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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, 2022
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
PDC ENERGY, INC.
(Exact name of registrant as specified in its charter)
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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.
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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.
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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: 96,307,108 shares of the Company's Common Stock ($0.01 par value) were outstanding as of July 26, 2022.
PDC ENERGY, INC.
TABLE OF CONTENTS
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| PART I – FINANCIAL INFORMATION | | Page |
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Item 1. | | | |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
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PART II – OTHER INFORMATION |
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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 from the acquisition and integration of Great Western, including changes in results of operations, production volumes and costs per Boe, DD&A per Boe, general and administrative expenses, and interest expense in the second half of 2022; 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 legacy PDC consent decree and Great Western’s compliance order on consent; expected impact from emission reduction initiatives; risk of our counterparties’ non-performance on derivative instruments; tax matters; 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 acquisition of Great Western Petroleum, LLC (“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;
•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;
•an unanticipated assumption of liabilities or other problems with the Great Western acquisition or other acquisitions we may pursue;
•civil unrest, terrorist attacks and cyber threats;
•risks associated with recent inflationary trends and the potential for a recession; 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.
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, 2022 | | December 31, 2021 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 38,528 | | | $ | 33,829 | |
Accounts receivable, net | | 723,415 | | | 398,605 | |
Fair value of derivatives | | 14,643 | | | 17,909 | |
Prepaid expenses and other current assets | | 11,726 | | | 8,230 | |
Total current assets | | 788,312 | | | 458,573 | |
Properties and equipment, net | | 7,087,772 | | | 4,814,865 | |
Fair value of derivatives | | 26,967 | | | 15,177 | |
Other assets | | 73,190 | | | 48,051 | |
Total Assets | | $ | 7,976,241 | | | $ | 5,336,666 | |
| | | | |
Liabilities and Stockholders’ Equity | | | | |
Liabilities | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 285,414 | | | $ | 127,891 | |
Production tax liability | | 242,653 | | | 99,583 | |
Fair value of derivatives | | 702,329 | | | 304,870 | |
Funds held for distribution | | 548,185 | | | 285,861 | |
Accrued interest payable | | 14,683 | | | 10,482 | |
Other accrued expenses | | 85,021 | | | 91,409 | |
Total current liabilities | | 1,878,285 | | | 920,096 | |
Long-term debt | | 1,698,047 | | | 942,084 | |
Asset retirement obligations | | 146,020 | | | 127,526 | |
Fair value of derivatives | | 235,630 | | | 95,561 | |
Deferred income taxes | | 186,383 | | | 26,383 | |
Other liabilities | | 361,155 | | | 314,769 | |
Total liabilities | | 4,505,520 | | | 2,426,419 | |
| | | | |
Commitments and contingent liabilities | | | | |
| | | | |
Stockholders’ equity | | | | |
Common shares - par value $0.01 per share, 150,000,000 authorized, 97,047,329 and 96,468,071 issued as of June 30, 2022 and December 31, 2021, respectively | | 970 | | | 965 | |
Additional paid-in capital | | 3,096,523 | | | 3,161,941 | |
Retained earnings (accumulated deficit) | | 380,467 | | | (249,954) | |
Treasury shares - at cost, 120,143 and 54,960 as of June 30, 2022 and December 31, 2021, respectively | | (7,239) | | | (2,705) | |
Total stockholders’ equity | | 3,470,721 | | | 2,910,247 | |
Total Liabilities and Stockholders’ Equity | | $ | 7,976,241 | | | $ | 5,336,666 | |
See accompanying Notes to Condensed Consolidated Financial Statements
1
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, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | | | | | | | | |
Crude oil, natural gas and NGLs sales | | $ | 1,237,680 | | | $ | 533,141 | | | $ | 2,120,058 | | | $ | 1,001,260 | |
Commodity price risk management gain (loss), net | | (101,976) | | | (308,253) | | | (670,031) | | | (489,509) | |
Other income | | 2,787 | | | 3,981 | | | 4,912 | | | 3,154 | |
Total revenues | | 1,138,491 | | | 228,869 | | | 1,454,939 | | | 514,905 | |
Costs, expenses and other | | | | | | | | |
Lease operating expense | | 70,611 | | | 42,395 | | | 124,767 | | | 84,199 | |
Production taxes | | 89,251 | | | 26,968 | | | 152,167 | | | 56,460 | |
Transportation, gathering and processing expense | | 29,584 | | | 25,989 | | | 57,555 | | | 47,721 | |
Exploration, geologic and geophysical expense | | 320 | | | 286 | | | 573 | | | 640 | |
General and administrative expense | | 45,649 | | | 32,843 | | | 79,756 | | | 65,520 | |
Depreciation, depletion and amortization | | 191,061 | | | 162,210 | | | 342,116 | | | 308,973 | |
Accretion of asset retirement obligations | | 3,352 | | | 3,232 | | | 6,339 | | | 6,360 | |
Impairment of properties and equipment | | 510 | | | 62 | | | 1,453 | | | 252 | |
Loss (gain) on sale of properties and equipment | | 498 | | | (129) | | | 373 | | | (341) | |
Other expense | | — | | | 2,145 | | | — | | | 2,193 | |
Total costs, expenses and other | | 430,836 | | | 296,001 | | | 765,099 | | | 571,977 | |
Income (loss) from operations | | 707,655 | | | (67,132) | | | 689,840 | | | (57,072) | |
Interest expense, net | | (17,565) | | | (20,060) | | | (30,510) | | | (39,101) | |
Gain on bargain purchase | | 100,273 | | | — | | | 100,273 | | | — | |
Income (loss) before income taxes | | 790,363 | | | (87,192) | | | 759,603 | | | (96,173) | |
Income tax benefit (expense) | | (127,982) | | | 155 | | | (129,182) | | | 100 | |
Net income (loss) | | $ | 662,381 | | | $ | (87,037) | | | $ | 630,421 | | | $ | (96,073) | |
| | | | | | | | |
Earnings (loss) per share: | | | | | | | | |
Basic | | $ | 6.83 | | | $ | (0.88) | | | $ | 6.52 | | | $ | (0.97) | |
Diluted | | $ | 6.74 | | | $ | (0.88) | | | $ | 6.42 | | | $ | (0.97) | |
| | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | 96,982 | | | 99,187 | | | 96,632 | | | 99,445 | |
Diluted | | 98,246 | | | 99,187 | | | 98,150 | | | 99,445 | |
| | | | | | | | |
| | | | | | | | |
See accompanying Notes to Condensed Consolidated Financial Statements
2
PDC ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | 630,421 | | | $ | (96,073) | |
Adjustments to net income (loss) to reconcile to net cash from operating activities: | | | | |
Net change in fair value of unsettled commodity derivatives | | 209,777 | | | 403,723 | |
Depreciation, depletion and amortization | | 342,116 | | | 308,973 | |
Impairment of properties and equipment | | 1,453 | | | 252 | |
Accretion of asset retirement obligations | | 6,339 | | | 6,360 | |
Non-cash stock-based compensation | | 12,770 | | | 11,515 | |
(Gain) loss on sale of properties and equipment | | 373 | | | (341) | |
Amortization of debt discount, premium and issuance costs | | 2,715 | | | 7,714 | |
Deferred income taxes | | 128,481 | | | — | |
Gain on bargain purchase | | (100,273) | | | — | |
Other | | (700) | | | 875 | |
Changes in assets and liabilities | | 2,909 | | | (65,632) | |
Net cash from operating activities | | 1,236,381 | | | 577,366 | |
Cash flows from investing activities: | | | | |
Capital expenditures for development of crude oil and natural gas properties | | (533,592) | | | (240,266) | |
Capital expenditures for midstream assets | | (3,015) | | | — | |
Capital expenditures for other properties and equipment | | (2,537) | | | (274) | |
Cash paid for acquisition of an exploration and production business | | (1,068,241) | | | — | |
Proceeds from sale of properties and equipment | | 461 | | | 4,414 | |
Proceeds from divestitures | | 465 | | | — | |
| | | | |
Net cash from investing activities | | (1,606,459) | | | (236,126) | |
Cash flows from financing activities: | | | | |
Proceeds from revolving credit facility and other borrowings | | 1,372,000 | | | 429,800 | |
Repayment of revolving credit facility and other borrowings | | (617,000) | | | (597,800) | |
| | | | |
| | | | |
| | | | |
Payment of debt issuance costs | | (47) | | | — | |
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | | (16,860) | | | (5,656) | |
Purchase of treasury shares under stock repurchase program | | (295,005) | | | (47,694) | |
Dividends paid | | (59,219) | | | (11,885) | |
Principal payments under financing lease obligations | | (962) | | | (879) | |
Net cash from financing activities | | 382,907 | | | (234,114) | |
Net change in cash and cash equivalents | | 12,829 | | | 107,126 | |
Cash, cash equivalents and restricted cash, beginning of period | | 33,829 | | | 2,623 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 46,658 | | | $ | 109,749 | |
See accompanying Notes to Condensed Consolidated Financial Statements
3
PDC ENERGY, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except dividends per share)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Common Stock | | Additional Paid-in Capital | | Treasury Stock | | Retained Earnings (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 income (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 | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 662,381 | | | 662,381 | |
Issuance of stock pursuant to acquisition | 4,007 | | | 40 | | | 293,274 | | | — | | | — | | | — | | | 293,314 | |
Stock-based compensation | 337 | | | 3 | | | 6,924 | | | — | | | 369 | | | — | | | 7,296 | |
Purchase of treasury shares for employee stock-based compensation tax withholding obligations | — | | | — | | | — | | | (101) | | | (7,657) | | | — | | | (7,657) | |
Retirement of treasury shares for employee stock-based compensation tax withholding obligations | (101) | | | (1) | | | (7,635) | | | 101 | | | 7,636 | | | — | | | — | |
Retirement of treasury shares | (2,946) | | | (29) | | | (214,123) | | | 2,946 | | | 214,152 | | | — | | | — | |
Issuance of treasury shares | — | | | — | | | — | | | 5 | | | — | | | — | | | — | |
Purchase of treasury shares under stock repurchase program | — | | | — | | | — | | | (2,966) | | | (214,706) | | | — | | | (214,706) | |
Dividends declared ($0.35 per share) | — | | | — | | | (34,658) | | | — | | | — | | | — | | | (34,658) | |
Balance, June 30, 2022 | 97,047 | | | $ | 970 | | | $ | 3,096,523 | | | (120) | | | $ | (7,239) | | | $ | 380,467 | | | $ | 3,470,721 | |
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See accompanying Notes to Condensed Consolidated Financial Statements
4
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 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 income (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 | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | (87,037) | | | (87,037) | |
Stock-based compensation | 295 | | | 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 | — | | | — | | | — | | | (661) | | | (26,509) | | | — | | | (26,509) | |
Dividends declared ($0.12 per share) | — | | | — | | | (12,117) | | | — | | | — | | | — | | | (12,117) | |
Balance, June 30, 2021 | 98,907 | | | $ | 989 | | | $ | 3,333,168 | | | (20) | | | $ | (913) | | | $ | (868,338) | | | $ | 2,464,906 | |
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See accompanying Notes to Condensed Consolidated Financial Statements
5
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2022, we owned an interest in approximately 4,200 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 six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year or any other future period.
NOTE 2 - BUSINESS COMBINATION
On May 6, 2022, we completed the acquisition of Great Western Petroleum, LLC (“Great Western”), for approximately $1.4 billion, inclusive of Great Western’s net debt (the “Great Western Acquisition”). Great Western was an independent oil and gas company focused on the exploration, production and development of crude oil and natural gas in the Wattenberg Field of Colorado. The consideration paid was $542.5 million in cash and approximately $4.0 million shares of our common stock, valued at $293.3 million on the acquisition date. In addition, we paid off the Great Western secured credit facility totaling $235.8 million and irrevocably deposited $361.2 million on Great Western’s behalf to pay and discharge on May 20, 2022 Great Western’s 12 percent senior secured notes due 2025, inclusive of unpaid accrued interest and a premium for early termination. The cash portion of the purchase price and the termination of Great Western’s debt were funded through a combination of cash on hand and availability under our revolving credit facility.
Purchase Price Allocation
The Great Western Acquisition has been accounted for using the acquisition method under Accounting Standards Codification (“ASC”) 805, Business Combinations, with PDC being treated as the accounting acquirer. Accordingly, we conducted assessments of the net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated fair values, while transaction and integration costs associated with the acquisition were expensed as incurred.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
The following table presents our preliminary allocation of the total purchase price of Great Western to the identifiable assets acquired and liabilities assumed based on the fair values as of the acquisition date:
| | | | | | | | |
| | (in thousands, except share and per share data) |
Consideration: | | |
Cash | | $ | 542,500 | |
Retirement of Great Western’s credit facility | | 235,822 | |
Extinguishment of Great Western’s secured senior notes | | 361,231 | |
Total cash consideration | | 1,139,553 | |
| | |
Common stock issued | | 4,007,018 | |
Fair value of PDC common stock on May 6, 2022 | | $ | 73.20 | |
Total fair value of common stock issued | | 293,314 | |
| | |
Total consideration | | $ | 1,432,867 | |
| | |
Assets acquired: | | |
Cash | | $ | 63,183 | |
Accounts receivable | | 164,433 | |
Other current assets | | 3,684 | |
Properties and equipment, net - proved | | 2,088,927 | |
| | |
Properties and equipment, net - other | | 7,035 | |
Other noncurrent assets | | 21,888 | |
Total assets acquired | | $ | 2,349,150 | |
| | |
Liabilities assumed: | | |
Accounts payable | | $ | (131,376) | |
Production tax liability | | (110,940) | |
Funds held for distribution | | (162,945) | |
Other current liabilities | | (3,903) | |
Fair value of derivatives | | (319,600) | |
Asset retirement obligations | | (22,926) | |
Deferred tax liabilities | | (31,518) | |
Other liabilities | | (32,802) | |
Total liabilities assumed | | (816,010) | |
| | |
Total identifiable net assets acquired | | $ | 1,533,140 | |
Gain on bargain purchase | | 100,273 | |
Purchase price consideration | | $ | 1,432,867 | |
Determining the fair values of the assets and liabilities of Great Western requires judgement and certain assumptions to be made, the most significant of these being related to the valuation of crude oil and natural gas properties. The majority of the 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 14.25 percent. These inputs require significant judgments and estimates by management at the time of the valuation. Due to this, the final purchase price allocation is considered an ongoing process and we anticipate the measurement period may extend into the fourth quarter of 2022.
ASC 805, Business Combinations, requires that any excess of purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill and any excess of fair value of acquired net
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
(Unaudited)
assets, including identifiable intangible assets over the acquisition consideration, results in a gain from bargain purchase. Prior to recording a gain, the acquiring entity must reassess whether all assets acquired and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired and liabilities assumed have been properly valued. The Great Western Acquisition resulted in a gain on bargain purchase due to the estimated fair value of the identifiable net assets acquired exceeding the purchase consideration transferred by $100.3 million and is shown as a gain on bargain purchase on our condensed consolidated statement of operations, net of related income taxes of $31.5 million. Upon completion of our assessment, we concluded that recording a gain on bargain purchase was appropriate and required under ASC 805. The bargain purchase was primarily attributable to the increase in commodity price forecasts from the date we entered into the definitive purchase agreement with Great Western, February 26, 2022, to the closing date of the acquisition, May 6, 2022, when the fair value of crude oil and natural gas reserves acquired were determined. Additionally, the majority of the acquisition consideration was fixed and therefore did not fluctuate in the event of market increases or decreases between the date of entry into the agreement through the closing date.
The results of operations for the Great Western Acquisition since the closing date have been included on our condensed consolidated financial statements for the three and six months ended June 30, 2022 and include approximately $191.0 million of total revenue and $133.3 million of income from operations. During the three and six months ended June 30, 2022, we recognized total transaction costs of $10.6 million, which are included in general and administrative expense on the condensed consolidated statement of operations.
Pro Forma Information. The following unaudited pro forma financial information represents a summary of the condensed consolidated results of operations for the three and six months ended June 30, 2022, assuming the acquisition had been completed as of January 1, 2021. 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.
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) our common stock issued to the owners of Great Western, (ii) the increase in depletion reflecting the relative fair values and production volumes attributable to Great Western’s properties and the revision to the depletion rate reflecting the reserve volumes acquired, (iii) adjustments to interest expense as a result of payoff of Great Western’s credit facility and secured senior notes, (iv) the adjustment to reflect the gain on bargain purchase, and (v) the estimated tax impacts of the pro forma adjustments. In addition, pro forma earnings were adjusted to exclude acquisition-related costs incurred by us and Great Western totaling approximately $25.3 million and $28.5 million for the three and six months ended June 30, 2022, respectively, and included the total costs of $28.5 million for the six months ended June 30, 2021.
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| | Three months ended June 30 | | Six months ended June 30 |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | (in thousands, except per share data) |
Total revenue | | $ | 1,154,220 | | | $ | 254,588 | | | $ | 1,506,567 | | | $ | 618,988 | |
Net income (loss) | | 574,887 | | | (160,895) | | | 491,127 | | | (121,460) | |
| | | | | | | | |
Earnings (loss) per share: | | | | | | | | |
Basic | | $ | 5.83 | | | $ | (1.56) | | | $ | 4.94 | | | $ | (1.17) | |
Diluted | | 5.76 | | | (1.56) | | | 4.87 | | | (1.17) | |
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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:
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
Revenue by Commodity and Operating Region | | 2022 | | 2021 | | Percent Change | | 2022 | | 2021 | | Percent Change |
| | (in thousands) |
Crude oil | | | | | | | | | | | | |
Wattenberg Field | | $ | 599,162 | | | $ | 291,551 | | | 106 | % | | $ | 1,051,073 | | | $ | 527,514 | | | 99 | % |
Delaware Basin | | 141,671 | | | 59,148 | | | 140 | % | | 239,509 | | | 96,836 | | | 147 | % |
Total | | $ | 740,833 | | | $ | 350,699 | | | 111 | % | | 1,290,582 | | | 624,350 | | | 107 | % |
Natural gas | | | | | | | | | | | | |
Wattenberg Field | | $ | 237,713 | | | $ | 74,664 | | | 218 | % | | 381,412 | | | 171,686 | | | 122 | % |
Delaware Basin | | 40,004 | | | 11,139 | | | 259 | % | | 59,429 | | | 19,763 | | | 201 | % |
Total | | $ | 277,717 | | | $ | 85,803 | | | 224 | % | | 440,841 | | | 191,449 | | | 130 | % |
NGLs | | | | | | | | | | | | |
Wattenberg Field | | $ | 181,552 | | | $ | 83,505 | | | 117 | % | | 320,427 | | | 161,282 | | | 99 | % |
Delaware Basin | | 37,578 | | | 13,134 | | | 186 | % | | 68,208 | | | 24,179 | | | 182 | % |
Total | | $ | 219,130 | | | $ | 96,639 | | | 127 | % | | 388,635 | | | 185,461 | | | 110 | % |
Crude oil, natural gas and NGLs | | | | | | | | | | | | |
Wattenberg Field | | $ | 1,018,427 | | | $ | 449,720 | | | 126 | % | | 1,752,912 | | | 860,482 | | | 104 | % |
Delaware Basin | | 219,253 | | | 83,421 | | | 163 | % | | 367,146 | | | 140,778 | | | 161 | % |
Total | | $ | 1,237,680 | | | $ | 533,141 | | | 132 | % | | $ | 2,120,058 | | | $ | 1,001,260 | | | 112 | % |
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 six months ended June 30, 2022:
| | | | | |
| (in thousands) |
Beginning balance | $ | 15,472 | |
Reductions to assets previously recognized (1) | (12,307) | |
Amortized as a reduction to crude oil, natural gas and NGLs sales | (429) | |
Ending balance | $ | 2,736 | |
_____________
(1) The reductions to our contract asset amounts previously recognized is due to the continued improvements in natural gas prices in 2022, which resulted in us receiving reimbursements from our third party gas processor during 2022 as part of our long-term gas processing agreement.
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.
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 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 | | $ | 2,555 | | | $ | 12,088 | | | $ | 14,643 | | | $ | — | | | $ | 17,909 | | | $ | 17,909 | |
Non-current | Fair value of derivatives | | 8,378 | | | 18,589 | | | 26,967 | | | 605 | | | 14,572 | | | 15,177 | |
Total | | | $ | 10,933 | | | $ | 30,677 | | | $ | 41,610 | | | $ | 605 | | | $ | 32,481 | | | $ | 33,086 | |
| | | | | | | | | | | | | |
Derivative liabilities | | | | | | | | | | | | | |
Current | Fair value of derivatives | | $ | (526,359) | | | $ | (175,970) | | | $ | (702,329) | | | $ | (230,695) | | | $ | (74,175) | | | $ | (304,870) | |
Non-current | Fair value of derivatives | | (175,402) | | | (60,228) | | | (235,630) | | | (74,715) | | | (20,846) | | | (95,561) | |
Total | | | $ | (701,761) | | | $ | (236,198) | | | $ | (937,959) | | | $ | (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: