 
$
8,727

 
$
2,526,708

Net loss

 

 

 

 

 
(120,176
)
 
(120,176
)
Stock-based compensation
112,626

 

 
2,136

 

 
2,547

 

 
4,683

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

 

 

 
(41,787
)
 
(1,460
)
 

 
(1,460
)
Issuance of treasury shares
(64,372
)
 
1

 
(1
)
 
64,372

 

 

 

Balance, March 31, 2019
66,196,863

 
$
662

 
$
2,521,558

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



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.
 
The accompanying unaudited condensed consolidated financial statements include the accounts of PDC and our wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments necessary for a fair statement of 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, 2019 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 2019 Form 10-K. Our results of operations and cash flows for the three months ended March 31, 2020 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 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
$
40

Retirement of seller's credit facility
166,238

Total cash consideration
166,278

Common stock issued
1,009,015

Shares withheld in lieu of taxes
6,299

Total consideration
$
1,181,592

 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
 
Assets acquired:
 
Current assets
$
150,487

Properties and equipment, net - proved
1,613,759

Properties and equipment, net - unproved
109,615

Properties and equipment, net - other
16,242

Deferred tax asset
189,509

Other assets
12,367

Total assets acquired
2,091,979

Liabilities assumed:
 
Current liabilities
(261,845
)
Senior notes
(555,500
)
Asset retirement obligations
(40,074
)
Other liabilities
(52,968
)
Total liabilities assumed
(910,387
)
Total identifiable net assets acquired
$
1,181,592



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
 
$
778,370

 
$
301,099

Net loss
 
(445,743
)
 
(62,180
)
 
 
 
 
 
Earnings per share:
 
 
 
 
Basic
 
$
(4.45
)
 
$
(0.59
)
Diluted
 
$
(4.45
)
 
$
(0.59
)


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
 
$
206,649

 
$
180,426

 
14.5
 %
Delaware Basin
 
42,525

 
50,657

 
(16.1
)%
Total
 
$
249,174

 
$
231,083

 
7.8
 %
 Natural gas
 
 
 
 
 
 
Wattenberg Field
 
$
40,078

 
$
46,701

 
(14.2
)%
Delaware Basin (1)
 
(563
)
 
5,770

 
(109.8
)%
Total
 
$
39,515

 
$
52,471

 
(24.7
)%
NGLs
 
 
 
 
 
 
Wattenberg Field
 
$
25,241

 
$
27,722

 
(8.9
)%
Delaware Basin
 
6,385

 
9,823

 
(35.0
)%
Total
 
$
31,626

 
$
37,545

 
(15.8
)%
Crude oil, natural gas and NGLs
 
 
 
 
 
 
Wattenberg Field
 
$
271,968

 
$
254,849

 
6.7
 %
Delaware Basin
 
48,347

 
66,250

 
(27.0
)%
Total
 
$
320,315

 
$
321,099

 
(0.2
)%
(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
$
365,263

 
$
72,186

 
$
437,449

 
$
22,886

 
$
8,938

 
$
31,824

Total liabilities
(20,704
)
 
(4,946
)
 
(25,650
)
 
(3,089
)
 
(524
)
 
(3,613
)
Net asset
$
344,559

 
$
67,240

 
$
411,799

 
$
19,797

 
$
8,414

 
$
28,211

 
 
 
 
 
 
 
 
 
 
 
 


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
 
$
8,414

 
$
58,329

Changes in fair value included in condensed consolidated statement of operations line item:
 
 
 
 
Commodity price risk management gain (loss), net
 
67,530

 
(43,520
)
Settlements included in condensed consolidated statement of operations line items:
 
 
 
 
Commodity price risk management gain (loss), net
 
(8,704
)
 
(1,819
)
Fair value of Level 3 instruments, net asset end of period
 
$
67,240

 
$
12,990

 
 
 
 
 
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
 
$
59,417

 
$
(38,680
)
 
 
 
 
 


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
$
162.0

 
81.0
%
 
$
188.6

 
94.3
%
 
2024 Senior Notes
225.6

 
56.4
%
 
409.2

 
102.3
%
 
2025 Senior Notes
52.5

 
51.3
%
 

 
%
 
2026 Senior Notes
307.8

 
51.3
%
 
599.4

 
99.9
%


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
 
2,700

 
$
55.00

 
$
71.68

 
9,212

 
$
59.08

 
$
331,947

2021
 

 

 

 
7,180

 
49.80

 
94,946

2022
 

 

 

 
1,980

 
34.88

 
(6,962
)
Total Crude Oil
 
2,700

 
 
 
 
 
18,372

 
 
 
$
419,931

 
 
 
 
 
 
 
 
 
 
 
 
 
Natural Gas
 
 
 
 
 
 
 
 
 
 
 
 
NYMEX
 
 
 
 
 
 
 
 
 
 
 
 
2020
 
15,250

 
$
2.00

 
$
2.23

 
3,000

 
$
2.30

 
$
2,353

2021
 
22,200

 
2.25

 
2.58

 
24,000

 
2.36

 
(4,203
)
Total Natural Gas
 
37,450

 
 
 
 
 
27,000

 
 
 
$
(1,850
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Basis Protection - Natural Gas
 
 
 
 
 
 
 
 
 
 
 
 
CIG
 
 
 
 
 
 
 
 
 
 
 
 
2020
 

 
$

 
$

 
15,375

 
$
(0.62
)
 
$
(2,571
)
2021
 

 

 

 
46,200

 
(0.50
)
 
(2,195
)
Waha
 
 
 
 
 
 
 
 
 
 
 
 
2020
 

 

 

 
3,000

 
(1.40
)
 
(1,516
)
Total Basis Protection - Natural Gas
 

 
 
 
 
 
64,575

 
 
 
$
(6,282
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Derivatives Fair Value
 
 
 
 
 
 
 
$
411,799

_____________
(1)
Approximately 16.5 percent of the fair value of our commodity derivative assets and 19.3 percent of the fair value of our commodity derivative liabilities were measured using significant unobservable inputs (Level 3).

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
 
$
379,355

 
$
27,766

 
Basis protection derivative contracts
 
Fair value of derivatives
 

 
312

 
 
 
 
 
379,355

 
28,078

 
Non-current
 
 
 
 
 
 
 
Commodity derivative contracts
 
Fair value of derivatives
 
58,094

 
3,746

Total derivative assets
 
 
 
$
437,449

 
$
31,824

 
 
 
 
 
 
 
 
Derivative liabilities:
Current
 
 
 
 
 
 
 
Commodity derivative contracts
 
Fair value of derivatives
 
$
5,910

 
$
529

 
Basis protection derivative contracts
 
Fair value of derivatives
 
5,710

 
2,392

 
 
 
 
 
11,620

 
2,921

 
Non-current
 
 
 
 
 
 
 
Commodity derivative contracts
 
Fair value of derivatives
 
13,458

 
692

 
Basis protection derivative contracts
 
Fair value of derivatives
 
572

 

 
 
 
 
 
14,030

 
692

Total derivative liabilities
 
 
 
$
25,650

 
$
3,613


    
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
 
$
45,823

 
$
(8,452
)
Net change in fair value of unsettled derivatives
 
388,875

 
(181,622
)
Total commodity price risk management gain (loss), net
 
$
434,698

 
$
(190,074
)
 
 
 
 
 


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:
 
 
 
 
 
 
Derivative instruments, at fair value
 
$
437,449

 
$
(24,014
)
 
$
413,435

 
 
 
 
 
 
 
Liability derivatives:
 
 
 
 
 
 
Derivative instruments, at fair value
 
$
25,650

 
$
(24,014
)
 
$
1,636

 
 
 
 
 
 
 


12

PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(unaudited)


As of December 31, 2019
 
Derivative Instruments, Gross
 
Effect of Master Netting Agreements
 
Derivative Instruments, Net
 
 
(in thousands)
Asset derivatives:
 
 
 
 
 
 
Derivative instruments, at fair value
 
$
31,824

 
$