Permian Resources Corp

NYSE:PR

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. And welcome to Permian Resources Conference Call to discuss its Second Quarter 2023 Earnings. Today’s call is being recorded. A replay of the call will be accessible until August 16, 2023 by dialing 877-674-7070 and entering the replay access code 908236 or by visiting the company’s website at www.permianres.com.

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

[Hays Mabry, Senior Director, Investor Relations]

Thanks, Tina. And thank you all for joining us on the company’s second quarter earnings call. On the call today are Will Hickey; and James Walter, our Chief Executive Officer; Guy Oliphint, our Chief Financial Officer; and Matt Garrison, our Chief Operating Officer.

Yesterday, August 2nd, we filed a Form 8-K with an earnings release reporting first quarter results for the company. 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 homepage or under the News and Events section at www.permianres.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 the 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 June 30, 2023, which is also expected to be filed with the SEC later this afternoon. 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 Will Hickey, Co-CEO.

[Will Hickey, Chief Executive Officer]

Thanks, Hays. This quarter represents our fourth consecutive quarter of strong execution since announcing the merger and forming Permian Resources and we are still getting better every day. During Q2, we grew production by 8% from Q1 driven by robust second quarter well results. We dropped from seven to six rigs due to the continued improvement in D&C efficiencies and we continue to deliver on our return of capital framework. Our team continues to get better in executing the field and we remain on track to achieve our full year and fourth quarter targets.

Our assets continue to perform, as you can see on slide five and from our Q2 production numbers. Wells placed online during the first half of the year are performing in line with 2022 results and we expect consistent performance over the remainder of the year.

This is no surprise as our large-scale multi-bench development philosophy has not changed and we are developing the same targets in the same areas as last year. Said differently, our 2023 development plan is essentially the exact same plan we prosecuted in 2022 and what you should expect to see from us going forward.

On the operations side, our team continues to get better quarter-over-quarter by increasing efficiencies, resulting in reduced cycle times and lower costs.

Our drilling department has further reduced flat times by optimizing our bottom hole assemblies and high grading our rig fleet. During the quarter, we drilled an average of 1,165 feet per day and set a company record by drilling a 2-mile Third Bone Spring Sand Well in Eddy County in just under 11 days. Similarly, on the completion side, we were able to complete an average of 1,800 feet per day driven by increases -- increasing in pumping hours per day on our two dedicated frac fleets.

Lastly, we have significantly expanded our water recycling efforts across both Texas and New Mexico. During the quarter, our completions team utilized 60% recycled water during its completion operations.

To put our year-to-date water recycling efforts into perspective, through the first six months of the year, Permian Resources has already pumped more recycled water than both predecessor companies combined during all of last year. This not only advances our sustainability initiatives, but also provides both CapEx and LOE savings.

We will continue to use recycled water whenever possible in our operations. This level of execution is a testament to the quality of our operations team and we will continue to push for more and I feel confident that we have the team in place to be able to execute on this goal.

Now looking forward, we are continuing to work across the entire supply chain to further drive down costs as we head into next year. With what we know today, we expect greater than 10% cost deflation on a per lateral foot basis when comparing from the start of this year to the start of 2024. This paired with our asset quality and consistent development philosophy bodes well for 2024 capital efficiency.

With that, I will turn it over to Guy to cover financial results and capital returns for the quarter.

[Guy Oliphint, Chief Financial Officer]

Thanks, Will. We continue to deliver on our 2023 plan with total company production of 156 MBOE per day, oil production of 84 MBO per day and cash capital expenditures of $371 million. Production growth of 8% over Q1 was a result of strong Q2 well results.

The company generated adjusted EBITDAX of $492 million for the quarter. LOE was $5.50 per BOE, GP&T was $1.44 per BOE and cash G&A was $1.17 per BOE. LOE per BOE was 2% higher than Q1, largely due to higher water disposal costs following our SWD divestiture that we closed in March. As a reminder, we received $125 million of total cash consideration for that sale at closing.

GP&T was higher than Q1 as a result of certain pads coming on in higher GP&T areas. G&A declined on both a per unit basis and an absolute basis driven by our relentless focus on reducing costs in our higher sequential production.

We reported adjusted free cash flow of $80 million on a cash CapEx basis. Accrued CapEx for the quarter was $386 million, resulting in $65 million of adjusted free cash flow on an accrued basis.

As we discussed in Q1, we have utilized the cash CapEx figure to calculate our variable dividend as we believe it better aligns with our focus on cash returns. We reported $0.14 per share of adjusted free cash flow on a cash CapEx basis and $0.27 per share of adjusted net income.

As you can see on slide four, we are delivering $57 million of total shareholder returns in Q2. Our calculation begins with adjusted free cash flow of $80 million. We reduced that amount by our $0.05 per share base quarterly dividend or $28 million.

We have committed to pay 50% of the remainder of free cash flow to shareholders via dividends or buybacks. This quarter, we are achieving that target with a variable dividend of $0.05 per share.

Turning to slide eight. We remain focused on maintaining a strong balance sheet that supports strategic flexibility, as well as our shareholder return program. We have no near-term maturities and well over $1 billion of liquidity on our RBL. We expect to continue to utilize free cash flow to reduce net debt over time.

Our hedge summary is included in the appendix, where you will see we have hedges in place for approximately 30% of our expected crude oil production for the remainder of the year at a weighted average floor price of approximately $82. These hedges are in line with our existing hedging strategy and consistent with our desire to be able to act opportunistically in the event of a downturn.

With that, I will turn it over to James.

[James Walter, Chief Executive Officer]

Thanks, Guy. We are proud to report that we have continued to make progress towards our goal of being the lowest cost operator in the Permian. We strive to be an industry leader across the entire cost structure, D&C, LOE, G&A and ultimately cost of capital.

Slide seven highlights our continued quarter-over-quarter and year-over-year improvement in G&A per BOE. We have lowered G&A per BOE by approximately 40% when compared to Centennial’s standalone quarter in Q2 2022. This improvement in G&A from $1.95 per BOE to $1.17 resulted in an incremental $12 million of free cash flow for the quarter.

Not only have we improved compared to our historical performance, we have quickly jumped to a leading position compared to our peers, but on a G&A per BOE basis, as well as a G&A per operated basis, which is a further testament to our talented team and highly efficient operations. Our team is always looking for well efficiencies across our entire cost structure to further enhance our free cash flow and drive value for shareholders.

I’d like to close our prepared remarks today by turning to slide nine, where we provide a quick recap of the goals we set out earlier in the year and our progress against those goals today. First, as a result of our robust and consistent well performance, we remain on track to deliver peer-leading organic oil production growth of 10% exit-to-exit or over 15% on a full year pro forma basis.

Two, we continue to execute on all spectrums of our capital return program, returning approximately $200 million or $0.35 per share to shareholders through our base dividend variable dividend and share repurchase program.

Three, through the combination of shared best practices and operational execution, we have driven significant operational efficiencies, which have lowered our overall cost structure, reduced cycle times and ultimately made our business more capital efficient.

Four, we continue to optimize our portfolio, driving meaningful value for shareholders. Between bolt-on acquisitions and our active ground game, we have acquired over 5,000 high quality acres offsetting our position in the core of the Delaware. We have also successfully divested non-core SWD assets in Reeves County for $125 million, representing a significant premium to our current trading multiple.

Lastly, but perhaps most importantly, we have executed all of the above while maintaining a strong balance sheet with ample liquidity, which will allow our business to thrive and create outsized shareholder value in any commodity price environment.

We are excited about where the business stands today and feel like we have significant momentum as we head into the back half of the year. Our team has come together well and we continue to execute on the plan we laid out to start the year. We are well positioned to generate robust free cash flow and deliver significant returns to shareholders, while maximizing long-term valuation.

Finally, as we put out in our press release yesterday afternoon, it’s worth noting that Matt Garrison, our Chief Operating Officer, will be departing the company on September 1st for personal reasons. As I sit here in the commentary with Matt, on what would be his last earnings call, it’s worth taking a moment to reflect on the tremendous contribution that has made to Permian Resources.

He has shown incredible dedication and leadership to this company, both during the past year, Permian Resources, as well as the prior 6 years at our predecessor, Centennial. Will, myself and the entire Permian Resources team have enjoyed rolling up our sleeves and working alongside Matt. He’s been a great contributor, business partner and friend.

From an organizational standpoint, Matt’s direct operational reports will report to Will Hickey going forward. With Will’s operational background, this will be a natural fit and something we are all excited about as it will allow for more streamlined communication and quicker decision-making between the field and the CEO.

In closing, I’d like to again thank Matt for everything he’s done at PR. We will miss him going forward to wish him and his family the best in the future.

Thank you for listening and now I will turn it back to the Operator for Q&A.

[Operator]

Thank you. [Operator Instructions] And your first question comes from the line of Neal Dingmann from Truist Securities. Please go ahead.

[Neal Dingmann, Truist Securities]

Good morning, guys. My -- nice quarter. My first question is on slide five. By looking at this and even the last couple of quarters, certainly appears you all continue to see some very strong well consistency. I am just wondering, can you speak to what’s driving this, is it the target of the key intervals or your spacing or completions as it looks like the wells continue to be very consistent both on a production and GOR basis?

[Will Hickey, Chief Executive Officer]

Yeah. Thanks, Neal. I mean, really, I think, what’s driving it is that we haven’t significantly or really at all changed any of those things you listed. We just -- we are in a fortunate position that we have got a deep bench of inventory to kind of keep doing what we have always done.

So we are still drilling those same targets in the same areas and we have made little tweaks to completion designs to try to drive some cost, but nothing that’s had any kind of any change to productivity. So kind of the short story is we are just doing what we have always done and this is what you should expect for the next few years going forward.

[Neal Dingmann, Truist Securities]

Yeah. It’s great to see the consistency. And then my second question is on the OFS cost and operational efficiencies. I am just wondering you mentioned on slide six. where you have high graded the number of your D&C services. I am just wondering, when you do this, are you seeing as much potential cost to place on the high spec equipment as you can see on the lesser quality side and what type of improvement or results do you all see, I guess, what I am asking is like, what’s the advantage of going to the high spec if potentially maybe see some lower cost on some of the lesser equipment?

[Will Hickey, Chief Executive Officer]

No. I think that’s right. I think kind of across the industry, we have seen that costs have come down on the low-spec stuff first and the hope is that we will start to drive some cost down on the high spec stuff kind of between now and the end of the year.

Really, what we have seen is just our ability to kind of continue to reduce cycle times and cut days out on the drilling intent side, kind of more than offsets that site premium we have to pay for that equipment.

But as we have always been, I mean, we are always kind of evaluating what that equation looks like, what the kind of overall cost structure looks like with high spec versus lower spec, and hopefully, we will kind of continue to both cut days and maybe get some kind of cost reductions on the high spec stuff between now and the beginning of next year.

[Neal Dingmann, Truist Securities]

Great details. Thanks, Will.

[Will Hickey, Chief Executive Officer]

Thank you.

[Operator]

Thank you. And your next question comes from the line of Zach Parham from JPMorgan. Please go ahead.

[Zach Parham, JPMorgan]

Hey, guys. Thanks for taking my question. I guess, first, just on the production trajectory. You all reaffirmed the exit rate on oil growth guidance. Can you talk a little bit about what 3Q looks like, just trying to get a sense of where production goes from here?

[Will Hickey, Chief Executive Officer]

Yeah. Sure. So I think the expertise so 3Q will be kind of low single-digit growth percentage from where we were in Q2 and then slightly more kind of higher percentage growth from Q4 to Q3 to kind of ultimately get to that Q4 exit rate that we discussed at the beginning of the year.

[Zach Parham, JPMorgan]

Got it. Thanks, Will. I guess just following up on Neal’s question on cost deflation. We have heard others mention 5% to 7% lower year-over-year well costs in 2024. Does that number seem reasonable to you, maybe can you just talk through what you are seeing on cost deflation now and if you are seeing any substantial declines on any of the larger ticket items?

[Will Hickey, Chief Executive Officer]

Yeah. I mean, I think that we would be at the high end of that range based on what we are seeing today, primarily driven by just two-wheelers and casing. I mean, we can point to kind of 5% reduction based on the casing we are purchasing today, which will ultimately run in Q1.

So we have kind of got 5% in the bag and now we are starting to chip away at things on the completion side and kind of other kind of fine items across the whole AFE. So I think based on what we are seeing today, we have got kind of good line of sight to 10% and I am hoping we can kind of call back more between now and then and hopefully beat that number when we get to next year.

[Zach Parham, JPMorgan]

Thanks, Will. That’s great color.

[Will Hickey, Chief Executive Officer]

Yeah.

[Operator]

Thank you. And your next question comes from the line of Geoff Jay from Daniel Energy Partners. Please go ahead.

[Geoff Jay, Daniel Energy Partners]

Hey, guys. I was just curious, there’s been a lot of commentary on some of the other calls about M&A in the Permian in particular, with I guess, sort of the notion that it’s pretty picked over and that what’s left, there’s not a lot left in the till and I know you guys are kind of all seeing on this front. So I was wondering what your sense of the land or land was there?

[Will Hickey, Chief Executive Officer]

Yeah. I mean, I think, starting with the grassroots effort that I think our team does incredibly well, like we are still finding great opportunities kind of think smaller blocking and tackling acquisitions ahead the drill bit, and as you saw, we did that in this quarter.

We have really done that every quarter for eight years and something we are highly confident we can continue to do. And look, those are some of the most highly attractive, highest rate of return acquisitions that we can find.

I think on bigger stuff, there’s still stuff out there, I think, you have seen a lot of transactions in the Permian. I think it’s safe to say we are looking at everything, but as we have said before, we have got a really good business and that sets the bar for acquisitions really high.

I’d say we have got one of the highest quality inventory bases out there. So we are only going to do deals that provide inventory that compete for capital and I think the better our business gets, the harder that is.

But we are looking, I think, if we can find something that was accretive, and we were confident to make our business better, we would be excited to pursue it. But I think at this point, we are also more than happy to stay on the sidelines and just keep working on our base business, because it’s so good.

[Geoff Jay, Daniel Energy Partners]

Yeah. That’s perfect. Thanks, guys. Appreciate it.

[Operator]

Thank you. And your next question comes from the line of Paul Diamond from Citi. Please go ahead.

[Paul Diamond, Citi]

Good morning, all. Thanks for taking my call. Just a quick one, the -- you guys noted a 2% increase in LOE on kind of water handling expenses. I guess I wanted to get an understanding of how sticky we should think about that or if that trend should go forward or do you expect it to kind of drop back down?

[Will Hickey, Chief Executive Officer]

Yeah. I mean, so that -- specifically, that’s the SWD divestiture. So, obviously, those assets are sold and so that part of it will be sticky. But I think what you would expect from us is, that probably puts us to the high end of the LOE range for the back half of this year.

But as we continue to kind of grow production and grow the base and just given the fixed cost nature of some of those LOE costs, I do expect kind of as you look out over the next few years, we will be able to drive that down if we do continue to grow the base production.

[Paul Diamond, Citi]

Understood. Maybe just one quick follow-up. You guys are dropping a rig on efficiency, holding production steady to up. Just on a longer term, what -- are there any bogeys out there that would have you bring back a rig for growth, whether in 2024 or beyond is what we need to see in order to kind of make that move?

[Will Hickey, Chief Executive Officer]

Yeah. I mean I think for us we have been pretty clear. We are not providing any kind of outlook on to 2024 at this point. I think we have been really clear with the market that that’s a decision we will make as we get closer to next year.

I think for us, as we have said for the past 12 months, any kind of decisions to increase or decrease activity are going to be driven by what maximizes near- to mid-term free cash flow for our investors.

And I think today it’s too early to tell what 2024 looks like. I think with a low service cost environment and a higher commodity price, I think that probably leans towards growth and I think if things go the other way, you could see us dial back activity.

So I think today, it’s too early to tell, but it’s something we are constantly kind of watching and planning around and we have got the right team in the asset base. We can react quickly as we put out a plan closer to next year.

[Paul Diamond, Citi]

Understood. Thanks for clarity.

[Operator]

Thank you. And your next question comes from the line of Subash Chandra from Benchmark. Please go ahead.

[Subash Chandra, Benchmark]

Yeah. Thank you. Two questions. First is, do we think of 4Q-to-4Q as sort of being the benchmark as you talk about 2024 plans, is that sort of the math we should be looking at?

[James Walter, Chief Executive Officer]

The real frank answer is, we put our Q4-to-Q4 because we didn’t have a clean, simple pro forma number that the market was familiar with last year. I think when we get to a place when we start talking about out years, I think, we will probably shift and start talking annual growth rates.

I think that’s simpler and cleaner and now that we will have a full year under our belt at that time, I think, that will make a lot more sense. So I think Q4-to-Q4 made sense kind of given the context of the merger. But as we look to the future, I think, probably, best for us and everyone else to start thinking annual growth rates.

[Subash Chandra, Benchmark]

Got it. Okay. My follow-up and we have seen this across multiple Permian operators is a bit of a declining oil cut, a host of reasons, but I guess, in maintenance that should be expected, I suppose, but how do you think about that for you guys in 2024?

[Will Hickey, Chief Executive Officer]

I’d expect kind of flat oil cut if the kind of commodity price market looks like it does today, obviously, we have got the asset base that if we saw a significant outperformance of gas between now and then that we could kind of shift development accordingly. But I think the base case is flat oil cuts for 2024.

[Subash Chandra, Benchmark]

Great. Perfect. Thanks so much.

[Will Hickey, Chief Executive Officer]

You bet.

[Operator]

Thank you. [Operator Instructions] And your next question comes from the line of Josh Silverstein from UBS. Please go ahead.

[Josh Silverstein, UBS]

Thanks. Good morning, guys. We have started to hear some more Permian offers go out towards 15,000 foot laterals even a little bit beyond it. I am wondering if what you guys have done, what your average lateral length may be this year and what the inventory or some of the longer laterals may look like?

[Will Hickey, Chief Executive Officer]

Yeah. So our average lateraling to-date this year is 9,300 feet, which kind of fits. If you look at our position on the sets up really well for 2-mile development across the majority of our position. So I think that’s what we have done over the last two years and that’s what you should expect going forward.

As far as just 3-mile laterals in general, I think, in the Delaware Basin, just given the overall productivity of those wells and how much fluid they make, it’s probably slightly less efficient than what you would get on the Midland Basin when you go that long.

Having said that, we have got a team that can do it. We have drilled plenty of 2.5-mile laterals this year and over the -- kind of over time. So we will keep watching it, we feel very confident that if that is the most capital efficient answer that we will move that direction, but I think as a base case, you should expect we are kind of a 2-mile development company next year.

[Josh Silverstein, UBS]

Yeah. Got it. Understood. And then just on the return on capital and cash to the balance sheet. You still have the 50% plus return on capital framework. Just given that you don’t have any maturity of that until 2026 and ramping free cash flow and stock is still trading at a low multiple. How do you balance the opportunity for share repurchases versus just building cash, because obviously, you guys are committed to the base dividend and variable dividend, but just curious about upside and buybacks versus cash on hand? Thanks.

[James Walter, Chief Executive Officer]

Yeah. Sure. No. I think that’s right. Obviously, the base dividend is what it is. I think on the variable versus share buyback, I think, for us, that’s just going to be opportunity set driven. We said before and continue to say that the default for us is going to be the variable dividend.

But we expect to be opportunistic to kind of take advantage of opportunities we have on the buyback side and I think we haven’t seen that in the last year, because the stock has performed really well. But I think as we see or if we see clear market dislocations or to kind of effectuate an organized sponsor sell-down, we are going to lead in hard to the buyback.

So I think I think you got it right. I think the risk case is going to be the variable dividend. But over time, I expect we will find some opportunities and should lean harden the buyback when those opportunities arise.

[Josh Silverstein, UBS]

Great. Thanks, guys.

[James Walter, Chief Executive Officer]

Thank you.

[Operator]

Thank you. Mr. Walter, there are no further questions at this time. Please continue.

[James Walter, Chief Executive Officer]

I’d like to conclude today’s conference call on slide 10, which helps to reemphasize our value proposition for current and future investors. Since closing our merger almost a year ago, we have delivered leading returns for our sector and outperformed the S&P. But we believe that our business continues to represent a compelling value as compared to both our high-quality Permian peer set and the broader market indexes.

We believe that quality business such as ours with core assets, organic growth, efficient operations and strong financial positions confirmed to rerate to more competitive multiples, not only with our direct peers, but also with other sectors in the broader market. By continuing to enhance and cultivate these attributes, we believe that we can continue to create value for shareholders, while solidifying our position as a leader in the energy sector.

Thank you again everyone for your time today.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.