Denver-based Centennial Resource Development Inc. Chairman and CEO Mark Papa, an industry icon before he took over in 2016, is planning to give retirement another go, but he is not going quietly, and per usual offered his take on the markets on Wednesday.
Papa shared his concerns during a conference call to discuss Centennial’s fourth quarter performance and expectations for 2020.
“Two things are apparent regarding the 2020 global oil supply-demand picture,” he told investors. “First, U.S. oil year/year growth will be less than past years. And second, global demand will likely be less than 1 million b/d this year.”
A big factor is the coronavirus, he said, which upended the stock market on Monday and slammed energy stocks.
Centennial’s business plan for 2020, in which it has reduced its outlook for oil production from the Permian Basin to about 3% this year from 7% in 2019, is in part in response to the virus, as it is reducing demand.
“It’s simple,” said Papa. “We're prioritizing balance sheet preservation over production growth.” The capital expenditure budget has been trimmed by about 28% year/year, “yet we still expect to achieve a small amount of production growth. We believe the slowdown in overall U.S. production growth will allow the global market to rebalance within a reasonable timeframe, and we plan to preserve our balance sheet until that occurs.”
Regarding his retirement, Papa said it was “simply because I’ve reached an age where I need to step off the stage. I'm 73 years old…” Centennial began as a blank check exploration and production (E&P) company in 2016, and at the time, “I told everyone I'd likely stay for four years until 2020.
“Clearly, the oil market and E&P equity valuations didn't develop as I expected. But I'm staying consistent with my original career plan. We're fortunate to have a competent team to come in behind me...I'll be working closely with this team over the next three months to ensure that this is a seamless transition.”
The energy industry icon previously had helped create and run EOG Resources Inc. before retiring in 2013. Effective June 1, COO Sean R. Smith is taking the helm.
Centennial was producing 6,000 b/d of oil when Papa took over in late 2016.
“Today, we are regarded as a technical leader within the E&P industry with 45,000 b/d of oil and a track record of consistent execution,” he said. “Notably, all of this has been accomplished by maintaining a rigorous focus on corporate rate of return and a conservative financial profile.”
The board also is separating the roles of chairman and CEO, with director Steven J. Shapiro tapped to succeed Papa as non-executive chairman. Additionally, Vice President Matt R. Garrison, who has overseen Geosciences since 2016, is taking over as COO in June.
The independent during 2019 increased production volumes by 25% to 76,072 boe/d, with oil output climbing 23% to 42,692 b/d. In 4Q2019, oil production increased 7% year/year to 45,031 b/d.
“Centennial had a strong year, accomplishing essentially all of our operational goals,” Papa said. “We maintained our original capital budget while exceeding our oil production target, which was raised twice during the year.”
However, times have changed, he said. “Given the uncertainty of oil prices, we reduced our planned capital expenditures for the year.” After casting off its saltwater disposal business in the Permian to WaterBridge Holdings LLC, “we expect to be essentially cash flow neutral in 2020 at current strip pricing.”
Centennial continues to focus its operations in the Delaware sub-basin, with acreage across West Texas and southeastern New Mexico.
In Reeves County, TX, the Bodacious unit was drilled using a stacked-staggered pattern in the Third Bone Spring Sand and Upper Wolfcamp A intervals with average 6,200-foot laterals. The two-well pad achieved an average initial production (IP) rate over 30 days of 1,797 boe/d.
“Centennial has been one of the industry leaders in the evaluation and development of the Third Bone Spring Sand in this area of Reeves County,” Papa said. “Having proven the economic viability of co-developing the Third Bone Spring Sand with the Upper Wolfcamp A, we expect this well pattern to continue to play a large role in our future development program.”
In the Upper Wolfcamp A interval of the play, the Lucy Prewit pad consisted of three wells with average laterals of 6,800 feet and IPs averaging 1,744 boe/d. The three-well Nicholas pad, also targeting the Upper Wolfcamp A, was drilled with average 9,800-foot laterals and average IPs of 1,865 boe/d.
In New Mexico’s Lea County, the four-well Airstream 24 State Com pad used 900-foot spacing in the Second Bone Spring Sand interval with average 10,200-foot laterals. Production averaged 1,843 boe/d.
“The Airstreams were a positive test, pairing the upper and lower portions of the Second Bone Spring Sand interval,” said Papa. “Specifically, we believe this co-development pattern will allow us to more effectively drain this reservoir on our Lea County position.”
Four Lea County Duck Hunt wells also were completed in the First, Second and Third Bone Spring Sand and Second Bone Spring Shale intervals with average laterals of 7,200 feet and IPs of 1,683 boe/d.
“Our team did a tremendous job driving operational efficiencies, which resulted in a significant reduction in well costs during the second half of the year,” Papa said. “As a result, we were able to stay within our original capital expenditure range, while completing 14 more gross wells than originally anticipated.”
To maintain its balance sheet in the current commodity price environment, Centennial plans to reduce its operated rig count by one to four beginning in April. Beginning in the second quarter, Centennial expects to work three rigs in Reeves County and one in Lea County.
Assuming planned activity levels and current commodity prices, oil production growth is forecast at 3% during 2020.
“In today’s uncertain commodity price environment, balance sheet strength is much more important than production growth,” said Papa. “Our 2020 capital budget is a prudent decision to preserve high-quality inventory and maintain a low leverage profile.”
The estimated fiscal year 2020 total capital budget is $590-690 million, down 28% from 2019.
For 4Q2019, net income was $9.6 million (3 cents/share), compared with $31 million (12 cents) in 4Q2018. Net income in 2019 totaled $15.8 million (6 cents/share), versus 2018 profits of nearly $200 million (75 cents).
Want to see more earnings? See the full list of NGI's 4Q2019 earnings season coverage.