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Centennial Resource Development (CDEV) looks capable of generating over $300 million in positive cash flow in 2022 still despite a decline in strip prices to $65 WTI oil. This would help get its leverage under 1.0x by the end of 2022.
Various transactions also point to Centennial having an estimated value of around $6.50 per share based on its current production levels and total acreage. This is similar to my previous estimates of its value in a long-term $65 WTI oil scenario.
Non-Core Divestiture
Centennial reached an agreement to sell its Big Chief asset (in the southernmost portion of its Reeves County acreage) to affiliates of Henry Resources and Pickering Energy Partners for $101 million in cash. This sale price was in-line with previous estimates of the value of Big Chief.
The divested assets include 6,200 net acres and approximately 1,600 BOEPD (64% oil, 76% liquids) in net production during Q3 2021. The transaction closed at the beginning of December 2021.
The $101 million sale price appears to be a solid price at around 4.6x estimated EBITDAX of $22 million at $65 WTI oil, based on 1,600 BOEPD in production.
Another Valuation Method
Another way to determine Centennial's valuation is to look at the Big Chief sale as well as Colgate Energy's Northern Delaware Basin acquisition (Eddy and Lea counties) as comparables.
If the current production in the Big Chief sale was valued at $40,000 per flowing BOE, that would result in a value of approximately $6,000 per net acre for the land.
The Colgate acquisition involved a price of $190 million for 22,000 net acres and 750 BOEPD in current production. Valuing that production at $40,000 per flowing BOE would result in a value of approximately $7,250 per net acre for the land. Valuing the production at $35,000 per flowing BOE instead would result in a value of approximately $7,440 per net acre for the land. Since the Colgate acquisition only involves a small amount of current production, most of the value is attributable to the land and there is limited variability caused the price per flowing BOE that is used.
At a price of $7,000 per net acre for Centennial's remaining 75,500 net acres would value its land at $528.5 million. A price of $7,000 per net acre seems reasonable since the Big Chief area wasn't a core development focus, and thus should have less value than average for Centennial's acreage.
A price of $35,000 per flowing BOE would value Centennial's approximately 63,500 BOEPD in production (Q3 2021 production adjusted for the sale of Big Chief) at $2.223 billion. Centennial's remaining production has a lower oil percentage (at 51% oil) than the production from its Big Chief asset, resulting in the lower valuation per flowing BOE.
That would result in a total valuation of $2.751 billion for Centennial's assets (excluding Big Chief). This leaves $1.836 billion for Centennial's market capitalization after subtracting its net debt (from the end of Q3 2021) and adding back the proceeds from the Big Chief disposition. This works out to a value of $6.46 per share.
Valuing Centennial's acreage at $7,500 per net acre instead would increase its value per share to around $6.60 per share. This lines up with my estimate that Centennial would be worth approximately $6.50 per share in a long-term $65 WTI oil environment.
Updated 2022 Outlook
Centennial mentioned that it may be able to achieve low double-digit production growth in 2022 with a two-rig program. This may translate into an average of 66,000 BOEPD in production during 2022, which would be around 11% growth compared to 2021 (excluding Big Chief production).
At $65 WTI oil in 2022, Centennial would be able to generate $1.039 billion in revenues after hedges. This also assumes that realized prices for NGLs end up between Q2 2021 and Q3 2021 levels, which is what the current strip for the various NGL components suggests.
| Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
| Oil | 12,285,900 | $60.00 | $737 |
| NGLs | 4,336,200 | $35.00 | $152 |
| Gas | 44,807,400 | $3.50 | $157 |
| Hedge Value | -$7 | ||
| Total | $1,039 |
Source: Author's Work
Centennial (and other producers) have been mentioning some cost inflation for 2022, so I am now modeling its capex at $345 million with a two-rig drilling program.
| $ Million | |
| Lease Operating | $114 |
| Production Taxes | $68 |
| Cash G&A | $46 |
| Gathering, Transportation and Processing | $96 |
| Cash Interest | $51 |
| Capex | $345 |
| Total | $722 |
Source: Author's Work
This results in an estimate of $317 million in positive cash flow at $65 WTI oil now.
Conclusion
Strip prices for 2022 have declined to around $65 for WTI oil, but Centennial should still be able to generate over $300 million in positive cash flow at that oil price. This would help Centennial reduce its leverage below 1.0x by the end of 2022.
Recent transactions (such as the Big Chief sale and Colgate Energy's bolt-on acquisition) also point to Centennial having a value of approximately $6.50 per share, which is consistent with my earlier estimates that Centennial is worth that much in a long-term $65 WTI oil scenario.
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