Permian Resources Corp - 10-K filing on 2020-02-24

Commitments and Contingencies

12 Months Ended

Dec. 31, 2019

Commitments and Contingencies Disclosure [Abstract]

Note 13—Commitments and Contingencies

Contractual Obligations

The following table is a schedule of the Company’s future minimum payments with commitments that have initial or remaining non-cancelable contractual terms in excess of one year as of December 31, 2019:



(in thousands)	2020		2021		2022		2023		2024		Thereafter		Total
Water disposal agreements	$	2,237	$	100	$	—	$	—	$	—	$	—	$	2,337
Purchase obligations	9,302		3,360		—		—		—		—		12,662
Transportation agreements	13,393		9,061		1,773		—		—		—		24,227
Total	$	24,932	$	12,521	$	1,773	$	—	$	—	$	—	$	39,226

Water Disposal Agreement

The Company has entered into agreements for the transportation and disposal of produced water from a portion of its operated wells. Under the terms of these agreements, Centennial is obligated to provide a minimum volume of produced water or else pay for any deficiencies at the prices stipulated in the contract. The obligations reported above represent the minimum financial commitment pursuant to the terms of the contracts as of December 31, 2019. Actual expenditures under these contracts may exceed the minimum commitments presented above. The Company recognized water disposal costs of $2.6 million, $2.2 million and $2.4 million for the years ended December 31, 2019, 2018 and 2017, respectively, related to its water disposal agreements.

Purchase Obligations

The Company has purchase agreements to buy frac sand, which is used in its well fracture stimulation process. Under the terms of these agreements, Centennial is obligated to purchase a minimum volume of frac sand at a fixed sales price. The obligations included in the table above represent the minimum financial commitments pursuant to the terms of the contracts as of December 31, 2019. Actual expenditures under these contracts may exceed the minimum commitments presented above. Pursuant to the terms of one of the frac sand purchase agreements, the Company paid $13.2 million during the year ended December 31, 2017 as a pre-payment for advanced purchases of frac sand of which $5.2 million, $4.6 million and $1.6 million were capitalized as incurred in 2019, 2018 and 2017, respectively. Additionally, the Company paid $24.8 million and $9.7 million for the years ended December 31, 2019 and 2018, respectively, under these contracts, which was capitalized as incurred during the periods.

Transportation and Gathering Agreements

The Company has various natural gas transportation and gathering agreements whereby it is required to deliver specified quantities over the contractual term as summarized below or else pay any volume deficiencies. These delivery commitments are tied to the Company’s natural gas production; however, the Company is not required to deliver oil or gas specifically produced from any of the Company’s properties under these agreements. The obligations reported above represent the gross minimum financial commitments pursuant to the terms of these agreements as of December 31, 2019 but exclude potential financial obligations related to an agreement that has variable pricing components as the future obligation cannot be determined. Actual expenditures under these contracts may exceed the minimum commitment amounts presented above. The Company paid transportation and gathering costs of $12.8 million, $3.7 million and $1.2 million for the years ended December 31, 2019, 2018 and 2017, respectively, related to these agreements.

The following table summarizes the natural gas volumes the Company is required to deliver by period under these agreements:



Period	Total Volume Commitments (MMBtu)⁽¹⁾	Daily Volume Commitments (MMBtu/d)⁽¹⁾
January 2020 - December 2020	114,111,400	311,800
January 2021 - December 2021	101,269,000	277,400
January 2022 - October 2022	19,700,000	64,800
Total	235,080,400

⁽¹⁾

The amounts reflected within this table are the total gross volumes the Company is required to deliver per the agreements. These volumetric quantities are therefore not comparable to the Company’s net production presented in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation as the amounts therein are reflected net of all royalties, overriding royalties and production due to others.

Delivery Commitments

In August 2018, the Company entered into two firm crude oil sales agreements with large integrated oil companies. Utilizing these companies’ transport capacity out of the Permian Basin, the agreements provide for firm gross sales ranging from approximately 30,000 to 105,000 Bbls/d in aggregate over six years beginning in 2019. These sales agreements only require the Company to physically deliver 30,000 Bbls/d of the aforementioned volumes of crude oil during the contractual years 2020 through 2024, which if not met, would result in a financial obligation. Failure to deliver the remainder of the committed volumes of crude oil under these agreements could result in a reduction of future contractual volumes at the purchaser’s discretion in accordance with the terms of the agreements.

The Company has firm gas sales agreements that provide for firm gross sales ranging from approximately 40,000 to 100,000 MMBtu/d in aggregate over four years beginning 2019. These sales agreements do not require the Company to physically deliver the aforementioned volumes of natural gas over the contractual terms of the agreements. However, if the firm commitments are not met and the purchaser incurs financial damages, the Company may be required to pay for differences between the contracted prices and current market prices for replacement volumes bought by the purchaser and the purchaser may also require the Company to provide additional financial guaranty in accordance with the terms of the agreements.

The amounts discussed above represent the total gross volumes the Company is required to deliver per the agreements, which are not comparable to the Company’s net production presented in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation as amounts therein are reflected net of all royalties, overriding royalties and production due to others. The Company believes its current production and reserves are sufficient to fulfill the physical delivery commitments; however, the Company is not required to deliver oil or gas specifically produced from any of the Company’s properties under these agreements. Further, if the Company’s production is not sufficient to satisfy the firm delivery commitments, the Company believes it can purchase sufficient volumes in the market at index-related prices to satisfy its commitments. The aggregate amount of any such potential financial obligation under these contracts is not determinable since the amount and timing of any volumetric shortfalls, as well as the difference between the prevailing market price and contract price at such time, cannot be predicted with accuracy.

Lease Commitments

Refer to Note 15—Leases for details on the Company’s operating lease agreements.

Contingencies

The Company may at times be subject to various commercial or regulatory claims, litigation or other legal proceedings that arise in the ordinary course of business. While the outcome of these lawsuits and claims cannot be predicted with certainty, management believes it is remote that the impact of such matters that are reasonably possible to occur will have a material adverse effect on the Company’s financial position, results of operations or cash flows. Management is unaware of any pending litigation brought against the Company requiring the reserve of a contingent liability as of the date of these consolidated financial statements.