Centennial Resource Development (NASDAQ: CDEV) is now expected to generate $635 million cash flow positive in 2022 at $100 WTI oil while increasing oil production. It also appears capable of providing a similar amount of positive cash debit in 2023 at the current strip.
This would allow Centennial to eliminate its net by the end of 2023 and complete its $350 million share buyback program. Centennial appears to be a reasonably good value at the moment, as at less than $8 per share, it appears to be priced for long-term (post-2022) oil prices low of $60.
Centennial is ramping up production relatively quickly (at least compared to the typical producer) and expects oil production growth of 10-15% this year. It estimated that its first-quarter 2022 wells would be paid for in about four months at current strip prices. This is a strong performance, although certainly helped by spot prices for oil over $100 and natural gas over $8.
2022 Outlook at $100 WTI Oil
With a current band around $100 of WTI oil (and NYMEX gas over $7), Centennial is now expected to generate $1.688 billion in oil and gas revenue in 2022.
Centennial’s hedges have an estimated negative value of $204 million for 2022. Its 2023 hedges have only a modest amount (less than $20 million) of negative value at the current strip due to less hedged volumes and higher cap/swap prices.
|Type||Barrels/Mcf||$ per barrel/Mcf||millions of dollars|
|Gas||40 701 150||$6.75||$275|
Although Centennial has not changed its cost forecast, I now assume that some items (such as rental operating expenses and capital expenditures) are at the upper end of its original forecast range. This reflects the cost inflation trends that are currently being reported in the industry.
Centennial has been efficient in early 2022 so far, completing six more wells than expected in Q1 2022 without changing its Q1 investment expectations. If capital spending is at the top of the full-year forecast, it could also average above the midpoint of the production forecast.
|millions of dollars|
|G&A in cash||$49|
|Collection, transport and processing||$87|
So, Centennial is now expected to be $635 million cash flow positive for 2022 with an average of $100 WTI oil.
It may be able to generate a similar amount of positive cash flow in 2023 at current strip prices, although that also depends on its growth plans. It currently maintains a two-rig drill program and could theoretically add a third rig at some point in the future. However, Centennial is confident that it can continue to ramp up production with two rigs for now.
Share buybacks and taxes
Centennial could thus end 2022 with approximately $196 million in net debt before any share buybacks. It is expected to begin share buybacks soon under its $350 million stock buyback program. Centennial had discussed starting share buybacks once its leverage was reduced to 1.0x or less, and its leverage was 1.1x at the end of the first quarter of 2022.
Centennial also noted that it does not expect to become a federal cash taxpayer until 2024. Thus, it should be able to eliminate its net debt and complete its $350 million stock buyback program before having to pay. pay taxes in cash.
Notes on assessment
I now estimate the value of Centennial at around $9.60 per share in the long term (post 2022) $70 of WTI oil. This has increased slightly since my last estimate due to Centennial’s higher projected cash flow for 2022.
At less than $8 per share, it looks like Centennial is pricing long-term WTI oil at $60, assuming it can generate $635 million in cash flow positive in 2022.
Centennial appears capable of generating $635 million in cash flow positive in 2022 while increasing oil production by 10% to 15%. It looks capable of generating a similar amount of positive cash flow in 2023 as well as at the current band if it continues with a dual-platform development program.
This would allow Centennial to eliminate its net debt by the end of 2023 while completing its $350 million share buyback program. Centennial appears to be reasonably priced for a current low $60 long-term WTI oil price environment.