UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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
(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
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 x No o
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 x No o
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 x | Accelerated filer o |
Non-accelerated filer o | Smaller reporting company o |
Emerging growth company o | |
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 o No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 66,282,650 shares of the Company's Common Stock ($0.01 par value) were outstanding as of April 22, 2019.
PDC ENERGY, INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | Page | ||
Item 1. | Financial Statements | ||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II – OTHER INFORMATION | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
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"), 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; drilling locations, zones and growth opportunities; commodity prices and differentials; capital expenditures and projects, including the number of rigs employed, and that cash flows from operations will exceed expected capital investments in crude oil and natural gas properties for 2019 and 2020; anticipated stock repurchase program, which may be modified or discontinued at any time, and expected timing and amount of such program; financial ratios and compliance with covenants in our revolving credit facility and other debt instruments; impacts of certain accounting and tax changes; anticipated sale of our Delaware Basin midstream assets and the timing of those sales and whether closing will occur timely or at all; timing and adequacy of infrastructure projects of our midstream providers and the related impact on our midstream capacity and related curtailments; fractionation capacity; impacts of Colorado political matters; ability to meet our volume commitments to midstream providers; ongoing compliance with our consent decree; and reclassification of the Denver Metro/North Front Range NAA ozone classification to serious.
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:
• | changes in global production volumes and demand, including economic conditions that might impact demand and prices for the products we produce; |
• | volatility of commodity prices for crude oil, natural gas and natural gas liquids ("NGLs") and the risk of an extended period of depressed prices; |
• | impact to our operations, personnel retention, strategy, stock price and expenses caused by the actions of activist shareholders; |
• | volatility and widening of differentials; |
• | reductions in the borrowing base under our revolving credit facility; |
• | impact of governmental policies and/or regulations, including changes in environmental and other laws, the interpretation and enforcement of those laws and regulations, liabilities arising thereunder and the costs to comply with those laws and regulations; |
• | declines in the value of our crude oil, natural gas and NGLs properties resulting in impairments; |
• | changes in estimates of proved reserves; |
• | inaccuracy of reserve estimates and expected production rates; |
• | potential for production decline rates from our wells being greater than expected; |
• | timing and extent of our success in discovering, acquiring, developing and producing reserves; |
• | availability of sufficient pipeline, gathering and other transportation facilities and related infrastructure to process and transport our production and the impact of these facilities and regional capacity on the prices we receive for our production; |
• | timing and receipt of necessary regulatory permits; |
• | risks incidental to the drilling and operation of crude oil and natural gas wells; |
• | difficulties in integrating our operations as a result of any significant acquisitions or acreage exchanges; |
• | increases or changes in costs and expenses; |
• | availability of supplies, materials, contractors and services that may delay the drilling or completion of our wells; |
• | potential losses of acreage due to lease expirations or otherwise; |
• | increases or changes in costs and expenses; |
• | future cash flows, liquidity and financial condition; |
• | possibility that one or more sales of our Delaware Basin midstream assets will not close when expected or at all; |
• | competition within the oil and gas industry; |
• | availability and cost of capital; |
• | our success 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; |
• | effect that acquisitions we may pursue have on our capital requirements; |
• | our ability to retain or attract senior management and key technical employees; 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 the heading "Risk Factors," made in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission ("SEC") on February 28, 2019 (the "2018 Form 10-K") and our other filings with the 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, including our proportionate share of the financial position, results of operations, cash flows and operating activities of our affiliated partnerships.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PDC ENERGY, INC.
Condensed Consolidated Balance Sheets
(unaudited; in thousands, except share and per share data)
March 31, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net | ||||||||
Fair value of derivatives | ||||||||
Prepaid expenses and other current assets | ||||||||
Total current assets | ||||||||
Properties and equipment, net | ||||||||
Assets held-for-sale, net | ||||||||
Fair value of derivatives | ||||||||
Other assets | ||||||||
Total Assets | $ | $ | ||||||
Liabilities and Stockholders' Equity | ||||||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Production tax liability | ||||||||
Fair value of derivatives | ||||||||
Funds held for distribution | ||||||||
Accrued interest payable | ||||||||
Other accrued expenses | ||||||||
Total current liabilities | ||||||||
Long-term debt | ||||||||
Deferred income taxes | ||||||||
Asset retirement obligations | ||||||||
Liabilities held-for-sale | ||||||||
Fair value of derivatives | ||||||||
Other liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingent liabilities | ||||||||
Stockholders' equity | ||||||||
Common shares - par value $0.01 per share, 150,000,000 authorized, 66,196,863 and 66,148,609 issued as of March 31, 2019 and December 31, 2018, respectively | ||||||||
Additional paid-in capital | ||||||||
Retained earnings (deficit) | ( | ) | ||||||
Treasury shares - at cost, 22,635 and 45,220 as of March 31, 2019 and December 31, 2018, respectively | ( | ) | ( | ) | ||||
Total stockholders' equity | ||||||||
Total Liabilities and Stockholders' Equity | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
1
PDC ENERGY, INC.
Condensed Consolidated Statements of Operations
(unaudited; in thousands, except per share data)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Revenues | ||||||||
Crude oil, natural gas and NGLs sales | $ | $ | ||||||
Commodity price risk management loss, net | ( | ) | ( | ) | ||||
Other income | ||||||||
Total revenues | ||||||||
Costs, expenses and other | ||||||||
Lease operating expenses | ||||||||
Production taxes | ||||||||
Transportation, gathering and processing expenses | ||||||||
Exploration, geologic and geophysical expense | ||||||||
Impairment of properties and equipment | ||||||||
General and administrative expense | ||||||||
Depreciation, depletion and amortization | ||||||||
Accretion of asset retirement obligations | ||||||||
(Gain) loss on sale of properties and equipment | ( | ) | ||||||
Other expenses | ||||||||
Total costs, expenses and other | ||||||||
Loss from operations | ( | ) | ( | ) | ||||
Interest expense | ( | ) | ( | ) | ||||
Interest income | ||||||||
Loss before income taxes | ( | ) | ( | ) | ||||
Income tax benefit | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Earnings per share: | ||||||||
Basic | $ | ( | ) | $ | ( | ) | ||
Diluted | $ | ( | ) | $ | ( | ) | ||
Weighted-average common shares outstanding: | ||||||||
Basic | ||||||||
Diluted | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
2
PDC ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited; in thousands)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | ( | ) | $ | ( | ) | ||
Adjustments to net loss to reconcile to net cash from operating activities: | ||||||||
Net change in fair value of unsettled commodity derivatives | ||||||||
Depreciation, depletion and amortization | ||||||||
Impairment of properties and equipment | ||||||||
Accretion of asset retirement obligations | ||||||||
Non-cash stock-based compensation | ||||||||
(Gain) loss on sale of properties and equipment | ( | ) | ||||||
Amortization of debt discount and issuance costs | ||||||||
Deferred income taxes | ( | ) | ( | ) | ||||
Other | ||||||||
Changes in assets and liabilities | ( | ) | ||||||
Net cash from operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Capital expenditures for development of crude oil and natural gas properties | ( | ) | ( | ) | ||||
Capital expenditures for other properties and equipment | ( | ) | ( | ) | ||||
Acquisition of crude oil and natural gas properties | ( | ) | ||||||
Proceeds from sale of properties and equipment | ||||||||
Proceeds from divestiture | ||||||||
Restricted cash | ||||||||
Net cash from investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from revolving credit facility | ||||||||
Repayment of revolving credit facility | ( | ) | ( | ) | ||||
Purchase of treasury stock | ( | ) | ( | ) | ||||
Other | ( | ) | ( | ) | ||||
Net cash from financing activities | ( | ) | ||||||
Net change in cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
Cash, cash equivalents and restricted cash, beginning of period | ||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements
3
PDC ENERGY, INC.
Condensed Consolidated Statement of Equity
(unaudited; in thousands, except share data)
Three Months Ended March 31, 2019 | |||||||||||||||||||||||||
Common Stock | Treasury Stock | ||||||||||||||||||||||||
Shares | Amount | Additional Paid-in Capital | Shares | Amount | Retained Earnings (Deficit) | Total Stockholders' Equity | |||||||||||||||||||
Balance, December 31, 2018 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||
Purchase of treasury shares | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||
Issuance of treasury shares | ( | ) | ( | ) | — | ||||||||||||||||||||
Non-employee directors' deferred compensation plan | — | — | — | ||||||||||||||||||||||
Issuance of stock awards, net of forfeitures | ( | ) | — | — | |||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||
Other | — | — | — | — | — | ||||||||||||||||||||
Balance, March 31, 2019 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
Three Months Ended March 31, 2018 | |||||||||||||||||||||||||
Common Stock | Treasury Stock | ||||||||||||||||||||||||
Shares | Amount | Additional Paid-in Capital | Shares | Amount | Retained Earnings (Deficit) | Total Stockholders' Equity | |||||||||||||||||||
Balance, December 31, 2017 | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||
Purchase of treasury shares | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||
Issuance of treasury shares | ( | ) | — | ||||||||||||||||||||||
Non-employee directors' deferred compensation plan | — | — | ( | ) | ( | ) | — | ( | ) | ||||||||||||||||
Issuance of stock awards, net of forfeitures | ( | ) | — | — | — | ||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||
Balance, March 31, 2018 | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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 Texas. Our operations in the Wattenberg Field are focused in the rural areas of the horizontal Niobrara and Codell plays and our Delaware Basin operations are primarily focused in the Wolfcamp zones. We previously operated properties in the Utica Shale in Southeastern Ohio; however, we divested these properties during the first quarter of 2018. As of March 31, 2019, we owned an interest in approximately 2,800 gross productive wells. We are engaged in two operating segments: our oil and gas exploration and production segment and our gas marketing segment. Our gas marketing segment does not meet the quantitative thresholds to require disclosure as a separate reportable segment. All of our material operations are attributable to our exploration and production business; therefore, all of our operations are presented as a single segment for all periods presented.
In 2018, we began the process of actively marketing our Delaware Basin crude oil gathering, natural gas gathering and produced water gathering and disposal assets for sale. In the second quarter of 2019, we entered into definitive agreements to divest the natural gas gathering and produced water gathering and disposal assets. These transactions are expected to close in mid-2019. We are also in the final stages of negotiations regarding the sale of our crude oil gathering assets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
March 31, 2019 | December 31, 2018 | March 31, 2018 | December 31, 2017 | ||||||||||||
(in thousands) | |||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | |||||||||||
Restricted cash | |||||||||||||||
Cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | $ | $ | $ | $ | |||||||||||
In February 2016, the FASB issued an accounting update and subsequent amendments aimed at increasing the transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and
5
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(unaudited)
NOTE 3 - REVENUE RECOGNITION
Crude oil, natural gas and NGLs revenues are recognized when we have transferred control of crude oil, natural gas or NGLs production to the purchaser. We consider the transfer of control to have occurred when the purchaser has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the crude oil, natural gas or NGLs production. We record sales revenue based on an estimate of the volumes delivered at estimated prices as determined by the applicable sales agreement. We estimate our sales volumes based on company-measured volume readings. We then adjust our crude oil, natural gas and NGLs sales in subsequent periods based on the data received from our purchasers that reflects actual volumes delivered and prices received. We receive payment for sales one to two months after actual delivery has occurred. The differences in sales estimates and actual sales are recorded one to two months later. Historically, these differences have not been material.
commodity and operating region for the three months ended March 31, 2019 and 2018 (in thousands):
Three Months Ended March 31, | |||||||||||
Revenue by Commodity and Operating Region | 2019 | 2018 | Percent Change | ||||||||
Crude oil | |||||||||||
Wattenberg Field | $ | $ | % | ||||||||
Delaware Basin | ( | )% | |||||||||
Utica Shale (1) | ( | )% | |||||||||
Total | $ | $ | % | ||||||||
Natural gas | |||||||||||
Wattenberg Field | $ | $ | % | ||||||||
Delaware Basin | ( | )% | |||||||||
Utica Shale (1) | ( | )% | |||||||||
Total | $ | $ | % | ||||||||
NGLs | |||||||||||
Wattenberg Field | $ | $ | ( | )% | |||||||
Delaware Basin | ( | )% | |||||||||
Utica Shale (1) | ( | )% | |||||||||
Total | $ | $ | ( | )% | |||||||
Revenue by Operating Region | |||||||||||
Wattenberg Field | $ | $ | % | ||||||||
Delaware Basin | ( | )% | |||||||||
Utica Shale (1) | ( | )% | |||||||||
Total | $ | $ | % | ||||||||
(1) | In March 2018, we completed the disposition of our Utica Shale properties. |
6
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(unaudited)
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Determination of Fair Value
Our fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability and may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The three levels of inputs that may be used to measure fair value are defined as:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived from observable market data by correlation or other means.
Level 3 – Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity.
Derivative Financial Instruments
We measure the fair value of our 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 such as the LIBOR curve for a similar duration of each outstanding position, 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 swap rates and the duration of each outstanding derivative position.
We validate our fair value measurement through the review of counterparty statements and other supporting documentation, determination that the source of the inputs is valid, corroboration of the original source of inputs through access to multiple quotes, if available, or other information and monitoring changes in valuation methods and assumptions.
March 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
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) | |||||||||||||||||||||||
Total assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Total liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Net asset (liability) | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
7
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(unaudited)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
(in thousands) | ||||||||
Fair value of Level 3 instruments, net asset (liability) beginning of period | $ | $ | ( | ) | ||||
Changes in fair value included in condensed consolidated statement of operations line item: | ||||||||
Commodity price risk management loss, net | ( | ) | ( | ) | ||||
Settlements included in condensed consolidated statement of operations line items: | ||||||||
Commodity price risk management loss, net | ( | ) | ||||||
Fair value of Level 3 instruments, net liability end of period | $ | $ | ( | ) | ||||
Net change in fair value of Level 3 unsettled derivatives included in condensed consolidated statement of operations line item: | ||||||||
Commodity price risk management loss, net | $ | ( | ) | $ | ||||
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.
Non-Derivative Financial Assets and Liabilities
The carrying value of the financial instruments included in current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.
We utilize fair value on a nonrecurring basis to review our proved crude oil and natural gas properties for possible impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such assets. The fair value of the properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production and prices at which we reasonably expect the crude oil and natural gas will be sold.
The portion of our long-term debt related to our revolving credit facility approximates fair value due to the variable nature of related interest 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 and/or dealer quotes, respectively, 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 and convertible notes as of:
As of March 31, 2019 | As of December 31, 2018 | |||||||||||||
Estimated Fair Value | Percent of Par | Estimated Fair Value | Percent of Par | |||||||||||
(in millions) | ||||||||||||||
Senior notes: | ||||||||||||||
2021 Convertible Notes | $ | % | $ | % | ||||||||||
2024 Senior Notes | % | % | ||||||||||||
2026 Senior Notes | % | % | ||||||||||||
Concentration of Risk
Derivative Counterparties. A portion of our liquidity relates to commodity derivative instruments that enable us to manage a portion of our exposure to price volatility from producing crude oil and natural gas. These arrangements expose us to credit risk of nonperformance by our counterparties. We primarily use financial institutions who are also lenders under our
8
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(unaudited)
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, 2019.
NOTE 5 - COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS
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 to protect against price declines in future periods. While we structure these commodity derivatives to reduce our exposure to decreases in commodity prices, they also limit the benefit we might otherwise receive from price increases.
We believe our commodity derivative instruments continue to be effective in achieving the risk management objectives for which they were intended. As of March 31, 2019, we had derivative instruments, which were comprised of collars, fixed-price swaps and basis protection swaps, in place for a portion of our anticipated 2019, 2020 and 2021 production. 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.
Collars | Fixed-Price Swaps | |||||||||||||||||||||
Commodity/ Index/ Maturity Period | Quantity (Crude oil - MBls Natural Gas - BBtu) | Weighted-Average Contract Price | Quantity (Crude Oil - MBbls Gas and Basis- BBtu ) | Weighted- Average Contract Price | Fair Value March 31, 2019 (1) (in thousands) | |||||||||||||||||
Floors | Ceilings | |||||||||||||||||||||
Crude Oil | ||||||||||||||||||||||
NYMEX | ||||||||||||||||||||||
2019 | $ | $ | $ | $ | ( | ) | ||||||||||||||||
2020 | ||||||||||||||||||||||
2021 | ||||||||||||||||||||||
Total Crude Oil | $ | ( | ) | |||||||||||||||||||
Natural Gas | ||||||||||||||||||||||
NYMEX | ||||||||||||||||||||||
2019 | $ | $ | $ | $ | ||||||||||||||||||
Dominion South | ||||||||||||||||||||||
2019 | — | — | — | |||||||||||||||||||
2020 | — | — | — | |||||||||||||||||||
Total Natural Gas | $ | |||||||||||||||||||||
Basis Protection - Natural Gas | ||||||||||||||||||||||
CIG | ||||||||||||||||||||||
2019 | — | $ | — | $ | — | $ | ( | ) | $ | ( | ) | |||||||||||
Total Basis Protection - Natural Gas | — | $ | ( | ) | ||||||||||||||||||
Commodity Derivatives Fair Value | $ | ( | ) | |||||||||||||||||||
_____________
(1) | Approximately |
We have not elected to designate any of our derivative instruments as cash flow hedges; therefore, these instruments do not qualify for hedge accounting. Accordingly, changes in the fair value of our derivative instruments are recorded in the condensed consolidated statements of operations.
Fair Value | |||||||||||
Derivative Instruments: | Condensed Consolidated Balance Sheet Line Item | March 31, 2019 | December 31, 2018 | ||||||||
(in thousands) | |||||||||||
Derivative assets: | Current | ||||||||||
Commodity derivative contracts | Fair value of derivatives | $ | $ | ||||||||
Non-current | |||||||||||
Commodity derivative contracts | Fair value of derivatives | ||||||||||
Total derivative assets | $ | $ | |||||||||
Derivative liabilities: | Current | ||||||||||
Commodity derivative contracts | Fair value of derivatives | $ | $ | ||||||||
Basis protection derivative contracts | Fair value of derivatives | ||||||||||
Non-current | |||||||||||
Commodity derivative contracts | Fair value of derivatives | ||||||||||
Total derivative liabilities | $ | $ | |||||||||
9
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(unaudited)
The following table presents the impact of our derivative instruments on our condensed consolidated statements of operations:
Three Months Ended March 31, | ||||||||
Condensed Consolidated Statement of Operations Line Item | 2019 | 2018 | ||||||
(in thousands) | ||||||||
Commodity price risk management loss, net | ||||||||
Net settlements | $ | ( | ) | $ | ( | ) | ||
Net change in fair value of unsettled derivatives | ( | ) | ( | ) | ||||
Total commodity price risk management loss, net | $ | ( | ) | $ | ( | ) | ||
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.
As of March 31, 2019 | Derivative Instruments, Gross | Effect of Master Netting Agreements | Derivative Instruments, Net | |||||||||
(in thousands) | ||||||||||||
Asset derivatives: | ||||||||||||
Derivative instruments, at fair value | $ | $ | ( | ) | $ | |||||||
Liability derivatives: | ||||||||||||
Derivative instruments, at fair value | $ | $ | ( | ) | $ | |||||||
As of December 31, 2018 | Derivative Instruments, Gross | Effect of Master Netting Agreements | Derivative Instruments, Net | |||||||||
(in thousands) | ||||||||||||
Asset derivatives: | ||||||||||||
Derivative instruments, at fair value | $ | $ | ( | ) | $ | |||||||
Liability derivatives: | ||||||||||||
Derivative instruments, at fair value | $ | $ | ( | ) | $ | |||||||
10
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(unaudited)
NOTE 6 - PROPERTIES AND EQUIPMENT
December 31, 2018 | |||||||
(in thousands) | |||||||
Properties and equipment, net: | |||||||
Crude oil and natural gas properties | |||||||
Proved | $ | $ | |||||
Unproved | |||||||
Total crude oil and natural gas properties | |||||||
Infrastructure and other | |||||||
Land and buildings | |||||||
Construction in progress | |||||||
Properties and equipment, at cost | |||||||
Accumulated DD&A | ( | ) | ( | ) | |||
Properties and equipment, net | $ | $ | |||||
Classification of Assets and Liabilities as Held-for-Sale. During the fourth quarter of 2018, as part of our plans to divest certain of our Delaware Basin crude oil gathering, natural gas gathering and produced water gathering and disposal assets, we began actively marketing the assets for sale; therefore, these assets are classified as held-for-sale as they met the criteria for such classification at March 31, 2019 and December 31, 2018. The planned disposition of our Delaware Basin crude oil gathering, natural gas gathering and produced water gathering and disposal assets does not represent a strategic shift in our operations or have a significant impact on our operations or financial results; therefore, we will not account for the disposition as a discontinued operation. Also included in assets held-for-sale are certain non-core Delaware Basin crude oil and natural gas properties.
December 31, 2018 | |||||||
(in thousands) | |||||||
Assets | |||||||
Properties and equipment, net | $ | $ | |||||
Other assets | |||||||
Total assets | $ | $ | |||||
Liabilities | |||||||