What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-03 compared with 2020-08-03 · 213 added, 121 removed, 636 unchanged (34% of the section changed)

3 unchanged sentences

(in thousands, except share and per share amounts)

June 30, 2020

September 30, 2020

December 31, 2019

18 unchanged sentences

Accounts payable and accrued expenses

Derivative instruments

Operating lease liabilities

6 unchanged sentences

Operating lease liabilities

Other noncurrent liabilities

Total liabilities

2 unchanged sentences

Preferred stock, $0.0001 par value, 1,000,000 shares authorized:

1 share issued and outstanding

No shares issued and outstanding at September 30, 2020 and 1 share issued and outstanding at December 31, 2019

Common stock, $0.0001 par value, 620,000,000 shares authorized:

282,209,347 shares issued and 277,283,494 shares outstanding at June 30, 2020 and 280,650,341 shares issued and 275,811,346 shares outstanding at December 31, 2019

290,104,427 shares issued and 278,317,272 shares outstanding at September 30, 2020 and 280,650,341 shares issued and 275,811,346 shares outstanding at December 31, 2019

Class C (Convertible):

No shares issued and outstanding at June 30, 2020 and 1,034,119 shares issued and outstanding at December 31, 2019

No shares issued and outstanding at September 30, 2020 and 1,034,119 shares issued and outstanding at December 31, 2019

Additional paid-in capital

7 unchanged sentences

(in thousands, except per share data)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Operating revenues

6 unchanged sentences

Impairment and abandonment expense

Exploration expense

Exploration and other expenses

General and administrative expenses

18 unchanged sentences

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash flows from operating activities:

34 unchanged sentences

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Supplemental cash flow information

12 unchanged sentences

Reconciliation of cash, cash equivalents and restricted cash presented on the consolidated statements of cash flows for the periods presented:

Six Months Ended June 30,

Nine Months Ended September 30,

Cash and cash equivalents

26 unchanged sentences

Balance at June 30, 2020

Restricted stock issued

Restricted stock forfeited

Restricted stock used for tax withholding

Issuance of Class A common stock under Employee Stock Purchase Plan

Stock-based compensation

Net income (loss)

Balance at September 30, 2020

CENTENNIAL RESOURCE DEVELOPMENT, INC.

19 unchanged sentences

Balance at June 30, 2019

Restricted stock issued

Restricted stock forfeited

Restricted stock used for tax withholding

Stock-based compensation

Conversion of common stock from Class C to Class A, net of tax

Net income (loss)

Balance at September 30, 2019

The accompanying notes are an integral part of these unaudited consolidated financial statements.

20 unchanged sentences

As a result, CRP was a wholly-owned subsidiary of Centennial Resource Development, Inc.

for the three month period ended June 30, 2020 .

for the three month periods ended June 30, 2020 and September 30, 2020 .

No cash proceeds were received by the Company in connection with the Conversion, and deferred tax expense of $ 2.2 million was recorded in equity with an offsetting deferred tax liability for the same amount, upon conversion.

11 unchanged sentences

(viii) accrued liabilities;

(ix) valuation of derivatives;

(ix) derivative valuations;

and (x) deferred income taxes.

13 unchanged sentences

The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information becomes known or as the tax environment changes.

During the first half of 2020, the Company determined that it is more-likely-than-not that a portion of its deferred tax assets will not be realized.

Accordingly, a valuation allowance against its deferred tax assets in the amount of $ 49.7 million was recognized as of June 30, 2020 , which caused the Company’s provision for income taxes for the three and six months ended June 30, 2020 to differ from the amounts that would be provided by applying the statutory U.S.

During the first nine months of 2020, the Company determined that it is more-likely-than-not that a portion of its deferred tax assets will not be realized.

Accordingly, a valuation allowance against its deferred tax assets in the amount of $ 58.0 million was recognized as of September 30, 2020 , which caused the Company’s provision for income taxes for the three and nine months ended September 30, 2020 to differ from the amounts that would be provided by applying the statutory U.S.

federal income tax rate of 21 % to pre-tax book loss.

Shareholders’ Equity

In July 2020, the Company redeemed its one outstanding share of Series A Preferred Stock at par value, $ 0.0001 per share (the “Series A Preferred Stock”), held by NGP X US Holdings, L.P.

(“NGP”), a former indirect equity owner of CRP.

The Series A Preferred Stock became redeemable by the Company as NGP ceased to own at least 5,000,000 shares of the Company’s Class A Common Stock.

Risks and Uncertainties

11 unchanged sentences

However, the purchaser a dvised the Company that it disputes this position, and as a result, the distribution of the Deposit is under ongoing litigation between the Company and the purchaser.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3—Accounts Receivable, Accounts Payable and Accrued Expenses

1 unchanged sentence

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

2 unchanged sentences

Accounts receivable, net

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts payable and accrued expenses are comprised of the following:

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

10 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

9 unchanged sentences

CRP, the Company’s consolidated subsidiary, has a credit agreement with a syndicate of banks that provides for a five-year secured revolving credit facility, maturing on May 4, 2023 (the “Credit Agreement”).

On May 1, 2020 , CRP, as borrower, and the Company, as parent guarantor, entered into the second and third amendments to the Credit Agreement (the “2020 Amendments”), which, among other things, established a new borrowing base and level of elected commitments of $ 700.0 million .

The 2020 Amendments that the lenders approved also permitted the issuance of the Senior Secured Notes in connection with the Debt Exchange (defined below), and they implemented an availability blocker equal to 25 % of the newly issued amount of Senior Secured Notes.

As of June 30, 2020 , the Company had $ 370.0 million in borrowings outstanding and $ 290.0 million in available borrowing capacity, which was net of $ 8.2 million in letters of credit outstanding and the availability blocker of $ 31.8 million .

The amount available to be borrowed under CRP’s Credit Agreement is equal to the lesser of (i) the borrowing base less the availability blocker, (ii) aggregate elected commitments, which was set at $ 700.0 million pursuant to the 2020 Amendments, or (iii) $ 1.5 billion .

On May 1, 2020 , CRP, as borrower, and the Company, as parent guarantor, entered into the second and third amendments to the Credit Agreement (the “Q2 2020 Amendments”), which, among other things, established a new borrowing base and level of elected commitments of $ 700.0 million .

The Q2 2020 Amendments that the lenders approved also permitted the issuance of the Senior Secured Notes in connection with the Debt Exchange (defined below), and they implemented an availability blocker equal to 25 % of the newly issued amount of Senior Secured Notes.

As of September 30, 2020 , the Company had $ 355.0 million in borrowings outstanding and $ 304.4 million in available borrowing capacity, which was net of $ 8.8 million in letters of credit outstanding and the availability blocker of $ 31.8 million .

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The borrowing base is redetermined semi-annually in the spring and fall by the lenders in their sole discretion.

3 unchanged sentences

Borrowings under the Credit Agreement are guaranteed by certain of CRP’s subsidiaries and the Company.

In connection with the Credit Agreement’s fall 2020 semi-annual borrowing base redetermination, the borrowing base and amount of elected commitments were reaffirmed at $ 700.0 million .

Borrowings under the Credit Agreement may be base rate loans or LIBOR loans.

Interest is payable quarterly for base rate loans and at the end of the applicable interest period for LIBOR loans.

LIBOR loans bear interest at LIBOR (adjusted for statutory reserve requirements and subject to 1% floor) plus an applicable margin, which ranged from 200 to 300 basis points as of June 30, 2020 , depending on the percentage of the borrowing base utilized.

LIBOR loans bear interest at LIBOR (adjusted for statutory reserve requirements and subject to 1% floor) plus an applicable margin, which ranged from 200 to 300 basis points as of September 30, 2020 , depending on the percentage of the borrowing base utilized.

Base rate loans bear interest at a rate per annum equal to the greatest of:

1 unchanged sentence

(ii) the federal funds effective rate plus 50 basis points;

or (iii) the adjusted LIBOR rate for a one-month interest period plus 100 basis points, plus an applicable margin, which ranged from 100 to 200 basis

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

points as of June 30, 2020 , depending on the percentage of the borrowing base utilized.

or (iii) the adjusted LIBOR rate for a one-month interest period plus 100 basis points, plus an applicable margin, which ranged from 100 to 200 basis points as of September 30, 2020 , depending on the percentage of the borrowing base utilized.

CRP also pays a commitment fee of 37.5 to 50 basis points on unused amounts under its facility.

13 unchanged sentences

(iii) a leverage ratio, as also defined in the Credit Agreement as the ratio of total funded debt to consolidated EBITDAX for the rolling four fiscal quarter period.

Pursuant to the 2020 Amendments, the leverage ratio is suspended until March 31, 2022, at which time, the ratio may not exceed 5.00 to 1.00 , with such maximum ratio declining at a rate of 0.25 for each succeeding quarter until March 31, 2023 when the ratio is set at not greater than 4.0 to 1.0 .

CRP was in compliance with the covenants and the financial ratios described above as of June 30, 2020 and through the filing of this Quarterly Report.

Senior Unsecured Note Debt Exchange

Pursuant to the Q2 2020 Amendments, the leverage ratio is suspended until March 31, 2022, at which time, the ratio may not exceed 5.00 to 1.00 , with such maximum ratio declining at a rate of 0.25 for each succeeding quarter until March 31, 2023 when the ratio is set at not greater than 4.0 to 1.0 .

CRP was in compliance with the covenants and the financial ratios described above as of September 30, 2020 and through the filing of this Quarterly Report.

Senior Unsecured Notes Debt Exchange

On May 22, 2020 , CRP completed its private exchange of debt pursuant to which a $ 254.2 million aggregate principal amount of Senior Unsecured Notes (defined below) was validly tendered and exchanged by certain eligible bondholders for consideration consisting of $ 127.1 million aggregate principal amount (the “Debt Exchange”) of newly issued 8.00 % second lien senior secured notes due 2025 (the “Senior Secured Notes”).

Whether a debt exchange should be accounted for pursuant to Financial Accounting Standards Board’s Accounting Standard Codification (“ASC”) Topic 470-60, Troubled Debt Restructurings by Debtors , or pursuant to ASC Topic 470-50, Modifications and Extinguishments, requires judgments to be made with respect to whether or not an entity is experiencing financial difficulty.

Whether a debt exchange should be accounted for pursuant to Financial Accounting Standards Board’s Accounting Standard Codification (“ASC”) Topic 470-60, Troubled Debt Restructurings by Debtors , or pursuant to ASC Topic 470-50, Modifications and Extinguishments (“ASC 470-50”), requires judgments to be made with respect to whether or not an entity is experiencing financial difficulty.

As it was determined that Centennial was not experiencing financial difficulty and could obtain funds at market rates it could afford (i.e.

non-investment grade but nontroubled debtor rates), the Company’s Debt Exchange was accounted for as an extinguishment of debt in accordance with ASC 470-50 .

As a result, a gain on the exchange of debt of $ 143.4 million was recognized in the Consolidated Statement of Operations, which consisted of the carrying values of the Senior Unsecured Notes exchanged less the aggregate principal amount of new Senior Secured Notes issued, net of their associated debt discount of $ 21.0 million (which was based on the notes’ estimated fair value on the exchange date).

As a result, a gain on the exchange of debt of $ 143.4 million was recognized in the consolidated statement of operations, which consisted of the carrying values of the Senior

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unsecured Notes exchanged less the aggregate principal amount of the new Senior Secured Notes issued, net of their associated debt discount of $ 21.0 million (which was based on the Senior Secured Notes’ estimated fair value on the exchange date).

Senior Secured Notes

5 unchanged sentences

The Company has the option to redeem all (but not less than all) of the Senior Secured Notes, at any time prior to May 22, 2021 on a single occasion, at a redemption price equal to 100 % of the principal amount, plus accrued and unpaid interest to the date of redemption, if such redemption is made entirely with proceeds from equity offerings or the issuance of unsecured indebtedness.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At any time prior to June 1, 2022 , the Company has the option to redeem the Senior Secured Notes, in whole or in part, at a redemption price equal to 100 % of the principal amount of the Senior Secured Notes redeemed plus accrued and unpaid interest and a “make-whole” premium.

5 unchanged sentences

In May 2020 in connection with the Debt Exchange, $ 143.7 million aggregate principal amount of the 2027 Senior Notes was exchanged for Senior Secured Notes.

As of June 30, 2020, the remaining aggregate principal amount of 2027 Senior Notes outstanding was $ 356.4 million .

As of September 30, 2020 , the remaining aggregate principal amount of 2027 Senior Notes outstanding was $ 356.4 million .

On November 30, 2017 , CRP issued at par $ 400.0 million of 5.375 % senior notes due 2026 (the “2026 Senior Notes” and collectively with the 2027 Senior Notes, the “Senior Unsecured Notes”) in a 144A private placement that resulted in net proceeds to CRP of $ 391.0 million , after deducting $ 9.0 million in debt issuance costs.

1 unchanged sentence

In May 2020 in connection with the Debt Exchange, $ 110.6 million aggregate principal amount of the 2026 Senior Notes was exchanged for Senior Secured Notes.

As of June 30, 2020, the remaining aggregate principal amount of 2026 Senior Notes outstanding was $ 289.4 million .

As of September 30, 2020 , the remaining aggregate principal amount of 2026 Senior Notes outstanding was $ 289.4 million .

The Senior Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company and each of CRP’s current subsidiaries that guarantee CRP’s revolving credit facility.

3 unchanged sentences

On and after the Optional Redemption Dates, CRP may redeem the Senior Unsecured Notes, in whole or in part, at redemption prices expressed as percentages of principal amount plus accrued and unpaid interest to the redemption date.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following section discusses the general terms of the indentures applicable to the Company’s Senior Unsecured Notes and the Senior Secured Notes (collectively, the “Senior Notes”).

9 unchanged sentences

and (ix) create unrestricted subsidiaries.

CRP was in compliance with these covenants as of June 30, 2020 and through the filing of this Quarterly Report.

CRP was in compliance with these covenants as of September 30, 2020 and through the filing of this Quarterly Report.

Upon an Event of Default (as defined in the indentures governing the Senior Notes), the trustee or the holders of at least 25 % of the aggregate principal amount of then outstanding Senior Notes may declare the Senior Notes immediately due and payable.

In addition, a default resulting from certain events of bankruptcy or insolvency with respect to CRP, any restricted subsidiary of CRP that is a significant subsidiary, or any group of restricted subsidiaries that, taken together, would constitute a significant subsidiary, will automatically cause all outstanding Senior Notes to become due and payable.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

If CRP experiences certain defined changes of control (and, in some cases, followed by a ratings decline), each holder of the Senior Notes may require CRP to repurchase all or a portion of its Senior Notes for cash at a price equal to 101 % of the aggregate principal amount of such Senior Notes, plus any accrued but unpaid interest to the date of repurchase.

Note 5—Asset Retirement Obligations

The following table summarizes changes in the Company’s asset retirement obligations (“ARO”) associated with its working interests in oil and gas properties for the six months ended June 30, 2020 :

The following table summarizes changes in the Company’s asset retirement obligations (“ARO”) associated with its working interests in oil and gas properties for the nine months ended September 30, 2020 :

(in thousands)

13 unchanged sentences

On April 29, 2020, the stockholders of the Company approved the amended and restated LTIP, which, among other things, increased the number of shares of Class A Common Stock authorized for issuance by 8,250,000 shares.

As of June 30, 2020 , the Company had 14,763,345 shares of Class A Common Stock available for future grants.

As of September 30, 2020 , the Company had 7,063,352 shares of Class A Common Stock available for future grants.

The LTIP provides for grants of restricted stock, stock options (including incentive stock options and nonqualified stock options), restricted stock units, stock appreciation rights and other stock or cash-based awards.

During the three months ended June 30, 2020 , as a result of the decline in crude oil and natural gas prices, ongoing uncertainty regarding the oil supply-demand macro environment and the related suspension of the Company’s drilling and completion activities, the Company implemented a reduction to its workforce.

As a result of the decline in crude oil and natural gas prices, ongoing uncertainty regarding the oil supply-demand macro environment and the related temporary suspension of the Company’s drilling and completion activities, the Company implemented a reduction to its workforce in the second quarter of 2020.

In connection with this reduction, the Compensation Committee of the Company’s Board of Directors approved an accelerated partial vesting of certain unvested stock options and restricted stock awards held by 36 of the terminated employees.

The acceleration changed the terms of the vesting conditions and are therefore treated as modifications in accordance with ASC Topic 718, Compensation-Stock Compensation .

The acceleration changed the terms of the vesting conditions and

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

are therefore treated as modifications in accordance with ASC Topic 718, Compensation-Stock Compensation (“ASC 718”).

The modification resulted in a decrease to total stock-based compensation expense of $ 2.6 million associated with the decrease in the fair value of the modified awards compared to the original awards’ fair value.

The shares and options that were accelerated are included within the vested line item in the below tables.

Stock-based compensation expense is recognized within both General and administrative expenses and Exploration expense in the Consolidated Statements of Operations.

Stock-based compensation expense is recognized within both General and administrative expenses and Exploration and other expenses in the consolidated statements of operations.

The Company accounts for forfeitures of awards granted under the LTIP as they occur in determining compensation expense.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes stock-based compensation expense recognized for the periods presented:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

Equity Awards

Restricted stock awards

2 unchanged sentences

Other stock-based compensation expense (1)

Total stock-based compensation - equity awards

Liability Awards

Restricted stock units

Performance stock units

Total stock-based compensation - liability awards

Total stock-based compensation expense

1 unchanged sentence

In May 2019, an aggregate of 2,000,000 shares were authorized by stockholders for issuance under the ESPP, which became effective on July 1, 2019.

As of June 30, 2020 , the Company had 1,940,801 shares of Class A Common Stock available for future issuance.

As of September 30, 2020 , the Company had 1,837,381 shares of Class A Common Stock available for future issuance.

Equity Awards

The Company has restricted stock awards, stock options and performance stock units (“PSUs”) outstanding that were granted under the LTIP as discussed below.

Each award has service-based and, in the case of the PSUs, market-based vesting requirements, and are expected to be settled in shares of the Company’s Class A Common Stock upon vesting.

As a result, these awards are classified as equity-based awards in accordance with ASC 718.

Restricted Stock

The following table provides information about restricted stock activity during the six months ended June 30, 2020 :

The following table provides information about restricted stock activity during the nine months ended September 30, 2020 :

Weighted Average Grant-Date Fair Value

Unvested balance as of December 31, 2019

Unvested balance as of June 30, 2020

Unvested balance as of September 30, 2020

The Company grants service-based restricted stock awards to executive officers and employees, which vest ratably over a three -year service period, and to directors, which vest over a one -year service period.

Compensation cost for the service-based restricted stock awards is based on the closing market price of the Company’s Class A common stock on the grant date, and such costs are recognized ratably over the applicable vesting period.

The weighted average grant-date fair value for restricted stock awards granted during the period was $ 2.53 and $ 12.48 per share for the six months ended June 30, 2020 and 2019 , respectively.

The total fair value of restricted stock awards that vested during the six months ended June 30, 2020 and 2019 was $ 4.6 million and $ 1.5 million , respectively, and includes awards with vesting terms that were accelerated as discussed above.

Unrecognized compensation cost related to restricted shares that were unvested as of June 30, 2020 was $ 21.7 million , which the Company expects to recognize over a weighted average period of 1.9 years.

The weighted average grant-date fair value for restricted stock awards granted during the period was $ 1.10 and $ 6.70 per share for the nine months ended September 30, 2020 and 2019 , respectively.

The total fair value of restricted stock awards that vested during the nine months ended September 30, 2020 and 2019 was $ 16.1 million and $ 9.1 million , respectively, and includes awards with vesting terms that were accelerated as discussed above.

Unrecognized compensation cost related to restricted shares that were unvested as of September 30, 2020 was $ 24.2 million , which the Company expects to recognize over a weighted average period of 2.1 years.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Stock Options

7 unchanged sentences

Treasury bond rates in effect at the grant date for its risk-free interest rates.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the assumptions and related information used to determine the grant-date fair value of stock option awards for the periods presented:

Six Months Ended June 30,

Nine Months Ended September 30,

Weighted average grant-date fair value per share

3 unchanged sentences

Risk-free interest rate

The following table provides information about stock option awards outstanding during the six months ended June 30, 2020 :

The following table provides information about stock option awards outstanding during the nine months ended September 30, 2020 :

Weighted Average Exercise Price

3 unchanged sentences

Outstanding as of December 31, 2019

Outstanding as of June 30, 2020

Exercisable as of June 30, 2020

The total fair value of stock options that vested during the six months ended June 30, 2020 and 2019 was $ 4.2 million and $ 4.1 million , respectively, and includes awards with vesting terms that were accelerated as discussed above.

There were no stock options exercised during either the six months ended June 30, 2020 or 2019 .

As of June 30, 2020 , there was $ 1.8 million of unrecognized compensation cost related to unvested stock options, which the Company expects to recognize on a pro-rata basis over a weighted-average period of 1.4 years .

Outstanding as of September 30, 2020

Exercisable as of September 30, 2020

The total fair value of stock options that vested during the nine months ended September 30, 2020 and 2019 was $ 4.7 million and $ 4.4 million, respectively, and includes awards with vesting terms that were accelerated as discussed above.

The intrinsic value of the stock options exercised was minimal for the nine months ended September 30, 2020 and there were no stock options exercised during the nine months ended September 30, 2019 .

As of September 30, 2020 , there was $ 1.2 million of unrecognized compensation cost related to unvested stock options, which the Company expects to recognize on a pro-rata basis over a weighted-average period of 1.3 years .

Performance Stock Units

During the six months ended June 30, 2020 and 2019 , there was no significant performance stock units activity.

As of June 30, 2020 , there was $ 3.7 million of unrecognized compensation cost related to performance stock units that were unvested, which the Company expects to recognize on a pro-rata basis over a weighted average period of 1.6 years.

The Company grants performance stock units to certain executive officers that are subject to market-based vesting criteria as well as a three-year service period.

Vesting at the end of the three-year service period is subject to the condition that the Company’s stock price increases by a greater percentage, or decreases by a lesser percentage, than the average percentage increase or decrease, respectively, of the stock prices of a peer group of companies.

The market-based conditions must be met in order for the stock awards to vest, and it is, therefore, possible that no shares could ultimately vest.

However, the Company recognizes compensation expense for the performance stock units subject to market conditions regardless of whether it becomes probable that these conditions will be achieved or not, and compensation expense is not reversed if vesting does not actually occur.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides information about performance stock units outstanding during the nine months ended September 30, 2020 .

Weighted Average Grant-Date Fair Value

Unvested balance as of December 31, 2019

Unvested balance as of September 30, 2020

As of September 30, 2020 , there was $ 3.1 million of unrecognized compensation cost related to performance stock units that were unvested, which the Company expects to recognize on a pro-rata basis over a weighted average period of 1.4 years.

Liability Awards

The Company has restricted stock units and performance stock units that were granted under the LTIP, which will be settled in cash and are classified as liability awards in accordance with ASC 718.

Compensation cost for the liability awards is based on the fair value of the units as of the balance sheet date as further discussed below, and such costs are recognized ratably over the period in which the liability is expected to be paid.

As the fair value of liability awards is required to be re-measured each period end, amounts recognized in future periods will vary.

The estimated future cash payments of these awards are presented as liabilities within the consolidated balances sheets within Other current liabilities and Other long-term liabilities .

Restricted Stock Units

During the three months ended September 30, 2020 , the Company granted 5.5 million restricted stock units to certain officers and employees that will be settled in cash.

The restricted stock units vest annually in one-third increments over a three-year service period, with the first portion vesting on September 1, 2021.

After one year from the grant date, however, the restricted stock units can vest immediately on an accelerated basis if they meet certain market-based vesting criteria (equal to the maximum return percentage discussed below for at least 20 out of any 30 consecutive trading days).

Additionally, the restricted stock units include maximum and minimum return amounts equal to 400 % and 25 % , respectively, of the closing market price of the Company’s common stock on the grant date.

As of September 30, 2020, there was $ 2.5 million of unrecognized compensation cost, which represents the unvested portion of the fair value of the restricted stock units and will be recognized over a weighted average period of 2.9 years .

Performance Stock Units

During the three months ended September 30, 2020 , the Company granted 5.5 million performance stock units to certain executive officers that will be settled in cash and are subject to market-based vesting criteria as well as a three-year service condition.

Vesting at the end of the three-year service period is subject to the condition that the Company’s stock price increases by a greater percentage, or decreases by a lessor percentage, than the average percentage increase or decrease, respectively, of the stock price of a peer group of companies.

The market-based conditions must be met in order for the awards to vest, and it is therefore possible that no units could ultimately vest.

As of September 30, 2020 , there was $ 3.1 million of unrecognized compensation cost that represents the unvested portion of the fair value of the performance stock units and will be recognized over a weighted average period of 2.75 years.

Liability Awards Fair Value

The fair value of the restricted stock units and performance stock units was estimated using a Monte Carlo valuation model as of the balance sheet date.

The Monte Carlo valuation model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment.

Expected volatility was calculated based on the historical volatility of the Company’s common stock as well as the peer companies that are specified in the award agreement for the performance stock units, and the risk-free rate is based on U.S.

Treasury yield curve rates with maturities consistent with the remaining vesting or performance period.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the key assumptions and related information used to determine the fair value of the liability awards as of September 30, 2020:

Restricted stock units

Performance stock units

Number of simulations

Expected stock volatility

Dividend yield

Risk-free interest rate

Note 7—Derivative Instruments

5 unchanged sentences

The Company does not enter into derivative contracts for speculative or trading purposes.

Commodity Swap Contracts.

The Company may use commodity derivative instruments known as fixed price swaps to realize a known price for a specific volume of production as well as basis swaps to hedge the difference between the index price and a local index price.

Commodity Swap and Collar Contracts.

The Company may use commodity derivative instruments known as fixed price swaps to realize a known price for a specific volume of production, basis swaps to hedge the difference between the index price and a local index price, or costless collars to establish fixed price floors and ceilings.

All transactions are settled in cash with one party paying the other for the resulting difference in price multiplied by the contract volume.

1 unchanged sentence

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the approximate volumes and average contract prices of swap contracts the Company had in place as of June 30, 2020 :

The following table summarizes the approximate volumes and average contract prices of derivative contracts the Company had in place as of September 30, 2020 :

Volume (Bbls)

Weighted Average Fixed Price ($/Bbl) (1)

Weighted Average Fixed Price

Crude oil swaps

October 2020 - December 2020

January 2021 - March 2021

April 2021 - June 2021

July 2021 - September 2021

October 2021 - December 2021

January 2021 - March 2021

April 2021 - June 2021

July 2021 - September 2021

October 2021 - December 2021

Volume (Bbls)

Weighted Average Differential ($/Bbl) (2)

Weighted Average Differential

Crude oil basis swaps

October 2020 - December 2020

April 2021 - June 2021

July 2021 - September 2021

October 2021 - December 2021

These crude oil swap transactions are settled based on the NYMEX WTI price on each trading day within the specified monthly settlement period.

Volume (Bbls)

Weighted Average Collar Price Ranges ($/Bbl) (3)

Crude oil collars

October 2020 - December 2020

These crude oil swap transactions are settled based on the NYMEX WTI or ICE Brent oil price on each trading day within the specified monthly settlement period.

These oil basis swap transactions are settled based on the difference between the arithmetic average of ARGUS MIDLAND WTI and ARGUS WTI CUSHING indices, during each applicable settlement period.

These crude oil collars are settled based on the NYMEX WTI price on each trading day within the specified monthly settlement period and establish floor and ceiling prices for the contracted volumes.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Volume (MMBtu)

Volume (MMBtu/d)

Weighted Average Fixed Price ($/MMBtu) (1)

Weighted Average Fixed Price

Natural gas swaps

July 2020 - September 2020

October 2020 - December 2020

January 2021 - March 2021

April 2021 - June 2021

July 2021 - September 2021

October 2021 - December 2021

Volume (MMBtu)

Volume (MMBtu/d)

Weighted Average Differential ($/MMBtu) (2)

Weighted Average Differential

($/MMBtu) (2)

Natural gas basis swaps

July 2020 - September 2020

October 2020 - December 2020

Volume (MMBtu)

Volume (MMBtu/d)

Weighted Average Collar Price Ranges

($/MMBtu) (3)

Natural gas collars

October 2020 - December 2020

January 2021 - March 2021

These natural gas swap contracts are settled based on the NYMEX Henry Hub price on each trading day within the specified monthly settlement period.

These natural gas basis swap contracts are settled based on the difference between the Inside FERC’s West Texas WAHA price and the NYMEX price of natural gas, during each applicable settlement period.

These natural gas collars are settled based on the NYMEX Henry Hub price on each trading day within the specified monthly settlement period and establish floor and ceiling prices for the contracted volumes.

Derivative Instrument Reporting.

3 unchanged sentences

The following table presents the impact of the Company’s derivative instruments in its consolidated statements of operations for the periods presented:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

11 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

Derivative Assets

Commodity contracts

Current assets - Derivative instruments

Prepaid and other current assets

Other noncurrent assets

Derivative Liabilities

Commodity contracts

Current liabilities - Derivative instruments

Other current liabilities

Other noncurrent liabilities

December 31, 2019

1 unchanged sentence

Commodity contracts

Current liabilities - Derivative instruments

The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets against derivative liabilities at settlement or in the event of a default under the agreements or contract termination.

Other current liabilities

The Company has agreements in place with each of its counterparties that allow for the financial right of offset for derivative assets against derivative liabilities at settlement or in the event of a default under the agreements or contract termination.

Contingent Features in Financial Derivative Instruments.

17 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

Total liabilities

33 unchanged sentences

Two of the Company’s fields were subject to an impairment write-down as quantified above, but the remaining five fields were not impaired due to their undiscounted cash flows exceeding their carrying values by 30 % to over 100 % .

There were no triggering event identified as of June 30, 2020 or 2019 and therefore the Company did not recognize any impairment write-downs with respect to its proved property for the three months ended June 30, 2020 and for the three and six months ended June 30, 2019 .

There were no triggering events identified as of September 30, 2020 or 2019 and therefore the Company did not recognize any impairment write-downs with respect to its proved property for the three months ended September 30, 2020 and for the three and nine months ended September 30, 2019 .

Impairment expense for proved properties is presented as part of Impairment and Abandonment Expense in the consolidated statements of operations.

15 unchanged sentences

The following table summarizes the carrying values, principal amounts and fair values of these instruments as of the dates indicated:

June 30, 2020

September 30, 2020

December 31, 2019

15 unchanged sentences

Diluted EPS is calculated by dividing adjusted net income available to Class A Common Stock by the weighted average shares of diluted Class A Common Stock outstanding, which includes the effect of potentially dilutive securities.

Potentially dilutive securities for the diluted EPS calculation consists of (i) unvested restricted stock and performance stock units, outstanding stock options, withholding amounts from employee stock purchase plan and warrants using the treasury stock method, and (ii) the Company’s Class C Common Stock outstanding prior to the Conversion using the “if-converted” method, which is net of tax.

Potentially dilutive securities for the diluted EPS calculation consists of (i) unvested equity based restricted stock and performance stock units, outstanding stock options, withholding amounts from employee stock purchase plan and warrants using the treasury stock method, and (ii) the Company’s Class C Common Stock outstanding prior to the Conversion using the “if-converted” method, which is net of tax.

The following table reflects the allocation of net income to common shareholders and EPS computations for the periods indicated based on a weighted average number of common shares outstanding for the period:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands, except per share data)

Net income (loss) attributable to Class A Common Stock

Income from conversion of Class C Common Stock

Adjusted net income (loss) attributable to Class A Common Stock

Basic weighted average shares of Class A Common Stock outstanding

Dilutive effects of potential common stock

Dilutive effects of conversion of Class C Common Stock

Diluted weighted average shares of Class A Common Stock outstanding

1 unchanged sentence

Diluted net earnings (loss) per share of Class A Common Stock

The Company recognized a net loss during the six months ended June 30, 2020 .

The Company recognized a net loss during the three and nine months ended September 30, 2020 and during the three months ended September 30, 2019.

As a result, all potential common shares were anti-dilutive and were excluded from the calculation of diluted net earnings per share.

T he following table presents shares excluded from the diluted earnings per share calculation for the periods presented as their impact was anti-dilutive:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

10 unchanged sentences

The following table summarizes the revenues recognized and the associated processing fees incurred from this marketing agreement as presented in the consolidated statements of operations for the periods indicated as well as the related net receivables outstanding as of the balance sheet dates:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

2 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

Receivable from (payable to) Lucid (1)

(1) Represents amounts due from or payable to Lucid and are presented net of unpaid processing fees as of the indicated period end date.

Receivable from Lucid (1)

(1) Represents amounts due from Lucid and are presented net of unpaid processing fees as of the indicated period end date.

Senior Secured Notes

4 unchanged sentences

The Company routinely enters into, extends or amends operating agreements in the ordinary course of business.

During the six months ended June 30, 2020 , the Company amended one of its firm crude oil sales agreements, which moved the start date of its physical delivery commitments of 30,000 Bbls/d from 2020 to January 1, 2021, and affirmed May 31, 2025 as the end of the initial term of the agreement.

There has been no other material, non-routine changes in commitments during the six months ended June 30, 2020 .

During the nine months ended September 30, 2020 , the Company amended one of its firm crude oil sales agreements, which moved the start date of its physical delivery commitments of 30,000 Bbls/d from 2020 to January 1, 2021, and affirmed May 31, 2025 as the end of the initial term of the agreement.

There have been no other material, non-routine changes in commitments during the nine months ended September 30, 2020 .

Please refer to Note 13—Commitments and Contingencies included in Part II, Item 8 in the Company’s 2019 Annual Report.

11 unchanged sentences

Oil and gas revenues presented within the consolidated statements of operations relate to the sale of oil, natural gas and NGLs as shown below:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Operating revenues (in thousands):

6 unchanged sentences

Natural gas and NGL sales

Under the Company’s natural gas processing contracts, liquids rich natural gas is delivered to a midstream processing entity at the inlet of the gas plant processing system.

Under the Company’s natural gas processing contracts, liquids rich natural gas is delivered to a midstream gathering and processing entity at the inlet of the gas gathering system.

The midstream processing entity gathers and processes the raw gas and then remits proceeds to Centennial for the resulting sales of NGLs, while the Company generally elects to take its residue gas product “in-kind” at the plant tailgate.

7 unchanged sentences

At such time, the volumes delivered and sales prices can be reasonably estimated and amounts due from customers are accrued in Accounts receivable, net in the consolidated balance sheets.

As of June 30, 2020 and December 31, 2019 , such receivable balances were $ 41.5 million and $ 76.6 million , respectively.

As of September 30, 2020 and December 31, 2019 , such receivable balances were $ 38.8 million and $ 76.6 million , respectively.

The Company records any differences between its estimates and the actual amounts received for product sales in the month that payment is received from the purchaser.

Historically, any identified differences between revenue estimates and actual revenue received have not been significant.

For the six months ended June 30, 2020 and 2019 , revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods were not material.

For the nine months ended September 30, 2020 and 2019 , revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods were not material.

Transaction price allocated to remaining performance obligations

7 unchanged sentences

ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make future lease payments arising from the lease.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has operating leases for drilling rig contracts, office rental agreements, and other wellhead equipment.

As of June 30, 2020 , these leases have remaining lease terms ranging from two months to two years , some of which include options to extend the lease term for up to five years , and some of which include options to early terminate.

As of September 30, 2020 , these leases have remaining lease terms ranging from two months to 1.4 years , some of which include options to extend the lease term for up to five years , and some of which include options to early terminate.

These options are considered in determining the lease term and are included in the present value of future payments that are recorded for leases when the Company is reasonably certain to exercise the option.

4 unchanged sentences

The table below summarizes the Company’s weighted-average discount rate and weighted-average remaining lease term as of the period presented.

As of June 30, 2020

As of September 30, 2020

Weighted-average discount rate

4 unchanged sentences

The following table presents the various components of the Company’s lease expenses for the periods presented.

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

6 unchanged sentences

Therefore, the lease costs presented in the above table represent the total gross costs the Company incurs, which are not comparable to the Company’s net costs recorded to the consolidated statements of operations, consolidated statements of cash flows or capitalized in the consolidated balance sheets, as amounts therein are reflected net of amounts billed to the Company’s working interest partners.

Includes drilling rig lease costs of $ 4.6 million and $ 15.8 million for the three and six months ended June 30, 2020 , which may not necessarily be recurring in these amounts in the near-term based on the Company’s reduction in its drilling plan.

Includes drilling rig lease costs of $ 15.8 million for the nine months ended September 30, 2020 , which may not necessarily be recurring in these amounts in the near-term based on the Company’s reduction in its drilling plan.

CENTENNIAL RESOURCE DEVELOPMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Maturities of the Company’s long-term operating lease liabilities by fiscal year as of June 30, 2020 are as follows:

Maturities of the Company’s long-term operating lease liabilities by fiscal year as of September 30, 2020 are as follows:

(in thousands)

2 unchanged sentences

Present value of lease liabilities (3)

Excludes payments made during the six months ended June 30, 2020 .

Excludes payments made during the nine months ended September 30, 2020 .

Total lease payments exclude variable lease payments which can be charged under the terms of the lease agreements.

Of the total present value of lease liabilities, $ 3.6 million was recorded to current Operating lease liabilities and $ 1.8 million was recorded in noncurrent Operating lease liabilities in the Consolidated Balance Sheets as of June 30, 2020 .

Of the total present value of lease liabilities, $ 3.4 million was recorded to current Operating lease liabilities and $ 1.1 million was recorded in noncurrent Operating lease liabilities in the consolidated balance sheets as of September 30, 2020 .

Note 14—Subsequent Events

In July 2020, the Company redeemed its one outstanding share of Series A Preferred Stock, par value $ 0.0001 per share (the “Series A Preferred Stock”), held by NGP X US Holdings, L.P.

(“NGP”), a former indirect equity owner of CRP.

The Series A Preferred Stock became redeemable by the Company as NGP ceased to own at least 5,000,000 shares of Class A Common Stock.

Credit Facility Amendment

On October 8, 2020 , CRP, as borrower, and the Company, as parent guarantor, entered into the fourth amendment to the Credit Agreement, which reaffirmed the Company’s $ 700.0 million borrowing base and elected commitment levels in connection with the scheduled semi-annual fall borrowing base redetermination process.

Furthermore, the Company reduced its letters of credit outstanding under the Credit Agreement to $ 4.3 million as of October 31, 2020, from $8.8 million as of September 30, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements