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Permian's Southern Delaware Energizes Centennial Resource, Jagged Peak

Denver-based independents Jagged Peak Energy Inc. and Centennial Resource Development Inc., each working the Permian Basin in West Texas, credited better completion techniques in helping them to increase oil and natural gas production from a year ago.

The exploration and production companies, which each began trading publicly last year, held conference calls Friday morning to discuss their individual results, fueled by the southern Delaware sub-basin in West Texas.

"Well results from the first quarter of 2017 confirm the technical strength of the team we've put in place," said Centennial CEO Mark G. Papa. "In addition, we've now built a sizable position across Reeves County and established a solid acreage footprint in the northern part of the basin, consistent with our strategy to focus in the Delaware Basin. The company is on track to achieve our updated 2017 production targets while maintaining capital budget discipline."

Centennial has more than 77,000 net acres in Reeves County. In early May it paid $350 million to expand its Permian holdings into New Mexico's Delaware sub-basin.

By improving geosteering operations, Centennial remained in its target drilling zone for 93% of total lateral feet drilled during the quarter, representing a sharp increase from previously drilled wells, Papa said. Changes on the completion side included increases to the number of clusters per stage to improve fracture stimulation and overall well productivity.

Centennial, which has up to now pushed its oil production expertise, reported surprisingly strong natural gas gains during the first quarter.

Average gas volumes increased from 1Q2016 by 301% to 31.48 MMcf/d, while oil volumes rose 103% to 10,489 b/d and natural gas liquids (NGL) were 255% higher at 2,733 b/d. Net gas output during the first three months climbed by 306% to 2,833 MMcf, while oil increased 101% to 944,000 b/d and NGLs increased 251% to 1.66 million boe.

Gas sales year/year jumped by 528% to $8.2 million, while oil sales were 253% higher at $47 million and NGL sales climbed 961% to $6 million. Average New York Mercantile Exchange prices for natural gas increased by 55% to $3.06/Mcf, while the crude oil price rose by 54% to $51.82/bbl.

Centennial reported several successful wells in the southern Delaware from the Upper Wolfcamp A formation. The Big Fundamental 4-52 1H, drilled with a 4,600-foot lateral, had an initial production rate over 30 days (IP-30) of 1,700 boe/d, 67% oil. On a per-lateral-foot basis, the Big Fundamental delivered an IP-30 of 370 boe/d per 1,000 feet and 247 b/d of oil/1,000 feet.

"The Big Fundamental 4-52 1H is likely one of the best wells drilled to date in Southern Reeves County on a per-lateral-foot basis," Papa said. Centennial has hit the sweet spot in the Delaware for technical completions, "a priority for the company."

For example, the Balmorhea State 2H was drilled with a 5,750-foot lateral with an IP-30 of 1,311 boe/d, while the Collins 2H achieved an IP-30 of 1,183 boe/d with a lateral of 6,315 feet.

Since February, Centennial has used a five-rig program in the southern Delaware, and it plans to add a sixth rig in Reeves County this month. During the first quarter, 15 operated wells were spud and 11 operated wells were completed. The completed wells had average laterals of about 6,250 feet.

The newly added northern Delaware acreage in New Mexico "adds attractive core acreage to our existing portfolio," Papa said. "This is an area that our geoscience and reservoir teams know well. We expect to apply our technical expertise to this asset and enhance its existing value."

Centennial reported net income of $9.8 million (4 cents/share) in 1Q2017, turning around from a year-ago loss for the predecessor company of $14.5 million. Net revenue rose 304% to $61 million from $15 million, while total operating expenses reversed to profits of $7.2 million from a year-ago loss of $14.73 million.

Jagged Peak Raising Rigs

Southern Delaware-focused output for Jagged Peak jumped 139% from a year ago and increased 52% sequentially to 9,785 boe/d, 85% weighted to oil. The company began 2017 operating three drilling rigs and added a fourth in January and a fifth in March.

The independent currently is producing from 32 wells, up from 20 wells at the end of 2016, with estimated net production now above 14,500 boe/d.

Daily combined natural gas, oil and NGL volumes more than doubled year/year from predecessor operations to 9,785 boe/d from 4,102 boe/d. Gas output increased to 370 MMcf from 158 MMcf, oil to 745,000 bbl from 311,000 bbl, and NGL volumes to 74,000 bbl from 36,000 bbl. Combined, volumes jumped to 881,000 boe from 373,000 boe.

Averaged realized prices during 1Q2017 increased from a year ago to $2.48/Mcf from $1.78 for gas, $47.89/bbl from $29.81 for oil and $20.61/bbl from $11.92 for NGLs. Meanwhile, lease operating expenses (LOE), including workovers, decreased to $1.83/boe, down 62% year/year and 52% sequentially.

"We have the flexibility to adjust our drilling program based on market conditions and have opportunistically operated up to seven rigs at one point this year but expect to operate a five to six-rig drilling program throughout the remainder of 2017," CEO Joe Jaggers said.

During the quarter, Jagged Peak drilled 12 gross-operated spuds with average laterals of 7,403 feet and completed seven gross-operated wells with laterals averaging  7,966 feet.

"On the land front, our team added 2,153 net leasehold acres at attractive prices," Jaggers said. "These additional acres not only add drilling locations to our extensive inventory, but also allow us to drill longer lateral lengths and to increase our working interest in certain existing locations."

The total leasehold position in the southern Delaware had increased at the end of March to 68,546 net acres, with an estimated 1,350 future well locations identified in the Third Bone Spring, Wolfcamp A and B formations. Since the end of March, the company since has tacked on more acreage to now hold about 70,000 net acres.

The company has contracted to operate "multiple fracturing fleets" this year and has a water infrastructure system in place capable of supplying fresh water and disposing of produced water to support the planned development program.

The management team said production continues at the State Skinwalker 2-8-1H well, with a lateral of 8,101 feet, and at the Chupacabra 1213-7-1H well, with a lateral of 10,369 feet, the easternmost wells drilled to date in the Whiskey River area. State Skinwalker, which began flowback in early February, had produced through early May 118,000 boe, while Chupacabra began flowing in early March with production through early May of 84,000 boe. The wells produced a peak combined output of 3,579 boe/d, 85% oil "and are exceeding the normalized type curve by 26% based on 60-day cumulative production."

The company also has begun flowback for the Whiskey River 98-34-IH well with a 5,164-foot lateral and an IP-30 of 119,000 boe/d. The Pyote Flats 98-34-2H well, with a 9,646-foot lateral had an IP-30 of 115,000 boe.

"Both of these data points are comparable to the normalized type curves for wells drilled on 880-foot spacing and better than the original wells in the section," management said. "If 660-foot spacing is feasible across the company's acreage position, the current inventory of approximately 1,350 gross well locations based on 880-foot well spacing would be increased by approximately 400 gross well locations."

Net losses totaled $465.9 million (minus 42 cents/share), which included one-time equity-based compensation expenses of $409 million and deferred tax expense of $79.1 million, both recorded as a result of the initial public offering last year. Net losses in 1Q2016 for the predecessor company totaled $7.5 million.

Adjusted net income in 1Q2017 was $10.5 million (5 cents/share), versus a year-ago adjusted net loss of $6.1 million. Revenue increased from a year ago to $39.39 million from $10.25 million.

Regarding its go-forward plan, Jaggers said there is "ample liquidity" to fund organic growth through the end of 2018. Capital expenditures for the first quarter totaled $122.5 million.

Jagged Peak has budgeted $525-570 million for capital expenditures in 2017, including $510-550 million for drilling/completion costs. Full-year LOEs are forecast to be $2.75-3.50/boe, down 25 cents at the midpoint from previous guidance.

Second quarter production is expected to average 14,000-15,000 boe/d, an increase of 4,715 boe/d, or 48%, at the midpoint from 1Q2017 output.

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