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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 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/5c3a7c5ae3c4ea6f12f16c14875bd74b-pdce-20210630_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: 98,659,588 shares of the Company's Common Stock ($0.01 par value) were outstanding as of July 27, 2021.


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PDC ENERGY, INC.


TABLE OF CONTENTS
PART I – FINANCIAL INFORMATIONPage
Item 1.
Item 2.
Item 3.
Item 4.
  
PART II – OTHER INFORMATION
   
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
  
 




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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (“Securities Act”) 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; 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 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:

market and commodity price volatility, widening price differentials, and related impacts to the Company, including decreased revenue, income and cash flow, write-downs and impairments and availability of capital;
future cash flows, liquidity and financial condition;
changes in, and interpretations and enforcement of, environmental and other laws and other political and regulatory development, including in particular additional permit scrutiny in Colorado;
the coronavirus 2019 (“COVID-19”) pandemic, including its effects on commodity prices, downstream capacity, employee health and safety, business continuity and regulatory matters;
declines in the value of our crude oil, natural gas and natural gas liquids (“NGLs”) properties resulting in impairments;
changes in, and inaccuracy of, reserve estimates and expected production and decline rates;
timing and extent of our success in discovering, acquiring, developing and producing reserves;
reductions in the borrowing base under our revolving credit facility;
availability and cost of capital;
risks inherent in the drilling and operation of crude oil and natural gas wells;
timing and costs of wells and facilities;
availability, cost, and timing of sufficient pipeline, gathering and transportation facilities and related infrastructure;
potential losses of acreage or other impacts due to lease expirations, other title defects, or otherwise;
risks inherent in marketing crude oil, natural gas and NGLs;
effect of crude oil and natural gas derivative activities;
impact of environmental events, governmental and other third-party responses to such events and our ability to insure adequately against such events;
cost of pending or future litigation;
impact to our operations, personnel retention, strategy, stock price and expenses caused by the actions of activist shareholders;
uncertainties associated with future dividends to our shareholders;
our ability to retain or attract senior management and key technical employees;


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civil unrest, terrorist attacks and cyber threats; 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 (“2020 Form 10-K”) 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)
June 30, 2021December 31, 2020
Assets
Current assets:
Cash and cash equivalents$109,749 $2,623 
Accounts receivable, net307,201 244,251 
Fair value of derivatives5,146 48,869 
Prepaid expenses and other current assets7,717 12,505 
Total current assets429,813 308,248 
Properties and equipment, net4,846,682 4,859,199 
Fair value of derivatives8,909 9,565 
Other assets48,585 60,961 
Total Assets$5,333,989 $5,237,973 
Liabilities and Stockholders’ Equity
Liabilities
Current liabilities:
Accounts payable$177,099 $90,635 
Production tax liability75,719 124,475 
Fair value of derivatives393,180 98,152 
Funds held for distribution225,134 177,132 
Accrued interest payable15,354 14,734 
Other accrued expenses77,559 81,715 
Current portion of long-term debt197,919 193,014 
Total current liabilities1,161,964 779,857 
Long-term debt1,242,676 1,409,548 
Asset retirement obligations121,628 132,637 
Fair value of derivatives100,675 36,359 
Other liabilities242,140 264,034 
Total liabilities2,869,083 2,622,435 
Commitments and contingent liabilities
Stockholders’ equity
Common shares - par value $0.01 per share, 150,000,000 authorized, 98,906,605 and 99,758,720 issued as of June 30, 2021 and December 31, 2020, respectively
989 998 
Additional paid-in capital3,333,168 3,387,754 
Accumulated deficit(868,338)(772,265)
Treasury shares - at cost, 20,000 and 37,510 as of June 30, 2021 and December 31, 2020, respectively
(913)(949)
Total stockholders’ equity2,464,906 2,615,538 
Total Liabilities and Stockholders’ Equity$5,333,989 $5,237,973 


See accompanying Notes to Condensed Consolidated Financial Statements
1

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PDC ENERGY, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Revenues
Crude oil, natural gas and NGLs sales$533,141 $173,921 $1,001,260 $494,236 
Commodity price risk management gain (loss), net(308,253)(120,786)(489,509)313,912 
Other income3,981 1,281 3,154 3,298 
Total revenues228,869 54,416 514,905 811,446 
Costs, expenses and other
Lease operating expense42,395 35,808 84,199 85,342 
Production taxes26,968 7,846 56,460 26,316 
Transportation, gathering and processing expense25,989 16,949 47,721 30,445 
Exploration, geologic and geophysical expense286 728 640 864 
General and administrative expense32,843 35,352 65,520 97,517 
Depreciation, depletion and amortization162,210 149,491 308,973 325,648 
Accretion of asset retirement obligations3,232 2,358 6,360 4,978 
Impairment of properties and equipment62 32 252 881,106 
Loss (gain) on sale of properties and equipment(129)(174)(341)(353)
Other2,145 2,003 2,193 4,147 
Total costs, expenses and other296,001 250,393 571,977 1,456,010 
Loss from operations(67,132)(195,977)(57,072)(644,564)
Interest expense, net(20,060)(21,782)(39,101)(45,955)
Loss before income taxes(87,192)(217,759)(96,173)(690,519)
Income tax benefit (expense)155 (4,073)100 3,672 
Net loss$(87,037)$(221,832)$(96,073)$(686,847)
Loss per share:
Basic$(0.88)$(2.23)$(0.97)$(7.09)
Diluted$(0.88)$(2.23)$(0.97)$(7.09)
Weighted-average common shares outstanding:
Basic99,187 99,566 99,445 96,821 
Diluted99,187 99,566 99,445 96,821 
Dividends declared per share$0.12 $ $0.12 $ 


See accompanying Notes to Condensed Consolidated Financial Statements
2

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PDC ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Six Months Ended June 30,
20212020
Cash flows from operating activities:
Net loss$(96,073)$(686,847)
Adjustments to net loss to reconcile to net cash from operating activities:
Net change in fair value of unsettled commodity derivatives403,723 (153,294)
Depreciation, depletion and amortization308,973 325,648 
Impairment of properties and equipment252 881,106 
Accretion of asset retirement obligations6,360 4,978 
Non-cash stock-based compensation11,515 12,036 
Gain on sale of properties and equipment(341)(353)
Amortization and write-off of debt discount, premium and issuance costs7,714 8,941 
Deferred income taxes (2,430)
Other875 1,657 
Changes in assets and liabilities(65,632)(22,180)
Net cash from operating activities577,366 369,262 
Cash flows from investing activities:
Capital expenditures for development of crude oil and natural gas properties(240,266)(387,930)
Capital expenditures for other properties and equipment(274)(1,935)
Acquisition of crude oil and natural gas properties (139,812)
Proceeds from sale of properties and equipment4,414 1,384 
Proceeds from divestitures 62 
Net cash from investing activities(236,126)(528,231)
Cash flows from financing activities:
Proceeds from revolving credit facility and other borrowings429,800 1,318,000 
Repayment of revolving credit facility and other borrowings(597,800)(669,000)
Redemption of senior notes (452,153)
Payment of debt issuance costs (4,666)
Purchase of treasury shares for employee stock-based compensation tax withholding obligations(5,656)(8,180)
Purchase of treasury shares under stock repurchase program (47,694)(23,819)
Dividends paid(11,885) 
Principal payments under financing lease obligations(879)(985)
Net cash from financing activities(234,114)159,197 
Net change in cash, cash equivalents and restricted cash107,126 228 
Cash and cash equivalents, beginning of period2,623 963 
Cash and cash equivalents, end of period$109,749 $1,191 


See accompanying Notes to Condensed Consolidated Financial Statements
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PDC ENERGY, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
Six Months Ended June 30, 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 — — 
Retirement of treasury shares(568)(6)(21,061)568 21,067 — — 
Issuance of treasury shares— —  65  —  
Purchase of treasury shares under stock repurchase program— — — (598)(22,098)— (22,098)
Balance, March 31, 202199,367 $994 $3,369,272 (51)$(1,897)$(781,301)$2,587,068 
Net loss— — — — — (87,037)(87,037)
Stock-based compensation295 3 5,742  750 — 6,495 
Purchase of treasury shares for employee stock-based compensation tax withholding obligations— — — (92)(3,300)— (3,300)
Retirement of treasury shares for employee stock-based compensation tax withholding obligations(78)(1)(2,807)78 2,808 — — 
Retirement of treasury shares(677)(7)(26,922)684 27,235 — 306 
Issuance of treasury shares— —  22  —  
Purchase of treasury shares under stock repurchase program— — — (661)(26,509)— (26,509)
Dividends declared ($0.12 per share)— — (12,117)— — — (12,117)
Balance, June 30, 202198,907 989 3,333,168 (20)(913)(868,338)2,464,906 








See accompanying Notes to Condensed Consolidated Financial Statements
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PDC ENERGY, INC.
Condensed Consolidated Statements of Stockholders’ Equity - continued
(in thousands)
(Unaudited)

Six Months Ended June 30, 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 — — 
Retirement of treasury shares(1,266)(12)(23,807)1,266 23,819 — — 
Issuance of treasury shares— —  69  —  
Purchase of treasury shares under stock repurchase program— — — (1,266)(23,819)— (23,819)
Balance, March 31, 202099,438 $994 $3,372,711 (21)$(781)$(512,960)$2,859,964 
Net income— — — — — (221,832)(221,832)
Stock-based compensation213 2 6,164  198 — 6,364 
Purchase of treasury shares for employee stock-based compensation tax withholding obligations— — — (64)(487)— (487)
Retirement of treasury shares for employee stock-based compensation tax withholding obligations(39)— (322)39 322 — — 
Issuance of treasury shares— —  13  — 
Balance, June 30, 202099,612 $996 $3,378,553 (33)$(748)$(734,792)$2,644,009 

See accompanying Notes to Condensed Consolidated Financial Statements
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 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 six months ended June 30, 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
June 30, 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 on our condensed consolidated financial statements for the three and six months ended June 30, 2020 and include approximately $48.3 million and $151.8 million, respectively, of total revenue, and $14.5 million and $1.4 million loss from operations, respectively.

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)

Pro Forma Information. The following unaudited pro forma financial information represents a summary of the consolidated results of operations for the six months ended June 30, 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 six months ended June 30, 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.

Six Months Ended June 30, 2020
Total revenue$832,786 
Net income (loss)(647,435)
Earnings (loss) per share:
Basic$(6.49)
Diluted(6.49)

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30,Six Months Ended June 30,
Revenue by Commodity and Operating Region20212020Percent Change20212020Percent Change
(in thousands)
Crude oil
Wattenberg Field$291,551 $93,540 212 %$527,514 $300,189 76 %
Delaware Basin59,148 22,231 166 %96,836 64,756 50 %
Total$350,699 $115,771 203 %$624,350 $364,945 71 %
 Natural gas
Wattenberg Field$74,664 $29,443 154 %$171,686 $69,520 147 %
Delaware Basin11,139 1,605 *19,763 1,042 *
Total$85,803 $31,048 176 %$191,449 $70,562 171 %
NGLs
Wattenberg Field$83,505 $22,762 267 %$161,282 $48,004 236 %
Delaware Basin13,134 4,340 203 %24,179 10,725 125 %
Total$96,639 $27,102 257 %$185,461 $58,729 216 %
Crude oil, natural gas and NGLs
Wattenberg Field$449,720 $145,745 209 %$860,482 $417,713 106 %
Delaware Basin83,421 28,176 196 %140,778 76,523 84 %
Total$533,141 $173,921 207 %$1,001,260 $494,236 103 %
_____________
* Percent change is not meaningful.

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 six months ended June 30, 2021:
(in thousands)
Beginning balance$25,872 
Reduction to additions previously recognized(819)
Amortized as a reduction to crude oil, natural gas and NGLs sales(1,488)
Ending balance$23,565 

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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:
June 30, 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$579 $4,567 $5,146 $36,580 $12,289 $48,869 
Non-currentFair value of derivatives2,330 6,579 8,909 315 9,250 9,565 
Total$2,909 $11,146 $14,055 $36,895 $21,539 $58,434 
Derivative liabilities
CurrentFair value of derivatives$284,799 $108,381 $393,180 $76,420 $21,732 $98,152 
Non-currentFair value of derivatives79,925 20,750 100,675 28,125 8,234 36,359 
Total$364,724 $129,131 $493,855 $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 June 30,Six Months Ended June 30,
2021202020212020
(in thousands)
Fair value of Level 3 instruments, net asset (liability) beginning of period$(36,234)$67,240 $(8,427)$8,414 
Changes in fair value included on condensed consolidated statements of operations line item:
Commodity price risk management gain (loss), net(94,131)(13,169)(127,520)54,361 
Settlements included on condensed consolidated statement of operations line items:
Commodity price risk management gain (loss), net12,380 (27,113)17,962 (35,817)
Fair value of Level 3 instruments, net asset (liability) end of period$(117,985)$26,958 $(117,985)$26,958 
Net change in fair value of Level 3 unsettled derivatives included on condensed consolidated statements of operations line item:
Commodity price risk management gain (loss), net$(81,417)$(13,675)$(93,867)$21,989 

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(Unaudited)

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.

Nonrecurring Fair Value Measurement

Acquisitions and Impairment of Long-lived Assets. We measure fair value using 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:

June 30, 2021December 31, 2020
Nominal InterestEstimated Fair ValuePercent of ParEstimated Fair ValuePercent of Par
(in millions)(in millions)
Senior Notes:
2021 Convertible Notes1.125 %$198.2 99.1 %$196.2 98.1 %
2024 Senior Notes6.125 %409.2 102.3 %410.8 102.7 %
2025 Senior Notes6.25 %105.9 103.5 %102.8 100.5 %
2026 Senior Notes5.75 %783.8 104.5 %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 June 30, 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
June 30, 2021
(Unaudited)

Commodity Derivative Contracts. As of June 30, 2021, we had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted-average contract price is presented:
 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
June 30,
2021
(in thousands)
FloorsCeilings
Crude Oil