Earnings Call Transcript - PR Q1 2023

Operator, 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 this call will be accessible until May 23, 2023, by dialing (877) 674-7070 and entering the replay access code 425142 or by visiting the Company's website at www.permianres.com. At this time, I will turn the call over to Hays Mabry, Permian Resources Senior Director of Investor Relations, for some opening remarks. Please go ahead, sir.

Hays Mabry, Senior Director of Investor Relations

Thanks, Anis, and thank you all for joining us on the Company's first quarter earnings call. On the call today are Will Hickey and James Walter, our Chief Executive Officers; Guy Oliphint, our Chief Financial Officer; and Matt Garrison, our Chief Operating Officer. Yesterday, May 8, we filed a Form 8-K with an earnings release reporting first quarter results for the Company. We also posted an earnings presentation to our website that we will reference during today's call. You can find the presentation on our website homepage or under the News and Events section at www.permianres.com. I would like to note that many of the comments during this earnings call are forward-looking statements that involve risks and uncertainties that could affect our actual results and plans. Many of these risks are beyond our control and are discussed in more detail in the risk factors and the forward-looking statements sections of our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter ended 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 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.

William Hickey, Co-CEO

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 154,000 barrels of oil equivalent per day, oil production of 78,000 barrels of oil per day and accrued capital expenditures of $360 million, 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. The company generated adjusted EBITDAX of $499 million for the quarter. Total cash costs also came in as expected and within 2023 guidance ranges 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&T was $1.12 per BOE and cash G&A was $1.36 per BOE. You will 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. 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 million on an accrued CapEx basis and $146 million 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. The success we have seen to date is a testament to their hard work, professionalism, and dedication to driving shareholder value. 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.

Guy Oliphint, CFO

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 million of total shareholder returns while reducing our overall debt and executing on accretive acquisitions. Since this is our first quarter 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 million on a cash CapEx basis. We reduced that amount by our $0.05 per share base dividend, or $28 million. We have committed to pay 50% of the remainder of free cash flow to shareholders via dividends or buybacks. As you can see during the quarter, we repurchased 2.75 million shares of stock for $29 million. 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 a 32 million share secondary offering by NGP and Riverstone. As a result of this transaction, the total number of sponsor on shares decreased from 281 million shares to 247 million, 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. 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 million during the quarter. We have no near-term maturities and well over $1 billion of liquidity on our RBL. We expect to continue to utilize free cash flow to reduce net debt over time. 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. 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, consistent with our desire to be able to act opportunistically in the event of a downturn. With that, I will turn it over to James.

James Walter, Co-CEO

Thanks, Guy. To start off, I'll point you to Slide 8 where we discuss our ongoing portfolio optimization efforts in more detail. As we referenced on 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 created several new operated drilling units. 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% 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 for giving us an edge on this ground game approach to growing the business. All in, the net effect of our portfolio optimization efforts in Q1 was 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 million. These transactions allow us to focus on our core business while enhancing overall corporate returns. Turning to Slide 9. We wanted to take a quick second 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 eight 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 8/8th 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 million of free cash flow per year if viewed on a standalone basis. Our high nets 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&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. 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&A.

Operator, Operator

Thank you, everyone. We will now start the question-and-answer session. The first question comes from Scott Hanold with RBC Capital Markets. Please go ahead.

Scott Hanold, Analyst

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

James Walter, Co-CEO

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 wells that we're developing. We find that to be some of the most highly accretive capital you can spend. But we're not looking to build a non-operated override portfolio or a separate business. More just kind of normal blocking and tackling that goes with our traditional upstream development. I'd say the reason for highlighting this is really twofold. First and foremost, we've got a lot of questions just about how capital efficient our business is. We have a very good widget, if you will. I think there are a lot of different components that drive that kind of outperformance. This is one that was maybe less understood, and we thought it'd be helpful to just shine a little bit of light on it. I think to your final question, I do think there could be opportunities to monetize, especially some of the non-operated overrides that are not fully valued in our portfolio today. But nothing big or strategic coming down the pipeline. We like having this and like what it does for the business as a whole.

Scott Hanold, Analyst

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? The first 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 to square the circle on expectations for that variable payout.

William Hickey, Co-CEO

Yes, this is Will. So on the production side, I think what you said 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. If you follow, you now have the starting point and the ending point. You can see it's not quite linear, but we feel really good that we will hit our full-year guidance. And to get there, you have to have a little bit bigger bump into Q2. Ultimately, you have the starting point and the ending point. You can solve for the middle. On the CapEx side, I'd say we're expecting 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. 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 expectations are that we are on track for the guidance outlined on the last quarter call, both on the production and CapEx side.

Scott Hanold, Analyst

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 pads being put in place that makes one quarter a little bit bigger than the other when you look at 2Q, 3Q, 4Q?

William Hickey, Co-CEO

I think somewhat linear is the right starting point.

Scott Hanold, Analyst

Okay. Appreciate that. Thank you.

William Hickey, Co-CEO

You bet.

Operator, Operator

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

Derrick Whitfield, Analyst

Good morning all. Congrats on a second solid quarter.

William Hickey, Co-CEO

Thanks, Derrick.

Derrick Whitfield, Analyst

At a high level, your return of capital was fairly balanced between share repurchases and variable dividends in 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 valuations?

James Walter, Co-CEO

Yes, sure. I mean, first of all, I'd say and echo what Guy said, we're super excited to finally have kicked off this variable return program. Returning capital to shareholders is something that's core to who we are at Permian Resources. Our view on the capital return strategy and the broader framework really hasn't changed at all over the past nine months. We've been pretty clear with you guys and investors that the default for us is going to be the variable dividend. We think that's the safest, most consistent way to return capital to shareholders over the long term. But we will be opportunistic. I think we've got a share buyback authorization out there for a reason. Opportunistic can take on two flavors here. First, which you saw in Q1, to ensure a thoughtful and orderly sponsor sell-down over time. We expect our sponsors to exit the business in a thoughtful, non-disruptive way. The second is if we see clear and severe dislocations in the stock trading of Permian Resources. This is a very volatile business, and over time, we will see those opportunities. You can expect us to lean into the buyback aggressively when we see those dislocations. But as we've said, the default and the base case for everyone should be a variable dividend.

Derrick Whitfield, Analyst

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 about your team and support structure that affords you the ability to continue to grind out hard-to-earn organic adds in a very mature basin and the market opportunity you see for Permian Resources?

James Walter, Co-CEO

Yes, sure. I think it really starts with being based in Midland, having boots on the ground and really our whole team having a presence here. That's the first core part of our strategy. Second, we've got a fully developed business development team whose sole purpose is doing transactions like what you see on the slide. It's probably eight or nine full-time dedicated people in that business development team, but they pool resources from the broader Permian Resources Group. The combination of a local presence here and a specific focus on these ground-game type acquisitions has been a real differentiator for us. I mentioned it, but these smaller deals are amongst the most attractive returns of any acquisition opportunities we've looked at in a long time.

Derrick Whitfield, Analyst

Agree. Thanks for your time.

James Walter, Co-CEO

Thanks, Derrick.

Operator, Operator

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

Neal Dingmann, Analyst

Good morning, guys. Thanks for the time. Will, my first question is probably for you. I would like to discuss operational efficiencies, which you all continue to see differently. Specifically, could you talk about how things are going for the remainder of the year? There’s talk about going from seven to six rigs. Are you still seeing efficiencies to be able to do that? Lastly, when you look at the region – thinking Texas or New Mexico and the formational focus, is there anything kind of different to think about? I'm trying to get at any sort of near-term lumpiness in one of the quarters? It sounds like it's going to be pretty good, just a continued ramp, but I'm trying to understand the plan for the remainder of the year and anything that might stick out.

William Hickey, Co-CEO

Yes. Thanks, Neal. We’re seeing all the efficiencies we need to feel confident in our plan to drop the seventh rig around midyear and still hit the kind of 150 TILs that we outlined at the beginning of the year. It’s been 12 months for us since we signed up for the deal. We've been heads down, working through how to put the best people in the right places with the right processes and strategy to get all the efficiencies we can. We’re very happy with what we've seen over the past 12 months since signing. On the production side, there's nothing that we see driving any significant lumpiness on the ramp to Q4. It's relatively linear as we model from Q1 to Q4.

Neal Dingmann, Analyst

Great. And then secondly, James, maybe for you or Guy, just on the recent hedges added. I understand Guy's comment about predicting the downside. Can you provide a little more color on why to add these hedges at all, given your improved financial position? You've always had a great financial position, but you also have the ability to change as needed.

Guy Oliphint, CFO

That's a great question. For us, hedges are an important part of our philosophy. This is a super volatile business, and we've seen that over the past weeks and expect to see more volatility. Hedges provide a great baseline, ensuring a certain amount of our free cash flow looking forward. We see real strategic value in hedges. While we don't technically need them to protect the balance sheet, we view hedges as strategic. They allow us to be opportunistic and aggressive if we have another downturn. We've seen hedges work to our favor in the past and expect them to continue being an important part of our strategy. You should see us continue layering in hedges over the coming years because that's how we run the business.

Neal Dingmann, Analyst

Well said, James. Look forward to all the upside, guys. Thanks.

James Walter, Co-CEO

Thanks, Neal.

Operator, Operator

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

Oliver Huang, Analyst

Good morning all, and thanks for taking my question. I wanted to ask about the services front. If I remember correctly, you are fairly well positioned to capture any potential deflation that we might see moving through the year. Can you provide the latest on what you 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?

William Hickey, Co-CEO

Yes, good question. Our rigs are pretty well staggered. Of the seven rigs we have, about a third are under multiyear deals, a third under one-year deals, and a third under pad-to-pad current deals. We’ve seen leading indicators of super spec rigs available in the market, which need to come before price reductions can happen. We were potentially close before the OPEC cut. But currently, there have been no material cuts on rig pricing yet. The market seems to be moving more in our favor over the last few months. On the frac side, it's similar. We revisit our frac pricing quarterly and have seen no increases over the last quarter. It has flattened from previous increases. We feel good about guidance on the CapEx side and believe there are more tailwinds than headwinds, but nothing concrete yet that we can take to the bank regarding this year's capital program.

Oliver Huang, Analyst

Awesome. Thanks for your time.

Operator, Operator

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

James Walter, Co-CEO

Before we conclude today's call, I wanted to briefly address a 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, but 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, everything from the development of a childcare center at the Midland Airport to financially supporting local schools and civic causes. Our efforts are bolstered by large organizations 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 million in education, health care, and safety throughout the Permian Basin. While we aren't immune to the fact that fighting to improve the Permian will be hard and take time, our region and industry are accustomed to taking on challenges and overcoming them. Thank you to everyone who listened into Permian Resources earnings call today. We are proud of what our team has accomplished over the past year and excited to continue to build on our track record of execution and equity value creation. I'll now hand it back over to the operator to conclude today's call.

Operator, 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 day.