Raising our 2020 oil production target to 60,000 BOPD: Centennial CEO Mark Papa

Denver’s Centennial Resource Development, Inc. (ticker: CDEV) said on Monday it is acquiring undeveloped acreage and producing oil and gas properties in the core of the Northern Delaware basin from privately held GMT Exploration for $350 million in cash. The acreage total in the acquisition comes to 11,860, all in Lea County, N.M.

Pro-forma for the pending acquisition, Centennial is raising its 2020 production target to 60,000 BOPD from the previous target of 50,000 BOPD.

The company said in its press release that the acquisition increases its Delaware basin position to ~88,000 net acres from ~76,000 net acres at year-end 2016. The acreage is located in Southern New Mexico directly north of the Red Hills area. Centennial said about 67% is held by production and that it expects less than one operated drilling rig is required to hold acreage.

No Slowing the Permian Land Grab: Centennial Resource Development Enters the Northern Delaware

Source: Centennial Resource Development

The company said it is now targeting a four-year compound annual oil growth rate of approximately 80% from 2016 to 2020.

Acquisition overview

  • 11,860 net acres in Lea County, New Mexico, 79% operated with 85% average working interest•  77% State Lands, 19% Federal and 4% Fee
  • Average net production of approximately 2,100 BOEPS during Q1 2017Approximately 77% oil
  • Identified approximately 255 gross horizontal drilling locations in the Avalon Shale, 2ndBone Spring Sand, 3rd Bone Spring Sand and Wolfcamp A formations
  • Estimated undeveloped resource potential of over 91 MMBOEAdditional upside potential from the 1stBone Spring Sand, 2nd Bone Spring Shale, 3rd Bone Spring Carbonate and Wolfcamp B formations
  • Significant upside potential related to additional zones and future downspacing
  • Current inventory includes drilling locations in four zones•  Conservative inventory spacing compared to offset operators•  Potential upside from four additional prospective zones
No Slowing the Permian Land Grab: Centennial Resource Development Enters the Northern Delaware

Source: Centennial Resource Development

No strangers to the Northern Delaware: Papa

“This is an area where our geoscience and reservoir teams have built their careers and worked these geologic formations,” said Centennial Resource Development Chairman and CEO Mark G. Papa.

“We expect well results in this Northern area to provide rates of return that are competitive with our existing portfolio. Based on this newly combined entity, we are raising our 2020 oil production target to 60,000 barrels per day. We can achieve this goal while still maintaining some of the lowest debt metrics relative to our peers.”

Four primary targets

Centennial said its chief targets are the Avalon Shale, 2nd Bone Spring, 3rd Bone Spring and Wolfcamp A formations.

Assumptions include 255 gross horizontal locations in the four formations, based on 660-foot to 1,056-foot spacing, the company said. Based on this analysis, Centennial said it foresees additional development and downspacing potential may exist across the acquired acreage position.

No Slowing the Permian Land Grab: Centennial Resource Development Enters the Northern Delaware

Source: Centennial Resource Development

Updated 2017 production guidance: 25,750 BOEPD

Pro-forma for the pending acquisition, Centennial is increasing the mid-point of its 2017 production guidance to 25,750 BOEPD from the previously announced 24,500 BOEPD. The company raised mid-point of its 2017 oil production guidance from 14,850 to 15,750 BOPD.

One rig slated for the new acreage, expects to spud 5 horizontal wells

There are currently no operated rigs on the GMT acreage, but Centennial said it expects to add one operated horizontal rig on the acquired acreage during the third quarter of 2017 and spud approximately five gross horizontal wells through year-end. Four wells are expected to be completed and placed on production late this year.  Well costs on the acquired acreage are estimated to be similar to the company’s Reeves County wells—$6.0 to $7.0 million for a 4,500 foot lateral.

Centennial has increased the mid-point of its full-year 2017 drilling and completion capital expenditure guidance by approximately $38 million, of which approximately 85% is expected to be associated with operated activity.

The following table shows Centennial’s 2017 operational guidance updated for the announced acquisition:

2017 FY Guidance 2017 FY Guidance
(Prior) (Updated)
Net Average Daily Production (Boe/d) 22,500 – 26,500 23,600 – 27,900
Oil Net Average Daily Production (Bbls/d) 14,000 – 15,700 14,850 – 16,650
Production Costs
Lease Operating Expense ($/Boe) ($3.25) – ($3.75) ($3.25) – ($3.75)
Transportation, Processing, Gathering ($3.10) – ($3.60) ($3.10) – ($3.60)
and Other ($/Boe)
Depreciation, Depletion, Amortization and ($18.00) – ($20.00) ($18.00) – ($20.00)
Accretion of Asset Retirement Obligations ($/Boe)
Cash General and Administrative ($/Boe) ($3.00) – ($3.75) ($3.00) – ($3.75)
Severance and Ad Valorem Taxes (% of Revenue) 6% – 8% 6% – 8%
Capital Expenditure Program ($MM) $500 – $585 $535 – $625
D&C Capital Expenditure $440 – $500 $475 – $540
Land $50 – $70 $50 – $70
Facilities, Seismic and Other $10 – $15 $10 – $15
Operated Drilling Program
Wells Spud (Gross) 60      –      70 65      –      75
Wells Completed (Gross) 60      –      70 65      –      75

Funding the acquisition

Centennial said it would likely finance the purchase price of the acquisition from GMT through proceeds from one or more capital markets transactions and that it expects the financing will be leverage neutral on a forward-looking and pro forma basis. The acquisition is expected to close during the second quarter of 2017 the company said in a statement.

Centennial recently completed its semi-annual borrowing base redetermination increasing its borrowing base to $350 million . This does not include any contribution from the GMT assets to be acquired by Centennial.

As of March 31, 2017, Centennial had no borrowings outstanding on its revolving credit facility. Absent potential future acquisitions, Centennial’s anticipated 2017 capital expenditure and working capital requirements are expected to be fully funded through cash flow, cash on hand and borrowings under its revolving credit facility.

Latham & Watkins LLP acted as legal counsel to Centennial. Tudor, Pickering, Holt & Co. acted as financial advisor to GMT in connection with the transaction.

The PowerPoint presentation detailing the acquisition is available here.


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