Permian Resources Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 9 speakers on the call.

Operator

Good morning, and welcome to Permian Resources Conference Call to discuss its First Quarter 2023 Earnings. Today's call is being recorded. A replay of the call will be accessible until May 23, 2023 by dialing 877-674 7,070, and entering the replay access code 425,142 or by visiting the company's website at 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, sir.

Speaker 1

Thanks, Annis, And thank you all for joining us on the company's Q1 earnings call. On the call today Are Will Hickey and James Walter, our Chief Executive Officers Guy Olyphant, our Chief Financial Officer And Matt Garrison, our Chief Operating Officer. Yesterday, May 8, we filed a Form 8 ks with an earnings release Reporting 1st 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.

Speaker 1

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 March 31, 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 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.

Speaker 2

Thanks, Hays. Good morning and thanks for joining our Q1 call. During the quarter, we continued to successfully execute our business plan, which is focused on generating free cash flow, Delivering shareholder returns, maintaining our commitment to balance sheet strength and optimizing our high quality Delaware Basin asset base. Following a very strong Q4, our first quarter results delivered on the 2023 plan with total company production of 100 54,000 barrels of oil equivalent per day, oil production of 78,000 barrels of oil per day and accrued capital expenditures of 360,000,000 all of which were in line with or ahead of expectations. We remain on track to achieve the full year guidance we outlined in February.

Speaker 2

The company generated adjusted EBITDAX of $499,000,000 for the quarter. Total cash costs also came in as expected and within 2023 guidance And are expected to trend lower in future quarters as we see production increase over the course of the year. LOE was $5.38 per BOE, GP and T was $1.12 per BOE and cash G and A was $1.36 per BOE. You You'll notice a new line item in our disclosure relating to CapEx. We have added in our quarterly earnings presentation a cash CapEx figure that tracks our cash flow statement.

Speaker 2

For Q1, cash CapEx was lower than accrued CapEx driven by normal course changes in working capital that we expect will normalize over time. We've also provided adjusted free cash flow on both basis, with $101,000,000 on an accrued CapEx basis and $146,000,000 on a cash CapEx basis. We've utilized the cash CapEx figure to calculate our variable dividend as we believe it better aligns with our focus on cash returns. Our team did an amazing job executing during a challenging integration process over the past 12 months.

Operator

The success we have seen

Speaker 2

to date is a testament to their hard work, We are excited that the integration of Colgate and Centennial is behind us and we can direct our sole focus on creating value for Permian Resources shareholders going forward. We have achieved the synergies and targets that we outlined at closing With significant improvement in drilling and completion costs, cycle times, as well as an overall reduction in cash operating costs That makes our business more efficient. Our talented team will continue to look for additional opportunities to reduce costs and improve capital efficiency, so that we can return that incremental free cash flow to our shareholders. With that, I will turn the call over to Guy to cover our capital return strategy and financial results for the quarter.

Speaker 3

Thanks, Will. One of the highlights for the quarter is our return of capital and the initiation of our variable return program, as you can see on Slide 4. In a quarter that we anticipate being our lowest production point for the year, we delivered $85,000,000 of total shareholder returns, while reducing our overall debt and executing on accretive acquisitions. Since this is our Q1 paying a variable dividend, we thought it would be helpful to walk you through our total return of capital calculation. First, our calculation begins with adjusted free cash flow of $146,000,000 on a cash CapEx basis.

Speaker 3

We reduced that amount by our $0.05 per share base dividend or $28,000,000 We have committed to pay 50% of the remainder Free cash flow to shareholders via dividends or buybacks. As you can see during the quarter, we repurchased 2,750,000 shares of stock For $29,000,000 So to achieve the 50% target, we will return the remainder as a variable dividend of $0.05 per share. As a reminder, the buyback was executed as part of the 32,000,000 share secondary offering by NGP and Riverstone. As a result of this transaction, the total number of sponsor owned shares decreased from 281,000,000 shares to 247,000,000, Representing a reduction of approximately 12%. Having publicly emphasized our objective of having an organized and thoughtful monetization process from our sponsors over time, We are pleased to have established the template for potential future transactions.

Speaker 3

We remain committed to balance sheet strength as demonstrated by our activity this quarter reducing debt and increasing hedging. Turning to Slide 6, continued debt repayment remains a focus And we were able to reduce net revolver borrowings by 20% or approximately $65,000,000 during the quarter. We have no near term maturities and well over $1,000,000,000 of liquidity on our RBL. We expect to continue to utilize free cash flow to reduce net debt over You'll see on Slide 7, we recently took advantage of the OPEC production cut announcement in April to top up on oil swaps for the second half of 2023 as well as additional hedges in 2024 and 2025. We added 3,000 barrels a day for the second half of this year at $77 per barrel.

Speaker 3

As a result of these additions, 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 slightly above $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.

Speaker 4

Thanks, Guy. To start, I'll point you to Slide 8, where we discuss our ongoing portfolio optimization efforts in more detail. As we referenced in our last earnings call, during Q1, we closed on both the Lea County acreage acquisition and the sale of our SWD system in Reeves County, two transactions that we are very excited about. We also completed a large acreage trade with an offset operator in Eddy County that allowed us to further high grade one of our best assets. This trade increased our working interest in high return locations and Several new operated drilling units.

Speaker 4

Notably, we expect to begin development activity in approximately half of the 3,400 inbound acres over the next 12 months, making this type of transaction highly accretive to shareholders. In addition, we remain highly active in the grassroots side of the business, completing over 45 smaller transactions where Nearly 100 percent of the acquired interest is going to be developed in the next 12 months. These smaller deals are amongst the highest rate of return acquisitions that we evaluate. We credit being based in Midland, Virginia with an Edge on this ground game approach to growing the business. All in, the net effect of our portfolio optimization efforts in Q1 With an increase in approximately 5,000 net leasehold acres and an increase of over 3,000 net royalty acres, all while generating net cash proceeds of over $20,000,000 These transactions allow us to focus on our core business while enhancing overall corporate returns.

Speaker 4

Turning to Slide 9, we wanted to take a 2nd to shine the spotlight on our rather large portfolio of mineral and royalty interests. You've seen this in past guidance, but the vast majority of our operated acreage footprint is at a higher NRI than the 75% that has become standard in the Permian, with an average 8x NRI across our portfolio of 78%. This allows us to realize additional production and free cash flow for the same capital spend, significantly improving the capital efficiency of the dollars we invest in development. To put that in perspective, an incremental 3% increase in the 88s net royalty interest adds over 10% to the IRR of a typical Wolfcamp well And reduces the payback period of that same well from 12 months to 10. It's worth pointing out that while we don't think of it as a separate business, our royalty entity is currently generating over $50,000,000 Free cash flow per year if viewed on a standalone basis.

Speaker 4

Our high net and their compounding effects on returns are one of several reasons that we have a highly capital efficient business, which can support both high return production growth and fulsome shareholder returns. Finally, Slide 10 helps to reemphasize our value proposition for current and future investors. As seen on the slide, Permian Resources has outpaced the S and P 500 and our Permian peers since the closing of the merger. Even with this recent outperformance, we believe that our business continues to represent a compelling value as compared to both this peer group and the broader market index. We believe our business has all of the attributes of a great business, not just a great oil and gas business, but a great business across any sector.

Speaker 4

Leading asset quality, low cost operations, thoughtful capital allocation, organic growth, balance sheet strength combined with this track record of delivering outsized returns to investors. By continuing to enhance and cultivate these attributes, we believe that we can continue to create value for our shareholders while solidifying our position as a leader in the energy sector. Thank you for listening. And now we will turn it back to the operator for Q and A.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. The first question comes from Scott Hanold with RBC Capital Markets, please go ahead.

Speaker 5

Thanks, all. Hey, just wanted to touch base on the, I guess, the emphasis around the Rolled to acreage, is that, you talked about that just in order to point out the value that is there with that Lower NRI or I guess higher NRI or is there some inference into there being opportunity to find other monetization paths With that end, if you could just give us a sense of if there's any kind of grassroots efforts to kind of build that royalty portfolio?

Speaker 4

Yes. I mean, I think I'd say to answer that last question first, we're always looking for ways to accretively increase our nets. And while we're developing, we find that to be some of the most Highly accretive capital you can spend, but not looking to build a non operated override portfolio or a separate business, more just Normal blocking and tackling that kind of goes with our traditional upstream development. I'd say the reason for highlighting this It's really twofold. I'd say 1st and foremost, we've got a lot of questions just about how capital efficient our business is, things that we've got a very good Widget, if you will, and I think there's a lot of different components that drive that kind of outperformance, but I think this is one that was Maybe less understood and we thought it'd be helpful to just shine a little bit of a light on it.

Speaker 4

And I think to your kind of final question, I do think there could be opportunities to monetize Especially some of the non operated overrides that are kind of not fully valued in our portfolio today, but kind of nothing big or strategic, I think, coming down the We like having this and like what it does for the business as a whole.

Speaker 5

I appreciate that. And then as my follow-up, Could you kind of give us a cadence of kind of cash capital spending through the year as well as production? I know the 1st quarter was a down production, but I assume we're going to be on an upward trajectory. If you could help us out with that cadence as well as Any kind of working capital nuances with cash capital expenditures just so we can square the circle on expectations for that variable payout? Just for that variable payout?

Operator

Yes, this is Will.

Speaker 2

So on the production side, I think that's How you said it is right. We had a down quarter in Q1, but we're still on track to achieve the kind of 10% production growth that we talked about from Q4 to Q4 Q4 of last year to Q4 of this year. And if you kind of follow, you now have the starting point and the ending point. If you follow, you can see it's not quite linear, but we feel really good that we will hit Our full year guidance and so to get there, you have to have a little bit bigger bump into Q2, but ultimately, it's you can kind of you have the starting point and the ending point, And then on the CapEx side, I'd say we're expecting kind of cash and accrued CapEx to Be the same over time and I think we're on pace for what we outlined in guidance from a total CapEx perspective. So Given that cash came in under accrued in Q1, it's probably going to be slightly above accrued for the rest of the year just giving some timing things and kind of But expectations are that we are on track for kind of the guidance that we outlined on the last quarter call, both on the production and CapEx side.

Speaker 5

Okay. And just out of curiosity on the production, you talked about getting a bump up, but is it, I guess, going to be somewhat linear? Is there any kind of nuance in terms of Had being put in place that makes 1 quarter a little bit bigger than the other when you look at 2Q and

Speaker 4

3Q, 4Q?

Speaker 2

I think somewhat linear is the right starting point.

Speaker 5

Okay. Appreciate that. Thank you.

Speaker 6

You bet.

Operator

Thank you. Your next question comes from Derrick Whitefield with Stifel. Please go ahead.

Speaker 6

Good morning all. Congrats on a second solid quarter.

Speaker 2

Thanks, Derek.

Speaker 6

At a high level, your return of capital was fairly balanced between share repurchases and variable dividend Q1, as you think about prosecuting on the return of capital program over the coming quarters, could you comment on the framework for share repurchases and Your preference at current valuation.

Speaker 4

Yes, sure. I mean, first of all, I'd say and echo what Guy said, we're super excited to Finally, we've kicked off this variable return program. As you think about our business returning capital to shareholders is something that's kind of core to who we are at Permian Resources. I'd say our view on the kind of capital return strategy and the broader framework really hasn't changed at all over the past 9 months. I'd say we've been pretty clear With you guys and with investors that the default for us is going to be the variable dividend.

Speaker 4

We think that's kind of the safest, most consistent way to return capital to Shareholders over the long term and but we will be opportunistic. I think we've got a share buyback authorization out there for a reason and I think opportunistic Can take on 2 flavors here. I think one, which you saw in Q1, to kind of ensure a thoughtful and orderly Sponsor sell down over time, and I think we've been really clear that we expect our sponsors to kind of exit the business in a thoughtful, non disruptive way. And the second is if we see Kind of clear and severe dislocations in the stock trading of Permian Resources. And that second one, we've been fortunate.

Speaker 4

We haven't seen it kind of since we came out in September. I think This is a very volatile business and I think over time we will see those opportunities and I think you all should expect us to lean into buyback aggressively when we see those severe dislocations. But As we said kind of all the time, I think the default and the base case for everyone should be a variable dividend.

Speaker 6

Terrific. And as my follow-up, I wanted to focus on the portfolio work that you guys have done on the ground game side. We joked about it yesterday, but Could you talk to your team and support structure that affords you the ability to continue to ground out hard to earn organic ads in a very mature basin and The market opportunity you guys see for Permian Resources?

Speaker 4

Yes, sure. I mean, I think it really starts with being based in Midland, Kind of having boots on the ground and really our whole team having a presence here, I think that's kind of the first kind of core part of our strategy. 2nd, we've got a fully developed a fully built out business development team. That's sole purpose is doing transactions like what you see On the slide, so I think it's probably 8 or 9 full time fully dedicated people in that business development team, but they have the ability to pull resources from The broader Permian Resources Group and I think having I'd say the combination of a local presence here and a real Specific focus on these kind of ground gate type acquisitions has been a real differentiator for us. And I mentioned it, but I think that No.

Speaker 4

These smaller deals are amongst the most attractive returns of any acquisition opportunities that we've looked at in a long time.

Speaker 6

Agree. Thanks for your time.

Speaker 4

Thanks, Derek.

Operator

Thank you. Your next question comes from Neal Dingmann with Truist Securities. Please go ahead.

Speaker 7

Good morning, guys. Thanks for the time. Well, my question first one is probably for you. My question is just really on the operational efficiencies, which you all continue to see. And I guess a little bit different, specifically, could you talk about Maybe for the remainder of the year, number 1, just how things are going.

Speaker 7

There's talk about going from the 7, I think, the 6 rig. Are you still seeing efficiencies to be able to do that? And then lastly, just when you sort of look at the regional, I think in Texas New Mexico and the formational focus, anything sort of different to think about? What I'm getting at, Will, is just Any sort of near term lumpiness, one of the quarters? I mean, it sounds like it's going to be pretty good just continued ramp, but I just was trying to get at When you look at sort of the plan for the remainder of the year, anything that might stick out?

Speaker 2

Yes. Thanks, Neil. So with the first one, I'd say we're seeing kind of all the efficiencies we need to feel confident in our plan To drop the 7.3 around mid year and still hit the kind of 150 tills that we outlined at the beginning of the year. I kind of hit on it in the opening remarks, but Well, it's been 12 months for us since we signed up the deal, a little less since we closed, but we've been kind of head down working through how do we put the best people in the right place With the right kind of processes and strategy to kind of get all the efficiencies we can. And I think we're very, very happy with what we've seen over the 12 months since signing up for the merger.

Speaker 2

And then kind of to your production thing, there's nothing that we see that would drive any kind of significant lumpiness on the ramp to Q4. It's relatively linear as we model it from kind of where we were in Q1 to Q4.

Speaker 7

Great. And then secondly, James, maybe for you or Guy, just really on the recent hedges added. I understand Guy's comment about predicting the downside, but Just my question is on even why even add those? I mean, given you guys have such now improved financial position, you've always had a great financial position, But then even operationally, you have the ability to sort of change as needed. So just maybe if you could give a little more color on why even that You don't even step up those hedges at all?

Speaker 4

Yes. That's a great question. I think for us, hedges are Important part of our philosophy, I think everyone knows this, but this is a super volatile business and we've seen that over the last week or 2 and Frankly, expect to see more volatility in the kind of months and years to come. And for us, hedges provide a great baseline kind of ensuring A certain amount of our free cash flow kind of looking forward to future quarters. And I think that we see real strategic value in hedges.

Speaker 4

I think Like having a strong balance sheet is obviously something that's been extremely core to us. And I think do we technically need the hedges or have to have them I think at this point, we're at a place where the answer to that is probably no. But we view hedges as really strategic and I think that can allow us to be Opportunistic and aggressive if we have another downturn. So I think we've seen hedges work to our favor in the past and Expecting to be an important part of the kind of strategy going forward, and I think you should see us continue to layer in hedges over the coming years because that's

Operator

Thank you. Your next question comes from Oliver Huang with TPH. Please go ahead.

Speaker 8

Good morning all and thanks for taking my question. Just had one on the services front. If I remember correctly, you all are fairly well positioned in terms of being able to capture any potential deflation So just wanted to grab the latest in terms of what you all are seeing from negotiations with service providers and how we should be thinking about long term contract roll offs On both the rig and crew side?

Speaker 2

Yes, good question. So yes, as a reminder, I'd say our rigs are pretty well So of the 7 rigs we have, it's about a third of them under kind of multiyear deals, a third of them under a 1 year deal and And a third of them under kind

Speaker 4

of more of, I call it,

Speaker 2

pad to pad current deal. Look, I'd say we've seen kind of leading indicators of there are now Kind of super spec rigs available in the market, which needs to come before you can see price reductions. And I'd even say we were Potentially close before the OPEC cut, but as it stands today, there has been no kind of material cuts on Rig pricing yet? Having said that, it does feel like kind of the market is moving more in our favor over the last few months, and so we'll see how that goes. And then on the frac side, it's very similar.

Speaker 2

I'd say our frac pricing is we revisit quarterly. And we've seen No increases over the last quarter. It's kind of flattened from where we were, and I think that's good. We've seen previous that we've seen 6 quarters in a row of increased frac pricing. So kind of all that together, I'd say we feel really good about our guidance on the CapEx side and it does feel like There's probably more tailwinds than headwinds at this point, but nothing that we can kind of take to the bank yet as far as this year's capital program.

Speaker 8

Awesome. Thanks for the time.

Operator

Thank you. There are no further questions at this time. Mr. Walter, back over to you.

Speaker 4

Before we conclude today's call, I wanted to briefly address the recently published article regarding Midland. While the article highlights several real challenges facing our city, it failed to present the qualities that make Midland a great place to live, namely the people that live here and the community that we have together. Being headquartered in Midland has real and meaningful strategic advantages that we see every day in our business. We have chosen to raise our families here and are proud to call Midland home. Permian Resources supports our community through countless grassroots efforts to make the entire basin a better place to live and work.

Speaker 4

Everything from the development of a childcare center at the Midland Airport to financially supporting local schools and civic causes. Our efforts are substantially bolstered by larger organizations that are focused on improving the quality of life in the Permian. One such organization of which we are a proud member is the Permian Strategic Partnership, which has invested over $125,000,000 in education, health care and safety throughout the Permian Basin. We are not naive to the fact that fighting to improve the permit will be hard and take time, but our region and our industry are accustomed to taking on challenges and overcoming them. Thank you to everyone who listened into Permian Resources' earnings call today.

Speaker 4

We are proud of what our team has accomplished over the past year and excited to continue to build I'll now hand it back over to the operator to conclude today's call.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great

Remove Ads
Powered by Quartr
Earnings Conference Call
Permian Resources Q1 2023
00:00 / 00:00
Remove Ads