Permian Resources Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 10 speakers on the call.

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 7,070 and entering the replay access code 9,08,236 or by visiting the company's website at www.firmioneres.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.

Speaker 1

Thanks, Ina, and thank you all for joining us on the company's 2nd quarter earnings call. On the call today are Will Hickey and James Walter, our Chief Executive Officers Guy Ollifant, our Chief Financial Officer And Matt Garrison, our Chief Operating Officer. Yesterday, August 2, 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 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.

Speaker 1

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.

Speaker 2

Thanks, Hayes. This quarter represents our 4th 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 7 to 6 rigs due to the continued improvement in D and 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 4th quarter targets.

Speaker 2

Our assets continue to perform as you can see on Slide 5 and from our Q2 production numbers. Wells placed online during 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 cost.

Speaker 2

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 11 65 feet per day and set a company record by drilling a 2 mile Third Bone Spring Sandwell in Eddy County in just under 11 days. Similarly, on the completion side, we're able to complete an average of 1800 feet per day, driven by increasing in pumping hours per day on our 2 dedicated frac fleets. Lastly, we've 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.

Speaker 2

To put our year to date water recycling efforts into perspective, Through the 1st 6 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'll 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'll 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're continuing to work across the entire supply chain to further drive down costs as we head into next year.

Speaker 2

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'll turn it over to Guy to cover financial results

Speaker 3

Thanks, Will. We continue to deliver on our 2023 plan with total company production of 166 MBOE per day, oil production of 84 MBO per day and cash capital expenditures of $371,000,000 Production growth of 8% over Q1 was a result of strong Q2 well results. The company generated adjusted EBITDAX $492,000,000 for the quarter. LOE was $5.50 per BOE, GP and T was $1.44 per BOE and cash G and 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.

Speaker 3

As a reminder, we received $125,000,000 of total cash consideration for that sale at closing. GP and T was higher than Q1 as a result of certain pads coming on and higher GP and T fee areas. G and A declined on both a per unit basis and an absolute basis, driven by our relentless focus on reducing costs and our higher sequential production. We reported adjusted free cash flow of $80,000,000 on a cash CapEx basis. Accrued CapEx for the quarter was $386,000,000 resulting in $65,000,000 of adjusted free cash flow on an accrued basis.

Speaker 3

As we discussed in Q1, we have utilized the cash CapEx figure to calculate Our variable dividend is 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 4, we are delivering $57,000,000 of total shareholder returns in Q2. Our calculation begins with adjusted free cash flow of $80,000,000 We reduced that amount by our $0.05 per share base quarterly dividend or $28,000,000 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 $0.05 per share.

Speaker 3

Turning to slide 8, 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 $1,000,000,000 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'll 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.

Speaker 4

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 and C, LOE, G and A and ultimately cost of capital. Slide 7 highlights our continued quarter over quarter and year over year improvement in G and A per BOE. We have lowered G and A per BOE by approximately 40% when compared to Centennial's standalone quarter in Q2 2022.

Speaker 4

This improvement in G and A from 1.95 Per BOE to $1.17 resulted in an incremental $12,000,000 of free cash flow for the quarter. Not only have we improved when compared to our historical We have quickly jumped to a leading position compared to our peers, both on a G and A per BOE basis as well as a G and A per operated rig basis, which is a further testament to our talented team and highly efficient operations. Our team is always looking for ways to drive 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 9, We'll 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 form a basis.

Speaker 4

2, we continue to execute on all spectrums of our capital return program, returning approximately $200,000,000 or $0.35 per share To shareholders through our base dividend, variable dividend and share repurchase program. 3, through the combination of shared best practices and operational execution, We've driven significant operational efficiencies, which have lowered our overall cost structure, reduced cycle times and ultimately made our business more capital efficient. 4, we continue to optimize our portfolio, driving meaningful value for shareholders. Between bolt on acquisitions and our active ground game, We've acquired over 5,000 high quality acres offsetting our position in the core of the Delaware. We've also successfully divested non core SWD assets and risk accounting for 125,000,000 representing a significant premium to our current trading multiple.

Speaker 4

Lastly, but perhaps most importantly, we've executed on all of the above while maintaining a strong balance sheet with ample liquidity, To allow our business to thrive and create outsized shareholder value in any commodity price environment. We're excited about where the business stands today I 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're well positioned to generate robust free cash flow and deliver significant returns to shareholders, while maximizing long term value creation. 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 1 for personal reasons.

Speaker 4

As I sit here in the conference room with Matt on what will be his last earnings call, it's worth taking a moment to reflect on the tremendous contribution Matt has made to Permian Resources. You have shown incredible dedication and leadership to this company, both during the past year at 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.

Speaker 4

With Will's operational background, this A natural fit and something we're 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'll miss him going forward to wish him and his family the best in the future. Thank you for listening. And now we will turn it back to the operator for Q and A.

Operator

Thank you. The question and answer session will be conducted electronically. Thank you. And your first question comes from the line of Neal Dingmann from Tuohy Securities. Please go ahead.

Speaker 5

Good morning, guys. Nice quarter. My first question is on Slide 5. By looking at this and even the last couple of quarters, certainly appears you all continue to see some very Strong well consistency. I'm just wondering, can you speak to what's driving this?

Speaker 5

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.

Speaker 2

Yes. Thanks, Neil. 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 We're in a fortunate position that we've got a deep bench of inventory to kind of keep doing what we've always done. So we're still drilling those same targets in the same areas. And We've made little tweaks to completion designs to try to drive some costs, but nothing that's had any kind of any change to productivity.

Speaker 2

So The short story is we're just doing what we've always done and this is what you should expect for the next few years going forward.

Speaker 5

Yes, it's great to see the consistency. And then my second question is On the OFS cost and operational efficiencies, I'm just wondering, you mentioned on Slide 6 where you've high graded the number of your D and C services. And I'm 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'm 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.

Speaker 2

No, I think that's right. I think it's kind of across the industry, we've seen that costs have come down on the low spec stuff first. And the hope is that we'll start to drive some costs down on the high spec stuff Between now and the end of the year, really what we've seen is just our ability to kind of continue to reduce cycle times and cut days out on the drilling and completion side Kind of more than offsets that slight premium we have to pay for that equipment. But as we've always been, I mean, we're always kind of evaluating what that equation looks like, what the Overall cost structure looks like with high spec versus lower spec and hopefully we'll kind of continue to both cut days and maybe get some kind of cost reductions on the high spec stuff

Operator

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

Speaker 6

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?

Speaker 6

Just trying to get a sense of where production goes in here.

Speaker 2

Yes, sure. So I think the actual data is the 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.

Speaker 6

Got it. Thanks, Will. I guess just following up on Neil's question on cost deflation. We've heard others You mentioned 5% to 10% lower year over year well cost than 2024. Does that number seem reasonable to Maybe can you just talk through what you're seeing on cost deflation now and if you're seeing any substantial declines on any of the larger ticket items?

Speaker 4

Yes.

Speaker 2

I mean, I think that we'd be at the high end of that range based on what we're seeing today, primarily driven by just tubulars and casing. I mean, we can point to kind of 5% reduction based on the casing we're purchasing today, which will ultimately run-in Q1. So we've kind of got 5% in the bag And now we're starting to chip away at things on the completion side and kind of other kind of line items across the whole AFE. So I think based on what we're seeing today, we've got Kind of good line of sight to 10%, and I'm hoping we can kind of call back more between now and then and hopefully beat that number when we get to next year.

Speaker 6

Thanks, Will. That's great color.

Speaker 3

Yes.

Operator

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

Speaker 6

Hey, guys. I was just curious, there's been a lot of commentary on some of the other calls about M and A in Armitt in particular, would I guess sort of the notion that it's pretty picked over and with 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 the what your sense of the land on land was there?

Speaker 4

Yes. I mean, I think starting with the grassroots I think our team does incredibly well. Like we're still finding great opportunities, kind of think smaller blocking and tackling acquisitions ahead of the drill bit. And as you saw, we did that In this quarter, we've really done it every quarter for 8 years and something we're highly confident we can continue to do. And look, those are some of the most highly attractive, highest rate of return acquisitions I think on bigger stuff, there's still stuff out there.

Speaker 4

I think you've seen a lot of transactions in the Permian. I think It's safe to say we're looking at everything. But as we said before, we've got a really good business and that sets the bar for acquisitions really high. I'd say We've got one of the highest quality inventory bases out there. So we're only going to do deals that provide inventory that compete for capital.

Speaker 4

And I think the better our business The harder that is, but we're out there looking. I think if we can find something that was accretive and we were confident to make our business better, we'd be excited to pursue it. But I think at this point, We're also more than happy to stay on the sidelines and just keep working on our base business because it's so good.

Speaker 6

Yes, that's perfect. Thanks guys. I appreciate it.

Operator

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

Speaker 7

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 if we expect it to kind of drop back down?

Speaker 2

Yes. 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'd expect from us is That probably puts us in 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'll be able to drive that down if we do continue to grow the base production.

Speaker 7

Understood. Just one quick follow-up. You guys are dropping a rig on efficiency holding production, steadied up. So on the longer term, what are there any bogies out there that would have you bring back a rig for growth, whether in 2024 or beyond? Yes.

Speaker 7

What would you need to see in order to kind of make that move?

Speaker 4

Yes. I mean, I think for us, we've been pretty clear. We're not providing any kind of outlook on the 2024 at this point. I think we've been With the market that that's a decision we'll make as we get closer to next year. I think for us, as we've 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.

Speaker 4

And I think today it's too early to tell what 2024 looks like. I think with a lower 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 activities. I think today, it's too early to tell, but it's something we're constantly We're watching and planning around and we've got the right team in the asset base.

Speaker 4

We can react quickly as we put out a plan closer to next year.

Speaker 6

Understood. Thanks for the clarity.

Operator

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

Speaker 8

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?

Speaker 4

The real frank answer is we put out Q4 to Q4 because we didn't have a clean simple pro form a 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'll probably shift and start talking Annual growth rates, I think that's simpler and cleaner. And now that we'll 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.

Speaker 8

Got it. Okay. My follow-up, and we've 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

Speaker 2

I'd expect kind of flat oil cut if the kind of commodity price market looks like it does today. Obviously, we've 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. I think the base case is flat oil cuts for 2024.

Speaker 8

Okay. Perfect. Thanks so much.

Operator

Thank you. And your next Question comes from the line of Josh Silverstein from UBS. Please go ahead.

Speaker 9

Thanks. Good morning, guys. We started to hear some more Permian operators go out towards 15,000 foot laterals, even a little bit beyond that. Wondering if what you guys have done, what your average That lateral length maybe this year and what the inventory of some of the longer laterals may look like?

Speaker 2

Yes. So our average lateral length to date this year is 9,300 feet, which kind of fits. If you look at our position on the map, it sets up really well for 2 mile development across the majority of our position. So I think that's what we've done over the last 2 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'd get on the Midland Basin when you go that long.

Speaker 2

Having said that, we've got a team that can do it. We've drilled 20 of 2.5 mile laterals this year and over the kind of over time. So we'll keep watching it. We feel very confident that If that is the most capital efficient answer, that will move that direction. But I think as a base case, you should expect to work kind of a 2 mile development company Next year.

Speaker 9

Got it. Understood. And then just on the return of capital and cash to the balance sheet, you still have the 50% plus And a return to capital framework. Just given that you don't have any maturities out 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?

Speaker 9

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.

Speaker 4

Yes, sure. No, I think that's right. Obviously, the base dividend is what it is. I think on the variable versus the share buyback, I think for us that's just going to be opportunity set driven. We've said before and continue to say that kind of the default for us is going to be the variable dividend, but we expect to be opportunistic and And take advantage of opportunities we have on the buyback side.

Speaker 4

And I think we haven't seen that in the last year because the stocks performed really well. But I think as we see Or if we see clear market dislocations or an opportunity to kind of effectuate an organized sponsor sell down, we're going to lead in hard to the buyback. So I think you got it right. I think the base case is going to be the variable dividend. But over time, I expect we'll find some opportunities and should lean hard into the buyback when those opportunities arise.

Speaker 8

Great. Thanks guys.

Speaker 4

Thank you.

Operator

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

Speaker 4

I'd like to conclude today's conference call on Slide 10, which helps to re emphasize our value proposition for current and future investors. Since closing our merger almost a year ago, we've delivered leading returns for our sector and outperformed the S and P, but believe that our business continues to represent 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 have bring the 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.

Remove Ads
Powered by Quartr
Earnings Conference Call
Permian Resources Q2 2023
00:00 / 00:00
Remove Ads