Good morning and welcome to Centennial Resource Development's Conference Call to discuss its First Quarter 2017 Earnings. Today's call is being recorded. A replay of the call will be accessible until May 25, 2017, by dialing (855) 859-2056 and entering the conference ID number 11411705 or by visiting Centennial's website at www.cdevinc.com.

At this time, I will turn the call over to Hays Mabry, Centennial's Director of Investor Relations for opening remarks. Please go ahead..

Thanks, Cayle, and thank you all for joining us on the company's first quarter 2017 earnings call. Presenting on the call today are Mark Papa, our Chairman and Chief Executive Officer; George Glyphis, our Chief Financial Officer; and Sean Smith, our Chief Operating Officer.

Yesterday May 10, we filed a Form 8-K with an earnings release reporting first quarter 2017 earnings results for the company and first quarter 2017 operational results for our subsidiary, Centennial Resource Production LLC. We also posted an earnings presentation to our website that we will reference during today's call.

You can find the presentation on our website in home page or under presentations at www.cdevinc.com. I would like to note that many of the comments during this earnings call are forward-looking statements that involve risks and uncertainties that could affect our actual results and plans.

Many of these risks are beyond our control and are discussed in more detail in the risk factors and the forward-looking statements sections of our filings with the Securities and Exchange Commission. Including our Annual Report on Form-K for the year-ended December 31, 2016, filed with the SEC on March 23, 2017.

Although we believe the expectations expressed are based on reasonable assumptions they are not guarantees of future performance and actual results or developments may differ materially. We may also refer to non-GAAP financial measures that help facilitate comparisons across periods with our peers.

For any non-GAAP measures, we use a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release available on our website. With that, I'll turn the call over to Mark Papa, Chairman and CEO..

Thanks, Hays. Good morning and welcome to Centennial's first quarter 2017 earnings call. A presentation sequence on this call will be as follows. George will discuss our first quarter results, recent financing activity, capital structure, and updated 2017 guidance.

Sean will then provide an update on operations and then I'll follow discussing overall strategy, the recently announced acquisition from GMT Exploration Company and closing comments. Now I will ask George to review our first quarter financial results..

Thank you, Mark. During the first quarter, Centennial operated an average of approximately five rigs which resulted in 15 wells being spud and 11 wells put on production. We incurred approximately $100 million of total capital expenditures of which approximately $89 million was related to drilling completion and workovers.

This was in line with our expectations relative to public guidance.

As you can see on Page 11 of the earnings presentation, average daily production for the quarter totaled slightly over 18,450 barrels of oil equivalent per day compared to approximately 9,800 barrels per day during the 2016 successor period which runs from October 11, 2016, when the Silver Run Centennial Business Combination closed until December 31.

Average oil production for the first quarter was approximately 10,500 barrels per day compared to approximately 6,400 barrels per day during the 2016 successor period. This represents a 64% increase driven by higher rig and completion activity, inclusion of the acquired Silverback production, as well as better than expected well performance.

Oil represented approximately 57% of total production volumes compared to 65% in the successor period primarily because of the full-quarter addition of Legacy Silverback production which has a higher gas to oil ratio than Legacy Centennial Wells.

To underscore a point we made when we announced the Silverback acquisition in late November of last year, we believe that many of the Silverback wells will result in an oil production curve that is equal to or better than our Legacy Centennial wells with the added benefit of higher relative gas and NGL production that will enhance overall returns.

Revenues for the first quarter were $61.1 million with oil revenues representing approximately 76% of the total. Our average realized oil price excluding the impact of commodity derivative transactions was 49.45 per barrel.

Lease operating costs including workover expenses totaled $7.3 million for the quarter or $4.38 per BOE which is in line with our expectations.

As you can see on Page 12 of the earnings presentation, our annual LOE guidance reflects a quarterly per unit cost profile that steadily declined sequentially quarter-to-quarter throughout the year as flush production from new wells comes online and overall production volumes increase substantially.

As the chart illustrates, the expectation is that our per unit cost towards the back half of the year will be below the low end of our average annual guidance, the inverse being true for the first quarter. The same dynamic holds for general administrative expenses and we are already seeing this play out on a month-to-month basis.

Cash G&A which forms the basis of our public guidance was approximately $9.5 million inclusive of non-recurring items such as approximately $830,000 of expenses related to Silverback transition services and approximately $930,000 related to the implementation of public company employee policies.

Transportation, gathering, and processing expenses totaled $5.2 million for the quarter or $3.16 per BOE.

This was higher than the $2.72 per BOE recorded during the 2016 successor period as a result of higher gas volumes from the Silverback wells and increased production from drilling activity, but is consistent with our public guidance range of $3.10 to $3.60 per BOE. EBITDAX totaled $36.4 million for the quarter.

Finally, we reported net income of $9.8 million attributable to Centennial Resource Development, Inc. which is adjusted to exclude the non-controlling interest in Centennial Resource Production, LLC. Switching focus, the recent events and the balance sheet.

As we announced last week Centennial has signed a definitive agreement to purchase undeveloped leasehold in producing oil and gas properties in Lea County, New Mexico, from GMT Exploration Company for $350 million.

Consistent with our conservative financial philosophy, we raise approximately $341 million of gross equity proceeds to fund the acquisition which will result in the issuance of 23.5 million shares of Class A common stock in a private placement.

The offering which we successfully launched and priced during a very challenging week in the capital markets is expected to close in June concurrent with the closing of the acquisition from GMT. On Page 13 of the earnings presentation, you can see our cash debt and liquidity position.

At March 31 we had approximately $55 million of cash on hand and no borrowings under our revolving credit facility. Subsequent to quarter end, we announced that our spring borrowing base redetermination resulted in $100 million increase to $350 million. The current borrowing base does not include any contribution from the GMT assets.

Taking into account the revised borrowing base, undrawn credit facility, and cash on hand; Centennial would have had a little over $400 million of liquidity at March 31. Also subsequent to quarter end, Centennial called for the redemption of all of its outstanding public warrants which were a relic of the Silver Run SPAC IPO.

This resulted in the issuance of approximately 6.2 million Class A common shares to holders of the public warrants which simplifies our capital structure, increases our float, and minimizes potential future dilution to Centennial stockholders.

Additionally, on May 25, of this month we will hold a special stockholder meeting to vote on the conversion of our Series B preferred shares that are held by Riverstone and were sold to partially fund the Silverback acquisition. A successful vote will result in the issuance of 26.1 million Class A common shares.

As you can see on Page 14 of the earnings presentation, adjusting for the exercise and redemption of all of our outstanding public warrants, and the pending Series B share conversion, we would have approximately 252.3 million total shares outstanding.

Adjusting further for the 23.5 million GMT private placement, total outstanding shares would be 275.8 million once the GMT acquisition closes. This does not take into account the 8 million outstanding private placement warrants.

Turning to guidance, which is summarized on Page 15, as a result of the GMT acquisition we have updated our 2017 guidance to account for incremental rig activity, capital expenditures, and production. In summary, we increased our average annual D&C capital expenditures by $38 million at the midpoint, 85% of which is expected to be operated.

Total 2017 D&C capital expenditures are estimated to be approximately $475 million to $540 million, up from $440 million to $500 million. Gross operated wells spud and completed were both increased by five wells to a total of 65 to 75 for the year respectively.

We also increased annual average production by 1,250 BOE per day and 900 barrels of oil per day. The GMT production estimates assume at June closing and an incremental rig added to the GMT acreage beginning in August. The balance of our 2017 guidance including per unit costs and land capital remains unchanged.

And finally in terms of the overall Centennial game plan we raised our 2020 average annual oil production target by 20% to 60,000 barrels per day from 50,000 to account for the GMT acquisition. With that I will turn it over to Sean Smith to review operations..

Thank you, George. During the first quarter of 2017 Centennial had five rigs drilling with a six rigs scheduled to begin in mid May. Centennial completed a 11 wells during the quarter with the majority of these wells being drilled at Wolfcamp Upper A few wells targeting the Wolfcamp lower A.

On average these wells exceeded our internal expectations and continue to prove the high quality nature of Centennials acreage position. There were a few standout wells completed during the quarter. The big fundamental 1H was the first well drilled and completed By Centennial on the recently acquired Silverback acreage.

The well targeted the Wolfcamp Upper A reservoir had an effective lateral length of approximately 4,600 feet and was completed with £9.1 million of Proppant and 10 clusters per stage.

While the IP30, 1,135 barrels of oil per day and 1,700 barrels well equivalent per day was an outstanding result the IP60 of 997 barrels of oil per day and 1,498 barrels of oil equivalent suggest this area will have a shallower decline and thus an increased rate of return versus what was originally anticipated.

The Balmorhea 2H drilled on the legacy Centennial acreage is another noteworthy well. This well was completed in the Wolfcamp Upper A with approximately 5,750 feet of effective lateral length £11.6 million tons of Proppant and 10 clusters per stage.

The well had an IP30 of 1,079 barrels of oil per day and 1,311 barrels of oil equivalent per day which equals 82% oil. Another well drilled on our legacy acreage was the Collins 2H when the approximate lateral length of 6,315 feet. This well had an IP30 has 976 barrels of oil per day and 1,183 barrels of oil equivalent per day.

The results of these wells continue through while we are excited about our entire acreage position in the Southern Delaware Basin. In order to perpetuate the success discussed above Centennial continues to focus on well for stimulation and Geo steering optimization. We recently hired a full time Geo steering staff.

As a result the 15 wells spud in the quarter were drilled within the intended target zone for 93% of the lateral and had an effective average length of 6,250 feet. We are pleased with the 93% in zone which is within the best accuracy levels that are technically achievable on a consistent basis.

This is a credit to our operational team and is critical to achieving consistent production results. Along with keeping the well within the target interval the completion of the well is also critical to performance.

While we continue to increase our profit per foot to help improve results one of our more recent advances includes increasing the number of perforated clusters per stage to 15. This increase in number of clusters per stage allows for a more efficient new well or a stimulated rock volume.

Centennial uses tracers during stimulation to both monitor stage contribution as well as cluster efficacy. Our current completion design is pumped with 100% Slickwater, £2,000 to £2,500 per lateral foot of Proppant over 80% of 100 Mesh sand, 15 clusters per stage, and approximately 210 feet of stage basin.

We are excited about the results to-date and will continue to refine our completion design to drive improved well performance and capital efficiency. During the first quarter we continued to work with our third party midstream provider to build out the oil gathering system on the Silverback acreage.

The plan is to have the system fully operational by the third quarter of this year. The gas gathering system is in place across all of our operated acreage position and gas is transported on a system with 320 million cubic feet a day of processing capacity.

Along with crude and gas, we also pipe our water to one of nine salt water disposal wells operated by Centennial. These disposal wells have the capacity to handle approximately 140,000 barrels of water per day which is more than adequate to handle our water disposal needs for the foreseeable future with minimal capital expenditure.

For the remainder of 2017, our operational goals include extended laterals, pad drilling, increased fracture stimulation intensity, and continued attention to drilling the completion efficiencies. We are driven by relentlessly improving production results, capital efficiency, and technological advances.

With these principles in place as a along with a highly trained and experienced staff we are on track to meet or exceed our goals for 2017 and beyond. With that said, I'll hand it back over to Mark..

first, the geology is similar to Reeves County and our newly recruited technical team is very familiar with its geology having worked it for many years; second, all pay zones from the Avalon through the Wolfcamp are significantly Geo pressured in this area.

This significant geo pressure allows for closer well spacing and allows the possibility of completing master wells.

We think this is an area where we'll see an impressive array of high rate completions over the next few years as exemplified by the press releases by offset operators just this week; and third, we believe there may be further expansion opportunities in this area.

To summarize, during the first quarter Centennial established a strong foundation for future growth is in on track to accomplish all of its goals and I'll note that these goals should allow us to have exemplary 2017-2020 equity performance.

If you're an equity analyst or PM all you have to do is project that our cash flow EBITDA and earnings CAGR as we move from last year's 5,800 to 2020 60,000 barrels of oil per day. No one in the industry can match that growth rate while combining it with low debt. Thanks for listening and now we will go to Q&A.

Cayle, you want to queue up the Q&A please..

Yes sir. [Operator Instructions]. Our first question comes from the line of Irene Haas from Wunderlich..

Hi good morning.

Congrats on a really strong quarter and my question is focused on New Mexico on the GMT assets how soon would you be able to start drilling some Wolfcamp wells and also in terms of the improvement you guys have made at big fundamental the same kind of refinements is it transferable to the GMT assets?.

Yes, good morning, Irene. Yes, we're -- our plans are to pick up one rig starting in August of this year and to run one rig essentially from all list of this year through 2018 and then in 2019 and 2020 we probably build it two rigs so, that's -- that's our general rig activity plans.

As you know to-date the main target in this particular area had been the Bone Springs intervals.

But I would say the emerging target up here has been the upper portion of the Wolfcamp intervals and you've seen some offset operators just very recently announce some Monster wells coming out of some of the Wolfcamp zones or the Wolfcamp A particularly in there.

So although our plans are somewhat tentative at this time, it's likely that the first several wells we target are going to be Bone Springs wells and from there, we will go and start testing the Wolfcamp interval.

But let me just expand on it a little bit, one of the reasons that really attracted in this area is that in relation to the Southern Delaware Basin, you have a higher degree of geopressure across all the intervals, all the way from the Avalon to the Wolfcamp and generally what that means is you get the pressures from point five all the way up to point six BSI per flick which is a little bit higher pressure than you have in the Southern Delaware and what that really does is it gives you a higher likelihood that you are going to get some high rate wells out of practically anywhere in the interval.

So if I had to project forward say for the next three years, I'm going to guess that the Northern Delaware is going to -- you're going to see announcements by various companies of a higher frequency of Monster wells by multiple companies coming out of the Northern Delaware.

And we want to be part of that that group that announces a lot of Monster wells up there and so that's one of the reasons why we took this 12,000 acre position in that area..

Our next question comes from the line of Jeffrey Campbell from Tuohy Brothers..

Good morning and congratulations on the quarter. Very impressive wells and that's actually where I want to ask my first question, Slide 8 talks about 15 plus for stage with less stages overall, that last point still saves money.

Was this design used in the three Wolfcamp phase that are referenced in the press release, are you already getting a sense from those results of the kind of well spacing that might be possible in the Wolfcamp A and do you have any plans to create a spacing pilot over the next 12 to 18 months?.

Sean, you want to feel that question?.

Sure. I think it's a good question. The results we published in this quarter are all 10 clusters per stage. So those are not really inclusive of the 13 to 15 that we're doing now and we need more time to get 30 day results on those wells.

So continue to expect improved production based on the increased number of clusters per stage that we get to release but I'm very impressed by the reaction from the reservoir so far based on this new completion design.

We will continue to evolve our completion techniques to try to drive results and so far things are continuing to go in the right direction by -- as we increase our profit load for lateral foot as well as increase our clusters per stage..

And is it too early to talk about any kind of spacing tests within the next 12 or 18 months at this point or is that possible?.

We are certainly looking at that and we're starting now we got some things planned, we don't have enough results really to release anything at this point in time but definitely that's certainly a focus for us in the future..

Right, understood. Slide 10 mentions building of Pecos field office, I was just wondering does this suggests you're going to begin testing your Pecos acreage sooner than later there's certainly industry activities picked up in Pecos area recently..

No, that -- I mean that's kind of in the city of Pecos but that's not really relates to have Pecos County acreage, we're likely more likely to be kind of liquidating selling our Pecos County acreage and trying to extend their play in Pecos County. Our focus is really on the Reeves County acreage.

So they don't get the direction that we're heading toward Pecos County that would be incorrect inference..

Okay, great. I appreciate that clarification..

Okay.

Anything else, Jeff?.

Sure.

You actually touched on this in your opening remarks, so I'll just ask you again because I was thinking about it too, I heard the same strong results north of Red Hills it's you're referring to and you were sort of sounds like that you felt that it was important to get a footprint in Lea County, I'm just wondering do you think in other words starting to hear those good results come out is it going to be any more difficult to expand organically in the area or do you just still think that you've got some good possibilities to build that position there?.

Yes, what I would say is that for last week towards expanding by acquiring acreage is I think you can see it by our two acquisitions that we've done first was a Silverback acquisition and let's say generally the market conditions at that time were roughly 30,000 bucks an acre for similarly valued acreage in Reeves County and we pulled that one off at 21,000 bucks an acre and that was mainly because we were able to close that before year-end last year, so it was mainly due to our ability to move quickly.

So and then this one again we paid roughly 22,000 an acre for -- and how much or what the market price is really in Northern New Mexico but I would say that there was a larger company that bought some acreage out there for about 34,000 an acre at about the same time we bought this for 21,000 an acre.

So our overall acquisition philosophy is whether it's Reeves County or Lea County is if the market price is 30,000 an acre we are unlikely to buy to be willing to pay 30,000 an acre. But if we can get a niche situation of decent acreage and sneak in there at 21,000, 22,000 an acre, we would probably pounce on it whether that's Reeves or Lea County.

Your specific question is further opportunities in Lea County and my honest answer is I don't know but we will be looking for those opportunities and if we can do niche deals with the right price. Yes, we were tempted pursue the Lea County so that's the best answer I can give you at this time, Jeff..

No, that's great, color. I really appreciate it..

Okay, thank you..

Yes, thank you..

Okay, next question..

[Operator Instructions]. Our next question comes from the line Derrick Whitfield from Stifel Financial..

Good morning, Derrick..

Good morning and great update. So building on Jeff's first question for you guys do you have a view on how the current 15 clusters for stage design would impact your effective frac links? Meaning if the initial view was 880 foot spacing in the Upper Wolfcamp A based on three clusters per stage.

It would seem that the near wellbore design suggest tighter spacing..

Yes, I'll try and feel that question Derrick. How we've approached this, this spacing concept in particularly for the Wolfcamp A in Reeves County at this time is we've really said let's get the frac optimization kind of 80% to 90% done and then that as a sequential first step.

And then the second step is then we will attract the well spacing issue and all of our locations that we've got to take it laid out for, in and on our presentations are really based on kind of 880 foot spacing for the Reeves County stuff in the Wolfcamp.

And where we are right now and I continuum is we're -- we've made great progress on the frac optimization but we're not, we're probably not to 80% to 90% optimized on the frac shift particularly on this cluster that the whole issue relating to clusters.

We've made great progress domain from Gel to Slickwater we've made great progress progressing to use of 100 Mesh sand and right now the Delaware twisting quite a bit is on the clusters and cluster spacing and number of clusters and things like that.

And then once we kind of get that, where we, we think it's optimized then we'll go to the concept of what's the optimum spacing between wells. The whole frac theory now is kind of short, shorter fatter fracs if you will rather than longer, thinner fracs, and as the whole industry is kind of gone that way.

But where that leads us to whether, whether the current spacing that we've got articulated in number of locations can be -- can we increase the number of locations particular for the Wolfcamp A and B. That question I'd say is really still unanswered.

So what I can suggest for your modeling right now is just, just use the numbers that we've got out there and just recognize that we're still -- we're still in the early stages as to whether we can actually increase the number of locations. It's a bit of an unknown right now the honest answer..

That's great and that makes perfect sense Mark. Moving to a bigger picture question for you could evaluate your organization and position with innovation are there any outstanding gating factors other than commodity prices that will prevent you from achieving the 2020 vision or further ramping activity beyond those levels as outlined in the plan..

Yes, that's a good question Derrick. I think on the acreage that's not a gating factor. I mean that I don't think there's any question that you know given the acreage if we have right now we can, we can ramp to 60,000 BOPD by 2020.

I would say that gating factor in my mind would likely be that the midstream -- questions about midstream I just have concerns takeaway issues in other words if -- if we do see a ramp in oil prices are there going to be some -- some midstream issues, take away issues that that pop up for a bunch of operators in the Permian that are not apparent today but made by this.

And we're -- we're trying to look out 2019 and 2020 and see you know are there potential issues and I know there's been a lot of kind of macro studies on that but that's the one that kind of just gently keeps me up at night a little bit.

So that would be a gating factor my sense is this I'm not at all worried on acreage we have or we going to be able to deliver the volumes is really, or we going to be able to move the volumes off of leases.

I think water disposal of that one I'm pretty comfortable with we -- we pretty much handle that in-house so, it's really are we going to be able to get the gas to gas plants or is the gas going to be able to move off the lease and the oil. So that's, that's the most honest answer I give you today Derrick from now..

Very helpful and great quarter..

Thank you..

This is the end Q&A for today. I will now hand the call back over to the presenters for any closing remarks..

Okay, yes, I would -- I'd just summarize and say two things.

One I'll stress again that you know under the Silverback acquisition essentially every well that's been drilled on acquisitions since we've acquired it has been a good well and we highlighted now four of those wells on the last two earnings calls so I think that’s should really a lay any doubts anyone would have that, that has been a positive acquisition for us.

And then the second thing that I will say is that, our track -- our goals that we established and articulated really from day one in this company. We're on track to hit to my mind to hit every one of those goals. So we built the foundations for the company now.

The execution is good we have the team in place and just watch us execute each quarter as we want. Thank you very much for tuning in the call..

This is the end of today's call. You may now disconnect. Presenters please hold..