Earnings Call Transcript - PR Q3 2023

Operator, Operator

Good morning, and welcome to Permian Resources Conference Call to Discuss its Third Quarter 2023 Earnings. Today's call is being recorded. A replay of the call will be accessible until November 22, 2023, by dialing (877) 674-7070 and entering the replay access code 608519 or by visiting the Company's website at www.permianres.com. At this time, I will turn the call over to Hays Mabry, Permian Resources Senior Director of Investor Relations, for some opening remarks. Please go ahead.

Hays Mabry, Senior Director of Investor Relations

Thanks, Lester. And thank you all for joining us on the Company's third-quarter earnings call. On the call today are Will Hickey and James Walter, our Chief Executive Officers, and Guy Oliphint, our Chief Financial Officer. Yesterday, November 7, we filed a Form 8-K with an earnings release reporting third-quarter results for the Company. We also posted an earnings presentation to our website that we will reference during today's call. You can find the presentation on our website homepage or under the News and Events section at www.permianres.com. I would like to note that many of the comments during this earnings call are forward-looking statements that involve risks and uncertainties that could affect our actual results and plans. Many of these risks are beyond our control and are discussed in more detail in the risk factors and the forward-looking statements sections of our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter ended September 30, 2023, which is expected to be filed with the SEC later this afternoon. Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance, and actual results or developments may differ materially. We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release or presentation, which are both available on our website. With that, I will turn the call over to Will Hickey, Co-CEO.

Will Hickey, Co-CEO

Thanks, Hays. Before we jump into the slides, I want to take a moment to thank our team for delivering the best operational quarter we have ever had as a company, which I will expand on in more detail in a moment. It's easy to get distracted when a big deal is announced, and our team didn't take their eyes off the ball from accounting to IT to all of the operational groups; great work from top to bottom. Having a strong underlying business is critical as we expand our focus to integration, and we have a great team that exceeded expectations so far in 2023. I want to spend a few minutes talking about the Earthstone acquisition, which we closed last week on November 1. As we stated during the announcement, we believe that the Earthstone deal provided a unique combination of significant near-term and long-term accretion, Permian Basin scale, high-quality assets in the core of the Northern Delaware Basin, and accelerated return of capital, all while allowing us to maintain a strong pro forma balance sheet. Importantly, we were able to complete the transaction at a purchase price and structure that will provide significant value to our combined shareholder base and are looking forward to delivering on the $175 million annual synergy target laid out in August. We spent the past few months working with the Earthstone team and preparing for the integration and synergy capture phase of the acquisition. M&A integration is something we consider our core competency at Permian Resources and we have already hit the ground running to leverage the playbook and lessons learned from the Colgate and Centennial merger last year. As we have begun integrating Earthstone's assets and team, we are more excited than ever about the improvement to our already great business that the combination provides. Shifting back to Permian Resources third quarter, I'm proud to announce that our team continued to deliver strong results. Operational outperformance across the board drove a meaningful increase in free cash flow for the quarter, resulting from a combination of wins. First, strong well results led to meaningful oil growth in the quarter with our new wells continuing to impress. Second, continued operational execution in the field lowered controllable costs despite summer weather in Texas, which is a real testament to how prepared and dedicated our field team is every single season. Weather in Texas is extreme but predictable and our team has worked hard to put equipment and processes in place to mitigate downtime. Third and finally, our drilling and completions team has relentlessly continued to drive down cycle times and well costs throughout the quarter. As a result, PR delivered total production of 172,000 barrels of oil equivalent per day and oil production of 90,000 barrels of oil per day, which represent 4% and 6% increases, respectively, compared to the second quarter. It's worth noting that we hit our Q4 '24 to Q4 '23 growth target of 10% a quarter early due to strong operational performance. The Company generated adjusted EBITDAX of $584 million for the quarter. Total controllable cash costs were $7.92 per BOE, which decreased slightly quarter-over-quarter. Overall, LOE, GP&T, and cash G&A were in line with our expectations. We reported adjusted free cash flow of $165 million based on cash CapEx of $380 million in the quarter. Lastly, we reported $0.29 of adjusted free cash flow per share on a cash CapEx basis and $0.39 per share of adjusted net income. Diving into operations a little more, our team increased efficiencies across the board, continuing our positive momentum from the previous quarter. The drilling team increased drilled feet per day by 14% quarter-over-quarter by continuing to refine best practices. In addition, the completions team delivered their best quarter to date with 1,880 completed feet per day and over 19 pumping hours per day, which we believe are some of the best performance metrics in the Delaware Basin. Overall, these efficiencies meaningfully reduced cycle time for the quarter, resulting in slightly higher CapEx spend for the quarter but lower per unit well cost. This is a winning combination; these sustained efficiencies should drive incremental value for shareholders going forward. Now I'll turn it over to Guy to discuss the return on capital.

Guy Oliphint, CFO

Thanks, Will. As you can see on Slide 9, strong Q3 results and increased free cash flow allowed us to deliver a total return of capital of $0.17 per share to shareholders during the quarter. Our calculation begins with adjusted free cash flow of $165 million. We reduced that amount by our $0.05 per share base quarterly dividend or $28 million. We have committed to pay 50% of the remainder of free cash flow to shareholders via dividends or buybacks. This quarter, we achieved that target with both. The share repurchase represents 2.2 million shares that we bought back for $28 million alongside a sponsor secondary offering during the quarter. Additionally, we will pay a variable dividend of $0.07 per share, bringing the all-in quarterly return of capital to $0.17 per share. Consistent with our goal of delivering sustainable long-term base dividend growth, we plan to increase our base dividend by 20% from $0.05 to $0.06 per share beginning in Q1. An overview of our balance sheet and hedge book can be found in the appendix. Our third-quarter results, both as a stand-alone company and combined with Earthstone, demonstrate our continued ability to maintain a strong balance sheet that supports strategic flexibility while pursuing accretive consolidation opportunities such as Earthstone. We have no near-term maturities and approximately $1.5 billion of liquidity on our RBL. We expect to continue to utilize excess free cash flow to pay down debt over time. Notably, our credit ratings were upgraded by all three agencies at the closing of the Earthstone transaction, furthering our goal of achieving an investment-grade credit rating within 12 to 18 months. With that, I'll turn it over to James.

James Walter, Co-CEO

Thanks, Guy. As you have all heard about the Earthstone announcement call in this morning's earnings call, we are incredibly excited about the future of our business with the addition of Earthstone. We're excited to get the deal closed last week and begin to welcome the Earthstone employees to the Permian Resources team. We view this transaction as consistent with our ultimate goal to do whatever it takes to maximize shareholder value creation. Our business today is better than it's ever been, and we expect to find ways to continue to improve it going forward. On Slide 10, we look back at a few of the key takeaways from our Earthstone acquisition. First, we acquired Earthstone at a very attractive valuation, where we are highly certain that we can exceed our return thresholds. Our purchase price at the time of announcement represented a slight discount to Proved-Developed PV-10 while adding significant high-quality Delaware inventory at little or no cost. Second, the transaction is accretive to all key financial metrics before synergies and highly accretive with synergies near term, long term, and midterm. But finally, and most importantly, we firmly believe this transaction will continue our track record of enhancing shareholder value through increased free cash flow per share and returns to investors. It's worth noting that this transaction makes Permian Resources the second largest remaining Permian pure-play, one of the largest operators in the Permian Basin. Although we have been very clear we would never do a deal just to get bigger, we do expect to benefit from enhanced economies of scale and the strategic benefits of being the second largest Permian pure-play. Before we move to Q&A, I'd like to take a quick second to look back at 2023 so far. This past February, our team set out a very strong and well-received full year 2023 plan that maximizes free cash flow for shareholders through high return cost-effective development. Since February, our team has executed extremely well, and we are exceeding expectations against that budget. We will not be providing standalone PR look back in our Q4 earnings call this February since we have two months of contributions from Earthstone included in our financials, but it's worth noting and giving our team credit for the fact that PR standalone is on track to deliver an excellent and outperforming year in its first full year as a public company. We will not be addressing our 2024 plan on this call today but expect to release an updated business plan and guidance on our next regularly scheduled call in February. Investors can rest assured that our philosophy has not changed. We'll be building a development plan that maximizes value for our shareholders over the near and long term. As we decide activity levels, we will put together a plan that results in the highest free cash flow over the next 12 to 24 months. We believe that by waiting until February, we'll have a much better idea of what that reinvestment environment looks like and be able to come to the market with a plan that maximizes value for shareholders in a way that we could not do as effectively if we rolled out a plan today. As always, our focus is on long-term value creation. Thank you for tuning in today. And now we will turn it back to the operator for Q&A.

Operator, Operator

The first question comes from Zach Parham from JPMorgan.

Zach Parham, Analyst

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

Will Hickey, Co-CEO

Thank you, Zach. There were really three main factors. You mentioned two of them regarding oil. The acceleration of wells this quarter has led to better operational efficiencies and improved downtime metrics. We managed to achieve record low downtime numbers for the year in Q3, thanks to the efforts of our operational team. When you combine all three of these factors, it resulted in a significant outperformance in our oil segment.

Zach Parham, Analyst

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

Will Hickey, Co-CEO

Yes. Just as you think about inflation, kind of as we discussed last quarter, I think we were trending for next year to see about 5% deflation year-over-year on the consumables side, primarily driven by casing and then hoping to get kind of a little bit on top of that via some of the services or things like sand, et cetera. So I think that's still consistent today. Obviously, the commodity prices are moving around a lot and people are putting out full-year budgets, which I think will drive kind of a lot of changes in that in either direction. But kind of call it, five-plus percent on the deflation side feels like a safe assumption for next year. And then on the operational efficiencies, the things we did in Q3 to reduce cycle times, faster drilling, faster frac times, et cetera, are the small little things that are really sticky. So I think our expectation is we'll be able to kind of continue that pace, drill more wells with less equipment and kind of add to that five-plus percent on the deflation side, just via better overall kind of operational efficiencies to drive well cost down even lower.

Zach Parham, Analyst

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

Will Hickey, Co-CEO

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

Operator, Operator

Your next question comes from Gabe Daoud from TD Cowen.

Gabe Daoud, Analyst

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

Will Hickey, Co-CEO

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

Gabe Daoud, Analyst

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

Will Hickey, Co-CEO

Yes. I mean I think the ground game is something we do quarter in, quarter out, I think something we do exceptionally well and can be a real differentiator over time. As we've mentioned time and again, those are, I think, the most attractive acquisition opportunities we look at, often right ahead of the drill bit and are really, really accretive. I think on the larger stuff, to be really clear, the first focus for us today is on integration of the Earthstone business, which we closed last week and continuing to execute. I think we have a saying on it; if we can't execute, we can't do anything else. I'd say larger stuff at some point down the road could make sense again. I'd say for us, we are highly focused on our asset quality, and I think remaining a Permian Basin pure-play is important to us. So I think that probably does narrow the potential scope of larger deals in the future. But we're going to continue to keep our eyes open. And as we've always said, we're going to do whatever makes the most sense for shareholders.

Operator, Operator

Next question comes from Neal Dingmann from Truist Securities.

Neal Dingmann, Analyst

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

Will Hickey, Co-CEO

Thank you, Neal. In terms of activity, we have made it clear that we will be moving rigs from Midland and reallocating that capital to Delaware. Our development plan will focus heavily on the Delaware Basin, where over 90 percent of our capital expenditures will be directed. When considering capital allocation for the Earthstone assets, around a third seems to be an appropriate estimate, possibly slightly less at times, but that should be a reasonable expectation for the year. On the operational side, we remain confident in achieving the synergies we previously outlined. The quickest wins will come from pricing adjustments on items such as sand, fuel, fracking, and wireline services, which we were able to secure right after closing the deal. The next step will involve improving rig efficiencies through either swapping out rigs or implementing best practices to enhance growth with the scale of our operations. Lastly, changes to lease operating expenses will come later, as they often involve contractual obligations or require more time to implement. It's just been a week since we started, and we feel more confident than ever in our ability to achieve these goals.

Neal Dingmann, Analyst

Yes, there is certainly a lot of potential for growth. James, my second question for you is regarding shareholder returns. Do you think that the current 50% free cash flow payout will remain the best approach as you grow larger and production increases, or could there be reasons to consider increasing it, or possibly even reducing it if you decide to enhance production?

James Walter, Co-CEO

I think we really like our framework. I think what we came out with 1.5 years ago or so was really the right balance, and we're trying to strike the right balance of making sure we maintain operational and strategic flexibility to take advantage of the opportunities that we see in whatever environment we're in, but while also returning capital to the shareholders in a way that's really meaningful and substantial. So I think we nailed it with the plan, and we have no plans to change it.

Neal Dingmann, Analyst

Yes, I think it's very steady. It makes a lot of sense for you all.

Operator, Operator

Your next question comes from Scott Hanold from RBC Capital Markets.

Scott Hanold, Analyst

You all have identified some opportunities for synergies, particularly regarding operating costs. Although you've only had Earthstone for about a week, how quickly do you think you can align their operations with your standards? This is particularly relevant on the OpEx side, which has been notably high for Earthstone.

Will Hickey, Co-CEO

I see it in three parts. First, from a cost perspective, we're experiencing immediate synergies through economies of scale and pricing adjustments as we're operating two to three frac fleets from the same company. The next set of efficiencies on the drilling and completion side is likely to follow. In our last merger with Colgate and CDEV, we reduced the number of rigs six to nine months post-closing, and now, a year after closing, we’re seeing improved efficiencies beyond what either company achieved independently. I estimate we'll achieve similar improvements on the drilling and completion side within six to nine months. However, reducing lease operating expenses will be a slower process due to the need to address contracts and negotiations. Nonetheless, we outlined a goal of reaching a $175 million run rate by the end of next year, and based on what we've seen, we are confident we can meet or exceed that target, possibly even sooner.

Scott Hanold, Analyst

Yes. And so on the operating cost side, just to clarify, you see more of that is contractual versus operational? Like you don't need to go out in the field and change plumbing and everything else on those wells that you're inheriting?

Will Hickey, Co-CEO

No, absolutely. There's a lot of that as well. I think of the significant factors as the optimization failure rate, which is what you just described; that's relevant in the field and reflects best practices. We are starting to work through that in real time today. The other major aspect is water disposal, which will take a bit longer as we identify the best SWD disposal or recycling process and work through some smaller contracts. So, in short, it's a combination of both.

Scott Hanold, Analyst

Sure. I understand that we will have a clearer outlook for 2024 as we move into early next year, and I appreciate the situation. This market is very dynamic. When considering a growth rate between 0% and 10%, can you discuss the influencing factors? Is it more related to fundamental macro conditions, pricing, or both? Additionally, how do you approach hedging in this context? For instance, if you could hedge at a sufficiently high price, would you lean towards the higher end of growth despite the macro conditions? Any insights on your strategic thinking would be appreciated.

Will Hickey, Co-CEO

Yes, our hedging strategy is quite straightforward. You're correct that we tend to hedge more and pursue growth when commodity prices are higher, as this aligns with sound business practices. With rising commodity prices, we have consistently stated our intention to be opportunistic and implement additional hedges for both crude and gas. When considering growth, it really comes down to the effectiveness of our reinvestment strategy, which is influenced equally by the expected commodity prices for the upcoming year or two and the current service cost environment. Over the last two years, we've experienced a significant variation in service and input costs that ultimately affect the return rates and payouts of our projects and development plans. Therefore, lower service costs combined with higher commodity prices create a favorable reinvestment climate that drives us toward the upper end of our growth range. Conversely, if the situation is reversed, it tends to push us toward the lower end.

Operator, Operator

Your next question comes from Derrick Whitfield from Stifel.

Derrick Whitfield, Analyst

Congrats on another solid quarter. Starting with a bigger picture longer-term outlook question on your pro forma asset base. And in recent quarters, there's been a heightened investor focus on asset productivity and durability. With the benefit of the Earthstone transaction, is it reasonable to assume your reinvestment one year out assessment looks very similar to your two- and five-year out assessments?

Will Hickey, Co-CEO

Yes, I think that's a fair assumption. We'd agree with that.

Derrick Whitfield, Analyst

Terrific. And then maybe staying on operations. Long lateral development has been a growing theme over the last couple of quarters. As you look out over the next couple of years, what are your thoughts on the risk reward metrics associated with integrating more 3-mile lateral development into your operations?

Will Hickey, Co-CEO

We're closely monitoring the situation. We've observed the actions of others in different basins, including the Delaware. Our position is well-prepared for 2-mile development across the entire area, thanks to the hard work we've put in over the last 5 to 10 years. If you compare our position with Earthstone's, you'll notice that it's conducive to 2-mile development, which makes it less likely for us to extend to 3 miles. We still believe that a 2-mile lateral is the most capital-efficient and risk-adjusted return option in the Delaware. As technology and our drilling capabilities improve, this could change to 2.5 or 3 miles in the near future. We will continue to monitor the situation and adapt as needed. There may be minor areas where we could explore longer laterals if we decide to, but it's not a primary focus for our immediate business strategy.

James Walter, Co-CEO

And Derrick, I think a lot of where you've seen the most important push to the extra-long 3-mile plus laterals has been in places where people are really pushing the margins of the basin, and they're into well into the kind of next tier of inventory. And we're in the fortunate position we're still drilling our core of the core acreage, that's extremely high quality and will be for the long time. So I think for us, we're in the fortunate position of we don't need to do that and really like the value proposition of the 2-milers we have set up for today.

Derrick Whitfield, Analyst

That's a fair point. Congrats again on the quarter guys.

Operator, Operator

Your next question comes from Phillips Johnston from Capital One.

Phillips Johnston, Analyst

I realize you guys won't have detailed '24 guidance until February. But now that the Earthstone deal is closed, can you maybe just frame up Q4 a bit and give us a sense for either what volumes might look like today or what kind of year-end exit rate we should be steering towards especially considering, I guess, the improvement in efficiencies that led to higher activity and volumes in Q3.

Will Hickey, Co-CEO

Yes, I can share a few points that might be helpful. Starting with PR on its own, we reached our Q4 target in Q3. It seems reasonable to assume we are slightly beating expectations for Q4 oil production on a standalone basis. The story is similar for CapEx; we brought some wells forward from Q4 to Q3, suggesting a slight beat in CapEx for PR as well. Regarding Earthstone, in Q4 we will include two months of their assets, specifically the last two months of the year. Earthstone has provided guidance that aligns with their Novo acquisition, which remains relevant. By combining these elements, you can estimate PR plus two-thirds of Earthstone to arrive at a reasonable projection for our Q4 performance.

Phillips Johnston, Analyst

Okay. So this might be too granular, but it looks like leading edge estimates for the quarter are sort of in the 260 to 270 day range for oil equivalent and 125 to 130 day for oil. Do those seem reasonable? Or is that a little bit too granular for you?

Will Hickey, Co-CEO

I think that's too detailed for me, but I'm sure you can follow up with Hays or someone else to ensure that you're not overlooking anything.

Phillips Johnston, Analyst

Yes. Okay. Sounds good. And then maybe just a modeling housekeeping question. Your natural gas differential stepped down in Q3 versus kind of where it was in the prior two quarters. Is that kind of a trend we should extrapolate going forward? Or were there some one-off factors in the quarter that sort of drove that?

Guy Oliphint, CFO

Yes. Regarding the commodity mix, oil is primarily driven by strong well productivity. Gas and NGL trends result from the oil cut in our drilling areas. Specifically for NGLs, the content of the gas is influenced by the wells we're popping and the related midstream contracts, which have faced some minor midstream constraints. I expect some fluctuation, but not a persistent trend based on one quarter.

Operator, Operator

Your next question comes from Oliver Huang from TPH.

Oliver Huang, Analyst

Congratulations on a strong quarter. I wanted to begin by discussing the operational efficiencies gained over the quarter. How confident are you in maintaining the Q3 run rate for the entire year, considering the activity a base program of 11 rigs could accomplish? Additionally, do you have any plans to drop a rig once efficiencies are achieved, similar to what you did with the Colgate deal, or is the focus on leveraging those efficiencies for further pro forma growth? This also relates to your current silence on the outlook for 2024.

Will Hickey, Co-CEO

Yes. I mean, I guess I'll give you some color around it. These efficiencies, a lot of them are just like small things. We're just continuing to get buy-in from the field, driving down flat time on both the drilling side and downtime on the frac side. So I think they're going to be pretty sticky. Q3 was a quarter where everything went right. So can we maintain that exact same run rate for a whole year that may be a little bit ambitious, but at the same time, I think we'll continue to find small things to improve upon. So I do think that the go-forward efficiencies will look more like Q3 than they did in any of the previous quarters. And kind of what does that mean for next year? Look, I think the way that we run our budget and think about it, is we're going to solve for what's the right amount of capital to spend and kind of that will be dictated by how James laid out. What is the ultimate kind of return on that capital, kind of how efficient is that widget in the calendar year in which we're doing it. And then we'll leverage these efficiencies to rightsize the amount of equipment to hit that capital budget. So the answer is everything is on the table. We may run less equipment and drill more wells because we're being more efficient. We may run the same amount of equipment and drill even more wells because we're trying to spend more capital because of the return on the capital, et cetera. So you can feel rest assured that we're going to keep these efficiencies and use the equipment that's generating these efficiencies, but kind of how we use it and how much of it we use is still kind of things we're working through in real time.

Oliver Huang, Analyst

Okay. That's helpful color. And just one more kind of thinking about Q4, given the year-to-date outperformance on efficiencies. Are there any concerns with respect to budget exhaustion that might drive a loss of efficiency with having to pull back a rig or crew? And could you also remind us how many crews you're running on a pro forma basis when including Earthstone and if there are any plans to pick back up a spot or full-time crew for next year?

Will Hickey, Co-CEO

Yes. We're not going to take any actions that don't make operational sense. We won't be letting go of a very efficient rig to adhere to short-term budget constraints. We had anticipated this situation, as we operated three frac fleets for most of Q3 and plan to reduce down to two in Q4. Due to the efficiencies we observed on the frac side, we decided to scale back to two fleets slightly earlier than initially projected in Q4. This approach allows us to reduce our capital expenditures in Q4 while aligning with consensus expectations for the full year, all while maintaining our rigs and the two dedicated frac fleets that have demonstrated significant efficiency. I hope that addresses your question, but we will not be reducing rigs or frac fleets that have performed exceptionally well just to meet quarterly budget targets.

Operator, Operator

Your next question comes from Paul Diamond from Citi.

Hays Mabry, Senior Director of Investor Relations

Paul, I think you're on mute, if you're there.

Operator, Operator

Your next question comes from Leo Mariani from ROTH MKM.

Leo Mariani, Analyst

I was hoping you could maybe just discuss the M&A landscape a bit. Obviously, you guys have been pretty acquisitive throughout your history, going back to Colgate and now in PR. So how do you kind of see things out there now? Are there deals available? What's your appetite? How would you kind of characterize some of these deals out there? Just any color would be great.

Will Hickey, Co-CEO

Yes. And I said it earlier, but I think worth emphasizing again, I'd say our very first priority and focus right now is on integration and execution; that comes first always. But I'd say, yes, you're right. We've been constantly in the market and understanding it. And I'd say it's changed quite a bit over the past nine months. I'd say we saw a very long backlog of kind of large-scale private deals come to market the first nine months or so of the year. I do think that backlog is largely exhausted and slowing. I'd say for us, we looked at all those deals, I'd say we're focused on doing transactions that enhance the quality of our business and our inventory base, and that's a really high bar today and didn't find anything outside of the Earthstone acquisition that fit that bar of scale. But I think what we're seeing that's really attractive is we're continuing to see the kind of small ball ground game to be the most attractive opportunities that are the highest rate of return, the most inventory accretive, and ultimately set us best up for long-term value creation. So I think we'll continue to be active on that front, and we'll evaluate larger packages as they come, but kind of does see anything coming down the pipeline that we think fits for us.

Leo Mariani, Analyst

Okay. That's helpful. And then just on Q4 for PR standalone you guys talked about kind of dropping a crew a little bit earlier. You kind of went faster. Obviously, a lot of efficiencies in Q4. Can you kind of help us out with sort of expected kind of standalone TIL count in 4Q in terms of number of wells? Is that coming down a fair bit this quarter? And just per your earlier comments, one to sort of clarify, given that the strength in 3Q seems like you're fairly confident that you're going to be kind of above midpoint of oil for the full year for PR standalone.

Will Hickey, Co-CEO

Yes. Q3 was our highest TIL count quarter as a business, and Q4 will decrease from that level as expected. Additionally, PR standalone will not be a consideration, as Q4 will include PR along with two months of Earthstone. However, on a PR standalone basis, we were on track for a Q4 performance exceeding the target of 90,000 barrels of oil per day that we set in our early year guidance. This improvement is primarily due to the acceleration of TILs into Q3 and some into Q4, along with increased well productivity and better downtime numbers than we initially projected.

Operator, Operator

Your next question comes from Paul Diamond from Citi.

Paul Diamond, Analyst

I apologize for the technical difficulties. I wanted to briefly discuss the ground game opportunities, specifically the 740 acres and 20 deals from last quarter. Now that we have Earthstone in-house, I'm interested in your thoughts on the opportunities regarding both the legacy operations and new projects. Is your focus changing, or is this going to be an all-encompassing event?

Will Hickey, Co-CEO

Yes. I mean I think I'd say the opportunity set is brighter for our ground game effort with Earthstone. I think just kind of a larger footprint creates more opportunities for bolt-on acquisitions for trades, et cetera. I think it's probably obvious that that's going to be exclusively focused in the Delaware today. I think that's where the full force of our operational and acquisition efforts are. But I think we're excited. I think there's a lot to do with these assets; we're kind of one plus one equals more than two. So we're excited and think the opportunity set only grows from here.

Paul Diamond, Analyst

Understood. I have a quick follow-up regarding the recent increase in M&A activity in the market. Are you experiencing any fluctuations in those negotiations, or are they still aligned with the general market trends, or is there any deviation?

Will Hickey, Co-CEO

I think the small bull market has been quite interesting over the last eight years. It has been more stable, mainly involving independent private sellers or legacy family-owned oil companies. Prices have not changed significantly; they don't drop as quickly when commodity prices or the broader market decline, nor do they rise rapidly when those markets improve. Therefore, I believe these opportunities have remained consistent and present a unique value proposition for us today.

Operator, Operator

There are no further questions at this time, handing it over to James Walter for the closing remarks.

James Walter, Co-CEO

Perfect. Thank you. I'd like to conclude today's conference call on Slide 11, which helps to reemphasize our value proposition for current and future investors. Since the formation of Permian Resources last year, we delivered best-in-class returns for our sector and meaningfully outperformed the S&P 500. This outperformance was largely driven by successful execution. As a result, our business continues to represent a compelling value proposition against other large capital oil and gas companies. It's worth noting that Permian Resources now sits in a new class of large-cap peers, with an enterprise value of almost $15 billion and 100% of our business focused on the Permian. It continues to be our belief that quality businesses such as ours with core assets, organic growth, efficient operations, and a strong financial position have room to 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 through quarter-in, quarter-out 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 again for your time today.

Operator, Operator

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