Business Combination (Notes)

12 Months Ended

Dec. 31, 2016

Business Combinations [Abstract]

Business Combination

Note 2—Business Combination

On October 11, 2016 (the "Closing Date"), the Company consummated the acquisition of approximately 89% of the outstanding membership interests in Centennial Resource Production, LLC, a Delaware limited liability company ("CRP"), pursuant to (i) that certain Contribution Agreement, dated as of July 6, 2016 (as amended by Amendment No. 1 thereto, dated as of July 29, 2016, the "Contribution Agreement"), among Centennial Resource Development, LLC, a Delaware limited liability company ("CRD"), NGP Centennial Follow-On LLC, a Delaware limited liability company ("NGP Follow-On"), Celero Energy Company, LP, a Delaware limited partnership (together with CRD and NGP Follow-On, the "Centennial Contributors"), CRP and New Centennial, LLC, a Delaware limited liability company ("NewCo"), (ii) that certain Assignment Agreement, dated as of October 7, 2016, between NewCo and the Company and (iii) that certain Joinder Agreement, dated as of October 7, 2016, by the Company (such acquisition, together with the other transactions contemplated by the Contribution Agreement, the "Business Combination").

At the closing of the Business Combination (the "Closing"), Silver Run contributed to CRP approximately $1.49 billion in cash and CRP then distributed to the Centennial Contributors cash in the amount of approximately $1.19 billion in partial redemption of the Centennial Contributors' membership interests in CRP. At the Closing, Silver Run and the Centennial Contributors effected a recapitalization of CRP pursuant to which (1) all of the remaining outstanding membership interests in CRP of the Centennial Contributors were converted into 20,000,000 units representing common membership interests in CRP (the "CRP Common Units") and (2) the Company was admitted as a member of CRP and issued 163,505,000 CRP Common Units, representing an approximate 89% interest in CRP. 

The Business Combination has been accounted using the acquisition method. The acquisition method of accounting is based on FASB ASC 805, Business Combination ("ASC 805"), and uses the fair value concepts defined in FASB ASC 820, Fair Value Measurements ("ASC 820"). ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date by Silver Run, who was determined to be the accounting acquirer.

The purchase consideration for the Business Combination was as follows:

(in thousands)	October 11, 2016
Preliminary purchase consideration:
Cash	$	1,186,744
Repayment of CRP long-term debt(1)	189,000
Total purchase price consideration	1,375,744
Fair value of non-controlling interest(2)	184,779
Total purchase price consideration and fair value of non-controlling interest	$	1,560,523

(1) Represents the additional contribution made by Silver Run to CRP in exchange for units representing common membership interest in CRP ("CRP Common Units"), to repay CRP's outstanding indebtedness at the Closing Date.

(2) Represents the fair value of the non-controlling interest (NCI) attributable to the Centennial Contributors. NCI is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly to Silver Run. In a business combination the NCI is recognized at its acquisition date fair value in accordance with ASC 805. The fair value of the NCI represents a 11% membership interest in CRP.

The following table summarizes the allocation of the purchase consideration to the assets acquired and liabilities assumed:

(in thousands)	October 11, 2016
Fair value of assets acquired:
Other current assets	$	13,341
Derivative instruments	1,052
Oil and gas properties(1):
Proved properties	444,551
Unproved properties	1,138,423
Other property, plant and equipment	1,764
Goodwill	—
Total fair value of assets acquired	1,599,131
Fair value of liabilities assumed:
Accounts payable and accrued expenses	30,156
Other current liabilities	63
Derivative instruments(2)	3,400
Asset retirement obligation	4,989
Fair value of net assets acquired	$	1,560,523

(1) The fair value measurements of oil and natural gas properties and asset retirement obligations are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair values of oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of oil and natural gas properties included estimates of: (i) recoverable reserves; (ii) production rates; (iii) future operating and development costs; (iv) future commodity prices; and (v) a market-based weighted average cost of capital rate. These inputs required significant judgments and estimates by management at the time of the valuation and are the most sensitive and may be subject to change. The reduction in the carrying cost of the proved properties was impacted by all of these factors, but most notably, the assumptions with respect to future commodity prices as of the valuation date.

(2) The fair value measurements of derivative instruments assumed were determined based on published forward commodity price curves as of the date of the merger and represent Level 2 inputs. Derivative instruments in an asset position include a measure of counterparty nonperformance risk, and the fair values of commodity derivative instruments in a liability position include a measure of the Company’s own nonperformance risk, each based on the current published credit default swap rates.

Unaudited Pro Forma Operating Results

The following unaudited pro forma combined financial information has been prepared as if the Business Combination and other related transactions had taken place on January 1, 2015. The unaudited pro forma consolidated financial information has been prepared using the acquisition method of accounting in accordance with GAAP.

The information reflects pro forma adjustments based on available information and certain assumptions that the Company believes are reasonable, including depletion of CRP’s fair-valued proved oil and gas properties, and the estimated tax impacts of the pro forma adjustments. Additionally, pro forma earnings for the year ended December 31, 2016, were adjusted to exclude $18.7 million of transaction-related costs and $165.4 million of incentive unit compensation incurred by CRP.

The pro forma condensed combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Business Combination taken place on January 1, 2015; furthermore, the financial information is not intended to be a projection of future results.

	(Unaudited Pro Forma)
	Year Ended December 31,
(in thousands)	2016		2015
Total revenues	$	98,833	$	90,460
Total operating expenses	86,490		123,702
Net income (loss) attributable to common shareholders of Centennial Resource Development, Inc.	1,666		(6,397		)
Basic and diluted net loss per share	0.01		(0.04		)