Permian Basin pure-play Centennial Resource Development Corp., like other operators across the basin, is pinning its expectation for higher Waha natural gas prices on stronger summer demand in Texas and the start up of one pipeline that isn’t set to ramp until later this year.
Waha should continue to trade “at zero or even negative” until demand increases on summer cooling loads in Texas, COO Sean Smith said Tuesday during a first quarter conference call. He joined CEO Mark G. Papa and the executive team to discuss the Denver independent’s performance and share their outlook for the year ahead.
“Overall, we remain bearish on Waha prices for the remainder of the year,” until the Gulf Coast Express (GCX) pipeline comes online. It is scheduled to begin commercial operations in the fourth quarter. Several other Permian operators during 1Q2019 conference calls, including Pioneer Natural Resources Co., also have said it will take the start up of GCX before gas prices improve substantially in the basin.
“Fortunately, Centennial has limited exposure to Waha prices,” Smith said. “Beginning in the second quarter, as a result of our first sales and firm transportation agreements, approximately 70% of our natural gas will receive Midcontinent-based pricing. Year-to-date Midcontinent-based pricing has traded at approximately $1-2 premium to Waha…
“Our gas takeaway agreements also mean we continue to experience immaterial amounts of natural gas flaring due to pipeline takeaway constraints...We expect this to continue in the future.”
Similar to minimizing its gas constraints, Centennial has secured physical takeaway capacity for all of its crude out of the Delaware, with pricing based on West Texas Intermediate (WTI).
“Based on current market differentials, gathering costs and associated transportation fees, Centennial expects to realize approximately 87-93% of WTI for the remainder of the year, excluding the effect of the existing basis hedges,” Smith said.
Beginning in 2020, “our pricing shifts to a more diversified mix with even greater exposure to international pricing. Therefore, in 2020 we expect realizations to improve toward 95% of WTI, which is inclusive of our transportation costs.”
Papa told investors that he is bullish on WTI through 2020.
“Oil prices have obviously rebounded strongly relative to early this year, and we think the setup is positive for prices in the $65-75 WTI range by year-end 2019 and throughout 2020,” he said. The impact of International Marine Organization rules, set to begin Jan. 1 that require lower sulfur fuels, also provide a “tailwind,” Papa said.
Total production increased 33% year/year to 6.48 million boe/d, with oil volumes up 28% to 40,508 b/d. It completed 20 wells, with half on production in March. There also were solid well results from multiple intervals in the northern and southern Delaware sub-basins.
“We posted some remarkable well results, maintained unit cost control and brought all production to sales through firm transportation and sales agreements we have in place,” said Papa.
“The other pieces of our business continue to perform at or slightly better than expectations...Our well results on average are performing slightly better than prognosed…” with capital expenditures in line and unit costs “running a bit lower than we targeted.”
The high-priced battle for Anadarko Petroleum Corp., which has substantial assets in the West Texas Delaware sub-basin, “points out the value of good quality Delaware Basin acreage,” Papa said. Centennial’s 81,000 net acres are “relatively contiguous.”
Centennial’s management team is seeing “two trends” regarding Permian acquisitions. The first is more purchases by international oil companies (IOC), i.e. supermajors, including BP plc, ExxonMobil Corp. and Chevron Corp.
“It’s obvious that the Permian Basin is the coveted asset that pretty much everybody wants,” Papa said. A lot of companies are “trying to get a larger position into the Permian Basin and perhaps more specifically into the Delaware side of the Permian Basin, as you've seen in the Anadarko transaction. I think you're going to see that the IOCs are definitely going to get bigger in the Permian Basin…
“Whoever is ultimately successful in capturing Anadarko, I think you're going to see other transactions where the IOCs grow over the next year in the Permian Basin.”
Papa also expects “ a lot of noise from hedge funds and others expressing unhappiness with some of the mid-caps” as shareholders push for more mergers and acquisitions (M&A) to consolidate Permian operations.
In the next couple of years he expects to see fewer mid-cap producers and “definitely more transactions in this space. “I'm not saying that we're going to be an active participant in the M&A space, but clearly the 81,000 acres we have is, I think, going to be...a lot more valuable than what that acreage is shown to be…”
Centennial reported a quarterly net loss of $8.1 million (minus 3 cents/share), which included a $31.3 million impairment for undeveloped leasehold. Net income in 1Q2018 totaled $66.1 million (25 cents/share). Revenue was nearly flat year/year at $214.6 million from $215.9 million.
Centennial’s realized natural gas price in 1Q2019 fell year/year to $2.88/Mcf from $3.08. The gas differential from New York Mercantile Exchange prices was minus $1.49 in 1Q2019, versus minus 66 cents in 1Q2018.