PARSLEY ENERGY, INC. The following discussion and analysis should be read in conjunction with the accompanying financial statements and related notes. The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil and natural gas, lack of transportation and storage capacity, production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed above in "Cautionary Note Regarding Forward-Looking Statements" and under the heading "Item 1A. Risk Factors" in this Quarterly Report on Form 10-Q (this "Quarterly Report") and in our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "Annual Report"), all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law. OverviewParsley Energy, Inc. (either individually or together with its subsidiaries, as the context requires, "we," "us," "our" or the "Company") is an independent oil and natural gas company focused on the acquisition, development, exploration and production of unconventional oil and natural gas properties in thePermian Basin .The Permian Basin is located in westTexas and southeasternNew Mexico and is characterized by high oil and liquids-rich natural gas content, multiple vertical and horizontal target horizons, extensive production histories, long-lived reserves and historically high drilling success rates. Our properties are located in two sub areas of thePermian Basin , theMidland Basin andDelaware Basin , where, given the associated returns, we focus predominantly on horizontal development drilling. Our sole material asset as ofMarch 31, 2020 consisted of 377,578,206 PE Units and, as the sole managing member, we hold a controlling equity interest inParsley Energy, LLC ("Parsley LLC ") and manage the business and affairs ofParsley LLC and its subsidiaries. We consolidate the financial and operating results ofParsley LLC and its subsidiaries and record noncontrolling interests for the economic interests inParsley LLC held by PE Unitholders (other than the Company). Outlook We expect the recent significant decline in commodity prices due to the global outbreak of COVID-19 and the actions of foreign oil producers such asSaudi Arabia andRussia to have a material impact on our business. For risks associated with these and other factors, see "Item 1A. Risk Factors" in this Quarterly Report. As a result of these market dynamics, we have taken actions to protect our balance sheet to preserve long-term shareholder value, and are committed to allocating capital based on prevailing market conditions. COVID-19 In the first quarter of 2020, the COVID-19 outbreak spread quickly across the globe. Federal, state and local governments mobilized to implement containment mechanisms and minimize impacts to their populations and economies. Various containment measures, which included the quarantining of cities, regions and countries, while aiding in the prevention of further outbreak, have resulted in a severe drop in general economic activity and a resulting decrease in energy demand. In addition, the global economy has experienced a significant disruption to global supply chains. As a producer of oil, natural gas and NGLs, we are recognized as an essential business under various federal, state and local regulations related to the COVID-19 pandemic. We have continued to operate as permitted under these regulations while taking steps to protect the health and safety of our workers. We have implemented protocols to reduce the risk of an outbreak within our field operations, and these protocols have not reduced production or efficiency in a significant manner. The risks associated with COVID-19 have also impacted our workforce and the way we meet our business objectives. Due to concerns over health and safety, we have asked all non-field employees to work remotely until further notice. We have been able to maintain a consistent level of 37 -------------------------------------------------------------------------------- Table of Contents effectiveness through these arrangements, including maintaining our day-to-day operations, our financial reporting systems and our internal control over financial reporting. Decline in Commodity Prices The extreme supply and demand imbalance created by demand decreases resulting from COVID-19 and supply increases resulting from recent periods of increased production by members of theOrganization of Petroleum Exporting Countries ("OPEC") and other countries, includingRussia , beginning inMarch 2020 , have negatively impactedU.S. and other oil, natural gas and NGL producers. InApril 2020 ,Saudi Arabia ,Russia and other crude oil-producing nations came to an agreement to cut limited amounts of production; however, we cannot predict whether or when oil production and economic activities will stabilize and return to levels seen prior to these events. We expect global equity market volatility experienced in first quarter 2020 to continue at least until the outbreak of COVID-19 stabilizes. In addition to the current commodity price environment, we expect midstream and downstream capacity and storage constraints to continue to have a negative impact on our ability to sell our production. We and other operators have recently encouraged regulatory intervention by state and federal authorities to moderate hydrocarbon production and alleviate storage constraints. If market constraints continue such that storage is unavailable or commodity prices remain depressed, or if regulatory action requires, we may be forced or elect to shut-in some or all of our production or delay or discontinue our drilling plans. If we are forced to shut in production, we will likely incur greater costs to bring the associated production back online. As a result of the factors discussed above, we reduced our 2020 capital budget to less than$700 million , with reported first quarter 2020 capital expenditures of$379 million representing more than 50% of this revised full-year budget. We have also significantly reduced our planned development activity in 2020, including by suspending all new drilling and completion activity in the near-term, and we plan to reactivate operations at a stabilized activity level of four-to-five rigs and one-to-two frac spreads when commodity prices improve. In addition, and in light of this challenging environment, all of Parsley's executive vice presidents and more senior officers elected to reduce their respective 2020 cash compensation by at least 50% when compared to 2019. Global Economic Environment The ongoing effects of COVID-19, coupled with a significant decline in commodity prices, has contributed to equity market volatility and, potentially, the risk of a global recession. We have experienced a sharp decline in the price of our Class A common stock over the first quarter of 2020, a condition that is consistent across our industry. We do not have any debt covenants or other lending arrangements that depend upon our stock price. As ofMarch 31, 2020 , we were in compliance with the financial covenants contained in our revolving credit facility (the "Revolving Credit Agreement"), which provide that our consolidated leverage ratio, as of the end of each fiscal quarter may not exceed 4.0 to 1.0 and our current ratio (based on the ratio of consolidated current assets to consolidated current liabilities), as of the end of each fiscal quarter, may not be less than 1.0 to 1.0. Please see "-Capital Requirements and Sources of Liquidity" and Note 17-Subsequent Events-Ninth Amendment to Revolving Credit Agreement for additional information regarding the Revolving Credit Agreement and the financial covenants contained therein. Our Properties AtMarch 31, 2020 , we held 360,629 gross (256,993 net) leasehold acres. Our identified drilling locations are located inUpton ,Reagan ,Midland ,Howard ,Martin andGlasscock Counties,Texas , in theMidland Basin , andPecos andReeves ,Winkler andWard Counties,Texas , in theDelaware Basin . 38 -------------------------------------------------------------------------------- Table of Contents As ofMarch 31, 2020 , we operated the following wells: Vertical Wells Horizontal Wells Total Area Gross Net Gross Net Gross Net Midland Basin 838 696.8 512 477.1 1,350 1,173.9 Delaware Basin 30 29.2 305 292.4 335 321.6 Total 868 726.0 817 769.5 1,685 1,495.5 As ofMarch 31, 2020 , we held an interest in 2,227 gross (1,571,2 net) wells, including wells that we did not operate. From the commencement of our horizontal drilling program in 2013 throughMarch 31, 2020 , we have placed on production 506 gross (458.7 net) horizontal wells in theMidland Basin and 107 gross (103.1 net) horizontal wells in theDelaware Basin . The table below summarizes the horizontal wells placed on production during the periods indicated: Three Months Ended March 31, 2020 Area Gross Net Midland Basin 28 27.0 Delaware Basin 13 12.8 Total 41 39.8 How We Evaluate Our Operations We use a variety of financial and operational metrics to assess the performance of our oil and natural gas operations, including: •production volumes; •realized prices on the sale of oil, natural gas, and NGLs, including the effect of our commodity derivative contracts; •lease operating expenses; •capital expenditures; •returns on capital invested; and •certain unit costs. Sources of Our Revenues Our production revenues are derived from the sale of our oil and natural gas production, as well as the sale of NGLs that are extracted from our natural gas during processing, and do not include the effects of derivatives. Our production revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. The following table presents the breakdown of our production revenues for the periods indicated: Three Months Ended March 31, 2020 2019 Oil sales 93 % 87 % Natural gas sales 1 % 3 % Natural gas liquids sales 6 % 10 % Other revenues include fees from third parties, including working interest owners in our operated wells, and fees relating to our midstream operations, as well as easement and other surface use fees charged byParsley Minerals, LLC to third parties. 39 -------------------------------------------------------------------------------- Table of Contents Production Volumes The following table presents production volumes for our properties for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 2019 Oil (MBbls) 11,523 7,102 Natural gas (MMcf) 16,667 10,488 Natural gas liquids (MBbls) 3,626 2,436 Total (MBoe) 17,927 11,286 Average net production (Boe/d) 197,000
125,400
Production Volumes Directly Impact Our Results of Operations As reservoir pressures decline, production from a given well or formation decreases. Growth in our future production and reserves will depend on our ability to continue to add proved reserves in excess of our production. Accordingly, we plan to continue adding reserves through the development of our properties as well as through selective acquisitions. Our ability to add reserves through development projects and acquisitions is dependent on many factors, including our ability to raise capital, obtain regulatory approvals, procure contract drilling rigs and personnel and successfully identify and consummate acquisitions. Realized Prices on the Sale of Oil, Natural Gas and NGLs Historically, and especially in recent months, oil, natural gas and NGLs prices have been extremely volatile, and we expect volatility to continue. Because our production consists primarily of oil, our production revenues are more sensitive to fluctuations in the price of oil than they are to fluctuations in the price of natural gas or NGLs. During 2019, the low price for each of NYMEX WTI oil futures and NYMEX Henry Hub gas futures was$45.41 per barrel and$2.07 per MMBtu, respectively. In contrast, during the three months endedMarch 31, 2020 , as a result of the global outbreak of COVID-19 and the competition amongRussia ,Saudi Arabia and other producers for global crude oil market share, prices for oil and natural gas declined significantly, reaching lows of$20.09 per barrel for NYMEX WTI oil futures and$1.60 per MMBtu for NYMEX Henry Hub gas futures. WhileOPEC ,Russia and other allied producers subsequently agreed to reduce production inApril 2020 , oil prices have remained depressed, including falling to negative pricing inApril 2020 . The imbalance between the supply of and demand for oil, as well as the uncertainty around the extent and timing of an economic recovery, have caused extreme market volatility and a substantial adverse effect on commodity prices in March and April. To achieve more predictable cash flow and to reduce our exposure to adverse fluctuations in commodity prices, we enter into derivative arrangements for a portion of our production, with an emphasis on our oil production. By removing a portion of price volatility associated with our oil production, we believe we will mitigate, but not eliminate, the potential negative effects of reductions in oil prices on our cash flow from operations for the relevant periods. See It em 3. Quantitative and Qualitative Disclosures About Market Risk-Commodity Price Risk for information regarding our exposure to market risk, including the effects of changes in commodity prices, and our commodity derivative contracts. We expect to use commodity derivative instruments to hedge our price risk in the future , although our ability to do so economically may be limited in the current commodities price environment as described in "Item 1A. Risk Factors-Some of our commodity hedging transactions limit our potential gains or fail to fully protect us from declines in commodity prices" in this Quarterly Report. Our hedging strategy and future hedging transactions will be determined at our discretion and may differ from our historical hedging strategy. We are not under an obligation to hedge a specific portion of our oil, natural gas or NGLs production. See Note 4-Derivative Financial Instruments to our condensed consolidated financial statements included elsewhere in this Quarterly Report for details regarding the volumes and terms of our derivative instruments as ofMarch 31, 2020 . 40 -------------------------------------------------------------------------------- Table of Contents We will have recognized the following cumulative gains (losses) in the line item Gain (loss) on derivatives on our condensed consolidated statements of operations from net premiums paid or deferred on options that will settle during the following periods (in thousands): Q2 2020$ 8,087 Q3 2020 7,575 Q4 2020 7,575 Q1 2021 (1,205) Q2 2021 (1,205) Q3 2021 (709) Q4 2021 (709) Total$ 19,409 Recent Events Ninth Amendment to Revolving Credit Agreement OnApril 27, 2020 , the Company,Parsley LLC , each of the guarantors thereto,Wells Fargo Bank, National Association , as administrative agent, and the other lenders party thereto, entered into the ninth amendment to the Revolving Credit Agreement (the "Ninth Amendment"). The Ninth Amendment, among other things, modified the terms of the Revolving Credit Agreement to (i) increase the aggregate elected borrowing base commitments from$1.0 billion to$1.075 billion , (ii) reaffirm the borrowing base at$2.7 billion , (iii) extend the maturity date fromOctober 28, 2021 toOctober 28, 2023 , (iv) increase the letters of credit commitments from$30.0 million to$60.0 million , (v) increase the applicable margins for borrowings under the Revolving Credit Agreement to a range of (a) 2.00% to 3.00% for LIBOR based borrowings and (b) 1.00% to 2.00% for alternative base rate based borrowings, with the specific applicable margins determined by reference to borrowing base utilization, (vi) add provisions to facilitate the transition from the use of LIBOR as a benchmark rate for borrowings upon the occurrence of certain events, (vii) add, at times only when the aggregate elected borrowing base commitments are greater than 75% of the borrowing base then in effect and the consolidated cash balance is in excess of$150.0 million , a mandatory prepayment of such excess amount, (viii) add an additional financial covenant of a maximum secured leverage ratio of not more than 2.50 to 1.00 as of the last day of any fiscal quarter for the four fiscal quarters ending on such date, (ix) require a semi-annual scheduled redetermination to occur on or aboutOctober 15, 2020 , and (x) amend certain other negative covenants, schedules and annexes to the Revolving Credit Agreement. Impairment ofProved Oil and Natural Gas Properties Proved oil and natural gas properties are reviewed for impairment periodically or when events and circumstances indicate a possible decline in the recoverability of the carrying amount of such property. We estimate the expected future cash flows of our oil and natural gas properties and compare the undiscounted cash flows to the carrying amount of the oil and natural gas properties, on a field by field basis, to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we will write down the carrying amount of the oil and natural gas properties to estimated fair value. As discussed above, the recent decline in commodity prices in addition to the ongoing effects of COVID-19 have impacted, among other things, our operations, future development plans and expected future cash flows. As a result of these impacts, the carrying amount of certain of the Company's proved oil and natural gas properties exceeded their expected undiscounted future cash flows. The key assumptions used to determine our expected undiscounted future cash flows include, but are not limited to, future commodity prices, future price differentials, future production estimates, estimated future capital expenditures and estimated future operating expenses. The recent significant decline in commodity prices and the ongoing effects of COVID-19 have resulted in business and operational changes impactful to each of the key assumptions mentioned above. We evaluate future commodity pricing for oil and NGLs based on five-year NYMEX WTI futures prices and future commodity pricing for natural gas based on five-year NYMEX Henry Hub futures prices, each of which decreased fromMarch 31, 2019 toMarch 31, 2020 . The estimated decrease in value of undiscounted future cash flows fromMarch 31, 2019 toMarch 31, 2020 is primarily due to decreased commodity prices. 41 -------------------------------------------------------------------------------- Table of Contents As part of our period end reserves estimation process for future periods, we expect changes in the key assumptions used, which could be significant, including updates to future pricing estimates and differentials, updates to future production estimates to align with our anticipated five-year drilling plan and changes in our capital costs and operating expense assumptions. There is a significant degree of uncertainty with respect to the assumptions used to estimate undiscounted future cash flows due to, but not limited to, the risk factors referred to in "Item 1A. Risk Factors" included elsewhere in this Quarterly Report and in the Annual Report. We estimated the fair value of the applicable asset group by discounting the estimated future cash flows using discount rates and other assumptions that market participants would use in their estimates of fair value. AtMarch 31, 2020 , our estimates of commodity prices for purposes of determining discounted future cash flows ranged from oil prices of$29.02 per barrel in 2020 to$57.22 per barrel in 2028. Natural gas prices ranged from$2.03 per Mcf in 2020 to$3.04 per Mcf in 2028. Pricing subsequent to 2028 was escalated based on a 2% inflation factor. These prices were then adjusted for location and quality differentials. The expected future cash flows were discounted using a rate of 11 percent, which we believe is a market-based weighted average cost of capital for industry peers and was deemed appropriate at the time of the valuation for this analysis. As a result, we recognized a non-cash charge against earnings of$4.4 billion during the three months endedMarch 31, 2020 . Of this amount,$3.1 billion and$1.3 billion were attributable to properties in ourMidland andDelaware Basin areas, respectively. AtMarch 31, 2020 , following the recognition of impairment in our significant fields that comprise 100% of our carrying value, our expected undiscounted future cash flows exceeded the carrying value of our proved oil and natural gas properties by an average of 91% per field and, individually, by a minimum of 75%. Due to the demand impacts associated with the global COVID-19 pandemic and the supply impacts associated with the competition amongRussia ,Saudi Arabia and other producers for global crude oil market share, we may experience additional proved and unproved impairments in the future if commodity prices continue to decline or remain low for a prolonged period of time. In addition, negative changes in price differentials or increases in capital or operating costs could also negatively impact the estimated future undiscounted cash flows related to our proved oil and natural gas properties, which could result in additional future impairment. Reserve estimates and related impairments of proved and unproved properties are difficult to predict in a volatile price environment. However, a decrease of 10% in estimated future pricing of oil and natural gas commodities as ofMarch 31, 2020 , would not have resulted in the carrying value of our oil and natural gas properties exceeding the estimated future undiscounted cash flows. Factors Affecting the Comparability of Our Financial Condition and Results of Operations Our historical financial condition and results of operations for the periods presented may not be comparable, either from period to period or going forward, for the following reasons: Capital Expenditures Our drilling, completions and infrastructure activities are capital intensive and require us to make substantial capital expenditures, which vary from year to year. For further information about our capital expenditures, see "-Capital Requirements and Sources of Liquidity." The following table sets forth our capital expenditures for drilling, completions and infrastructure for the periods indicated (in thousands): Three Months Ended March 31, 2020 2019 Capital expenditures$ 378,764 $ 406,304 42
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Results of Operations
Production Revenues
The following table provides the components of our production revenues for the
periods indicated, as well as each period's respective average prices and
production volumes:
Three Months Ended
2020 2019
Production revenues (in thousands):
Oil sales $ 522,172 $ 368,126
Natural gas sales 5,169 14,452
Natural gas liquids sales 32,435 43,785
Total production revenues $ 559,776 $ 426,363
Average realized prices(1):
Oil, without realized derivatives (per Bbls) $ 45.32 $ 51.83
Oil, with realized derivatives (per Bbls) 49.17 49.40
Natural gas, without realized derivatives (per Mcf) 0.31 1.38
Natural gas, with realized derivatives (per Mcf) 0.50 1.33
Natural gas liquids (per Bbls) 8.95 17.97
Average price per Boe, without realized derivatives 31.23 37.78
Average price per Boe, with realized derivatives 33.88 36.20
Production:
Oil (MBbls) 11,523 7,102
Natural gas (MMcf) 16,667 10,488
Natural gas liquids (MBbls) 3,626 2,436
Total (MBoe) 17,927 11,286
Average daily production volume:
Oil (Bbls) 126,626 78,911
Natural gas (Mcf) 183,154 116,533
Natural gas liquids (Bbls) 39,846 27,067
Total (Boe) 197,000 125,400
(1) Average prices shown in the table reflect prices both before and after the effects of
our realized commodity hedging transactions. Our calculation of such effects includes
both realized gains and losses on cash settlements for commodity derivative
transactions and premiums paid or received on options that settled during the period.
The table below shows, for the periods indicated, our average realized oil price as a percentage of the average NYMEX oil price, our average realized natural gas price as a percentage of the average NYMEX gas price, and our average realized NGLs price as a percentage of the average NYMEX oil price. Management uses the realized price to NYMEX margin analysis to analyze trends in our oil, natural gas and NGLs revenues. Realized oil, natural gas and NGLs prices are the actual prices realized at the wellhead, adjusted for quality, transportation fees and costs, differentials, marketing premiums or deductions and other factors that affect the price received at the wellhead. During the three months endedMarch 31, 2020 , most of our oil production was sold at NYMEX WTI and most of our natural gas production was sold at Waha Hub prices. 43
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Three Months Ended March 31,
2020 2019
Average realized oil price ($/Bbl) $ 45.32 $ 51.83
Average NYMEX ($/Bbl) $ 46.07 $ 54.74
Differential to NYMEX
98 % 95 %
Average realized natural gas price ($/Mcf) $ 0.31 $ 1.38
Average NYMEX ($/Mcf) $ 1.87 $ 2.88
Differential to NYMEX
17 % 48 %
Average realized NGLs price ($/Bbl) $ 8.95 $ 17.97
Average NYMEX ($/Bbl) $ 46.07 $ 54.74
Differential to NYMEX
19 % 33 %
As reflected in the table above, the price differential between our average
realized oil price and the average NYMEX oil price was lower during the three
months ended March 31, 2020 than during the three months ended March 31, 2019 .
Widened oil and natural gas basis differentials during the three months ended
March 31, 2019 were largely attributable to industry concerns at that time
regarding the sufficiency of pipeline takeaway capacity for oil, natural gas and
NGLs production. These concerns ebbed during the remainder of 2019 and the first
quarter of 2020, causing the oil price differential to narrow, and, as of March
31, 2020 , we had not experienced material pipeline-related interruptions to our
oil, natural gas or NGLs production.
Following March 31, 2020 , the global supply and demand imbalance described
elsewhere in this Quarterly Report, together with increased concerns regarding
the availability of storage and transportation capacity, has caused our oil
price differential to widen. As a result, our average realized oil price as a
percentage of the NYMEX oil price may be lower during the second quarter of 2020
than during the first quarter of 2020.
Oil, natural gas and NGLs revenues. Our oil, natural gas and NGLs revenues
increased by $133.4 million , or 31.3%, to $559.8 million for the three months
ended March 31, 2020 from $426.4 million for the three months ended March 31,
2019 .
As shown in the following tables, from the three months ended March 31, 2019 to
the three months ended March 31, 2020 , the net dollar effect of the decrease in
oil, natural gas and NGLs prices was $125.7 million and the net dollar effect of
the increase in production volumes of oil, natural gas and NGLs was $259.1
million .
Three months ended
March 31, 2020 Total net dollar effect
Change in prices(1) Production volumes(2) of change
Effect of change in price: (in thousands) (in thousands)
Oil (per Bbls) $ (6.51) 11,523 $ (75,113)
Natural gas (per Mcf) (1.07) 16,667 (17,798)
Natural gas liquids (per Bbls) (9.02) 3,626 (32,739)
Total revenues due to change in price $ (125,650)
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Three months ended
Change in production March 31, 2019 Total net dollar effect
volumes(2) Average prices(1) of change
Effect of change in production volumes: (in thousands) (in thousands)
Oil (MBbls) 4,421 $ 51.83 $ 229,159
Natural gas (MMcf) 6,179 1.38 8,515
Natural gas liquids (MBbls) 1,190 17.97 21,389
Total revenues due to change in
production volumes $ 259,063
(1) Oil and NGLs prices are shown per Bbl and natural gas prices are shown per
Mcf.
(2) Oil and NGLs production volumes are shown in MBbls and natural gas
production volumes are shown in MMcf.
Other revenues
Other revenues increased by $3.7 million to $5.0 million for the three months
ended March 31, 2020 from $1.3 million for the three months ended March 31,
2019 . The increase is predominantly associated with increased water income from
our midstream operations.
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Operating expenses
The following table summarizes our operating expenses for the periods indicated:
Three Months Ended March 31,
2020 2019
Operating expenses (in thousands):
Lease operating expenses $ 73,608 $ 41,172
Transportation and processing costs 14,195 8,257
Production and ad valorem taxes 37,183 27,407
Depreciation, depletion and amortization 274,680 173,723
General and administrative expenses(1) 35,964 38,037
Exploration and abandonment costs 561,611 22,994
Impairment 4,374,253 -
Acquisition costs 14,425 -
Accretion of asset retirement obligations 435 345
Gain on sale of property (10) -
Restructuring and other termination costs(2) 34,769 -
Other operating expenses (income) 169 (811)
Total operating expenses $ 5,421,282 $ 311,124
Expense per Boe:
Lease operating expenses $ 4.11 $ 3.65
Transportation and processing costs 0.79 0.73
Production and ad valorem taxes 2.07 2.43
Depreciation, depletion and amortization 15.32 15.39
General and administrative expenses 2.01 3.37
Exploration and abandonment costs 31.33 2.04
Impairment 244.00 -
Acquisition costs 0.80 -
Accretion of asset retirement obligations 0.02 0.03
Gain on sale of property - -
Restructuring and other termination costs 1.94 -
Other operating expenses (income) 0.01 (0.07)
Total operating expenses per Boe $ 302.40 $ 27.57
(1) General and administrative expenses include stock-based compensation expense
of $6.4 million and $5.3 million for the three months ended March 31, 2020 and
March 31, 2019 , respectively.
(2) Restructuring and other termination costs includes stock-based compensation
expense of $4.8 million for the three months ended March 31, 2020 related to
accelerated vesting.
Lease operating expenses. Lease operating expenses were $73.6 million and $41.2
million for the three months ended March 31, 2020 and March 31, 2019 ,
respectively. The increase is primarily due to the increase in our asset base,
the majority of which is associated with our acquisition of Jagged Peak Energy
Inc. ("Jagged Peak") in January 2020 ("the Jagged Peak Acquisition").
On a per Boe basis, lease operating expenses increased $0.46 per Boe, or 13%, to
$4.11 for the three months ended March 31, 2020 from $3.65 for the three months
ended March 31, 2019 . The increase in lease
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operating expenses per Boe is primarily attributable to the acquired Jagged Peak
properties discussed above, partially offset by increased production volumes.
Transportation and processing costs. Transportation and processing costs, which
represent third-party costs related to certain of our natural gas and NGLs
marketing and processing agreements, were $14.2 million and $8.3 million for the
three months ended March 31, 2020 and 2019, respectively. The increase is
primarily due to the increase in production period over period, as well as plant
electricity charges and other fees. On a per Boe basis, transportation and
processing costs were $0.79 and $0.73 for the three months ended March 31, 2019 ,
respectively. The increase in transportation and processing costs per Boe for
the three months ended March 31, 2020 , as compared to the three months ended
March 31, 2019 , is primarily attributable to increased electricity charges and
other fees.
Production and ad valorem taxes. Production and ad valorem taxes were $37.2
million and $27.4 million for the three months ended March 31, 2020 and 2019,
respectively. On a per Boe basis, production and ad valorem taxes decreased to
$2.07 per Boe for the three months ended March 31, 2020 from $2.43 per Boe for
the three months ended March 31, 2019 .
Overall, for the three months ended March 31, 2020 , as compared to the same
period in 2019, production taxes increased by approximately $3.9 million as a
result of increased production volumes, offset by decreased oil, natural gas and
NGLs prices. Ad valorem taxes increased $5.9 million over the same period,
reflecting higher property valuation assessments by local taxing authorities.
Depreciation, depletion and amortization. Depreciation, depletion and
amortization ("DD&A") expense was $274.7 million and $173.7 million for the
three months ended March 31, 2020 and 2019, respectively.
The increase in DD&A is largely attributable to development activity that
resulted in an increase in costs subject to depletion as of March 31, 2020 , as
compared to March 31, 2019 and a 57% increase in production during the three
months ended March 31, 2020 , as compared to the same period in 2019. These
increases were partially offset by a 35% increase in total proved reserves and a
53% increase in proved developed reserves as of March 31, 2020 , as compared to
March 31, 2019 . The increase in reserves is primarily attributable to the
addition of reserves as a result of the Jagged Peak Acquisition.
On a per Boe basis, DD&A expense decreased to $15.32 per Boe for the three
months ended March 31, 2020 from $15.39 per Boe during the three months ended
March 31, 2019 , primarily due to the increase in total proved and proved
developed reserves as discussed above.
General and administrative expenses. General and administrative expenses were
$36.0 million and $38.0 million during the three months ended March 31, 2020 and
2019, respectively. The decrease for the three months ended March 31, 2020 , as
compared to the three months ended March 31, 2019 , is primarily due to ongoing
corporate cost savings initiatives.
On a per Boe basis, general and administrative expenses were $2.01 and $3.37 for
the three months ended March 31, 2020 and 2019, respectively. The decreases are
a result of production volume growth outpacing general and administrative
expenses, as well as the corporate cost savings initiatives discussed above.
Exploration and abandonment costs. The following table provides a breakdown of
exploration and abandonment costs incurred for the periods indicated (in
thousands):
Three Months Ended March 31,
2020 2019
Leasehold abandonments and impairments $ 556,512 $ 22,189
Geological and geophysical costs 5,099 797
Other - 8
Total exploration and abandonment costs $ 561,611 $ 22,994
During the three months ended March 31, 2020 and 2019, we recognized leasehold
abandonment and impairment charges of approximately $556.5 million and $22.2
million respectively. As a result of the recent
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significant commodity price decline and the ongoing effects of COVID-19, as
discussed in more detail in "-Outlook" and "-Recent Events", we have reduced our
development activity plans for 2020 and begun proactively shutting-in certain
vertical wells with modest production spanning multiple counties. The acreage
held by these wells is identified as unproved property, held by production
("HBP") and the production from these wells has generally met the associated
lease requirements.
Our evaluation involved reviewing the impact that the commodity price decline
and the ongoing effects of COVID-19 would have on operated and non-operated HBP
acreage. During the three months ended March 31, 2020 , we recorded $531.1
million of leasehold abandonment and impairment charges associated with the
probable loss of HBP operated and non-operated acreage due to shutting-in
vertical wells with modest production or because we believe the applicable
operator has no current plans to drill or extend the applicable leases prior to
their expiration. Additionally, during the three months ended March 31, 2020 , we
recorded non-cash leasehold abandonment and impairment charges of $13.0 million
relating to acreage expiring in future years and $12.4 million associated with
leases expiring during the current year, in each case because we have no current
plans to drill or extend the leases prior to their expiration.
During the three months ended March 31, 2020 and 2019, we incurred geological
and geophysical expenses of $5.1 million and $0.8 million . Our geological and
geophysical expenses consist of the costs of acquiring and processing seismic
data, geophysical data and core analysis, primarily relating to geoscientific
analysis of our acreage. The increase in geological and geophysical expenses for
the three months ended March 31, 2020 , as compared to the three months ended
March 31, 2019 , is primarily due to transfer fees and costs relating to the
acquisition of seismic data in connection with the Jagged Peak Acquisition.
We recognized other exploration costs of $8.0 thousand during the three months
ended March 31, 2019 , which includes research and other similar costs. There
were no such costs incurred during the three months ended March 31, 2020 .
Impairment. As a result of the carrying amount of certain of our proved oil and
natural gas properties being less than their expected undiscounted future cash
flows, we recognized a non-cash charge against earnings of $4.4 billion as
discussed in more detail in Note 16-Disclosures About Fair Value to our
consolidated financial statements included elsewhere in this Quarterly Report.
There were no such costs for the three months ended March 31, 2019 .
Acquisition costs. During the three months ended March 31, 2020 , we incurred
$14.4 million in acquisition costs primarily relating to the Jagged Peak
Acquisition that include non-recurring legal costs, advisory costs, accounting
and valuation costs, consulting costs and other general and administrative
expenses directly associated with the acquisition. During the three months ended
March 31, 2019 , we incurred no such acquisition costs.
Restructuring and other termination costs. During the three months ended
March 31, 2020 , we incurred one-time restructuring and other termination costs
of $34.8 million associated with the Jagged Peak Acquisition. We incurred no
such restructuring and other termination costs for the three months ended
March 31, 2019 .
Other operating expenses (income). During the three months ended March 31, 2020 ,
other operating expenses included an impairment expense of $0.1 million
associated with leasehold improvements for office space in Austin, Texas that we
are no longer using as discussed in Note 16-Disclosures About Fair Value to
our consolidated financial statements included elsewhere in this Quarterly
Report. During the three months ended
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Other income (expense)
The following table summarizes our other income and expenses for the periods
indicated:
Three Months Ended March 31,
2020 2019
Other income (expense) (in thousands):
Interest expense, net $ (41,679) $ (33,002)
Loss on early extinguishment of debt (21,388) -
Gain (loss) on derivatives 545,692 (119,687)
Change in TRA liability 70,529 -
Interest income 249 291
Other (expense) income (3,983) 58
Total other income (expense), net $ 549,420 Interest expense, net. Interest expense, net for the three months endedMarch 31, 2020 and 2019 was$41.7 million and$33.0 million , respectively. The$8.7 million increase is primarily due to$6.0 million of interest expense related to the assumption of the$500.0 million in aggregate principal amount of 5.875% senior notes due 2026 (the "2026 Notes") that we assumed in connection with the Jagged Peak Acquisition,$2.2 million of interest expense related to the newly issued$400.0 million in aggregate principal amount of 4.125% senior unsecured notes due 2028 (the "2028 Notes"), and increased borrowings under the Revolving Credit Agreement, offset by the decrease in interest expense resulting from our redemption of$400.0 million in aggregate principal amount of outstanding 6.250% senior unsecured notes due 2024 (the "2024 Notes"), as discussed in Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report. Loss on early extinguishment of debt. We recorded a$21.4 million loss on early extinguishment of debt during the three months endedMarch 31, 2020 due to the redemption of the 2024 Notes. No such expenses were incurred for the three months endedMarch 31, 2019 . Gain (loss) on derivatives. We recognized a gain on derivatives of$545.7 million and a loss on derivatives of$119.7 million during the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively. The change in gain (loss) on derivatives for each of the periods is attributable to changes in commodity prices as well as the restructuring of our hedge portfolio. Where applicable, a decrease in the value of our commodity portfolio is generally attributable to higher commodity prices and, conversely, an increase in the value of our commodity portfolio is generally attributable to lower commodity prices. Change in TRA liability. We recorded$70.5 million in other income during the three months endedMarch 31, 2020 associated with the write-off of the Company's TRA liability primarily resulting from a valuation allowance recorded against the associated deferred tax asset. There was no such income recorded during the three months endedMarch 31, 2019 . Interest income. Interest income was$0.2 million and$0.3 million during the three months endedMarch 31, 2020 and 2019, respectively. Other (expense) income. Other expense was$4.0 million and other income was$0.1 million for the three months endedMarch 31, 2020 and 2019, respectively. The increase in other expense for the three months endedMarch 31, 2020 , as compared to the same period in 2019, is primarily attributable to the$3.4 million material and supplies valuation adjustment as discussed in Note 16-Disclosures About Fair Value to our consolidated financial statements included elsewhere in this Quarterly Report, decrease in income from our equity investment inSpraberry Production Services, LLC and increases in expense in other miscellaneous items. Income Tax Benefit During the three months endedMarch 31, 2020 and 2019, we recognized income tax benefits of$571.0 million and$7.8 million , respectively. During the three months endedMarch 31, 2020 , we recognized impairment of proved oil and natural gas properties of$4.4 billion and leasehold abandonment and impairment of unproved oil and natural gas properties of$556.5 million . As a result, the deferred tax balance changed from a net deferred tax 49 -------------------------------------------------------------------------------- Table of Contents liability to a net deferred tax asset as ofMarch 31, 2020 , which resulted in the establishment of a valuation allowance against the net deferred tax assets atMarch 31, 2020 . We recognized the valuation allowance as a discrete item in our estimated annual effective tax rate. The increase in income tax benefit during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 is predominately associated with the impairments and leasehold abandonments discussed above, as well as net loss attributable to noncontrolling ownership interests and the impact of state income taxes. These increases are offset by the impact of the valuation allowance recorded against our net deferred tax asset balance. Capital Requirements and Sources of Liquidity The following table sets forth our capital expenditures for drilling, completions and infrastructure for the periods indicated (in thousands): Three Months Ended March 31, 2020 2019 Capital expenditures$ 378,764 $ 406,304 As a result of the significant commodity price decline and the ongoing effects of COVID-19 as discussed in "-Recent Events," we reduced our 2020 budget for capital development expenditures to be less than$700 million , of which approximately 90% is expected to be used for drilling, completions and equipment, and approximately 10% is expected to be used for infrastructure and other expenditures. We have also significantly reduced our planned development activity in 2020, including by suspending all new drilling and completion activity in the near-term, and we plan to reactivate operations at a stabilized activity level of four-to-five rigs and one-to-two frac spreads when commodity prices have sufficiently improved to justify increased activity. As a result of our reduced development activity, we expect to realize lower service and equipment costs in 2020. We expect approximately 30% to 35% of this budget to be associated with drilling and completions for proved undeveloped reserves as ofDecember 31, 2019 . Our capital budget excludes any amounts that may be paid for acquisitions. The amount and timing of capital expenditures during the remainder of 2020 is largely discretionary and within our control and will depend, in large part, on commodity prices. We could choose to defer a portion of these planned capital expenditures depending on a variety of factors, including, but not limited to, the success of our drilling activities, prevailing and anticipated prices for oil and natural gas, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other working interest owners. Based upon current oil and natural gas price expectations for fiscal year 2020, we believe that our cash on hand, cash flow from operations and borrowings under the Revolving Credit Agreement will be sufficient to fund our operations through 2020. As ofMarch 31, 2020 , our liquidity was as follows (in millions): Cash and cash equivalents 45.3 Revolving Credit Agreement availability 693.3 Liquidity$ 738.6 Pro forma for our entry into the Ninth Amendment to the Credit Agreement, our liquidity as ofMarch 31, 2020 was approximately$813.6 million . Future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices, our commodity derivative contracts and the extent to which our production is hedged and the significant capital expenditures required to more fully develop our properties. For example, we expect a portion of our future capital expenditures to be financed with cash flows from operations derived from wells drilled in drilling locations not associated with proved reserves on ourDecember 31, 2019 reserve report. The failure to achieve anticipated production and cash flows from operations from such wells could result in a reduction in future capital spending. Further, our capital expenditure budget for 2020 does not allocate any amounts for acquisitions of oil and natural gas properties. In the event we make additional acquisitions and the amount of capital required is greater than the amount we have available for acquisitions at that time, we could be required to reduce the expected level of capital expenditures or seek additional capital. If we require additional capital for that or other reasons, we may seek such capital through reserve base borrowings, joint venture partnerships, production payment financings, asset sales, 50 -------------------------------------------------------------------------------- Table of Contents offerings of debt or equity securities or other means. We cannot assure you that needed capital will be available on acceptable terms or at all, particularly in light of current market conditions. If we are unable to obtain funds when needed or on acceptable terms, we may be required to further curtail our current drilling programs, which could result in a loss of acreage through lease expirations. In addition, we may not be able to complete acquisitions that may be favorable to us or finance the capital expenditures necessary to replace our reserves. We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other debt or equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. Dividends The following table sets forth information with respect to cash dividends and distributions declared by our board of directors during the three months endedMarch 31, 2020 : Total Dividend/Distribution Dividend/Distribution Payment(3) Declaration Date(1) Record Date Payment Date Amount(2) (in thousands) January 23, 2020 March 10, 2020 March 20, 2020 $ 0.05 $ 20,603 (1) OnMay 4, 2020 , our board of directors declared a cash dividend of$0.05 per share of Class A common stock and, in its capacity as the managing member ofParsley LLC , a corresponding distribution of$0.05 per PE Unit, payable onJune 19, 2020 to holders of Class A common stock and PE Unitholders of record as ofJune 9, 2020 . The portion of theParsley LLC distribution attributable to PE Units held by the Company will be used to fund the quarterly dividend on issued and outstanding shares of Class A common stock. (2) Per share of Class A common stock and per PE Unit. The portion of theParsley LLC distribution attributable to PE Units held by the Company was used to fund the quarterly dividend on issued and outstanding shares of Class A common stock. (3) Reflects total cash dividend and distribution payments made, or to be made, to holders of Class A common stock and PE Unitholders (other than the Company) as of the applicable record date. We did not pay dividends on our Class A common stock or distributions on our PE Units during the three months endedMarch 31, 2019 . The decision to pay any future dividends is solely within the discretion of, and subject to approval by, our board of directors. Our board of directors' determination with respect to any such dividends, including the record date, the payment date and the actual amount of the dividend, will depend upon our results of operations, financial condition, liquidity, capital requirements, contractual restrictions, restrictions imposed by applicable law and other factors that the board deems relevant at the time of such determination. In addition, our debt agreements and the Parsley LLC Agreement place certain restrictions onParsley LLC's ability to distribute cash to PE Unitholders (including to us to fund dividends to holders of Class A common stock). Cash Flows The following table summarizes our cash flows for the periods indicated (in thousands): Three Months Ended March 31, 2020 2019 Net cash provided by operating activities$ 385,943 $ 213,059 Net cash used in investing activities (238,958)
(359,307)
Net cash used in financing activities (122,450)
(6,588)
Cash flows provided by operating activities. Net cash provided by operating activities was approximately$385.9 million and$213.1 million for the three months endedMarch 31, 2020 and 2019, respectively. Net cash provided by operating activities increased primarily due to a$137.1 million increase in total revenues due to increased production volumes offset by the decrease in commodity prices. Additionally, we had an increase of$90.6 million associated with changes in working capital, net of acquisitions, offset by a$95.2 million increase in cash 51 -------------------------------------------------------------------------------- Table of Contents based operating expenses, in each case, during the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 . Cash based operating expenses include lease operating expenses, transportation and processing costs, production and ad valorem taxes, cash general and administrative expenses, rig termination, restructuring and other termination costs, acquisition costs and certain other operating expenses. Cash flows used in investing activities. Net cash used in investing activities was approximately$239.0 million and$359.3 million for the three months endedMarch 31, 2020 and 2019, respectively. The reduction in the amount of cash used in investing activities was due primarily to a$70.8 million decrease in development costs related to our oil and natural gas properties and$53.3 million in cash received upon completion of the Jagged Peak Acquisition, which is described in more detail in Note 6-Acquisitions and Divestitures to our condensed consolidated financial statements included elsewhere in this Quarterly Report. Cash flows used in financing activities. Net cash used in financing activities was$122.5 million and$6.6 million for the three months endedMarch 31, 2020 and 2019, respectively. Net cash used in financing activities increased primarily due to increased net debt activity of$90.2 million as discussed in Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report, dividends paid of approximately$20.6 million during the three months endedMarch 31, 2020 and$5.7 million increased payments primarily relating to the vesting of certain stock-based awards as a result of the Jagged Peak Acquisition. Capital Sources Revolving Credit Agreement. See Note 8-Debt and Note 17-Subsequent Events-Ninth Amendment to the Revolving Credit Agreement to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding the Revolving Credit Agreement. 5.875% Senior Unsecured Notes due 2026. See Note 8-Deb t to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding the 2026 Notes. 4.125% Senior Unsecured Notes due 2028. See Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report for information regarding the 2028 Notes. Derivative Activity. We plan to continue our practice of entering into hedging arrangements to (i) reduce the impact of commodity price volatility on our cash flow from operations and (ii) support our annual capital budgeting and expenditure plans. Under this strategy, we intend to continue our historical practice of entering into commodity derivative contracts at times and on terms desired to maintain a portfolio of commodity derivative contracts covering a portion of our projected oil production. Working Capital Our working capital totaled($149.1) million and($397.3) million atMarch 31, 2020 andDecember 31, 2019 , respectively. Our collection of receivables has historically been timely, and losses associated with uncollectible receivables have historically not been significant. Our cash and cash equivalents totaled$45.3 million and$20.7 million atMarch 31, 2020 andDecember 31, 2019 , respectively. The$24.4 million increase in cash and cash equivalents was largely related to an increase in derivative-related activity, including$32.5 million received in connection with restructuring our derivative portfolio and$16.9 million received from positions that settled during the current period, which was offset by$14.5 million of deferred premium payments. Additionally, these cash receipts were offset by payments made for costs associated with the development of our oil and natural gas properties, as described in "-Factors Affecting the Comparability of Our Financial Condition and Results of Operations-Capital Expenditures." Due to the costs incurred related to our drilling program, we may incur additional working capital deficits in the future. We expect that our pace of development, production volumes, commodity prices and differentials to NYMEX prices for our oil and natural gas production will continue to be the largest variables affecting our working capital. Contractual Obligations We had no material changes, other than described below, in our contractual commitments and obligations during the three months endedMarch 31, 2020 from the amounts listed under "Part II, Item 7. Management's 52 -------------------------------------------------------------------------------- Table of Contents Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations" in the Annual Report. Assumption of Jagged Peak Notes and Payoff of Jagged Peak Revolving Credit Facility In connection with the completion of the Jagged Peak Acquisition,Parsley LLC assumed Jagged Peak's guarantee of the 2026 Notes and repaid in full all outstanding obligations under Jagged Peak's credit facility by borrowing under the Revolving Credit Agreement, as discussed in Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report. Termination of Indenture In connection with the issuance of the 2028 Notes, the Company redeemed in full the 2024 Notes and the indenture governing such 2024 Notes was satisfied and discharged. The Company also entered into a new indenture in connection with the issuance of the 2028 Notes. For additional information, see Note 8-Debt to our condensed consolidated financial statements included elsewhere in this Quarterly Report. Critical Accounting Policies and Estimates There have not been any material changes during the three months endedMarch 31, 2020 to the methodology applied by management for critical accounting policies previously disclosed in the Annual Report. Please read "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Annual Report for further description of our critical accounting policies. Off-Balance Sheet Arrangements As ofMarch 31, 2020 , we were party to certain transportation and sale agreements providing for the delivery of fixed and determinable quantities of oil and natural gas, which we enter into in the ordinary course of business. If production volumes are not sufficient to meet these contracted delivery commitments, we may be subject to deficiency fees unless we purchase commodities in the market to satisfy such commitments. See Note 12-Commitments and Contingencies to our condensed consolidated financial statements included elsewhere in this Quarterly Report. We do not otherwise maintain off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources which are not disclosed in the notes to the condensed consolidated financial statements. 53
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