Permian Resources Corporation (NYSE:PR) Q3 2023 Earnings Call Transcript

Permian Resources Corporation (NYSE:PR) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Good morning, and welcome to Permian Resources Conference Call to Discuss its Third Quarter 2023 Earnings. Today’s call is being recorded. A replay of the call will be accessible until November 22, 2023, by dialing (877) 674-7070 and entering the replay access code 608519 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: Thanks, Lester. And thank you all for joining us on the Company’s third quarter earnings call. On the call today are Will Hickey; and James Walter, our Chief Executive Officers and Guy Oliphint, our Chief Financial Officer. Yesterday, November 7, we filed a Form 8-K with an earnings release reporting third 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 September 30, 2023, which is 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: Thanks, Hays. Before we jump into the slides, I want to take a moment to thank our team for delivering the best operational quarter we have ever had as a company, which I will expand on in more detail in a moment. It’s easy to get distracted when a big deal is announced, and our team didn’t take their eyes off the ball from accounting to IT to all of the operational groups, great work from top to bottom. Having a strong underlying business is critical as we expand our focus to integration, and we have a great team that exceeded expectations so far in 2023. I want to spend a few minutes talking about the Earthstone acquisition, which we closed last week on November 1. As we stated during the announcement, we believe that the Earthstone deal provided a unique combination of significant near-term and long-term accretion, Permian Basin scale, high-quality assets in the core of the Northern Delaware Basin and accelerated return of capital, all while allowing us to maintain a strong pro forma balance sheet.

Importantly, we were able to complete the transaction at a purchase price and structure that will provide significant value to our combined shareholder base and are looking forward to delivering on the $175 million annual synergy target laid out in August. We spent the past few months working with the Earthstone team and preparing for integration and synergy capture phase of the acquisition. M&A integration is something we consider our core competency at Permian Resources and we have already hit the ground running to leverage the playbook and lessons learned from the Colgate, Centennial merger last year. As we have begun integrating Earthstone’s assets and team, we are more excited than ever about the improvement to our already great business that the combination provides.

Shifting back to Permian Resources third quarter, I’m proud to announce that our team continued to deliver strong results. Operational outperformance across the board drove a meaningful increase in free cash flow for the quarter, resulting from a combination of wins. First, strong well results led to meaningful oil growth in the quarter with our new wells continuing to impress. Second, continued operational execution in the field lowered controllable costs despite summer weather in Texas, which is a real testament to how prepared and dedicated our field team is every single season. Weather in Texas is extreme but predictable and our team has worked hard to put equipment and processes in place to mitigate downtime. Third and finally, our drilling and completions team has relentlessly continued to drive down cycle times and well costs throughout the quarter.

As a result, PR delivered total production of 172,000 barrels of oil equivalent per day and oil production of 90,000 barrels of oil per day, which represent 4% and 6% increases, respectively, compared to the second quarter. It’s worth noting that we hit our Q4 ’24 to Q4 ’23 growth target of 10% a quarter early due to strong operational performance. The Company generated adjusted EBITDAX of $584 million for the quarter. Total controllable cash costs were $7.92 per BOE, which decreased slightly quarter-over-quarter. Overall, LOE, GP&T and cash G&A were in line with our expectations. We reported adjusted free cash flow of $165 million based on cash CapEx of $380 million in the quarter. Lastly, we reported $0.29 of adjusted free cash flow per share on a cash CapEx basis and $0.39 per share of adjusted net income.

Diving into the operations a little more. Our team increased efficiencies across the board, continuing our positive momentum from the previous quarter. The drilling team increased drilled feet per day by 14% quarter-over-quarter by continuing to refine best practices. In addition, the completions team delivered their best quarter to date. With 1,880 completed feet per day and over 19 pumping hours per day, which we believe are some of the best performance metrics in the Delaware Basin. Overall, these efficiencies meaningfully reduced cycle time for the quarter, resulting in slightly higher CapEx spend for the quarter but lower per unit well cost. This is a winning combination, these sustained efficiencies should drive incremental value for shareholders going forward.

Now I’ll turn it over to Guy to go to return on capital.

Guy Oliphint: Thanks Will. As you can see on Slide 9, strong Q3 results and increased free cash flow allowed us to deliver a total return of capital of $0.17 per share to shareholders during the quarter. Our calculation begins with adjusted free cash flow of $165 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 achieved that target with both. The share repurchase represents 2.2 million shares that we bought back for $28 million alongside a sponsor secondary offering during the quarter. Additionally, we will pay a variable dividend of $0.07 per share bringing the all-in quarterly return of capital to $0.17 per share.

Consistent with our goal of delivering sustainable long-term base dividend growth, we plan to increase our base dividend by 20% from $0.05 to $0.06 per share beginning in Q1. An overview of our balance sheet and hedge book can be found in the appendix. Our third quarter results, both as a stand-alone company and combined with Earthstone demonstrate our continued ability to maintain a strong balance sheet that supports strategic flexibility while pursuing accretive consolidation opportunities such as Earthstone. We have no near-term maturities and approximately $1.5 billion of liquidity on our RBL. We expect to continue to utilize excess free cash flow to pay down debt over time. Notably, our credit ratings were upgraded by all three agencies at closing of the Earthstone transaction, furthering our goal of achieving an investment-grade credit rating within 12 to 18 months.

With that, I’ll turn it over to James.

James Walter: Thanks, Guy. As you have all heard about the Earthstone announcement call in this morning’s earnings call, we are incredibly excited about the future of our business with the addition of Earthstone. We’re excited to get the deal closed last week and begin to welcome the Earthstone employees to the Permian Resources team. We view this transaction as consistent with our ultimate goal to do whatever it takes to maximize shareholder value creation. Our business today is better than it’s ever been, and we expect to find ways to continue to improve it going forward. On Slide 10, we look back at a few of the key takeaways from our Earthstone acquisition. First, we acquired Earthstone at a very attractive valuation, where we are highly certain that we can exceed our return thresholds.

Our purchase price at the time of announcement represented a slight discount to Proved-Developed PV-10 while adding significant high-quality Delaware inventory at little or no cost. Second, the transaction is accretive to all key financial metrics before synergies and highly accretive with synergies near term, long term and midterm. But finally, and most importantly, we firmly believe this transaction will continue our track record of enhancing shareholder value through increased free cash flow per share and returns to investors. It’s worth noting that this transaction makes Permian Resources the second largest remaining Permian pure-play one of the largest operators in the Permian Basin. Although we have been very clear we would never do a deal just to get bigger, we do expect to benefit from enhanced economies of scale and the strategic benefits of being the second largest Permian pure-play.

Before we move to Q&A, I’d like to take a quick second to look back at 2023 so far. This past February, our team set out a very strong and well received full year 2023 plan that maximize free cash flow for shareholders through high return cost-effective development. Since February, our team has executed extremely well, and we are exceeding expectations against that budget. We will not be providing standalone PR look back in our Q4 earnings call this February since we have two months of contribution from Earthstone included in our financials, but it’s worth noting and giving our team credit for the fact that PR standalone is on track to deliver an excellent and outperforming year in its first full year as a public company. We will not be addressing our 2024 plan on this call today, but expect to release an updated business plan and guidance on our next regularly scheduled call in February.

Investors can rest assured that our philosophy has not changed. We’ll be building a development plan that maximizes value for our shareholders over the near and long term. As we decide activity levels, we will put together a plan that results in highest free cash flow over the next 12 to 24 months. We believe that by waiting until February, we’ll have a much better idea of what that reinvestment environment looks like and be able to come to the market with a plan that maximizes value for shareholders in a way that we could not do as effectively if we rolled out a plan today. As always, our focus is on long-term value creation. Thank you for tuning in today. And now we will turn it back to the operator for Q&A.

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Q&A Session

Operator: [Operator Instructions] First question comes from Zach Parham from JPMorgan.

Zach Parham: Congrats on the quarter. I guess, first, just a question operationally. Like you mentioned, you hit the 10% exit-to-exit growth target a full quarter in advance. Can you just give us some more detail on what drove that outperformance in 3Q? Was it well productivity? Was it cycle times that allowed you to bring wells online earlier or any other factors you would point to that allowed you to deliver that oil well above expectations?

Will Hickey: Yes. Thanks, Zach. It was really three things. You hit on two of them — oil side. The kind of acceleration of wells into the quarter has given the operational efficiencies and then improved downtime numbers. We just — we saw kind of record downtime numbers for the year in Q3 just due to what the operational team did. And so kind of add all three of those together and it leads to what was a pretty big beat on the oil side.

Zach Parham: And then just one more on the CapEx side. You talked about CapEx being a little higher than expected in 3Q because of those efficiency gains and getting more wells drilled and completed, but that well costs were also lower. Maybe could you quantify where leading-edge D&C cost per foot are and maybe give us some thoughts on where those costs could go in 2024, given deflation and efficiency gains as well?

Will Hickey: Yes. Just as you think about inflation, kind of as we discussed last quarter, I think we were trending for next year to see about 5% deflation year-over-year on the consumables side, primarily driven by casing and then hoping to get kind of a little bit on top of that via some of the services or things like sand, et cetera. So I think that’s still consistent today. Obviously, the commodity prices are moving around a lot and people are putting out full year budget, which I think will drive kind of a lot of changes in that in either direction. But kind of call it, five-plus percent on the deflation side feels like a safe assumption for next year. And then on the operational efficiencies, the things we did in Q3 to reduce cycle times, faster drilling, faster frac times, et cetera, are the small little things that are really sticky.

So I think our expectation is we’ll be able to kind of continue that pace, drill more wells with less equipment and kind of add to that five-plus percent on the deflation side, just via better overall kind of operational efficiencies to drive well cost down even lower.

Zach Parham: Got it. And then any color on where leading edge D&C costs are currently?

Will Hickey: I think kind of if you think about relative to where we were in kind of earlier this year, it’s probably down 10%, something like that.

Operator: Your next question comes from Gabe Daoud from TD Cowen.

Gabe Daoud: Was hoping that we could maybe get a bit more color on how you guys are thinking about just at a high level exit-to-exit growth going forward. I know the goal is to always maximize free cash flow with maybe growth being an output of that. But just curious now as a larger entity, how you guys think about growth on an exit-to-exit basis?

Will Hickey: Yes. I mean I think we’ve been pretty clear with the market that we’re not going to put out a 2024 plan. At this point, we don’t think that’s advantageous or the right thing for our shareholders over the long term. But I do think that growth can certainly as we’re bigger, continue to be a part of the mix. I think we pride ourselves our ability to be flexible and react to whatever the investment environment looks like at the time. And I think that could be in a less attractive environment, kind of low or zero growth and in a higher, better return environment, it could be as high as the kind of 10% we’d outlined previously. I think despite additional scale, we’ve got an incredible high-return inventory base and our philosophy on that front hasn’t changed.

Gabe Daoud: Understood. And then you mentioned the ground game in the quarter, 20 grassroots transactions. Just curious how you guys think about larger scale M&A at this point. You noted the attractiveness and the strategic value of being a large Permian pure-play. So just curious how that lends itself to your thinking on M&A?

Will Hickey: Yes. I mean I think the ground game is something we do quarter in, quarter out, I think something we do exceptionally well and can be a real differentiator over time. As we’ve mentioned time and again, those are, I think, the most attractive acquisition opportunities we look at often right ahead of the drill bit and really, really accretive. I think on the larger stuff, to be really clear, the first focus for us today is on integration of the Earthstone business, which we closed last week and continuing to execute. I think we have a saying on it if we can’t execute, we can’t do anything else. I’d say larger stuff at some point down the road could make sense again. I’d say for us, we are highly focused on our asset quality, and I think remaining a Permian Basin pure-play is important to us.

So I think that probably does narrow the potential scope of larger deals in the future. But we’re going to continue to keep our eyes open. And as we’ve always said, we’re going to do whatever makes the most sense for shareholders.

Operator: Next question comes from Neal Dingmann from Truist Securities.

Neal Dingmann: My first question is on the Earthstone assets. I’m just wondering, well, I know you’re definitely not giving ’24, but I’m just wondering, sort of broadly speaking, are you able to say, just in broad strokes, how much of the total activity for by mid-24, these assets could represent. And I’m just also wondering, would you consider at this point, I know it’s early, what would you consider sort of the initial low-hanging fruit with that operation?

Will Hickey: Yes. Thanks, Neal. As far as activity goes, I think we’ve been pretty clear that we’re going to kind of move rigs from Midland and reallocate that capital to Delaware. So our development plan will be very Delaware focused, kind of 90-plus percent Delaware Basin will be where the CapEx has been. And I think kind of within the Delaware, as you think about capital allocation to the Earthstone assets, I think plus or minus 1/3 is probably the right range and maybe a little less than that kind of at times. But I think kind of over the course of the year, that’s probably a safe bet as to where it will shake out. And then low-hanging fruit on the operational side, I think everything we laid out in our rollout call around synergies is we’re still very convicted that, that was — those synergies are very achievable and ones that we can even go beat.