SEC Filing - PDC Energy, Inc.

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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, 2022

☐ 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

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

Trading Symbol(s)

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 ☒ No ☐

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 ☒ No ☐

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	☒	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 ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 95,429,367 shares of the Company's Common Stock ($0.01 par value) were outstanding as of April 26, 2022.

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PDC ENERGY, INC.

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	PART I – FINANCIAL INFORMATION	Page

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Cash Flows	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	43

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Mine Safety Disclosures	45
Item 5.	Other Information	45
Item 6.	Exhibits	46

	Signatures	47

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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, the pending acquisition of Great Western Petroleum, LLC (“Great Western”) and the effects thereof, including but not limited to, an anticipated increase in our capital investment budget and the redemption of Great Western’s 12% Senior Notes due September 2025; the expected timing of the acquisition of Great Western and the possibility that the acquisition will not close; 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 return of capital to shareholders through buybacks of shares and/or payments of dividends; ongoing compliance with our consent decree; expected impact from emission reduction initiatives; 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 decreased availability of capital;

•difficulties in integrating our operations as a result of any significant acquisitions, including the pending acquisition of Great Western, or acreage exchanges;

•adverse changes to our future cash flows, liquidity and financial condition;

•changes in, and interpretations and enforcement of, environmental and other laws and other political and regulatory developments, 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;

•limitations in the availability of supplies, materials, contractors and services that may delay the drilling or

completion of our wells;

•potential losses of acreage or other impacts due to lease expirations, other title defects, or otherwise;

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•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 or share buybacks;

•timing and amounts of federal and state income taxes;

•our ability to retain or attract senior management and key technical employees;

•a failure to complete the acquisition of Great Western or an unanticipated assumption of liabilities or other problems with the acquisition;

•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, 2021 (“2021 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)


	March 31, 2022		December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	171,157	$	33,829
Accounts receivable, net	537,056		398,605
Fair value of derivatives	13,158		17,909
Prepaid expenses and other current assets	12,191		8,230
Total current assets	733,562		458,573
Properties and equipment, net	4,886,264		4,814,865
Fair value of derivatives	19,956		15,177
Other assets	91,582		48,051
Total Assets	$	5,731,364	$	5,336,666

Liabilities and Stockholders’ Equity
Liabilities
Current liabilities:
Accounts payable	$	192,268	$	127,891
Production tax liability	112,348		99,583
Fair value of derivatives	572,636		304,870
Funds held for distribution	302,649		285,861
Accrued interest payable	18,251		10,482
Other accrued expenses	77,130		91,409
Total current liabilities	1,275,282		920,096
Long-term debt	942,565		942,084
Asset retirement obligations	123,856		127,526
Fair value of derivatives	234,284		95,561
Deferred income taxes	29,983		26,383
Other liabilities	360,643		314,769
Total liabilities	2,966,613		2,426,419

Commitments and contingent liabilities

Stockholders’ equity
Common shares - par value $0.01 per share, 150,000,000 authorized, 95,749,823 and 96,468,071 issued as of March 31, 2022 and December 31, 2021, respectively	957		965
Additional paid-in capital	3,052,741		3,161,941
Accumulated deficit	(281,914)		(249,954)
Treasury shares - at cost, 105,002 and 54,960 as of March 31, 2022 and December 31, 2021, respectively	(7,033)		(2,705)
Total stockholders’ equity	2,764,751		2,910,247
Total Liabilities and Stockholders’ Equity	$	5,731,364	$	5,336,666

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,
		2022		2021
Revenues
Crude oil, natural gas and NGLs sales		$	882,378	$	468,119
Commodity price risk management gain (loss), net		(568,055)		(181,256)
Other income		2,125		(827)
Total revenues		316,448		286,036
Costs, expenses and other
Lease operating expense		54,156		41,804
Production taxes		62,916		29,492
Transportation, gathering and processing expense		27,971		21,732
Exploration, geologic and geophysical expense		253		354
General and administrative expense		34,107		32,677
Depreciation, depletion and amortization		151,055		146,763
Accretion of asset retirement obligations		2,987		3,128
Impairment of properties and equipment		943		190
Loss (gain) on sale of properties and equipment		(125)		(212)
Other expense		—		48
Total costs, expenses and other		334,263		275,976
Income (loss) from operations		(17,815)		10,060
Interest expense, net		(12,945)		(19,041)
Income (loss) before income taxes		(30,760)		(8,981)
Income tax benefit (expense)		(1,200)		(55)
Net income (loss)		$	(31,960)	$	(9,036)

Earnings (loss) per share:
Basic		$	(0.33)	$	(0.09)
Diluted		$	(0.33)	$	(0.09)

Weighted average common shares outstanding:
Basic		96,279		99,702
Diluted		96,279		99,702

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,
	2022		2021
Cash flows from operating activities:
Net income (loss)	$	(31,960)	$	(9,036)
Adjustments to net income (loss) to reconcile to net cash from operating activities:
Net change in fair value of unsettled commodity derivatives	406,461		150,606
Depreciation, depletion and amortization	151,055		146,763
Impairment of properties and equipment	943		190
Accretion of asset retirement obligations	2,987		3,128
Non-cash stock-based compensation	5,474		5,020
(Gain) loss on sale of properties and equipment	(125)		(212)
Amortization of debt discount, premium and issuance costs	1,357		3,837
Deferred income taxes	3,600		—
Other	(905)		(305)
Changes in assets and liabilities	(49,839)		53,068
Net cash from operating activities	489,048		353,059
Cash flows from investing activities:
Capital expenditures for development of crude oil and natural gas properties	(187,021)		(109,048)
Capital expenditures for other properties and equipment	(67)		(69)

Proceeds from sale of properties and equipment	89		4,370
Proceeds from divestitures	465		—
Funds held in escrow for acquisition	(50,000)		—
Net cash from investing activities	(236,534)		(104,747)
Cash flows from financing activities:
Proceeds from revolving credit facility and other borrowings	100,500		229,000
Repayment of revolving credit facility and other borrowings	(100,500)		(397,000)



Payment of debt issuance costs	(30)		—
Purchase of treasury shares for employee stock-based compensation tax withholding obligations	(9,203)		(2,356)
Purchase of treasury shares under stock repurchase program	(80,853)		(21,067)
Dividends paid	(24,681)		—
Principal payments under financing lease obligations	(419)		(445)
Net cash from financing activities	(115,186)		(191,868)
Net change in cash and cash equivalents	137,328		56,444
Cash and cash equivalents, beginning of period	33,829		2,623
Cash and cash equivalents, end of period	$	171,157	$	59,067

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, 2022
	Common Stock			Additional Paid-in Capital		Treasury Stock			Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount				Shares	Amount
Balance, January 1, 2022	96,468	$	965	$	3,161,941	(55)	$	(2,705)	$	(249,954)	$	2,910,247
Net loss	—	—		—		—	—		(31,960)		(31,960)
Stock-based compensation	655	7		1,798		—	3,669		—		5,474
Purchase of treasury shares for employee stock-based compensation tax withholding obligations	—	—		—		(164)	(9,203)		—		(9,203)
Retirement of treasury shares for employee stock-based compensation tax withholding obligations	(53)	(2)		(3,022)		53	3,024		—		—
Retirement of treasury shares	(1,320)	(13)		(83,508)		1,320	83,521		—		—
Issuance of treasury shares	—	—		—		67	—		—		—
Purchase of treasury shares under stock repurchase program	—	—		—		(1,326)	(85,339)		—		(85,339)
Dividends declared ($0.25 per share)	—	—		(24,468)		—	—		—		(24,468)
Balance, March 31, 2022	95,750	$	957	$	3,052,741	(105)	$	(7,033)	$	(281,914)	$	2,764,751


	Three Months Ended March 31, 2021
	Common Stock			Additional Paid-in Capital		Treasury Stock			Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount				Shares	Amount
Balance, January 1, 2021	99,759	$	998	$	3,387,754	(38)	$	(949)	$	(772,265)	$	2,615,538
Net loss	—	—		—		—	—		(9,036)		(9,036)

Stock-based compensation	209	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, 2021	99,367	$	994	$	3,369,272	(51)	$	(1,897)	$	(781,301)	$	2,587,068

See accompanying Notes to Condensed Consolidated Financial Statements

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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, 2022, we owned an interest in approximately 3,450 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, 2021 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 2021 Form 10-K. Our results of operations and cash flows for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year or any other future period.

NOTE 2 - PENDING ACQUISITION

On February 26, 2022, we entered into a definitive purchase agreement under which we will acquire Great Western Petroleum, LLC (“Great Western”) for approximately $1.4 billion, inclusive of Great Western’s net debt (the “Great Western Acquisition”). Great Western is an independent oil and gas company focused on the exploration, production and development of crude oil and natural gas in Colorado. The purchase consideration for the Great Western Acquisition will be made through the transfer of approximately 4.0 million shares of our common stock and approximately $543 million in cash, pursuant to the Membership Interest Purchase Agreement that we entered into with Great Western (“Acquisition Agreement”). In February 2022, we deposited $50.0 million into an escrow account pursuant to the terms of the Acquisition Agreement, recognized as other assets on the condensed consolidated balance sheet. We anticipate that the Great Western Acquisition will be completed in May 2022, subject to certain customary closing conditions being met.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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 Region		2022		2021		Percent Change
		(in thousands)
Crude oil
Wattenberg Field		$	451,911	$	235,963	92	%
Delaware Basin		97,838		37,688		160	%
Total		549,749		273,651		101	%
Natural gas
Wattenberg Field		143,699		97,022		48	%
Delaware Basin		19,425		8,624		125	%
Total		163,124		105,646		54	%
NGLs
Wattenberg Field		138,875		77,777		79	%
Delaware Basin		30,630		11,045		177	%
Total		169,505		88,822		91	%
Crude oil, natural gas and NGLs
Wattenberg Field		734,485		410,762		79	%
Delaware Basin		147,893		57,357		158	%
Total		$	882,378	$	468,119	88	%

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 for the three months ended March 31, 2022:


	(in thousands)
Beginning balance	$	15,472
Additions (Net reduction to additions previously recognized)	(5,112)
Amortized as a reduction to crude oil, natural gas and NGLs sales	(328)
Ending balance	$	10,032

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 use our counterparties’ valuations to assess reasonableness of our fair value measurement.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Our crude oil and natural gas fixed-price exchanges and basis exchanges are included in Level 2. Our collars are included in 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, 2022						December 31, 2021
	Condensed Consolidated Balance Sheet Line Item	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)
Derivative assets
Current	Fair value of derivatives	$	6,795	$	6,363	$	13,158	$	—	$	17,909	$	17,909
Non-current	Fair value of derivatives	4,680		15,276		19,956		605		14,572		15,177
Total		$	11,475	$	21,639	$	33,114	$	605	$	32,481	$	33,086

Derivative liabilities
Current	Fair value of derivatives	$	(389,334)	$	(183,302)	$	(572,636)	$	(230,695)	$	(74,175)	$	(304,870)
Non-current	Fair value of derivatives	(169,736)		(64,548)		(234,284)		(74,715)		(20,846)		(95,561)
Total		$	(559,070)	$	(247,850)	$	(806,920)	$	(305,410)	$	(95,021)	$	(400,431)

The following table presents a reconciliation of our Level 3 assets and liabilities measured at fair value for the periods presented:


	Three Months Ended March 31,
		2022		2021
		(in thousands)
Fair value of Level 3 instruments, net asset (liability) beginning of period		$	(62,540)	$	(8,427)
Changes in fair value included on condensed consolidated statements of operations line item:
Commodity price risk management gain (loss), net		(209,771)		(33,389)
Settlements included on condensed consolidated statement of operations line items:
Commodity price risk management gain (loss), net		46,100		5,582
Fair value of Level 3 instruments, net asset (liability) end of period		$	(226,211)	$	(36,234)

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		$	(159,118)	$	(30,863)

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 Measurements

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.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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 as of the dates indicated:


			March 31, 2022				December 31, 2021
	Nominal Interest		Estimated Fair Value		Percent of Par		Estimated Fair Value		Percent of Par
			(in millions)				(in millions)
Senior Notes:
2024 Senior Notes	6.125	%	$	202.6	101.3	%	$	202.8	101.4	%
2026 Senior Notes	5.75	%	762.0		101.6	%	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 crude 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, 2022, we had derivative instruments in place for a portion of our anticipated production in 2022 through 2025. 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.

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 for the periods presented:


	Three Months Ended March 31,
Condensed Consolidated Statement of Operations Line Item		2022		2021
		(in thousands)
Commodity price risk management gain (loss), net
Net settlements		$	(161,594)	$	(30,650)
Net change in fair value of unsettled derivatives		(406,461)		(150,606)
Total commodity price risk management gain (loss), net		$	(568,055)	$	(181,256)

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Commodity Derivative Contracts. As of March 31, 2022, we had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is presented:


	Collars					Fixed-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, 2022 (in thousands)
		Floors		Ceilings
Crude Oil
NYMEX
2022	4,104	$	53.18	$	67.33	5,028	$	46.14	$	(349,549)
2023	4,833	58.13		76.68		6,510	60.13		(206,083)
2024	225	55.00		75.12		6,126	70.59		(39,312)
2025	—	—		—		1,200	73.00		(398)
Total Crude Oil	9,162					18,864			(595,342)

Natural Gas
NYMEX
2022	26,595	3.14		4.78		25,200	2.70		(117,951)
2023	15,060	3.07		4.36		34,742	3.01		(58,102)
2024	—	—		—		26,160	3.49		(5,337)
	41,655					86,102			(181,390)
CIG
2023	—	—		—		8,760	3.39		(6,185)
2025	—	—		—		4,800	3.10		(1,425)
	—					13,560			(7,610)

Total Natural Gas	41,655					99,662			(189,000)





Basis Protection - Natural Gas
CIG
2022						51,795	(0.25)		9,540
2023						49,802	(0.30)		1,711
2024						26,160	(0.39)		(715)




Total Basis Protection - Natural Gas						127,757			10,536

Commodity Derivatives Fair Value									$	(773,806)

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

Subsequent to March 31, 2022, we entered into the following commodity derivative positions covering our crude oil and natural gas production:


	Collars					Fixed-Price Swaps
Commodity/ Index/ Maturity Period		Quantity (Crude oil - MBbls Natural Gas - BBtu)		Weighted-Average Contract Price				Quantity (Crude oil - MBbls Natural Gas - BBtu)	Weighted- Average Contract Price
	Floors		Ceilings
Crude Oil
NYMEX
2023		600		$	75.00	$	110.00	804	$	86.00

Natural Gas
NYMEX
2023		900		5.00		14.40		—	—

Basis Protection
CIG
2022		—		—		—		13,300	(0.31)
2023		—		—		—		4,800	(0.28)

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 March 31, 2022:


	Total Gross Amount Presented on the Balance Sheet		Effect of Master Netting Agreements		Total Net Amount
	(in thousands)
Derivative assets:
Derivative instruments, at fair value	$	33,114	$	(33,114)	$	—

Derivative liabilities:
Derivative instruments, at fair value	$	806,920	$	(33,114)	$	773,806

Derivative Counterparties. Our commodity derivative instruments expose us to the risk of non-performance by our counterparties. We 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, 2022; however, this determination may change.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(Unaudited)

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, 2022		December 31, 2021
	(in thousands)
Properties and equipment, net:
Crude oil and natural gas properties
Proved	$	8,511,308	$	8,310,018
Unproved	306,210		306,181
Total crude oil and natural gas properties	8,817,518		8,616,199
Equipment and other	66,917		63,099
Land and buildings	19,928		19,928
Construction in progress	387,212		371,968
Properties and equipment, at cost	9,291,575		9,071,194
Accumulated DD&A	(4,405,311)		(4,256,329)
Properties and equipment, net	$	4,886,264	$	4,814,865

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, 2022 and 2021.

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, 2022		Year Ended December 31, 2021
	(in thousands, except for number of wells)
Beginning balance	$	—	$	7,459
Additions to capitalized exploratory well costs pending the determination of proved reserves	3,428		5,902
Reclassifications to proved properties	—		(13,361)
Ending balance	$	3,428	$	—

Number of wells pending determination at period-end	1		—

As of March 31, 2022, there were no exploratory well costs that were capitalized for more than one year.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2022

(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, 2022		December 31, 2021
	(in thousands)
Crude oil, natural gas and NGLs sales	$	523,029	$	368,991
Joint interest billings	16,922		24,860
Other	550		10,809
Allowance for doubtful accounts	(3,445)		(6,055)
Accounts receivable, net	$	537,056	$	398,605

Other Accrued Expenses. The following table presents the components of other accrued expenses as of the dates indicated:


	March 31, 2022		December 31, 2021
	(in thousands)
Employee benefits	$	12,935	$	29,319
Asset retirement obligations	31,914		32,146
Environmental expenses	12,266		11,942
Operating and finance leases	7,574		7,197
Other	12,441		10,805
Other accrued expenses	$	77,130	$	91,409

Other Liabilities. The following table presents the components of other liabilities as of the dates indicated:


	March 31, 2022		December 31, 2021
	(in thousands)
Deferred midstream gathering credits	$	157,526	$	159,788
Deferred oil gathering credits	15,578