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Basis of Presentation (Policies)
 9 Months Ended
Sep. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, certain disclosures normally included in an Annual Report on Form 10-K have been omitted. The consolidated financial statements and related notes included in this Quarterly Report should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2019 (the “2019 Annual Report”). Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in the Company’s 2019 Annual Report.
In the opinion of management, all normal, recurring adjustments and accruals considered necessary to present fairly, in all material respects, the Company’s interim financial results have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiary CRP, and CRP’s wholly-owned subsidiaries. Noncontrolling interest represents third-party ownership in CRP and is presented as a component of equity. As of December 31, 2019, the noncontrolling interest ownership of CRP was 0.4%.
On April 2, 2020, the legacy owners of CRP converted all of their remaining 1,034,119 CRP Common Units (and corresponding shares of Class C Common Stock) into Class A Common Stock (the “Conversion”), which eliminated the noncontrolling interest ownership in CRP. As a result, CRP was a wholly-owned subsidiary of Centennial Resource Development, Inc. for the three month periods ended June 30, 2020 and September 30, 2020. No cash proceeds were received by the Company in connection with the Conversion, and deferred tax expense of $2.2 million was recorded in equity with an offsetting deferred tax liability for the same amount, upon conversion.
Use of Estimates
The preparation of the Company’s consolidated financial statements requires the Company’s management to make various assumptions, judgments and estimates to determine the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of commitments and contingencies. Changes in these assumptions, judgments and estimates will occur as a result of the passage of time and the occurrence of future events, and accordingly, actual results could differ from amounts previously established.
The more significant areas requiring the use of assumptions, judgments and estimates include: (i) oil and natural gas reserves; (ii) cash flow estimates used in impairment tests for long-lived assets; (iii) impairment expense of unproved properties; (iv) depreciation, depletion and amortization; (v) asset retirement obligations; (vi) determining fair value and allocating purchase price in connection with business combinations and asset acquisitions; (vii) accrued revenues and related receivables; (viii) accrued liabilities; (ix) derivative valuations; and (x) deferred income taxes.
Income Taxes
Historically, CRP has been treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, CRP was not subject to U.S. federal and certain state and local income taxes, and any taxable income or loss generated by CRP was passed through to and included in the taxable income or loss of its members, including Centennial Resource Development, Inc., on a pro rata basis. Following the Conversion, CRP is no longer a partnership for tax purposes. As a result, the deferred tax assets and liabilities previously recorded within the partnership, and previously reported by the Company as a net deferred tax balance related to its investment in the CRP partnership, are now directly included within the Company’s
deferred tax assets and liabilities. Further, the Company is now subject to U.S. federal and applicable state and local income taxes for its entire consolidated taxable income or loss.
Income tax expense recognized during interim periods is based on applying an estimated annual effective income tax rate to the Company’s year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various state jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information becomes known or as the tax environment changes.
During the first nine months of 2020, the Company determined that it is more-likely-than-not that a portion of its deferred tax assets will not be realized. Accordingly, a valuation allowance against its deferred tax assets in the amount of $58.0 million was recognized as of September 30, 2020, which caused the Company’s provision for income taxes for the three and nine months ended September 30, 2020 to differ from the amounts that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax book loss.
Stockholders' Equity, Policy [Policy Text Block]
In July 2020, the Company redeemed its one outstanding share of Series A Preferred Stock at par value, $0.0001 per share (the “Series A Preferred Stock”), held by NGP X US Holdings, L.P. (“NGP”), a former indirect equity owner of CRP. The Series A Preferred Stock became redeemable by the Company as NGP ceased to own at least 5,000,000 shares of the Company’s Class A Common Stock.
Risks and Uncertainties [Policy Text Block]
Risks and Uncertainties
The prices received for oil, natural gas and NGL production heavily influence the Company’s revenue, profitability, liquidity, access to capital, future rate of growth and carrying value of its properties. Oil, natural gas and NGLs are commodities, and their prices have been volatile in response to recent changes in global and domestic supply, the global COVID-19 pandemic and demand, and market uncertainty. The Company generally funds its operations and capital expenditures with its cash flows from operations, borrowings under CRP’s credit agreement, and offerings of debt and equity securities. The Company expects to be able to fund its operations, planned capital expenditures and working capital requirements during the next 12 months and the foreseeable future. However, continued volatility of oil and gas prices could have an adverse effect on the Company’s future business, financial condition, results of operations, operating cash flows, liquidity, production levels and quantities of oil and gas reserves that may be economically produced, which could in turn impact the Company’s ability to comply with the financial covenants under its borrowing agreements and could also limit the amount of borrowings available to fund the Company’s capital expenditures and potential acquisitions. Additionally, if forward prices decline, the Company could incur additional impairments of its oil and gas assets.