☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
☐ 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
PDC ENERGY, INC.
(Exact name of registrant as specified in its charter)
(State of incorporation)
(I.R.S. Employer Identification No.)
1775 Sherman Street,Suite 3000
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 860-5800
Securities registered pursuant to Section 12(b) of the Act.
Title of each class
Name of each exchange on which registered
Common stock, par value $0.01 per share
Nasdaq Global Select Market
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. Yesx 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). YesxNo 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
Smaller reporting company
Emerging growth company
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 ☐No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 61,616,700 shares of the Company's Common Stock ($0.01 par value) were outstanding as of October 21, 2019.
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, the pending acquisition of SRC Energy, Inc. ("SRC") and the effects thereof; the expected timing of the acquisition of SRC; 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; cash flows from operations relative to future capital investments; our stock repurchase program, which may be modified or discontinued at any time; potential additional payments from the sale of our midstream assets; financial ratios and compliance with covenants in our revolving credit facility and other debt instruments; impacts of certain accounting and tax changes; 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 and expected timing of rulemakings; ability to meet our volume commitments to midstream providers; ability to obtain permits from the Colorado Oil and Gas Conservation Commission ("COGCC") in a timely manner; ongoing compliance with our consent decree and expected timing of certain litigation; 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;
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;
impact of recent regulatory developments in Colorado with respect to additional permit scrutiny;
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, including the acquisition of SRC, or acreage exchanges;
increases or changes in costs and expenses;
limitations in the 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;
future cash flows, liquidity and financial condition;
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 to our operations, personnel retention, strategy, stock price and expenses caused by the actions of activist shareholders;
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, including litigation related to the acquisition of SRC;
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.
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
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 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 September 30, 2019, we owned an interest in approximately 2,700 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.
The accompanying unaudited condensed consolidated financial statements include the accounts of PDC, our wholly-owned subsidiaries and our proportionate share of our affiliated partnerships. Pursuant to the proportionate consolidation method, our accompanying condensed consolidated financial statements include our pro rata share of assets, liabilities, revenues and expenses of the entities which we proportionately consolidate. All material intercompany accounts and transactions have been eliminated in consolidation.
In our opinion, the accompanying condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. The December 31, 2018 condensed consolidated balance sheet data was derived from audited statements, but does not include all disclosures required by U.S. GAAP. The information presented in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and notes thereto included in our 2018 Form 10-K. Our results of operations and cash flows for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year or any other future period.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting Standards Board ("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 disclosing key information about related leasing arrangements (the “New Lease Standard”). For leases with terms of more than 12 months, the accounting update requires lessees to recognize a right-of-use ("ROU") asset and lease liability for its right to use the underlying asset and the corresponding lease obligation. As provided by practical expedients, we made accounting policy elections to not recognize ROU assets and lease liabilities that arise from short-term leases and to not separate lease and non-lease components for any class of underlying asset. The FASB issued an accounting update which provides an optional transition practical expedient for the adoption of the New Lease Standard that, if elected, permits an organization to not evaluate the accounting for existing land easements that are not accounted for under the previous lease accounting standard. We elected this practical expedient, and accordingly, existing land easements at December 31, 2018 were not assessed. All new or modified land easements entered into after January 1, 2019 are evaluated under the New Lease Standard. The New Lease Standard does not apply to leases of mineral rights to explore for or use crude oil and natural gas. Adoption of the New Lease Standard resulted in increases to other assets of $20.1 million, other accrued expenses of $4.6 million and other liabilities of $15.5 million at January 1, 2019, with no adjustment to the opening balance of retained earnings.
Recently Issued Accounting Standards
In June 2016, the FASB issued an accounting update and subsequent amendments on the impairment of financial instruments. The update added a new impairment model, known as the current expected credit loss model, which is based upon expected credit losses, rather than incurred losses. Under the new guidance, an allowance will be recognized based upon
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
the entity's estimate of lifetime expected credit losses. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and early adoption is permitted. Based on implementation efforts performed to date, we do not expect adoption of the update to have a material impact on our condensed consolidated financial statements.
NOTE 3 - PENDING ACQUISITION
On August 25, 2019, we and SRC entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which we will acquire SRC in an all-stock transaction (the “SRC Acquisition”). We expect the SRC Acquisition to be completed early in the first quarter of 2020, subject to PDC and SRC shareholder approval and the satisfaction of certain customary closing conditions, including the receipt of federal regulatory approvals. The Merger Agreement may be terminated by us or SRC in certain circumstances. We will account for the SRC Acquisition as a business combination using the acquisition method of accounting.
Upon completion of the SRC Acquisition, SRC shareholders will automatically receive 0.158 of a share of our common stock in exchange for each share of SRC common stock. This exchange ratio is fixed and will not be adjusted for changes in our or SRC’s stock price. The value of the SRC Acquisition, which will include assumption of SRC's net debt, will be dependent upon the market value of our common stock on the date of closing. We estimate that we will issue up to approximately 40 million shares of our common stock in connection with the SRC Acquisition.
During the nine months ended September 30, 2019, we recorded transaction costs related to the SRC Acquisition of $5.0 million, which are included in general and administrative expense in our condensed consolidated statement of operations. The liabilities associated with such amounts are included in other accrued expenses in our condensed consolidated balance sheet as of September 30, 2019.
Subject to closing the SRC Acquisition, the borrowing base on our revolving credit facility will increase from $1.6 billion to $2.1 billion. In addition, we elected to increase the aggregate commitment amount under our revolving credit facility to (i) $1.7 billion upon closing of the SRC Acquisition and (ii) up to $1.9 billion, at our sole discretion, at any time following closing of the SRC Acquisition before April 30, 2020. As described below, if the SRC Acquisition results in a "Change of Control" under the indenture governing SRC’s $550 million 6.25% Senior Notes due December 2025 (the "SRC Senior Notes"), we will be required to offer to purchase those notes. We expect that our decision regarding the expansion of the commitment to $1.9 billion will be based in part on whether we make such an offer and, if so, the amount of SRC Senior Notes tendered in the offer.
Upon closing the SRC Acquisition, we will assume the SRC Senior Notes and be required to pay off and terminate SRC's revolving credit facility. As of September 30, 2019, SRC had $165 million outstanding under its revolving credit facility. The SRC Senior Notes contain a change of control provision pursuant to which, if the consummation of the SRC Acquisition results in a “Change of Control” under the indenture governing the SRC Senior Notes, we will be required to make an offer to repurchase the SRC Senior Notes at a price equal to 101 percent of the principal amount of the notes, together with any accrued and unpaid interest to the date of purchase.
Additionally, in August 2019, contingent on the closing of the SRC Acquisition, our Board of Directors (the "Board") approved an increase and extension to the Stock Repurchase Program from $200 million to $525 million with a target completion date of December 31, 2021.
NOTE 4 - 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.