Permian Resources Corp

NYSE:PR

Earnings Call Transcript 2020-Q1

[Operator]

Good morning and welcome to Centennial Resource Development's conference call to discuss its first quarter 2020 earnings. Today's call is being recorded. A replay of the call will be accessible until May 19, 2020, by dialing [phone] and entering the conference ID number 6939844 or by visiting Centennial's website at www.cdevinc.com.

At this time, I will turn the call over to Hays Mabry, Centennial's Director of Investor Relations, for some opening remarks. Please go ahead.

[Hays Mabry, executive]

Thank you. And thank you all for joining us on the company's first quarter call. Presenting on the call today are Sean Smith, our Chief Executive Officer; George Glyphis, our Chief Financial Officer; and Matt Garrison, our Chief Operating Officer. Yesterday, May 4, we filed a Form 8-K with an earnings release reporting first quarter earnings results for the company and operational results for our subsidiary, Centennial Resource Production, LLC. We also posted an earnings presentation to our website that we will reference during today's call. You can find the presentation on our website home page or under presentations at www.cdevinc.com.

I would like to note that many of the comments during this earnings call are forward-looking statements that involve risks and uncertainties that could affect our actual results and plans. Many of these risks are beyond our control and are discussed in more detail in the risk factors and forward-looking statements sections of our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter ended March 31, 2020, which was also filed with the SEC yesterday. Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance, and actual results or developments may differ materially.

We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release or presentation, which are both available on our website.

With that, I will turn the call over to Sean Smith, our CEO.

[Sean Smith, executive]

Thank you, Hays. I'd like to start off by extending our thoughts and prayers to all those who have been impacted by the coronavirus as well as say thank you to all of the first responders, health care workers and other essential service personnel. We are truly indebted to these individuals who are on the front lines fighting this pandemic.

In response to COVID-19, even before state and local officials in Colorado and Texas issued mandatory stay-at-home orders, Centennial had already instituted a work-from-home policy for all of our employees in the Denver and Midland offices. While our office employees are still working from home, the organization has been able to continue to perform all our field operations as well as back- and front-office functions without any material disruption to our business. This is a direct result of our team's resiliency, positive attitude and teamwork. Keeping our employees and business partners and all their families healthy will remain a top priority.

I think everyone listening in on the call is aware of COVID-19's impact on global oil demand, which has resulted in a steep decline in crude oil prices. Now more than ever, we will remain focused on our balance sheet and liquidity. We acted quickly to suspend our drilling and completions activity in response to low oil prices. And going forward, we'll be keenly focused on reducing costs, protecting the balance sheet and managing our liquidity. Given the potential for near-term shut-in volumes and declining drilling activity by both U.S. and international producers, we believe there is a good chance that oil prices will be higher towards the end of this year. Therefore, our capital budget allows us the flexibility to resume a modest amount of activity during the second half of the year depending on prices.

As many of you saw in today's earnings release, we plan to voluntary curtail up to 40% of our production in May. This is a prudent financial decision given projected netback prices during the month of May. Future curtailment decisions, both voluntarily due to price or involuntary due to midstream congestion or storage constraints, will be made on a month-to-month basis depending upon commodity prices and other contractual agreements.

In addition to the announced capital reductions, we've taken several steps in order to significantly reduce our cost structure. Given the current commodity price environment, we recently made the difficult decision to reduce the size of our workforce. While we are extremely proud of the organization that we've built over the past 3 years, this reduction will position us to navigate the uncertain macro environment and to better align the company organizationally to anticipated activity levels. Additionally, we made reductions to employee salaries across the board, with the largest reductions being taken at the senior management level. Specifically, the Vice Presidents, George and I have reduced our salaries 10%, 15% and 25%, respectively. The Board of Directors has also elected to reduce their cash retainer by 25%. These are unprecedented and challenging times for our industry, including Centennial. But as you can see from the actions outlined today, we are acting swiftly and decisively in order to protect the business.

With that, I will turn the call over to George to review the financial results.

[George Glyphis, executive]

Thank you, Sean. I'll first review our Q1 financial results, and then I'll summarize some of the financial aspects of our response to the current oil price environment.

Turning to our financials on Slide 12 of the earnings presentation. Net oil production for the first quarter averaged approximately 41,500 barrels per day, which was up 2% over the prior year period but represents an 8% decrease from a strong Q4. Average net oil equivalent production totaled approximately 71,800 barrels per day, which was relatively flat with the prior year period and represents a 10% reduction from Q4. I will also note that our primary natural gas processor operated in ethane rejection for all of Q1, which contributed to the decline in NGL volumes during the quarter.

While we had very solid well results during the quarter, volumes were impacted by the timing of completions and offset frac shut-ins. Of the 22 wells that were brought online during the quarter, which was approximately 20% fewer than Q4, nearly half of the wells were completed in March and, therefore, had a limited impact on production. Revenues totaled approximately $193 million, which was a 25% decrease compared to Q4, primarily as a result of lower production and weaker commodity price realizations across all 3 product streams. Excluding the impact of basis hedges, Centennial's realizations were 98% of WTI or $45.14 per barrel for the quarter compared to $53.25 in Q4.

Turning to unit costs. We continued our positive momentum from last quarter. LOE per barrel decreased by 6% from Q4 to $4.99 per barrel primarily as a result of a reduction in equipment rentals, ESP, water disposal and chemical costs as well as lower workover expense. Matt will provide some details on our LOE shortly.

Cash G&A for Q1 was $1.99 per barrel, down 6% from the previous quarter. DD&A decreased by 8% to $15.49 per barrel due to reserve adds during the quarter. Lastly, GP&T expense also decreased 8% to $2.59 per barrel. Combined, these unit cost metrics were down almost $2 per barrel versus last quarter despite the fact that total equivalent production declined by 10%.

In Q1, we recorded a GAAP net loss attributable to our Class A common stock of $548 million due to a $611 million noncash impairment charge, primarily related to proved oil and gas properties. The impairment was driven by lower commodity price futures curves for both oil and natural gas at the end of Q1. Adjusted EBITDAX totaled approximately $114 million, down from $160 million in Q4 due to lower commodity prices and volumes, which were partially offset by reduced operating costs.

Shifting to CapEx. During Q1, we ran 5 rigs for a majority of the quarter before reacting to the significant decline in crude oil prices. For context, we entered March operating a 5-rig program with 2 completion crews and by early April had already lowered our number of rigs and dedicated frac crews to 0. I'll note that we incurred approximately $1.5 million of rig termination fees in Q1.

For the quarter, we spud 17 gross wells and completed 22 compared to 22 and 27 gross wells, respectively, during the prior quarter. As a result of lower activity and continued well cost reductions, Q1 D&C CapEx declined to $147 million or 10% lower compared to Q4. Facilities and infrastructure capital totaled approximately $25 million, which was down almost 20% from Q4 due to the lower level of completion activity in Q1. We also incurred approximately $3 million in land capital. Overall, Centennial incurred approximately $175 million of total capital expenditures during the first quarter compared to $197 million in Q4, which represents an 11% reduction quarter-to-quarter and marked our fifth consecutive decline in quarterly CapEx.

On Slide 8, we summarize our capital structure and liquidity position. Following our spring redetermination process, our borrowing base was lowered from $1.2 billion to $700 million. At the end of the quarter, we had $4 million of cash on hand and $235 million of borrowings on our credit facility. As of March 31 and pro forma for our updated borrowing base, Centennial had total liquidity of $468 million. Lastly, Centennial's net debt to LTM EBITDAX at March 31 was 2x, and net debt to book capitalization was 29%.

Turning now to our response to the lower commodity price environment. There are several key items I wanted to address. First, on CapEx, as we've already pointed out and as detailed on Slide 11 -- excuse me, Slide 10, we have suspended activity for the foreseeable future and currently have no drilling rigs or completion crews operating. You may recall in mid-March that we have reduced our rig count from 5 to 1, and we suspended our original annual guidance. Subsequently, we recently announced a new 2020 annual capital budget of $240 million to $290 million, which reflects the suspension of all near-term activity but at the high end allows for the resumption of modest completion and rig activity during the second half of the year, assuming prices improve. Our new CapEx guidance is a 60% reduction from the original roughly 4-rig plan that we had initially guided to for the year. However, this is an even more dramatic decline considering that approximately 2/3 of our estimated total capital expenditures for the year were incurred during Q1. Approximately 85% of our revised annual capital budget is anticipated to be related to D&C capital.

For Q2, it is important to note that we completed 4 wells in the first half of April. So while we expect to run 0 rigs for essentially all of the second quarter, we'll still have associated CapEx related to the activity outlined above. Also, please keep in mind that even if we don't have any drilling or completion activity during a given quarter, we will still incur a minimal amount of fixed or recurring capital related to capitalized workovers, infrastructure and land. For example, should we not spud or complete any wells during a quarter, we'd most likely still have $10 million to $15 million in total CapEx related to those items.

Lastly, given the ongoing macro uncertainty from COVID-19, oil market volatility and the potential for both future voluntary and involuntary curtailments, we are maintaining our previous suspension of annual guidance related to production and unit costs as we can't reasonably estimate those items at this time.

Moving to expenses. We've significantly lowered our cost structure by making the difficult decision to implement a reduction in force. In total, we expect these reductions, combined with other non-payroll initiatives, to reduce Centennial's original 2020 cash G&A budget by approximately 30% or $18 million to $20 million on an annualized go-forward basis. Given the timing of the reduction and associated onetime costs of approximately $3 million to $4 million, we estimate our full year 2020 cash G&A budget will be approximately 15% lower versus original guidance. We will continue to scrutinize costs across the organization, both in the field and in our corporate offices to ensure that we are running as efficiently as possible.

Turning to hedging. Starting in March, we implemented significant levels of fixed price oil hedges, primarily in Q2 and Q3, to protect against further declines in WTI prices, which, unfortunately, we are seeing play out in real time. Slide 11 provides a summary of our hedge positions. In total, we have an average of approximately 19,400 barrels of oil per day hedged for the remainder of the year, principally in Q2 and Q3, at a weighted average price of just under $27 per barrel. We have begun to hedge Q4 volumes, and we'll be actively adding to our oil hedge position for Q4 2020 and 2021 in the coming quarters.

Turning to our credit facility. As I touched on earlier, our borrowing base was redetermined at $700 million, which provides the company with ample liquidity. Importantly, we also announced that our credit facility was amended to eliminate the total debt leverage covenant through year-end 2021. This covenant will be replaced with a first lien debt to EBITDAX leverage covenant that begins at 2.75x and steps down to 2.5x in the first quarter of 2022. We believe these changes provide additional flexibility in a difficult environment, and we appreciate the support of our bank group.

Finally, on April 22, we announced the initiation of a debt exchange offer where existing bondholders have the opportunity to exchange their senior unsecured notes into new senior secured notes. Depending on the number of holders who tender their existing senior unsecured notes, the transaction could materially reduce the amount of total debt outstanding and lower annual interest expense. The early tender date of this exchange occurs today at 5:00 p.m. Eastern Time, while the final expiration date is May 19. We'll update the market accordingly when results are available but will not be addressing any questions on the exchange during the Q&A portion of today's call.

Before I pass it off to Matt Garrison, I'd like to welcome him to the executive management team. Matt was promoted to Chief Operating Officer last month and has led our Geosciences Department since 2016. He was instrumental to our early growth efforts and the company's initial entry into the northern Delaware. Before Centennial, Matt worked at EOG for 9 years, primarily in their Midland office, focusing on exploration and development in the Delaware Basin. Sean and I would like to congratulate Matt on his new well-deserved position.

And with that, I'll turn the call over to Matt to review operations.

[Matt Garrison, executive]

Thank you, George. This was another solid quarter for the operations team, highlighted by continued reductions in D&C and unit costs. Overall, well results during the quarter were in line with our expectations. But as George alluded to earlier, first quarter oil volumes were impacted by our March weighted completion schedule as well as higher-than-expected offset shut-ins during February. Thus, despite solid well results, the majority of our Q1 completions had a limited impact on first quarter production due to timing.

Turning to the cost side. During the quarter, we continued to build upon our recent drilling and completions efficiencies, which have been highlighted in the past 2 earnings calls. Slide 6 details our ongoing improvement in spud to rig release and completion stages pumped per day. Overall, these efforts resulted in a 9% reduction to our drilling cost per foot and a 13% reduction to our completed lateral cost per foot in the first quarter compared to the second half of last year. Most importantly, I believe we will continue to see improvements in both our cost and efficiency metrics when activity resumes.

During downturns such as this, it's important to manage our controllable costs. Sean mentioned our recent G&A reductions, and we've also worked to find ways to lower our LOE costs. As you can see on Slide 5, first quarter LOE of $4.99 per Boe represents a 6% reduction from Q4 and a 17% reduction from Q3 levels. This decrease is the result of a number of projects undertaken by our team dating back to around this time last year. First, we've been able to save a significant amount in electricity costs throughout our operating base. We've been gradually transitioning more facilities off of generators and on to electrical grid power, which saves money on equipment rentals. Additionally, Phase 1 of our company-owned electric substation will be operational this month, allowing us to shift further away from generated (sic) [ generator ] provided power. Second, we've had an ongoing effort to transition more of our artificial lift methods from ESPs to gas lift, which has benefits from both a cost and production standpoint. The increased reliability associated with gas lift results in fewer overall workovers, which directly impacts the bottom line by providing stability to the base production. Third, we've taken a hard look at our chemical providers and our overall usage needs. And in doing so, we found that we can cut costs and optimize our usage in the field.

Lastly, as an overall improvement in our operating efficiencies at the field level, several LOE categories have seen quarter-over-quarter declines driven by our Pecos and Hobbs production operations staff. These smaller categories are starting to show up in a very big way, and we expect for these trends to continue going forward. I'd note that none of these projects are one-and-done in nature. These are ongoing cost-saving initiatives that we'll be focused on throughout the year. Going forward, our team will continue to analyze every dollar spent, looking for additional ways to shave costs.

Before I pass it back to Sean, I'll provide a quick update to our pending SWD divestiture. As previously announced, in February, we entered into a purchase and sale agreement with WaterBridge to divest our SWD and associated water infrastructure in Texas for $225 million, consisting of cash and incentive payments. That transaction remains pending, and either party may terminate that transaction if closing does not occur on or before May 15, 2020.

And with that, I'll turn it over to Sean for closing remarks.

[Sean Smith, executive]

Thanks, Matt. As you heard from our comments this morning, protecting the balance sheet will remain our #1 priority during these times.

Before we go to Q&A, I'd like to quickly recap the steps we've taken in order to achieve this goal. We've shut down all of our drilling and completion activity in the near term, resulting in an approximate 60% reduction to our original CapEx guidance. We meaningfully reduced our G&A in response to lower activity levels. We secured a $700 million borrowing base and amended our credit facility to provide leverage covenant relief. And finally, we hedged a substantial portion of our 2020 production to protect against downside commodity risk.

In closing, we are fortunate to be entering this low commodity price environment with a solid balance sheet and good liquidity. This, along with our proactive steps in reducing activity and costs, should ensure Centennial prospers once again when commodity prices improve.

Thanks for listening, and now we'll go to Q&A.

[Operator]

[Operator Instructions] The first question is from John Silterbein (sic) [ Josh Silverstein ].

[Joshua Silverstein, analyst]

It's Josh Silverstein at Wolfe. So just a question on the hedging profile here. You guys have mentioned that you're going to start to try to layer in some hedges for next year and the coming quarters. Why don't you just do that today with prices like -- that are higher in 2021 than where you've hedged in 2020? Is there a price point that you're waiting for or something just to trigger that?

[Sean Smith, executive]

Sure. I'll take that, Josh. I appreciate you mentioning that. Hedging has not been part of our repertoire in the past to -- sometimes to our benefit and sometimes not. Recently, we've made some substantial hedges for both Q2 and Q3, as you've seen. We've also started layering on Q4. I think what you'll see from us going forward is a much more systematic approach to hedging our production. You say why not hedge out next year. I think prices are going to continue to improve as we go out throughout this year and into 2021. So I don't think there's a particular price point that we're going to talk about on this call, but we will continue to add hedges on a quarterly basis going forward.

[Joshua Silverstein, analyst]

Got it. And then just a question on the volumes. You guys have held this kind of 40,000 to 45,000 level for -- it seems it's about 6 quarters now and spending anywhere from the $175 million to $200 million plus in that range. If you guys were to add the $75 million of capital in the back half of this year, can you stabilize volumes at a lower level? Or does the volumes continue to decline into 2021?

[Sean Smith, executive]

I think production is something we always focused on certainly in the past. And with production curtailments, that's a hard thing to forecast. So I'm not going to give you some specifics around that. It's just too hard to look at right now from a curtailment point of view on how we're going to end the year. Q4 last year was a very strong quarter. And we knew that coming into Q1, it was going to be a little bit lower than Q4, even with the 5 rigs that we had running in the first part of the quarter. So I think the production was in line with our expectations-ish, even though we had a few more shut-ins due to offset completions. I'm going to hesitate or back off the maintenance CapEx question a bit, but know that we are certainly managing the production to the best of our ability. And without giving any forward-looking forecast or what our volumes are going to be this year, I'm going to shy away for the back half of that question.

[Operator]

Your next response is from Dun McIntosh.

[Duncan McIntosh, analyst]

Sean, I just had a quick question, maybe a little more color around the curtailments, up to 40%. How do you kind of think about a true shut-in versus maybe choking wells back? And then to break that down further between maybe some older legacy kind of lower rate wells versus your more flush production? And then kind of coming out on the back side of that, bringing those back on, any color around costs that might be associated with bringing those volumes back?

[Sean Smith, executive]

Sure. I'll just take a first pass at that, and then maybe I'll pass it over to Matt Garrison to talk about some of the specifics. But the up to 40% curtailment is what we were very specific in our language there and that we have the flexibility should we want to shut-in up to 40%. We know which wells and how we would roll that out across the field. And so what we do is it's a very detailed look on a well-by-well basis on how we're going to manage that, whether that's a full shut-in or a reduction in production on various wells. It varies across the field. And with that, maybe I'll turn it over to Matt to kind of talk about some of the specifics on how that process works.

[Matt Garrison, executive]

Sure. Yes. As it pertains to the shut-ins of the field, we've been monitoring pretty closely through our production department, our cash flow statements on the wells, and we've been able to kind of model what we think the realized prices might be in the coming weeks and months. And the decisions about to curtail or not to curtail production is really driven primarily by the cash flow of the well and then secondary to that, any sort of volume nominations that we've got maybe for that particular month. As far as old production versus new production, yes, Centennial has quite a few older wells associated with acquisitions that have been made throughout the course of this company's history. And yes, those wells tend to be a little bit higher on the operating costs. And so we do watch those closely. And those are most likely the ones that are in the near-term targets for any sort of curtailments.

With regard to the costs associated with bringing wells back online, I would offer that shut-ins are a part of our day-to-day business in normal operating conditions with drilling rigs and completions spreads. And so we have a pretty good line of sight on what it costs to shut-in wells in the case of offsetting frac jobs. And since this does not involve offset frac jobs, we feel even more strong in our conviction, I would say, with regard to the costs that we got a pretty good model for what we should anticipate. And we do not anticipate costs that are outside the normal operating procedure for shutting in wells and turning them back on.

[Duncan McIntosh, analyst]

Great. And then for a follow-up, I was wondering if you could maybe provide a little color on your current marketing arrangements. I know you've got -- you have the firm sales with BP. But one of the things that I've kind of been educated on recently, and I think maybe the same for other sell-side analysts, is the exposure to the roll in the contract. And I didn't know if that was a part of what you're doing with BP. Just trying to get a little better idea on pricing in the second quarter.

[Sean Smith, executive]

I think that we haven't disclosed what all of our contracts and terms are with our various providers. But the roll is certainly part of some contracts, and it's certainly part of our netbacks. And so you definitely need to think about whatever pricing index you are using, whether it's Brent or MEH or WTI, minus whatever roll is in your contract, minus transportation costs. And that's the netback for crude, and that's what the majority of contracts have involved, not just us but across the business. But specifics around that will not be provided.

[Operator]

Your next response is from [ Christian Renaud ].

[Unknown Analyst]

I guess just kind of looking at the workforce reduction here. Where across the organization were these reductions made? And what level of activity are you kind of staffed for right now? Could you go back to a 5-rig program tomorrow if you needed to?

[Sean Smith, executive]

Well, it's a very sensitive topic. Anytime you have a workforce reduction, it affects everybody, both those folks who are no longer here as well as those folks who are at the company. So I'm not going to comment across what divisions they were mainly focused in. I will talk about, once we do get back to operating, we have retained some staff that is capable of ramping back up to some modest level of operations should we be ready to do so in the back half of the year. And so we're prepared to do that as commodity prices improve to the end of -- towards the end of 2020.

[Unknown Analyst]

Okay. Great. And then I guess just kind of on that signaling for additional activity, you've mentioned that price is probably, I guess, the predominant signal that you'd look for. But are there any other things that might govern how quickly you return to activity? And I guess, like what level of activity you'd be looking to get back to?

[Sean Smith, executive]

Sure. So I don't have a specific price that we're going to reference today, but I think the back half of the year and then going into 2021 looks a lot more promising than it does today. So with that in mind, that's what we're looking forward to. And as those prices start to realize, we will consider getting back to operations. So I'm not going to specifically say what price we're going to trigger in and start up activity. But if you look at strip pricing now, and the back half of the year looks a lot stronger than it is today, and we have the ability within the budget that we've provided to do some modest level, the number of rigs or the number of completion crews, we haven't specified for a reason because I don't know exactly what commodity prices are going to be. So we've given ourselves some flexibility financially to put some activity in place and what level of activity will be purely related to the commodity price.

[Operator]

Your next response from William Thompson.

[William Thompson, analyst]

Sean, maybe just a follow-up on that. I mean -- is there -- I know oil price is a big factor in determining reactivation activity in the second half of the year. But is there a certain guidepost like a return that you're looking to, to justify bringing activity back?

[Sean Smith, executive]

Sure. We are a rate of return-driven company. And we've talked about that many times. Corporate rate of return is kind of how we judge ourselves. It's difficult in this commodity price environment to say that that's a number today that we're focused on. But overall, for the year, that is what drives our business. And so again, as Matt alluded to, we've been continuing to drive down the cost and increase our efficiencies across the field, both from an operating point of view but also from a capital point of view. And so as those costs have come down, and I expect service costs to continue to be -- feel pressure throughout the rest of the year, that will continue to lower the commodity price needed to generate a decent rate of return.

[William Thompson, analyst]

And then a follow-up to that. How much does leasehold obligations have on further curtailment decisions and an ability to continue to maintain no development activity? The last I remember, Centennial had significantly increased its percentage of acreage held by production during 2019, but I assume there's some continuous drilling obligations. So just to get your thoughts there.

[Sean Smith, executive]

There are. And I think for any operator that operates in Texas, you tend to have those more so than in other parts of the basin, i.e., in New Mexico, where you tend to hold all depths, all rights. In Texas, you have a little bit more shorter terms on your leases. And so there will always be some kind of need for activity level to hold all positions. That being said, we've done a very good job of HBP-ing our position and holding our most attractive rate of return pieces of property and zones of interest. And so the amount of acreage that is exposed is minimal in 2020. We -- as we said earlier, we had 5 rigs running in the first quarter and then -- so that held a significant portion of potential properties that might be expiring. And then if we ramp up activity towards the end of the year and into next year, I think we're going to have very little problem keeping our acreage position mostly intact.

[Operator]

Your next response is from Neal Dingmann.

[Neal Dingmann, analyst]

Sean, my first question, I'm just wondering, you've touched on this a little bit already, but just on -- do you anticipate much impact either at the field or well level on -- you've got -- and have talked about a fair amount of shut-ins. And I'm just wondering on either at the well level or the field level, do you anticipate any sort of issues there? I mean I haven't seen that in years done to this level for you or for others. And then sort of secondly with that, also talking about sort of shut-ins and all, I know some service companies have suggested that a fair amount of stimulation might be needed to bring these back. I'm just wondering your view on that as well.

[Sean Smith, executive]

Yes. I'll take that first part of that question, then I'll pass the second part over to Matt to talk about stimulation. But as Matt referenced in both his portion of the script as well as a previous question, we've done a fair amount of shut-ins across the field throughout our operating of this area, and those shut-ins, due to offset fracs, whether they are our own fracs or offset operators, can last anywhere from days to a month. And so we've got a fair amount of experience, both with the shut-in process but also on what that recovery looks like post shut-in. And we've seen very little negative effects by shutting in wells for that kind of duration. And these are both older wells as well as newer wells. So I think we've got a pretty good feeling of what the response will be once we bring the wells back online. And Matt, maybe you can comment on if there's any thought about restimulating wells. I think that was the second part of Neal's question.

[Matt Garrison, executive]

Yes. Neal, I was actually going to ask if you could repeat maybe that second part of the question, so I could make sure I answer it to the best of my ability.

[Neal Dingmann, analyst]

Yes, sure. I've heard sort of kind of 2 different rules. And I don't know if it matters, obviously, on what the type of reservoirs or all these things. But I've heard some service companies suggest that a fair amount of stimulation might be needed to bring back some of the shut-ins, whereas I've heard others suggest, no, we really won't. It's just a matter of sort of choking it back and bringing it back on. And so again, I'm just trying to wonder what -- how you all view that?

[Matt Garrison, executive]

Sure. That's a good question. I'll start by saying off the top, we right now do not believe that turning the field back online would require additional refracs or stimulations of any of the laterals that we're proposing to be curtailed. That being said, there is an ongoing initiative within our group to evaluate potential refrac candidates based on a variety of different criteria internally. And so that is a project that we are looking at doing in environments such as this, where -- whereby you could potentially realize some cost associated with a refrac or a stimulation, but not all the costs associated with drilling and casing and cementing and everything else. So we are actively looking at that, but we have no plans at this time.

[Neal Dingmann, analyst]

Very good. You gave great details. And then, Sean, I was wondering, for a while, I know when you guys, back in earlier days, were pretty aggressive drilling, you were known for having kind of more material decline. I'm wondering now, should probably -- could you talk a little and give a little color, this should play in your favor now that you're slowing, how you envision sort of either the PDP decline or just sort of the overall general company or corporate decline as we sort of exit this year and when we're looking at '21?

[Sean Smith, executive]

Sure, Neal. Yes. I think it's pretty well documented, even though we haven't released official numbers on what our corporate decline is. It's pretty well-known that it's in the 45% to 50% range going into the quarter. And we still had 5 rigs running in the first quarter, if you recall, right? So going into this quarter, I would say it's in that same kind of category. But also, as you mentioned, as we have now shut down our activity, you're going to see a material decrease in that corporate decline as we get towards the end of the year and into next year. So it's going to -- from that perspective, it will help our PDP decline rates and our production decline rates greatly by not having continued activity. So the one benefit, if you will, of shutting all capital activity down is your corporate decline rate lowers materially.

[Operator]

Your next question is from the line of Kashy Harrison.

[Kashy Harrison, analyst]

Apologies if this was addressed in the prepared remarks, phone line's a bit backed up, but a quick question on the balance sheet. Just wondering, let's just say, theoretically, the WaterBridge transaction doesn't close and you're not able to reduce what's drawn on the revolver. Are there any thoughts on alternative methods to just reduce the balance on the borrowing base -- on the revolver, sorry? So specifically, maybe asset sales or any other transactions you can pursue to reduce that balance. And then the second part of that question is, if at any point in time through 2021, 2022, whenever you exceed the new leverage covenant, are there any -- are there opportunities to get waivers? Just trying to understand the risk potential if you do, at any point, exceed that leverage covenant.

[George Glyphis, executive]

Kashy, it's George. Thanks for the questions. I think on the first one, in terms of reducing the credit facility balance, I think the first order of business, obviously, in addressing this situation is getting the borrowing base reaffirmed, which we did -- or getting a new borrowing base set, which we did at $700 million. We believe at this time that, that provides us with ample liquidity and a decent runway from a liquidity standpoint. In terms of lowering those balances, obviously, the original intent of the SWD transaction was to raise some proceeds to do that. And if that transaction doesn't close, I think the focus is more on what we're doing on the capital side and what we might be doing from a hedging standpoint in order to protect our cash flow and our liquidity going forward. It's difficult to point to something -- any one thing that says, well, you're going to take the outstandings down, any kind of catalyst to do that. So it's really more about maintaining the liquidity situation, obviously looking at hedges to preserve the borrowing base on a go-forward basis.

With respect to the second part of your question on exceeding leverage covenants, I think the near-term focus was obviously evaluating how we can address the current situation with the total leverage covenant, and that's why we switched to the first lien leverage covenant. And so we feel like we have addressed our near-term and medium-term considerations with respect to those leverage covenants. Your question really gets into forecasts around what prices are and what kind of levels of cash flow we have and when we trip a covenant. And the thing I would highlight is we've done this to avoid tripping a covenant in the future. And so we'll just have to see how prices shake out, what our spending levels are, what cash flows look like on a go-forward basis before needing to address that situation. I would say that banks are used to dealing with waivers on certain covenants. We certainly hope that we're not faced with that in the future, and the initiative we've just closed on was very much focused on that.

[Kashy Harrison, analyst]

That's super helpful color. I really appreciate that. And then second question, just relatively straightforward. Just wondering, do you guys have any color on what you're seeing on leading-edge cost deflation? Just wondering how -- maybe what sort of relief you're getting today relative to your initial budget?

[Sean Smith, executive]

Yes. I think that what we saw, and we talked about in our earnings presentation, was a pretty material decrease in our capital costs associated with D&C. That's driven both by efficiencies within the company as well as service costs coming down. I think there will continue to be some downward pressure on some service costs. Obviously, the fact that we've got no drilling rigs or completion crews running, we don't have much baked into that and through the remainder of the year. But I do think there will be some continued downward pressure on service costs.

[Operator]

Your next response is from Matt Portillo.

[Matthew Portillo, analyst]

Just a quick follow-up question on the commentary around May. You mentioned up to 40% of your production curtailed. Any color on where that might be at spot? And then the follow-up question would just be around June. We've seen the forward curve improve to kind of $24, $25 a barrel over the next couple of months. Should we expect generally the vast majority of your shut-in volumes to come back on stream to maximize cash flow given the improvement in the forward curve, obviously, volatility aside?

[Sean Smith, executive]

Yes. I think that it's a good question, Matt. And we, again, selected that terminology, specifically, up to 40% because it's a very dynamic market, right? Crude prices fluctuate materially on a day-to-day basis now. And so your realized price for both May, June and July are very much in flux. And depending on how those shake out, we have the ability to adjust up or down based on what our netbacks are at the wellhead. So I'd love to say that it's going to be this specific amount for May and then this specific amount for June. That's just not the world we live in when crude fluctuates 10% to 15% on any given day. So that's how we're managing it. As Matt outlined, we've got a very specific tool that we use internally to manage a well-by-well look back on what our costs are. And until those wells are positively cash flowing, we're going to consider them as potential curtailment wells. That being said, as you mentioned, June prices look a lot better than May prices, when they usually look better than April prices. So everything is going in the right direction. And I would expect, if that continues, you'll have less production shut-in in June than you did in May.

[Matthew Portillo, analyst]

Okay. Maybe just to clarify there. So if we look at kind of a $24, $25 crude price, is it fair to assume the vast majority of your production is in the money in terms of cash costs, and that's a pretty healthy level if it were to hold for you guys to start working back off of the curtailments?

[Sean Smith, executive]

I think that is definitely going in the right direction. And without being specific about what the costs are, because it's a well-by-well decision, yes, the vast majority of them look a lot more profitable at $24, $25 than they do today.

[Operator]

You have a question from the line of Jeffrey Campbell.

[Jeffrey Campbell, analyst]

My first question was just to ask, what is your current DUC inventory? And assuming that there is some resumption of activity in the second half of '20, is -- are the DUCs the most likely first target for spending?

[Sean Smith, executive]

Yes. Thanks, Jeffrey. Appreciate the question. We do have some DUCs built up because, obviously, as we shut down our completion crews, we still had rigs running. And so we've got a few DUCs built up, which is not -- our traditional MO is to build up a DUC inventory. Currently, we have 5 uncompleted wells that are ready to be fracked. Those, as you pointed out, will be the first level of activity that we would spend capital dollars on as we get towards later in the year. And obviously, your costs associated with that is just the C side of the D&C costs. So it's much more minimal than both the drilling and completion costs.

[Jeffrey Campbell, analyst]

Right. And I was wondering what your current nat gas flaring look like. And what do you anticipate for that in the future?

[Sean Smith, executive]

I don't think we've disclosed a percent flaring number. But I think what we've shown traditionally is that we've been on the lower end of the industry relative to our peers. And I think we do a good job managing that. Any Mcf flared is a wasted molecule in my book. So we do our best to not have any. That being said, there are areas where they're more isolated. And so sometimes it's harder to get midstream pipelines to those locations in a timely manner. That said, it's continued to come down over time, and it's a process that we manage very carefully.

[Jeffrey Campbell, analyst]

And if I can ask one last quick one. Going back to services, just wondering, is there any concern about obtaining the necessary services when you're ready to get going, again, bearing in mind the drastic shutdown of E&P activity currently?

[Sean Smith, executive]

Yes. I'll pass that over to our COO, who's a little closer to services. But yes, I don't think we're going to see an issue coming out of this. But Matt, do you have any commentary on that?

[Matt Garrison, executive]

The conversations I've had with folks suggest that somewhere in the approximately 1 month of lead time is kind of a good rule of thumb for coming back out and picking up rigs or picking up frac spreads. So we're trying to, to the best of our ability, lead that appropriately.

[Operator]

Thank you. There are no further questions in the queue at this time. And now I'd like to turn the call back over to Sean Smith.

[Sean Smith, executive]

Great. Thank you. These are certainly challenging times for the industry and Centennial as well. But hopefully, what you saw from our release is that we are clearly prioritizing the balance sheet, and it's a bit of a shift away from the growth company that we had originally positioned this to be. So focusing on balance sheet and liquidity is what we're going to be doing going forward. And hopefully, that's what you'll see coming in the next earnings call and beyond. So appreciate everybody's participation on the call and look forward to future conversations. Thank you.

[Operator]

Thank you. This concludes today's conference call. You may now disconnect, and have a good day.