Rating Action: Moody's affirms Centennial's B1 ratings, changes outlook to positive on merger with ColgateGlobal Credit Research - 02 Sep 2022New York, September 01, 2022 -- Moody's Investors Service ("Moody's") has affirmed the ratings of Centennial Resource Production, LLC (Centennial) and revised its outlook to positive from stable. Centennial's SGL-1 short-term liquidity rating is unchanged. Concurrently, Moody's upgraded the senior unsecured rating of Colgate Energy Partners III, LLC (Colgate) to B2 from B3 with a positive outlook, following its merger with Centennial. Moody's will withdraw all the other ratings of Colgate, as Centennial is the surviving entity of the merger renamed as Permian Resources Operating, LLC. This rating action concludes the review for possible upgrade of Colgate's ratings initiated on May 20, 2022."The positive outlook reflects Centennial's increased scale in the Permian basin and improved credit metrics as a result of its merger with Colgate, which has highly complementary assets" commented Thomas Le Guay, a Moody's Assistant Vice President and Analyst. "The successful implementation of cost synergies and further debt reduction to below $2.0 billion will be key considerations for an upgrade to Ba3."Upgrades:..Issuer: Colgate Energy Partners III, LLC....Senior Unsecured Global Notes, Upgraded to B2 (LGD5) from B3 (LGD5) (previously under review for upgrade)Affirmations:..Issuer: Centennial Resource Production, LLC.... Corporate Family Rating, Affirmed B1.... Probability of Default Rating, Affirmed B1-PD....Senior Unsecured Global Notes, Affirmed B2 (LGD5)Withdrawals:..Issuer: Colgate Energy Partners III, LLC.... Corporate Family Rating, Withdrawn , previously rated B2 (previously under review for upgrade).... Probability of Default Rating, Withdrawn , previously rated B2-PD (previously under review for upgrade)Outlook Actions:..Issuer: Centennial Resource Production, LLC....Outlook, Changed To Positive From Stable..Issuer: Colgate Energy Partners III, LLC....Outlook, Changed To Positive From Rating Under ReviewRATINGS RATIONALECentennial's B1 rating reflects the company's low cost of operations, its high-quality acreage in the core of the Delaware basin and consistent improvement in operating and capital efficiency. The rating further reflect Centennial's single basin exposure, increasing oil production mix, and earnings volatility on its majority unhedged oil price exposure.The positive outlook reflects Centennial's increased scale in the Permian basin and the potential for synergies from highly complementary assets that could lead to improved credit metrics.The Centennial and Colgate senior unsecured notes are rated B2, one notch below the B1 CFR, and benefit from the same guarantees from all the operating subsidiaries and parent following the merger. The notching on the notes reflects the effective subordination of the unsecured notes to the significant size of the $1.5 billion senior secured revolving credit facility. An increase in the revolver's commitment to the $2.5 billion borrowing base could result in a further notching of the bonds as they would become subordinated to a greater amount of secured debt.Centennial's SGL-1 Speculative Grade Liquidity Rating reflects its very good liquidity through 2023. The liquidity position is supported by its free cash flow generation and a $1.5 billion committed senior secured revolving facility maturing in February 2027, of which more than half was available at the closing of the merger. Moody's expects the company to pay back a large part of the outstanding amount through 2023 and does not expect borrowings thereafter as funds from operations will cover planned capital expenditures. The facility has two financial covenants including a maximum debt/EBITDAX of 3.5x and minimum current ratio of 1.0x. Moody's expects the company to remain well in compliance with its financial covenants.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe upgrade of the CFR would require the successful achievement of cost synergies from the Colgate merger and debt reduction to below $2.0 billion. An upgrade would require LFCR to be sustained above 2x, and RCF/debt maintained above 40%.The B1 CFR may be downgraded if leverage weakens with RCF/debt below 25%, the company generates negative free cash flow, or its liquidity position weakens.The principal methodology used in these ratings was Independent Exploration and Production published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/74836. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Centennial Resource Production, LLC is an independent oil and gas exploration and production company in the Permian basin, operating across West Texas and New Mexico. Pro forma for its merger with Colgate, the company owns c. 180,000 net acres and produced c. 137 thousands of barrels of oil equivalent (Mboe/d) in the second quarter of 2022. Centennial is owned at 51% by a consortium of financial sponsors including NGP Energy Capital, Pearl Energy Investments and Riverstone Energy. The remaining 49% is publicly listed under Centennial's holding company Centennial Resource Development, Inc. (CDEV).REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The below contact information is provided for information purposes only. For disclosures on the lead rating analyst and the Moody's legal entity that issued the rating, please see the issuer/deal page on https://ratings.moodys.com for each of the ratings covered.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Thomas Le Guay, CFA Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Peter Speer Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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