pdce-20210331
PDC ENERGY, 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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, 2021
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/5c0a2e0e67fa96728f3a2c87c43da6e7-pdce-20210331_g1.jpg
PDC ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware95-2636730
(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 classTicker SymbolName of each exchange on which registered
Common stock, par value $0.01 per sharePDCENasdaq 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: 99,315,624 shares of the Company's Common Stock ($0.01 par value) were outstanding as of April 23, 2021.


Table of contents

PDC ENERGY, INC.


TABLE OF CONTENTS
PART I – FINANCIAL INFORMATIONPage
Item 1.
Item 2.
Item 3.
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PART II – OTHER INFORMATION
   
Item 1.
Item 1A.
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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") and 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; impacts of Colorado political matters, including recent rulemaking initiatives influencing our ability to continue to obtain permits; 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; financial ratios and compliance with covenants in our revolving credit facility and other debt instruments; impacts of certain accounting and tax changes; ability to meet our volume commitments to midstream providers and timing and adequacy of midstream infrastructure; the potential return of capital to shareholders through buybacks of shares and/or payments of dividends; ongoing compliance with our consent decree; risk of our counterparties non-performance on derivative instruments; and our ability to repay our 1.125% convertible notes due 2021 (the "2021 Convertible Notes") and fund planned activities.

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 coronavirus 2019 ("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;
impacts of political and regulatory developments in Colorado, particularly with respect to additional permit scrutiny;
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 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 availability of capital;
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 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;
risks incidental to the drilling and operation of crude oil and natural gas wells;


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difficulties in integrating our operations and potential effects on capital requirements as a result of any significant acquisitions or acreage exchanges;
increases 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;
success in marketing our 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;
our ability to replace our oil and natural gas reserves;
title defects in our oil and natural gas properties;
civil unrest, terrorist attacks and cyber threats;
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 Item 1A, Risk Factors made in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the U.S. Securities and Exchange Commission ("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.


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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PDC ENERGY, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
March 31, 2021December 31, 2020
Assets
Current assets:
Cash and cash equivalents$59,067 $2,623 
Accounts receivable, net256,837 244,251 
Fair value of derivatives8,032 48,869 
Prepaid expenses and other current assets11,323 12,505 
Total current assets335,259 308,248 
Properties and equipment, net4,832,798 4,859,199 
Fair value of derivatives15,587 9,565 
Other assets57,013 60,961 
Total Assets$5,240,657 $5,237,973 
Liabilities and Stockholders' Equity
Liabilities
Current liabilities:
Accounts payable$120,647 $90,635 
Production tax liability126,144 124,475 
Fair value of derivatives197,967 98,152 
Funds held for distribution209,448 177,132 
Accrued interest payable20,975 14,734 
Other accrued expenses72,935 81,715 
Current portion of long-term debt195,451 193,014 
Total current liabilities943,567 779,857 
Long-term debt1,242,108 1,409,548 
Asset retirement obligations125,193 132,637 
Fair value of derivatives52,335 36,359 
Other liabilities290,386 264,034 
Total liabilities2,653,589 2,622,435 
Commitments and contingent liabilities
Stockholders' equity
Common shares - par value $0.01 per share, 150,000,000 authorized, 99,367,276 and 99,758,720 issued as of March 31, 2021 and December 31, 2020, respectively
994 998 
Additional paid-in capital3,369,272 3,387,754 
Accumulated deficit(781,301)(772,265)
Treasury shares - at cost, 51,094 and 37,510
 as of March 31, 2021 and December 31, 2020, respectively
(1,897)(949)
Total stockholders' equity2,587,068 2,615,538 
Total Liabilities and Stockholders' Equity$5,240,657 $5,237,973 


See accompanying Notes to Condensed Consolidated Financial Statements
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PDC ENERGY, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
20212020
Revenues
Crude oil, natural gas and NGLs sales$468,119 $320,315 
Commodity price risk management gain (loss), net(181,256)434,698 
Other income (expense)(827)2,017 
Total revenues286,036 757,030 
Costs, expenses and other
Lease operating expense41,804 49,534 
Production taxes29,492 18,470 
Transportation, gathering and processing expense21,732 13,496 
Exploration, geologic and geophysical expense354 136 
General and administrative expense32,677 62,165 
Depreciation, depletion and amortization146,763 176,157 
Accretion of asset retirement obligations3,128 2,620 
Impairment of properties and equipment190 881,074 
Loss (gain) on sale of properties and equipment(212)(179)
Other48 2,144 
Total costs, expenses and other275,976 1,205,617 
Income (loss) from operations10,060 (448,587)
Interest expense, net(19,041)(24,173)
Income (loss) before income taxes(8,981)(472,760)
Income tax benefit (expense)(55)7,745 
Net income (loss)$(9,036)$(465,015)
Earnings (loss) per share:
Basic$(0.09)$(4.94)
Diluted$(0.09)$(4.94)
Weighted-average common shares outstanding:
Basic99,702 94,077 
Diluted99,702 94,077 


See accompanying Notes to Condensed Consolidated Financial Statements
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PDC ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended March 31,
20212020
Cash flows from operating activities:
Net loss$(9,036)$(465,015)
Adjustments to net loss to reconcile to net cash from operating activities:
Net change in fair value of unsettled commodity derivatives150,606 (388,875)
Depreciation, depletion and amortization146,763 176,157 
Impairment of properties and equipment190 881,074 
Accretion of asset retirement obligations3,128 2,620 
Non-cash stock-based compensation5,020 5,672 
Gain on sale of properties and equipment(212)(179)
Amortization and write-off of debt discount, premium and issuance costs3,837 3,640 
Deferred income taxes (6,331)
Other(305)1,011 
Changes in assets and liabilities53,068 56,507 
Net cash from operating activities353,059 266,281 
Cash flows from investing activities:
Capital expenditures for development of crude oil and natural gas properties(109,048)(190,768)
Capital expenditures for other properties and equipment(69)(455)
Acquisition of crude oil and natural gas properties (139,812)
Proceeds from sale of properties and equipment4,370 793 
Proceeds from divestitures 62 
Net cash from investing activities(104,747)(330,180)
Cash flows from financing activities:
Proceeds from revolving credit facility and other borrowings229,000 917,000 
Repayment of revolving credit facility and other borrowings(397,000)(304,000)
Payment of debt issuance costs (4,666)
Purchase of treasury shares(21,067)(23,819)
Purchase of treasury shares for employee stock-based compensation tax withholding obligations(2,356)(7,693)
Redemption of senior notes (452,153)
Principal payments under financing lease obligations(445)(489)
Net cash from financing activities(191,868)124,180 
Net change in cash, cash equivalents and restricted cash56,444 60,281 
Cash, cash equivalents and restricted cash, beginning of period2,623 963 
Cash, cash equivalents and restricted cash, end of period$59,067 $61,244 


See accompanying Notes to Condensed Consolidated Financial Statements
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PDC ENERGY, INC.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands)
(Unaudited)
Three Months Ended March 31, 2021
Common StockTreasury Stock
SharesAmountAdditional Paid-in CapitalSharesAmountAccumulated DeficitTotal Stockholders' Equity
Balance, January 1, 202199,759 $998 $3,387,754 (38)$(949)$(772,265)$2,615,538 
Net loss— — — — — (9,036)(9,036)
Stock-based compensation209 2 3,670  1,348 — 5,020 
Purchase of treasury shares for employee stock-based compensation tax withholding obligations— — — (81)(2,356)— (2,356)
Retirement of treasury shares for employee stock-based compensation tax withholding obligations(33) (1,091)33 1,091 — — 
Purchase of treasury shares— — — (598)(22,098)— (22,098)
Retirement of treasury shares(568)(6)(21,061)568 21,067 — — 
Issuance of treasury shares   65  —  
Balance, March 31, 202199,367 $994 $3,369,272 (51)$(1,897)$(781,301)$2,587,068 

Three Months Ended March 31, 2020
Common StockTreasury Stock
SharesAmountAdditional Paid-in CapitalSharesAmountAccumulated DeficitTotal Stockholders' Equity
Balance, January 1, 202061,652 $617 $2,384,309 (35)$(1,474)$(47,945)$2,335,507 
Net loss— — — — — (465,015)(465,015)
Issuance pursuant to acquisition39,182 391 1,014,921 — — — 1,015,312 
Stock-based compensation121 1 3,713  1,958 — 5,672 
Purchase of treasury shares for employee stock-based compensation tax withholding obligations— — — (306)(7,693)— (7,693)
Retirement of treasury shares for employee stock-based compensation tax withholding obligations(251)(3)(6,425)251 6,428 — — 
Purchase of treasury shares— — — (1,266)(23,819)— (23,819)
Retirement of treasury shares(1,266)(12)(23,807)1,266 23,819 — — 
Issuance of treasury shares   69  —  
Balance, March 31, 202099,438 $994 $3,372,711 (21)$(781)$(512,960)$2,859,964 

See accompanying Notes to Condensed Consolidated Financial Statements
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(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 west 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 horizontal Wolfcamp zones. As of March 31, 2021, we owned an interest in approximately 3,600 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 the results of interim periods presented 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, 2020 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 2020 Form 10-K. Our results of operations and cash flows for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year or any other future period.


NOTE 2 - BUSINESS COMBINATION

In January 2020, we merged with SRC Energy Inc. ("SRC") in a transaction valued at $1.7 billion, inclusive of SRC's net debt (the "SRC Acquisition"). SRC was an independent oil and natural gas company engaged in the exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves in Weld County, Colorado. The acquisition added approximately 83,000 net acres which are located on large, contiguous acreage blocks in the core of the Wattenberg Field.

Upon closing, we issued approximately 38.9 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 terms of the merger agreement that we entered into with SRC. We finalized the purchase price allocation on December 31, 2020, and we recognized total transaction costs of $19.9 million for the year ended December 31, 2020.
     
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)

The following table details our final purchase price, valuation and allocation of the purchase price to the assets acquired and liabilities assumed as a result of the SRC Acquisition:
(in thousands)
Consideration:
Cash$40 
Retirement of seller's credit facility166,238 
Total cash consideration166,278 
Common stock issued1,009,015 
Shares withheld in lieu of taxes6,299 
Total consideration$1,181,592 
Recognized amounts of identifiable assets acquired and liabilities assumed:
Assets acquired:
Current assets$145,792 
Properties and equipment, net - proved1,613,674 
Properties and equipment, net - unproved109,615 
Properties and equipment, net - other16,242 
Deferred tax asset189,311 
Other assets11,810 
Total assets acquired2,086,444 
Liabilities assumed:
Current liabilities(253,967)
Senior notes(555,500)
Asset retirement obligations(42,417)
Other liabilities(52,968)
Total liabilities assumed(904,852)
Total identifiable net assets acquired$1,181,592 

This acquisition was accounted for under the acquisition method of accounting for business combinations. 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 and assumptions to the valuation of proved and unproved crude oil and natural gas properties include estimates of reserve volumes, future operating and development costs, future commodity prices, 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.

The results of operations for the SRC Acquisition since the closing date have been included in our condensed consolidated financial statements for the three months ended March 31, 2020 and include approximately $103.5 million of total revenue, and $13.2 million of income from operations.

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)

Pro Forma Information. The following unaudited pro forma financial information represents a summary of the consolidated results of operations for the three months ended March 31, 2020, assuming the acquisition had been completed as of January 1, 2020. The information below reflects certain nonrecurring pro forma adjustments that were directly related to the business combination based on available information and certain assumptions that we believe are reasonable, including (i) the Company's common stock issued to convert SRC's outstanding shares of common stock and the cancellation of equity awards, (ii) the depletion of SRC's fair-valued proved oil and gas properties using the successful efforts method of accounting and (iii) the estimated tax impacts of the proforma adjustments, if any. Additionally, pro forma earnings were adjusted to exclude acquisition-related costs incurred by the Company and SRC totaling approximately $38.0 million for the three months ended March 31, 2020. 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.

Three Months Ended March 31, 2020
(in thousands, except per share data)
Total revenue$778,370 
Net income (loss)(425,717)
Earnings (loss) per share:
Basic$(4.25)
Diluted(4.25)

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)

NOTE 3 - REVENUE RECOGNITION

Disaggregated Revenue. The following table presents crude oil, natural gas and NGLs sales disaggregated by commodity and operating region for the periods presented:

Three Months Ended March 31,
Revenue by Commodity and Operating Region20212020Percent Change
(in thousands)
Crude oil
Wattenberg Field$235,963 $206,649 14 %
Delaware Basin37,688 42,525 (11)%
Total273,651 249,174 10 %
 Natural gas
Wattenberg Field97,022 40,078 142 %
Delaware Basin (1)
8,624 (563)*
Total105,646 39,515 167 %
NGLs
Wattenberg Field77,777 25,241 208 %
Delaware Basin11,045 6,385 73 %
Total88,822 31,626 181 %
Crude oil, natural gas and NGLs
Wattenberg Field410,762 271,968 51 %
Delaware Basin57,357 48,347 19 %
Total$468,119 $320,315 46 %
_____________
* Percent change is not meaningful.
(1)Negative natural gas revenue was due to the deduction for transportation, gathering and processing by the purchaser exceeding the average sales price.
Contract Assets. Contract assets include material contributions in aid of construction, which are common in purchase and processing agreements with midstream service providers that are our customers. The intent of the payments is primarily to reimburse the customer for actual costs incurred related to the construction of its gathering and processing infrastructure. Contract assets are included in other assets on the condensed consolidated balance sheets. The contract assets are amortized as a reduction to crude oil, natural gas and NGLs sales revenue during the periods in which the related production is transferred to the customer.

The following table presents the changes in carrying amounts of the contract assets associated with our crude oil, natural gas and NGLs sales revenue for the three months ended March 31, 2021:
(in thousands)
Beginning balance$25,872 
Reduction to additions previously recognized(1,134)
Amortized as a reduction to crude oil, natural gas and NGLs sales(751)
Ending balance$23,987 

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)

NOTE 4 - FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

Derivative Financial Instruments. We measure the fair value of our commodity 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, 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 exchange 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 reviewing counterparty statements and other supporting documentation.

Our crude oil and natural gas fixed-price exchanges are included in Level 2. Our collars are included in Level 3. Our basis exchanges 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 the dates indicated:
March 31, 2021December 31, 2020
Condensed Consolidated Balance Sheet Line ItemSignificant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
TotalSignificant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(in thousands)
Derivative assets
Current Fair value of derivatives$(390)$8,422 $8,032 $36,580 $12,289 $48,869 
Non-currentFair value of derivatives4,611 10,976 15,587 315 9,250 9,565 
Total$4,221 $19,398 $23,619 $36,895 $21,539 $58,434 
Derivative liabilities
CurrentFair value of derivatives$153,497 $44,470 $197,967 $76,420 $21,732 $98,152 
Non-currentFair value of derivatives41,173 11,162 52,335 28,125 8,234 36,359 
Total$194,670 $55,632 $250,302 $104,545 $29,966 $134,511 
    

The following table presents a reconciliation of our Level 3 assets and liabilities measured at fair value:
Three Months Ended March 31,
20212020
(in thousands)
Fair value of Level 3 instruments, net asset (liability) beginning of period$(8,427)$8,414 
Changes in fair value included in consolidated statements of operations line item:
Commodity price risk management gain (loss), net(33,389)67,530 
Settlements included in condensed consolidated statement of operations line items:
Commodity price risk management loss, net5,582 (8,704)
Fair value of Level 3 instruments, net asset (liability) end of period$(36,234)$67,240 
Net change in fair value of Level 3 unsettled derivatives included in consolidated statements of operations line item:
Commodity price risk management gain (loss), net$(30,863)$59,417 

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.
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)


Nonrecurring Fair Value Measurement

Acquisitions and impairment of long-lived assets. We utilize fair value with inputs that are not observable in the market, and are therefore designated as Level 3 within the valuation hierarchy, on a nonrecurring basis for any acquired assets or businesses and to review our proved and unproved crude oil and natural gas properties for possible impairment.
    
Asset Retirement Obligations. We measure the fair value of asset retirement obligations as of the date a well begins drilling or when production equipment and facilities are installed using a discounted cash flow model based on inputs that are not observable in the market and therefore are designated as Level 3 within the valuation hierarchy.

Other Financial Instruments

The carrying value of the financial instruments included in current assets and current liabilities approximates fair value due to the short-term maturities of these instruments.

Long-term debt. The portion of our long-term debt related to our revolving credit facility approximates fair value, as the applicable interest rates are variable and reflective of market 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 or dealer quotes, 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 the dates indicated:
March 31, 2021December 31, 2020
Estimated Fair ValuePercent of ParEstimated Fair ValuePercent of Par
(in millions)(in millions)
Senior Notes:
2021 Convertible Notes$198.2 99.1 %$196.2 98.1 %
2024 Senior Notes410.4 102.6 %410.8 102.7 %
2025 Senior Notes102.8 100.5 %102.8 100.5 %
2026 Senior Notes777.8 103.7 %775.5 103.4 %

NOTE 5 - COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS

Objective and Strategy. 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 such as collars, fixed-price exchanges and basis protection exchanges, to protect against price declines in future periods. We do not enter into derivative contracts for speculative or trading purposes.

We believe our commodity derivative instruments continue to be effective in achieving the risk management objectives for which they were intended. Depending on changes in oil and gas futures markets and management's view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels. As of March 31, 2021, we had derivative instruments in place for a portion of our anticipated production in 2021 through 2023. 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.

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)

Commodity Derivative Contracts. As of March 31, 2021, we had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted-average contract price is shown:
 CollarsFixed-Price Swaps 
Commodity/ Index/
Maturity Period
Quantity
(Crude oil -
MBbls
Natural Gas - BBtu)
Weighted-Average
Contract Price
Quantity
(Crude Oil - MBbls
Gas and Basis-
BBtu)
Weighted-
Average
Contract
Price
Fair Value
March 31,
2021
(in thousands)
FloorsCeilings
Crude Oil
NYMEX
20213,255 $38.47 $49.76 7,576 $45.33 $(126,882)
20222,112 45.74 58.34 6,384 43.65 (69,493)
2023   2,010 53.73 3,856 
Total Crude Oil5,367 15,970 $(192,519)
Natural Gas
NYMEX
202154,900 2.51 2.92 23,850 2.40 (10,278)
202217,400 2.50 2.89 14,700 2.65 554 
2023   10,200 2.50 (406)
Total Natural Gas72,300 48,750 (10,130)
Basis Protection - Natural Gas
CIG
202178,750 (0.44)(18,592)
202232,100 (0.33)(5,242)
202310,200 (0.23)(200)
Total Basis Protection - Natural Gas121,050 (24,034)
Commodity Derivatives Fair Value$(226,683)

Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet. The balance sheet line items and fair value amounts of our derivative instruments are disclosed in Note 4 - Fair Value Measurements.

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 the dates indicated:
As of March 31, 2021Total Gross Amount Presented on Balance SheetEffect of Master Netting AgreementsTotal Net Amount
(in thousands)
Derivative assets:
Derivative instruments, at fair value$23,619 $(22,760)$859 
Derivative liabilities:
Derivative instruments, at fair value$250,302 $(22,760)$227,542 

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)

As of December 31, 2020Total Gross Amount Presented on Balance SheetEffect of Master Netting AgreementsTotal Net Amount
(in thousands)
Derivative assets:
Derivative instruments, at fair value$58,434 $(39,691)$18,743 
Derivative liabilities:
Derivative instruments, at fair value$134,511 $(39,691)$94,820 

Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations. 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 Item20212020
(in thousands)
Commodity price risk management gain (loss), net
Net settlements$(30,650)$45,823 
Net change in fair value of unsettled derivatives(150,606)388,875 
Total commodity price risk management gain (loss), net$(181,256)$434,698 

Derivative Counterparties. Our commodity derivative instruments expose us to credit risk of non-performance 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, 2021; however, this determination may change.

NOTE 6 - PROPERTIES AND EQUIPMENT, NET

The following table presents the components of properties and equipment, net of accumulated depreciation, depletion and amortization ("DD&A") as of the dates indicated:
March 31, 2021December 31, 2020
(in thousands)
Properties and equipment, net:
Crude oil and natural gas properties
Proved$7,650,594 $7,523,639 
Unproved350,993 350,677 
Total crude oil and natural gas properties8,001,587 7,874,316 
Equipment and other64,900 65,027 
Land and buildings17,665 24,299 
Construction in progress519,931 523,550 
Properties and equipment, at cost8,604,083 8,487,192 
Accumulated DD&A(3,771,285)(3,627,993)
Properties and equipment, net$4,832,798 $4,859,199 

Impairment of Oil and Gas Properties. There were no significant impairment charges recognized related to our proved and unproved properties during the three months ended March 31, 2021. In the first quarter of 2020, the significant decline in crude oil prices in addition to the ongoing effects of COVID-19 was considered a triggering event that required us to assess our crude oil and natural gas properties for possible impairment. As a result of our assessment, we recorded impairment expense of $881.1 million to our proved and unproved properties.

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)

Proved Properties. Of the total impairment expense recognized in the first quarter of 2020, approximately $753.0 million was related to our Delaware Basin proved properties. These impairment charges represented the amount by which the carrying value of the crude oil and natural gas properties exceeded the estimated fair value. We estimated the fair value of proved crude oil and natural gas properties using valuation techniques that convert future cash flows to a single discounted amount, a level 3 input. Significant inputs and assumptions to the valuation of proved crude oil and natural gas properties include estimates of reserves volumes, future operating and development costs, future commodity prices, and a discount rate of 17 percent, which was based on a weighted-average cost of capital for the area where the assets are located.

Unproved Properties. We recognized approximately $127.3 million of impairment charges for our unproved properties in the Delaware Basin during the three months ended March 31, 2020. These impairment charges were recognized based on the fair value of the properties, a Level 3 input. The fair value is estimated based on a review of our current drilling plans, estimated future cash flows for probable well locations and expected future lease expirations, primarily in areas where we have no development plans.
    
Suspended Well Costs. The following table presents the capitalized exploratory well cost pending determination of proved reserves and included in properties and equipment for the periods presented:
    
Three Months Ended March 31,Year Ended December 31, 2020
(in thousands, except for number of wells)
Beginning balance$7,459 $16,078 
Additions to capitalized exploratory well costs pending the determination of proved reserves1,219 11,770 
Reclassifications to proved properties (20,389)
Ending balance$8,678 $7,459 
Number of wells pending determination at period-end22

Our net capitalized exploratory well costs that have been capitalized for a period greater than one year were $7.5 million as of March 31, 2021 and December 31, 2020. We expect to complete our two gross suspended wells associated with two projects prior to the end of 2021.

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2021
(Unaudited)

NOTE 7 - ACCOUNTS RECEIVABLE, OTHER ACCRUED EXPENSES AND OTHER LIABILITIES

Accounts Receivable. The following table presents the components of accounts receivable, net of allowance for doubtful accounts as of the dates indicated:
March 31, 2021December 31, 2020
(in thousands)
Crude oil, natural gas and NGLs sales$220,121 $178,147 
Joint interest billings20,044 35,396 
Other22,748 37,471 
Allowance for doubtful accounts(6,076)(6,763)
Accounts receivable, net$256,837 $244,251 
        
Other Accrued Expenses. The following table presents the components of other accrued expenses as of the dates indicated:
March 31, 2021December 31, 2020
(in thousands)
Employee benefits$14,754 $23,304 
Asset retirement obligations33,711 33,933 
Environmental expenses10,083 10,139 
Operating and finance leases7,251 7,986 
Other7,136 6,353 
Other accrued expenses$72,935 $81,715 

Other Liabilities. The following table presents the components of other liabilities as of the dates indicated:
March 31, 2021December 31, 2020
(in thousands)
Deferred midstream gathering credits$166,826 $168,478 
Deferred oil gathering credits17,588 18,090 
Production taxes94,371 65,592 
Operating and finance leases