Good morning. And welcome to Centennial Resource Development's Conference Call to discuss its Fourth Quarter and Full Year 2020 Earnings. Today's call is being recorded.

A replay of the call will be accessible until March 3, 2020 by dialing 855-859-2056 and entering the conference ID number 9171897 or by visiting Centennial's Web site at www.cdedinc.com. At this time, I will turn the call over to Hays Mabry, Centennial Director of Investor Relations, for some opening remarks. Please go ahead..

Thank you, Towanda. And thank you all for joining us on the company's fourth quarter earnings call. Presenting on the call today are Sean Smith, our Chief Executive Officer; George Glyphis, our Chief Financial Officer; and Matt Garrison, our Chief Operating Officer..

Thanks, Hays. I'd like to start off by extending our thoughts to all those who have been impacted by the recent severe winter weather events, which includes our employees in West Texas and Southern New Mexico. As always, our top priority is our employees and their families health and safety.

Thus, I'd like to personally thank all of our team members, as last week was a challenging time for many. As a result of their hard work and dedication, we're currently in the process of restoring our operations back to normal levels, while Matt will speak in detail on the impacts of the winter weather.

I'm confident our team will have our production and operations fully restored by the end of this week. As we reflect on 2020, it was certainly a challenging year for the entire E&P industry. But I'm proud of how the Centennial team handled such a difficult time.

The substantial cost reduction initiatives in G&A, LOE and D&C all contributed to the company successfully transforming into a free cash flow generating entity, which has allowed us to begin to delever organically.

I look forward to carrying over those traits into 2021 as we continue to focus on the balance sheet, operating costs and capital efficiency..

Thank you, Sean. I'll first review the fourth quarter results then highlight several key takeaways from 2020 before summarizing 2021 guidance.

As you can reference on Slide 18 of the earnings presentation, Centennial's fourth quarter net oil production and total net equivalent production averaged approximately 32,597 barrels per day respectively, which was down about 13% from Q3.

Despite lower production levels revenues for Q4 totaled approximately 148 million which was essentially flat to Q3, primarily as a result of stronger prices for oil, NGLs and natural gas. Excluding the impact of hedges Centennial's realized oil price was $40.36 per barrel for the quarter, compared to $36.95 in Q3.

Natural gas and NGL realized pricing increased 53% and 40% respectively compared to the prior quarter. Shifting to costs as previewed by our annual guidance update released with Q3 earnings. Our Q4 LOE per barrel increased relative to Q3 levels, but remained relatively flat on a notional basis.

LOE per barrel increased by 24%, from Q3 to $4.78 per barrel, primarily as a result of the anticipated decline in production, as well as a slight up tick in electrical and water disposal costs. Overall, we have continued to realize the benefits of the significant structural reductions we've made to LOE throughout 2020.

Cash G&A for Q4 was essentially flat quarter-to-quarter at $1.96 per barrel but notional G&A declined by approximately 12% as our cost reduction initiatives continued to take hold. GP&T expense increased 8% to $3.27 per barrel driven in part by higher gas prices reflected in our percent of proceed contracts.

VD&A decreased by 3% to $13.62 per barrel, primarily because of upward PDP revisions. For the quarter, we recorded a GAAP net loss of approximately $89 million that was impacted by 19 million of unrealized hedging derivative losses and $40 million of non-cash impairment expense related to expiring acreage that we don't intend to drill.

Adjusted EBITDAX totaled $79 million, which is up approximately 55% from Q3. Shifting to CapEx, Centennial incurred approximately 30 million of total capital expenditures during the fourth quarter compared to 22 million in Q3. We ran a single rig during the majority of Q4 and added a second rig as well as the completion crew in late December.

We spud two more wells than expected due to increased drilling efficiencies and ended the quarter with seven gross well spud and none completed. Of the 30 million incurred D&C CapEx was 24 million and facilities CapEx was 4 million. The majority of the facility's CapEx was spent on wells that will be completed in Q1 2021.

The modest amount of remaining capital was spent on infrastructure and land..

Thank you, George. Before I kick off today, I'd like to follow Sean's lead and express my thanks and gratitude to all the Centennial operations personnel in Texas and New Mexico that have been working countless hours to bring our production back online after the winter storm event.

We are very proud of our employees and contractors, and in times like this are reminded that the product we produce is both essential and life saving. I'll take a moment to provide a quick update on our current restoration of production.

Like everyone else in the Permian Basin, our production and field operations were impacted by conditions created by the winter storm event. As already mentioned, like many producers in the Permian, we lost power in the field, resulting in significant downtime during the week of February 14.

Power was restored over the weekend and since then our operations team has been working diligently to place the impacted wells back on production. We expect to have essentially all of our wells back online by the end of this week.

And while we're still assessing real-time developments, we anticipate that the impacts to LOE and production will be relatively modest on an annual basis. Lastly, the storm disruption caused minimal delays to our drilling and completions program.

Pivoting now to current operations on Slide 9, as you'll recall, in late Q3 2020, we stood up one rig, and in late Q4, we added a second rig to our program. This is the first look at Centennial 2.0s operations, and we are proud to report costs and efficiencies in line with our guidance provided last quarter.

This is a strong start after many months without significant operations in 2020. As a reminder, our operations team is now fully relocated to Midland and we believe we are poised to realize additional efficiencies and take advantage of the competitive local market of the Permian Basin.

Year-to-date, we've completed two packages of wells in Reeves County. The vintage four well pad was drilled targeting the Third Bone Spring and the Wolfcamp Upper A, these wells delivered an average IP30 of over 1900 BOE e per day, or 235 BOE per 1000 foot of lateral.

Additionally, from this group of wells, I feel it's worth pointing out that the vintage BT13H set an internal Centennial drilling record and possibly a Reeves County record of spud to TD in just 7.6 days for an approximate 9000 foot lateral, or 19,100 foot total depth well..

Thanks, Matt. As you've witnessed over the past several quarters, Centennial has materially shifted its focus to free cash flow generation and debt reduction. As a result of recent initiatives largely undertaken last year, I also believe that Centennial is a fundamentally stronger company going into 2021.

Through efficiencies and structural design changes, we have lowered well costs by roughly a third compared to a year end 2019. Our LOE related projects in the field, primarily our electric substation and associated infrastructure, have materially reduced our LOE and will continue to benefit us in the future.

Lastly, the shallowing of our corporate decline rate has significantly reduced our go forward capital intensity. All of these attributes have help drive and shape our long-term game plan, which is highlighted on Slide 15. As George touched on earlier, we plan an operating a two rig program in '21.

This plan will allow us to maintain full year average oil production largely consistent with fourth quarter 2020 levels. Our capital program this year will also be highlighted by longer lateral development and overall higher capital efficiency, which we have already started to realize in the first quarter of 2021.

As a result, we expect to generate $55 million to $75 million of free cash flow, which will reduce our leverage by 1.5x. Looking past this year and unto 2022, we will continue to deliver on a sustainable free cash flow model utilizing a portion of our operating cash flow to pay down debt to further delever organically.

This will be paired with a modest production growth profile, as we'll be targeting mid to high single digit oil growth long-term, depending upon oil prices and global oil market stability.

Lastly, while we anticipate ending 2021 at less than 2,5x net debt to EBITDA at current strip prices, our forward plan provides for a clear line of sight on less than 2x net debt to EBITDA in 2022 with a further goal of less than 1.5x leverage in 2023.

And while the macro environment remains fragile, pending the global recovery from COVID-19, we are cautiously optimistic that improving oil demand fundamentals are likely to support oil prices going forward.

It is important to note that our expectations of free cash flow generated both this year and in the future are not underwritten by $60 or even $55 oil prices. Due to the dramatic changes to our cost structure, we believe we can be free cash flow positive in 2021 and beyond with oil prices in the mid $40 per barrel range.

Coupling that with our long data maturity profile and ample liquidity, Centennial is very well positioned going forward. In closing, I believe the company is poised to generate shareholder value in 2021 and beyond. We continue to have high quality assets in the Premier U.S. oil basin and an operations team with a proven track record.

Most importantly, we have transitioned to a sustainable free cash flow generating company as a result of our expanded operating margins and lower well costs and plan to continue to organically reduced leverage over time. We will also continue to look for opportunities to gain size and scale, but only if they are accretive to our financial metrics.

Ultimately, we believe the strategy discussed above will create long-term value for our stakeholders. So thanks for this thing. And with that, we'll turn it over to Q&A..

Thank you. Our first question comes from the line of Jordan Levy with Truist Securities..

Just wanted to touch on that 70% of wells on the New Mexico side this year. That's a pretty meaningfully from last year, as you guys said. First, just wanted to get the thoughts on the key components driving that knowing the quality of the rock there, but also kind of being the smaller portion of your portfolio.

And then, along the same lines, we saw a peer of yours announced plans to increase activity to accelerate federal acreage development announced today and knowing that federal acreage is a pretty small portion of your portfolio just 4%. Just wanted to get your thoughts around that and if that plays into the allocation strategy for the year..

Sure, Jordan. Yes, I appreciate these questions. I think that New Mexico has always been a younger asset for Centennial. We started out building our company from our Texas base. And so the investment in infrastructure and whatnot into Texas has always been higher in the past, allowing us to develop that asset a bit more aggressively.

As we have gained some maturity in New Mexico and continued to add to our position, as Matt mentioned, we added some acreage last year in New Mexico as well, that position has allowed us to further develop that we added some infrastructure last year and now that the maturity level is elevated into Mexico, it's just allowing us to pivot our activity level to that area and we're pleased with the results we've seen and so that's the main focus.

You mentioned, federal acreage and some of our other peers talk about targeting federal acreage early in the year rather than later due to potential regulatory issues. That's not a key component for us. As you mentioned, it's 4% of our portfolio is federal.

And so we're not going to be pivoting around that necessarily, it's a very small component of what we do. The main driver for it is that New Mexico is now a much more mature asset for us and the infrastructures in place to allow us to more fully develop..

Great color. Thank you.

And then just as a quick follow up, just wanted to kind of try and get a sense of cadence for the year knowing that given the impacts of the winter weather, 1Q, the impact on that, but just thinking about how I should think about things progressing throughout the rest of the year?.

From a rig cadence perspective, I can tackle that, we've talked about a two rig program throughout the year. We added that second rig in December of last year and plan on continuing that to two rig program throughout this year. So the plan right now is no change in or adding of any rigs throughout the year.

So you can think of it-ish as an even cadence throughout the year. Obviously, as we drill pads, which we do on almost every rig and pad, its multiple wells per pad that can change timing, from one quarter to the next based on the timing of completions and whatnot.

So, but overall, it's a rather even cadence from a drilling and completion or a spud to completion perspective..

Our next question comes from the line of Dun McIntosh with Johnson Rice..

Just wanted to know, get some color on your thoughts on hedging going forward. Traditionally as non-hedging a lot of things have changed since then.

But now, as you look at the strip for next year, both 55, how do you all think about managing that risk from the hedge book perspective?.

Sure, I'll tackle that a little bit. And then maybe George might tack on as well as he kind of is running our hedge book. But as you mentioned, traditionally, hedging has not been part of the Centennial strategy and for better for worse during different times of our life. But going forward, it will be part of our strategy.

It's just, it makes sense for us now that we've reached a certain tenure, to the life of the company, to make sure that we are covering certain corporate costs, as well as a capital program that will continue to have sustainable free cash flow, we want to protect the shareholders when it comes to that to generating free cash flow and deleveraging the company.

So that's the focus of that. As we mentioned, in the prepared remarks, the first half of 2021 is more heavily hedged than the back half, we do see more risk on the first half of 2021, than we do the back half of 2021 and then going into 2022. That said, as those quarters approach, we are likely to add some incremental hedges as time goes on.

If you've looked at, forward looking prices, there's a backwardation in price forecasts right now. And that makes it a bit -- it prevents us from being too aggressive, I think, in getting too forward looking and had adding hedges to the back half of this year. So we're slowly legging our way into the back half of the year.

But I think at very attractive prices, as we see today.

George, anything there you want to add to that?.

I think you covered a lot of it, Sean. I think for 2021 given the objectives I laid out in our prepared remarks, I think we've largely achieved the 2021 objectives in terms of protecting cash flow and the balance sheet to underwrite a baseline of operational activity.

As we look forward, we're mindful to maintain some upside exposure for our shareholders. But there's a natural tension there between protecting your downside and delivering upside to your shareholders.

We're being a little patient, as Sean pointed out on 22 given the backwardation, but you'll see in the coming quarters that we'll start to chip away at that and certainly start to establish that protection for 2022, so that we can remain on a deleveraging path.

I think the silver lining of the backwardation in the curve is the fact that it encourages producer restraint from a capital standpoint, which in theory will support oil prices. So hopefully that's the case. But we're monitoring our hedge program on a daily basis, frankly, and unexpected to add some more protection for 22 in the coming quarters..

And then, the next question, you all gave some great color on some of the things you've done in the field to continue to drive those efficiencies on the D&C cost but this faster cycle times is a theme that we're kind of seeing amongst the smaller, kind of one to two to three rig operators, as we work through earnings.

And I'm just kind of trying to get a feel for it, is some of that the factor, the result of getting rigs that, six, eight months ago, and some of the bigger players were running 2x or 3x what they're running now.

I mean, is there a better product on the market that's now more cost attainable for you all and how much of that is driving what you've been able to do and dropping D&C costs by over 20% of first half of '20?.

Yes. I'll go ahead and field that. This is Matt.

I don't think that it's necessarily the result of us getting field hands that came from the big companies like the Exxons and the Shells and the folks that lay down rigs, I mean, what I think it is, is a cultural shift in our field we had to rebuild a lot of our drilling department as a function of the reduction in force that we went through last year.

So our guys got to kind of build a new culture around a different set of folks. And so, everybody from the field superintendents down to the hands on the rigs have all kind of gone through, what we are calling our Centennial 2.0 cultural indoctrination. So a lot of it is just training people to look at all the different things.

With regard to flat time focusing on where you're standing and where the people need to be on the location for trips and connection speeds and we're focusing on every little aspect of our business. And really, the industry has experienced a very significant downturn.

And a lot of the experienced people in the field, there's a lot of them that are still there and they're on our cruise and other cruise. But a lot of folks have gone on to other things, too. And I think there's a lot of green hands that are coming in and we're just training them too.

And so it's not necessarily the way you had described it, where we're just reaping the benefits of somebody else's training. We're training folks and starting our culture from square one..

Okay, great. Thanks. I mean, it sounds like it and glad to see the progress you're making and look forward to seeing what else you can do over the course of this year. Thank you all..

Thank you. I'm showing no further questions. I will now turn the call back over to Sean for closing remarks..

Great, thank you. Yes, in closing, as you can tell from our presentation and from the prepared remarks, we're very excited about the future of the company. Now that we've pivoted to a sustainable free cash flow entity, we think we can materially continue to delever the company over the coming quarters and beyond.

And so with that said, I look forward to answering additional questions with upcoming conferences, we do plan on attending even these virtual conferences over the next few months. And I look forward to following up on questions there.

But I think the future is bright for Centennial and I think 2021 is going to be a very good year for both the company and the stakeholders. And I look forward to continuing the conversation with all of you investors and those folks who are listening on the call today. So with that, thank you and again, we'll talk to you all soon..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..