Permian Resources Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 14 speakers on the call.

Operator

Good morning, and welcome to Permian Resources' Conference Call to discuss its 4th Quarter and Full Year 2023 Earnings. Today's call is being recorded. A replay of the call will be accessible until March 13, 2024 by dialing 877-674 7,070 and entering the replay access code 855,841 or by visiting the company's website at www.permianres.com. At this time, I will now turn the call over to Hays Mabry, Permian Resources' Senior Director of Investor Relations for some opening remarks. Please go ahead.

Speaker 1

Thanks, John, and thank you all for joining us on the company's Q4 and full year 2023 earnings call. On the call today are Will Hickey and James Walter, our Chief Executive Officers and Guy Ollifin, our Chief Financial Officer. Yesterday, February 27, we filed a Form 8 ks with an earnings release reporting 4th quarter results. We also posted an earnings presentation to our website that we will reference during today's call. 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.

Speaker 1

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 SEC, including our Form 10 ks, which is expected to be filed tomorrow 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.

Speaker 2

Thanks, Hays. We're excited to share our Q4 and full year 2023 results as Permian Resources was able to deliver another quarter of outperformance, closing out an incredible 1st year of operations under the PR name. I think that over the past 5 quarters, we've demonstrated just how good this Permian pure play business is, operating efficiently on our core Delaware assets, executing on highly accretive deals and continuing to demonstrate low cost operatorship across the business, which all contribute to PR's industry leading returns since inception. As we look to 2024, we expect to continue maximizing shareholder value, And I want to take a moment to walk through how we think about value creation here at PR. Our relentless focus is on creating value on a per share basis.

Speaker 2

And our team has positioned us to deliver a 2024 plan that's expected to generate peer leading production, cash flow and free cash flow per share growth without increasing leverage. We're able to drive this outsized growth per share through PR's continued focus on being the lowest cost operator in the Delaware. Our thoughtful capital allocation and development plan and the highly accretive transactions we completed during the year. In the midst of closing the Earthstone acquisition on November 1, the Permian Resources team was still able to deliver an outstanding Q4 across all metrics. Q4 production outperformed with total production of 285,000 barrels of oil equivalent per day and oil production of 137,000 barrels per day, exceeding both internal and external expectations.

Speaker 2

This production beat was attributable to 3 things. First and most significantly, we saw outperformance across the board between both PR and legacy Earthstone assets. 2nd, a reduction in downtime on legacy Earthstone assets led to higher than expected run times as the team realized operational synergies more quickly than planned. 3rd and finally, our drilling and completion efficiencies continue to impress, bringing incremental wells and producing days into the quarter. Even with the increased activity, capital expenditures were in line due to per unit cost reductions, leading to significant free cash flow outperformance in the quarter.

Speaker 2

Our team was also able to transition seamlessly into integration and synergy capture mode in the Q4, executing on our proven integration playbook, while maintaining focus on driving low cost leadership across the business. PR continued to increase operational efficiencies in the 4th quarter, while integrating legacy Earthstone rigs and fleets into its program. Contributing to overall program decreases in per well unit cost that we've been able to carry forward into the full year 2024 plan, culminating in a program average of $8.60 per lateral foot. In addition, the team demonstrated strong controllable cost discipline, driven largely by lower LOE with controllable cash costs decreasing 8% quarter over quarter to $7.33 per BOE despite higher legacy Earthstone costs. Overall, our strong production and low cost structure allowed PR to report $0.47 per share of adjusted free cash flow or $332,000,000 in aggregate.

Speaker 2

In addition to our focus on execution, we believe our portfolio optimization program will continue to drive meaningful value for shareholders. As many of you saw last month, Permian Resources announced a series of transactions, which added 14,000 net acres and 5,300 net royalty acres in the core of the Delaware Basin, just 3 months after closing the $4,500,000,000 Earthstone acquisition. Most notably, the 2 bolt on acquisitions add over 100 high return locations directly offset our Core Parkway position, which represents one of the highest returning assets within our portfolio. This is in addition to a sizable acreage swap, a non core divestiture and our ongoing ground game. Importantly, when you combine all of our portfolio management efforts from the last year, our inventory additions more than replaced the wells we drilled on a stand alone basis.

Speaker 2

We believe that excellent execution on these type of difficult transactions in smaller deals is a great path towards material improvements in our inventory position, NAV and overall value proposition to stakeholders and will continue to be a key focus for us going forward. Our excellent Q4 results and increased free cash flow allowed us to deliver total return of capital of $0.24 per share to shareholders during the quarter. We announced a $0.05 per share base quarterly dividend and we are excited to be able to demonstrate sustainable base dividend growth as we plan to increase our base dividend by 20% to $0.06 per share next quarter. In addition, we remain committed to paying 50% of the remainder of free cash flow to shareholders via dividends and or buybacks. And once again, we executed both methods of variable returns during the Q4.

Speaker 2

First, we repurchased a total of 5,000,000 shares at an aggregate price $13.32 per share for the quarter. And consistent with our framework, we announced an incremental variable dividend of $0.10 per share, bringing the all in quarterly return of capital to $0.24 per share. As I mentioned before, our team has absolutely hit the ground running with the integration and synergy capture phase of the Earthstone acquisition. We are well ahead of schedule, giving us high level of confidence that we will be able to beat the original synergy target time line laid out in August. Importantly, drilling and completion costs and efficiencies were realized almost immediately at closing with a 12% D and C savings per well already realized on the legacy Ersteon wells and more to come.

Speaker 3

I want to take

Speaker 2

a second to highlight the amount of effort that's gone into that 12% cost reduction per well since closing the Aerostone acquisition because it's not just swapping out rigs or changing a casing design. Slide 6 shows around 10 drivers, but in reality, it's close to 40 plus small initiatives that add up to meaningful improvements and our team has not stopped pushing on those efforts. 2 of the largest savings, drilling and completion efficiencies have improved by 35% and 20%, respectively, versus historical Earthstone results as equipment has been high graded and best practices have been shared across the Unified team. These faster drilling completion times both reduce cost and improve returns by shortening cycle times. Our field operations team has also made incredible progress on the LOE front, optimizing production operations in many large and small ways.

Speaker 2

We couldn't be more pleased with the synergy results to date and look forward to providing another positive update next quarter. The same relentless focus on low cost leadership allows us to maximize synergies in the Earthstone acquisition also allows us to drive controllable cash cost to peer leading levels. Our 2024 plan, which James will outline here in a minute, benefits from lower than expected all in cost, with the combined business able to basically get back to PR's legacy cost structure despite higher historical Earthstone costs. Given the marginal nature of free cash flow, running a low cost business is critical to supporting strong free cash flow per share generation. With that, I'll turn it over to James to talk through 2024 plan.

Speaker 4

Thanks, Will. Turning to Slide 8, we're excited to discuss our 2024 development program, which is focused on maximizing returns and free cash flow per share through thoughtful capital allocation and efficient low cost execution. Our plan is a result of a tremendous amount of work from every department at Permian Resources and I want to thank our entire team for the work that went into this plan. Our goal is to focus on high return developments in the Delaware Basin that allow the company to maximize returns while ensuring we minimize any future well or location degradation. Fortunately, our robust inventory allows us to drill similar zones, areas and packages to what we drilled in 2023 and as such achieve similar well productivity.

Speaker 4

For the full year 2024, we expect total production to average between 300,000,000 3 125,000 BOE per day and oil production to average between 145,000 and 150,000 barrels of oil per day. We expect production to be in the lower half of the full range during the first half of twenty twenty four and the upper half during the back half of the year. Our capital program consists of approximately $2,000,000,000 of which 75% is allocated to drilling and completion operations. We expect to turn in line 2 50 wells this year. The balance is primarily investments in infrastructure that position PR to continue to drive value in 2024 and years beyond.

Speaker 4

In terms of CapEx cadence, we expect CapEx to be slightly front half weighted. Our drilling program is largely focused on our high returning Delaware Basin asset with a particular emphasis on the New Mexico portion of the Delaware given the returns we're seeing from those assets today. The Midland Basin will not be a substantial part of our development plan in 2024. As Will mentioned, we expect our controllable cash cost to be approximately $8 per BOE, which screens well relative to other operators in the Permian and is particularly impressive given the higher legacy cost structure that came over from the Airstone assets. Turning to Slide 9, we want to concisely lay out how our business is getting better this year through the lens of capital efficiency related metrics.

Speaker 4

Simply put, in 2024, we expect our cost to be lower and our well productivity to be the same or slightly better than last year, which is a winning combination. We would also like to highlight that these improvements in capital efficiency do not come easy. Our team is focused on maximizing value by analyzing every input into our model on a per unit basis and looking for areas to improve. We moved very quickly in leveraging our increased size and scale to receive better pricing on key consumables, such as casing and sand, but some key input costs such as drilling rigs and pressure pumping remain at elevated prices as we head into 2024. Our team continues to find ways to do more with us and we're always looking for ways to tweak and optimize well designs and find that these individual changes only reduce cost by a percentage point or 2, but the cumulative effect adds up to real dollars when multiplied over a $250,000,000 program.

Speaker 4

This hard work drives our base and leading cost structure and really makes a difference in our ability to extract as much value from every single asset as possible. I'd like to conclude today's prepared remarks on Slide 11, which helps to reemphasize our value proposition for current and future investors. Since the formation of Permian Resources, we have delivered best in class returns for our sector and meaningfully outperformed the S and P 500. This outperformance was largely driven by successful execution, low cost leadership and accretive acquisitions. As a result, our business continues to represent a compelling value proposition against other large cap oil companies.

Speaker 4

With some of the recent deals announced, there are fewer and fewer Permian pure plays solely focused on the highest returning base in the Lower 48. It's worth emphasizing that Permian Resources now sits at a new cost of large staff peers with an enterprise value of greater than $15,000,000,000 and 100 percent of our business focused on the Permian. It continues to be our belief that quality businesses such as ours with core assets in the Permian, efficient operations and strong multiple strong production and free cash flow per share growth have room to rerate to higher multiples. By continuing to cultivate and enhance these attributes through efficient execution and opportunistic transactions such as Earthstone, we believe that we can continue to create outsized value for shareholders and solidify our position as a leader in the energy sector. Thank you for tuning in today.

Speaker 4

And now we will turn it back to the operator for Q and

Operator

Your first question comes from the line of Scott Hanold from RBC Capital Markets. Your line is now open.

Speaker 5

Yes, thanks. Great quarter guys and good to see those synergies coming in faster than expected. And if we turn to Page 6, where you kind of walk down the Earthstone cost to where they're at right now. Could you give us a sense of as you look at the current cost and bring that down to the PR legacy costs, like what are really the areas where that difference is going to be occurring and how fast can you do those? And so is it drilling efficiencies, casing like what gets you to the PR well cost and how quickly can you get there?

Speaker 2

Yes. Look, I think we've made frankly, we're way we've gotten here way faster than I thought we would be. If you think about the 5 Ersteyn rigs that we picked up, we've already swapped out 3 of them just 3 months post close, and we're able to get our casing design implemented effectively day 1. We were in a fortunate position. They didn't have a big backlog casing that we had to choose through before we could start running our wellbore design and our casing.

Speaker 2

So that's how we were able to achieve such dramatic cost reduction in just 3 months. And if you think kind of what's on the come, it's the stuff it's not the kind of pricing power we've already implemented all that. It's more kind of to go build the last bit of efficiencies across all the Earthstone equipment. So we've got 2 more rigs that we'll have to kind of either get up to our standards or swap out over time. We'll have to kind of continue to drive a few more efficiencies on the drilling and frac side.

Speaker 2

But we're more than halfway there to where we're trying to get to and we've done that in just 3 months. So I'd say we're feeling really good about both the absolute quantum of dollars that we'll be able to cut from the Irastone well cost and

Speaker 3

also the time to get there. Understood.

Speaker 5

And as we think about the 2024 activity and budget, it looks like it's sort of maintaining your current pace coming into the year. But with you all seeing better efficiencies and performance, you the well count next year and the rig count? Or would you guys just produce at a higher level if your efficiencies continue through next year. So it's really a question on pace of next year. And if you keep going faster, will you just kind of keep rolling through that?

Speaker 2

Yes. I think there's 2 answers I'll give. I'd say, first, just as we think about pace of activity, I'd say just as our business has gotten bigger and working interest moved around a little bit, we're much more focused on kind of the total quantum of dollars that we want to reinvest, kind of what is the capital dollar budget. I'd say that's kind of how we're thinking about activity. I think as you follow this year, we've got 12 rigs running today and you could see that number kind of move up and down around 11% to 12% throughout the year just as we're optimizing both the rig fleet as we continue to swap out and bring in better rigs, but also kind of optimizing around larger pads, etcetera.

Speaker 2

So more of a focus on, I think, you'll see a relatively consistent capital profile around that total capital budget of $2,000,000,000 And then yes, as you get to year end and you get to these weird things where are we going to if we bring wells into the quarter, are we willing to spend more and whatnot, I'd say we'll take on a case by case basis. But historically speaking, when our per unit costs are the lowest they've ever been because efficiencies are the highest they've ever been and returns are very, very good like they were at the in Q4 just 2 or 3 months ago, we lean towards we'll go ahead and kind of bring the extra wells on, add the value of the business focused on the long term as opposed to doing some kind of cute things on a quarter to quarter basis.

Speaker 5

Great. Makes sense. Thanks.

Operator

Your next question comes from the line of Neal Dingmann from Truist. Your line is now

Speaker 3

open.

Speaker 6

Good morning guys and thanks for the time. My first question just going right to well productivity looking at Slide 10. Specifically, Will, I'm just wondering how repeatable is this production not only in Lea and Eddy counties, but maybe as you go down into Texas? And then I'm just wondering is continue to plan throughout this year or maybe more into next year in 'twenty six, should we assume more child wells or sort of the same mix as you've always had?

Speaker 2

No, I think it will be very, very similar. I can speak very specifically to kind of 24 to 25 because we've already got basically 25 schedule kind of all lined out and it's a very, very similar well mix. Our development methodology really hasn't changed from 2022, 2021, 2023. Now you're seeing it in 2024 and you'll I'd expect you'd see this again in 2025 and 2026. Just we are kind of methodically marching across the position, join the right size pads to make sure to minimize kind of any future degradation and you're seeing kind of that flatten out to capital efficiency.

Speaker 2

So should be quiet, kind of no story, no news is good news on the well productivity side for us for the years to

Speaker 6

come. That sounds fantastic. And then, Will, for you, James, just on my second is just on your ground game. While you've done a great job, Earthstone and some larger deals, which have been very notable, can you speak to the degree of upside that the bolt on trades and grassroot efforts will continue to provide? It seems like that certainly was a big deal even here recently.

Speaker 4

Yes. I mean, we obviously put up release in January that went through all of that detail. I have a slide in the back here. But I think our ground game in the Delaware is awesome. We've got an incredible land team and incredible business development team that kind of every day are out there doing deals, looking to accretively add acreage in places a lot of people aren't looking.

Speaker 4

So really cool some stats. I mean, I think you've seen this, but we did 145 acquisitions last year that added almost 17,000 net acres to our position. I think that's just a little piece of the PR secret sauce that drives value in a different way than I think a lot of our peers are. But it's something we think we can continue to do. I'd say those small deals, the pipeline still feels really good for 2024 2025.

Speaker 4

And I think we're confident we continue to get the right deals done at the right prices.

Speaker 6

Great guys. Thanks.

Speaker 7

Thanks Neil. Thanks

Operator

Neil. Your next question comes from the line of Gabe Daoud from EDCOINS. Your line is now open.

Speaker 8

Thanks guys. Thanks for taking my questions. I guess what I would like to hit on first is just you talked about the increasing pad size and you obviously highlighted the targets that you'll be going after in the Delaware. I was just wondering if you could overall refresh our memory on where the pad size or project size is going this year relative to last year and then just the spacing kind of looks like for this year and the Delaware?

Speaker 2

Yes. I mean, it ends up being a couple wells per pad bigger than where we were last year, but this isn't really a change in kind of spacing or anything from a development perspective. It's more just as we look at the footprint of the acreage we're drilling, we've got some wider fairways than maybe we had the year before, which calls for slightly larger pads. So it's factually correct. Our average pad size will be a couple of wells higher this year than it was last year, but I wouldn't view that as any bit of a change in hemp development philosophy.

Speaker 2

It's more just the acres that we're drilling this year calls for slightly larger pads to keep with a consistent development methodology and really nothing more than that.

Speaker 8

Okay, got it. Understood. Thanks for that. And then I guess as a follow-up, could you maybe just talk a little bit about that 25% non D and C capital? What kind of infrastructure projects?

Speaker 8

And is that a similar level of spend we should expect on infrastructure in 2025 beyond?

Speaker 2

No. Look, really what it is this year is it's a little bit of catch up on the Earthstone side, just kind of some stuff where we want to go kind of build out some batteries and some stuff the PR way. So there's a little bit of kind of incremental catch up cost this year with Earthstone and a little

Operator

bit of kind of some of the

Speaker 2

gathering side to make sure that we're continuing to have really, really good takeaway in New Mexico like we've always had. But

Speaker 4

I think of it more

Speaker 2

as kind of one time in nature. And as you look forward, we're probably to that, I don't know, 15% or something like that on a total percent of capital budget for infrastructure spend.

Speaker 3

Cool. Got it. Thanks guys.

Operator

Your next question comes from the line of Zach Parham from JPMorgan. Your line is now open.

Speaker 3

Good morning, guys. Thanks for taking my question. First, we've heard from some of your peers about some natural gas processing tightness in New Mexico that's been a headwind. Has this been an issue for you all at all? And maybe talk about how you've managed this issue and if you see anything impeding the 2024 program as far as a processing standpoint?

Speaker 4

No, Zach. I mean, we're in a really fortunate position that we've got the right long term midstream partners in New Mexico. I think we said it on calls in the past that fortunately, we're part of some of the kind of biggest and best natural gas processors and transporters in the basin. That's kind of both in New Mexico and Texas. And looking back historically, we've really never had any issues and don't foresee anything going forward.

Speaker 4

I think that's just kind of being in the fortunate position to have the right partners in the right places, but we don't foresee any issues whatsoever on the midstream side.

Speaker 3

Thanks. And my follow-up is just on cash taxes. You guided the $75,000,000,000 in cash taxes for 2024. Can you give us some color on how you expect cash taxes to trend in 2025 and in future years? Yes.

Speaker 9

I mean, we'll start getting closer to a normal course cash taxpayer beginning in 2025. We have some sensitivity in 2024 to oil price obviously, but we have NOLs today, meaningful portion of which we're using and we'll start trending to more cash taxes in 2025 and beyond.

Speaker 3

Thanks, guys.

Operator

Your next question comes from the line of Oliver Huang from TPH. Your line is now open.

Speaker 10

Good morning all and thanks for taking my questions.

Speaker 7

Good morning Oliver.

Speaker 10

Great quarter and you all have obviously done a good job with integrating the Earthstone assets ahead of schedule. But just wanted to see if you all might be able to provide some incremental details to help us better understand the drivers of LOE moving sustainably lower for both Q4 and for the 2024 guide being so quick, just kind of looking at where the figure was just 6 months or so ago as from the standalone earthstone business?

Speaker 2

Yes. I think kind of the big drivers in LOE, there's kind of there's 2 or 3 things that we're working on it. I'd say one, just to give the Earthstone team some credit, that their LOE was improving quarter over quarter pre close. I mean it was I think we've applied some best practices and some things that are that have kind of helped accelerate that and maybe have a slight step change from where it was headed. But that LOE was kind of coming down on its own.

Speaker 2

So there's a little bit of tailwind there. I'd say secondly, just the overall kind of production profile in Q4 and go forward helps kind of a bigger denominator obviously is going to help on the OE side. And then probably the more sticky stuff would be what we're doing on the water disposal side and how we're addressing kind of failure rates and really kind of optimizing artificial lift for the right well set. We've got kind of the best practices at PR are we don't we're not a blanket gas lift company. We're not a blanket ESP company.

Speaker 2

We're not a blanket spaggle company. It's really a we challenge every engineer over every area. It's built to suit. It's going to put the right lift that the well needs, which will give better run times and lower LOE. And we've been really successful.

Speaker 2

If you go out to a PR pad across the Delaware, you may see a different lift type and 2 wells that are very close to each other in the same area because that's what they call for. And you're starting to see kind of the benefits of that pretty quickly. So there's a lot more to come there. Look, I think that we can do some stuff on the water disposal side in a bigger way. We've had some quick wins where we had good water contracts or good water disposal solutions or water recycling solutions in areas that, Ursoon wells didn't have that tie in and which are kind of right offset us.

Speaker 2

But go forward, I'd expect we'll continue to tackle the LOE side on the really, really with respect to water.

Speaker 10

Okay. That's certainly helpful. And maybe for a follow-up, I mean, definitely good to see some of the drilling and completion efficiency improvements starting to be realized right off the bat for Earthstone. But just with the understanding that there's still solid running room to kind of converge those well costs towards the legacy PR business, Just wanted to see how much of that future benefit has already been taken into account when kind of looking at the D and C budget that you all have laid out for this year?

Speaker 2

It is taken into account. So I'd say from what we have line of sight on, expect to get all of it. Obviously, we're hopeful and kind of doing everything to try to get more, but the budget does take into account the synergies that we have achieved to date and expect to achieve between now and year

Speaker 10

end. Awesome. Appreciate the color guys.

Speaker 2

Thanks Oliver.

Operator

Your next question comes from the line of Leo Mariani from Roth MKM. Your line is now open.

Speaker 11

Hi, guys. It's very, very strong production here during Q4 and I was hoping you could provide a little bit more detail. I mean, did you get some extra wells on? Were there some extra non op benefit? Obviously, you just had very strong growth in both oil and in total volumes.

Speaker 11

And I guess my understanding was that you maybe had quite a few low wells that were turning mine this quarter versus last, but perhaps mistaken. So maybe you could just provide a little bit more color on the dynamic there?

Speaker 2

Yes. I mean, I tried to address some of it in scripts, Leo. I'd say that the biggest driver would just be well outperformance. The legacy Earthstone wells and the PR wells you brought online in the quarter just outperformed even our expectations. So that's going to be kind of more than half of the volume beat for the quarter.

Speaker 2

The balance is going to be made up of we were able to make some material progress on downtime on the Earthstone assets in Q4, kind of a step change in less downtime. So better run time than kind of what we had budgeted for and what we've seen historically, which really helped with Q4 production. And then lastly being we did bring some more wells in the quarter. I don't know the exact numbers. It was a couple of wells.

Speaker 2

So couple of wells with some meaningful amount of producing days into the quarter that were expected to be in 'twenty four. And again, that's just going to be we didn't expect to start drilling 35% faster in fracking, 20% faster on the Earthstone assets effectively day 1 and we were. So that just kind of brought some activity into the quarter.

Speaker 11

Okay. That's helpful in terms of all that color. And then just looking at 2024, I think you guys had mentioned that CapEx is a little bit front half weighted. I mean, you generally expect it to decline

Speaker 4

during the course of

Speaker 11

the year and I'm guessing production is maybe a little bit of a mirror of that. Would you generally expect Q1 to be low on production and it's kind of build a bit throughout the year? Just any color you have around cadence in 2024 would be helpful.

Speaker 4

Yes. I think how you said it is right. CapEx is a little bit front half weighted and production is a little bit back half weighted. But it's not giant swings. I'd say it's pretty modest, but what you said was just right.

Speaker 11

All right. Thanks guys.

Speaker 2

Thanks, Philip.

Operator

Your next question comes from the line of Doug Leggate from Bank of America. Your line is now open.

Speaker 12

Hey, good morning. This is John Abbott on for Doug Leggate. Thank you for taking our questions. The first question is just on your Midland position. Just what is your current production on that position?

Speaker 12

And then just given the continued interest in Permian assets, what is your latest thoughts on what you do with that position here and also the possible timeframe?

Speaker 4

Yes. So the managed position is about 20,000 barrels of oil per day and about 60,000 BOE a day. And it's a great cash flow business. I think the ErsteM team and our PR team have that in a really good place where we've got consistent low declines, low costs, etcetera. So we like having it.

Speaker 4

I think I'd say we're doing a couple of wells on that asset the first half of this year. And pretty excited about what our team has done to date just on the cost side. I think there could be some meaningful cost reductions there that are a big boost to the value of that asset. But I think over the long term, we've been really clear we're a Delaware Basin focused business and that's where the majority of our capital, our time and our energy are focused. So I don't think we're going to do anything strategic with the Midland Basin asset in the near term.

Speaker 4

But I think over time as we better understand that asset, if there's ways to extract more value other than owning it, I'd say we're kind of all ears. But I'd say that's probably down the road, most likely a 2025 type of thing if we look to do anything at all.

Speaker 12

Appreciate it. And then for our follow-up question, while it is not your focus necessarily, how do you sort of think about long term maintenance CapEx? I mean, do you sort of look at the midpoint of your guidance several $100,000,000 less than that? How do you think about long term CapEx for your business?

Speaker 2

Yes, I think that's right. I mean, just given all the kind of integration and acquisitions over the last 6 months, it's kind of hard to peg what production level you're calling maintenance. But I think if you're going to predict peg kind of where we were in Q4 or where we'll be in Q1 for and then kind of maintenance CapEx to be exactly what you said. I think it's about $200,000,000 less than the midpoint of the guide, something like that.

Speaker 1

All right.

Speaker 7

Thank you very much for taking our questions.

Speaker 2

Yes. Happy to do it, John.

Operator

Your next question comes from the line of John Annis from Stifel. Your line is now open.

Speaker 7

Hey, good morning guys and congrats on the strong quarter. For my first question, digging further into your comments around downtime, what was Earthstone's primary source of downtime? And what were some of the specific practices in the field you've implemented to minimize it?

Speaker 2

There's 2 ways to attack downtime. 1 is lower failure rate, just kind of the easiest and most sticky best thing to do is lower failure rate. And although I think that is in progress, that takes a little longer. And the second is when wells go down, you just get on them quicker. Try to have turnaround time on a well that fails be a day or measured in a day or measured in hours, not measured in a week or weeks.

Speaker 2

And it's a little bit of that. It's a little bit of kind of what I said. There are some tailwinds on the Ariston asset. The team has done a good job of starting to address some of these problems over the last 6 months. So we kind of stepped in at a time where we were set up to succeed.

Speaker 2

And I think the people on the Earthstone team that become part of the PR team were excited to kind of do things the PR way and really jump head first into it. And

Speaker 4

so we've picked

Speaker 2

up the low hanging fruit, things like that. I think where we'll go get now is hopefully kind of really start to improve run times, which is the best way to lower LOE and increased run

Speaker 7

time. Terrific. For my follow-up, referencing Slide 7 and where you stacked up against peers in terms of cash costs is quite impressive, especially with the Delaware being a little heavier in water production. What's your sense of the biggest delta between you and other Delaware operators?

Speaker 2

I think I mean, what helps us if you compare it to other operators really in general, one is we don't have a lot of old vertical wells. We've got relatively clean new horizontal production, which really helps keep costs down. I think it's a great asset of ours. We don't have a lot of vertical wells that kind of increase the cost structure. And then we have great assets.

Speaker 2

If you think about where our assets sit within the Delaware Basin, although I think it's a fair statement that there's more water on average, we're in some of the oiliest places in the whole basin on oil cut percentage. We're not at any places that have or very few places that have like high H2S treatment, nothing like that. We are in the kind of basinal core of the basin. Then look, this is what we do. We are a low cost operator.

Speaker 2

We focus on controlling the things that we can control. We try to be the lowest on the D and C side, the lowest on the LOE side and the lowest on the G and A side. So I think that's what shows up here.

Speaker 4

And I think the only thing I'd add to that is we have a real awesome culture in the field with an ownership mindset. Like I think we spend a of time answering questions on management ownership, management stock, etcetera. But I think what's honestly probably more impactful about is that ownership mindset in the field where our team is incredibly proud of what they do and work incredibly hard in the field to fix wells as soon as they go down and kind of waste no time, waste no effort and kind of getting the right things to run the business the right way done. So I think it's that ownership mindset that we've talked about a lot at the top, but really permeates through the entire Permian Resources organization. I don't think that gets enough credit.

Speaker 7

Great color. Thanks for taking my questions.

Operator

Your next question comes from the line of Paul Beaman from Citi. Your line is now open.

Speaker 3

Thank you. Good morning, all. Thanks for taking my call. Just a quick one on valuation. You talked about a potential opportunity for you and similarly sized peers to rerate versus those larger.

Speaker 3

Just want to get your get a bit more detail on what type of catalyst you think or you anticipate to see to kind of close that gap?

Speaker 4

Yes. I mean, I think for us, I think it's all about execution. I think the market has started to realize the quality of our business looks a lot more like the other Permian pure plays than other large caps, albeit at a smaller scale. But I think over time as we can continue to execute quarter in quarter out and year in year out, I think that rerating happens on its own. I think it's kind of too obvious to miss.

Speaker 4

And the most important thing for us is to execute and continue to be the lowest cost operator in the Delaware.

Speaker 3

Understood. Thank you. Just a quick follow-up. As you guys think about the go forward cadence on D and C improvement, you already captured that 12%. We know some more is coming from the full integration of Earthstone.

Speaker 3

I guess I'm trying to get an understanding of your guys' view on the quantum you can expect going forward like into late 2024 and 2025 and beyond?

Speaker 2

I think it's 2 different ways to think about it. I think on the Earthstone assets specifically, we expect over the coming months those costs to converge with the legacy PR costs where we don't really talk about legacy or sooner legacy PR anymore. It's just these are Permian Resources well cost by area. And that's well on its way and expect to be there in short order. And then as far as what does that mean for absolute PR, D and C costs?

Speaker 2

What we laid out is this $8.60 a foot is kind of the guide for the year this year and that's based on what we're seeing real time today. So we're not baking in further efficiencies or further deflation. I think there we're hopeful we'll get a little bit of each of those kind of over the coming years. But again, we made a ton of progress recently and I think kind of more expected to see that kind of gradual decrease in cost, no more of the kind of step changes seen over the last 4 quarters.

Speaker 3

Understood. Appreciate the clarity. I'll leave it there.

Speaker 13

Yes. Thanks.

Operator

Your next question comes from the line of Philip Johnston from Capital One. Your line is now open.

Speaker 3

Hey guys, thank you. First, just to follow-up on Neil's question on well productivity. Slide 9, you show an expected 3% increase in your average productivity this year versus last in the Delaware. Is that mainly a function of the geographic mix shifts with 70% of your activity going towards Mexico versus the 40% last year? Or are there other factors driving that?

Speaker 4

No, well mix would be the biggest factor there. You're spot on.

Speaker 12

Okay. I assume that's all baked in

Speaker 3

the year 'twenty four guidance, right?

Operator

Yes. Okay.

Speaker 12

And then just

Speaker 3

last question, just next 12 month PDP decline that Midland Soul assumed in your year end 2023 reserve report and would you expect that decline rate to change significantly between now and the end of this year?

Speaker 2

Sorry, what's the second part of that question again? Can you repeat that real quick?

Speaker 3

Yes, just I'm looking for just a PDP decline rate that Nell and Sewell assumed in your reserve report and then you said the follow-up, would you expect that decline rate to change significantly between now and the end of this year?

Speaker 2

I can't say offhand what Netherlands Sewell's reserve report says, but I can say what we say, which is it's in the low 30s, kind of low to mid 30s on

Speaker 3

a BOE decline.

Speaker 2

And then, do the significant amount of growth like we had last year, you'll see that decline will slowly arrest. I'm not sure it's going to be super significant, but yes, that decline will continue to shallow out between now year end. Yes.

Speaker 3

Okay. Makes sense. Thank you.

Operator

Your next question comes from the line of Subash Chandra from Benchmark. Your line is now open.

Speaker 13

Yes. Thanks guys. The 150 ish type transaction, 17,000 acres of I think the metrics you throw out. What do you think the dollar per location map has worked out

Speaker 4

too? We haven't we kind of intentionally haven't published that in a lot of these especially smaller transactions. I think there are probably some competitive dynamics that are important to keep tied to the vest and some frankly, some confidentiality there. But I'd say the dollar per location is going to be in the pretty low single digit millions, if that gets you in the right direction?

Speaker 3

Yes, yes,

Speaker 13

I guess directionally. That's cool. And then secondly, on the integration costs, are they all done at this point? Or should we see anything kind of flow into 2024?

Speaker 9

Percent? About 20 percent in the first half of the year.

Speaker 13

Another 20,000,000

Speaker 3

There are

Operator

no further questions at this time. I will now hand the call back to James Walter for closing remarks.

Speaker 4

In closing, I just want to say that we believe our Q4 2023 results in our 2024 go forward plan speak for themselves and demonstrate just how good our Permian business is. Our lowest cost operating in the Delaware Basin, we believe that we are positioned to continue to generate significant returns for our shareholders as we build our track record of consistent low cost execution year in and year out. Thanks to everyone for joining the call today and following the Permian Resources story.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Permian Resources Q4 2023
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