Q3 2022 Permian Resources Corp Earnings Call
Okay.
Good morning, and Bell Creek, and Permian Resources conference call to discuss its kind of quarter 'twenty 'twenty earnings.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star followed by DRAM.
After todays presentation, there will be an opportunity to ask question to ask a question you May Press Star then one on a touchtone phone.
Your question. Please press Star then two.
Today's call is being recorded.
A replay of the call will be accessible under November 16, 2022 by dialing 87734 475 to nine.
And entering the replay access code 5341497 or by visiting the company that site at Www Dot Indra dotcom.
At this time I will turn the call over to Keith Me, Great. I mean, just so says senior director of Investor Relations for some opening remarks. Please go ahead Sir.
Thank you thank you vishal.
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.
George Griffith, our Chief Financial Officer.
And Matt garrison, our Chief operating officer.
Yesterday November eight we filed a form 8-K.
With an earnings release reporting third quarter earnings results as well as the operational 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.
Www dot Permian, whereas dotcom.
I would like to note that many of the comments during this earnings call are forward looking statements.
All of the 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.
Including our quarterly report on Form 10-Q for the quarter ended September 30th.
Which was filed with the SEC this morning.
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'll turn the call over to Wil Hickey co CEO .
Thank you <unk>.
Good morning, and welcome to our first quarterly earnings call as Permian resources. We are extremely excited having recently closed the merger of equals between Colgate and Centennial.
Both teams have been working hard prior to and post closing and I couldn't be more proud and appreciative of our employees' efforts people are the foundation of any business and if there's one thing the integration process has highlighted for me, it's the quality and talent of the employees from both legacy companies I firmly believe that we have one of the highest caliber employee bases in the industry.
But you will continue to create outsized returns for our investors.
During Q3, our team executed very well in the field with no issues producing strong well results, while demonstrating cost control in a difficult operating environment, all while working through the integration of a corporate merger.
On a pro forma basis, we operated eight drilling rigs and three frac fleets. During the majority of the third quarter, which spud and completed 36 and 38 wells respectively.
In addition to driving solid well results across both new Mexico, and Texas. Our production team has done an excellent job in the field as we saw a reduction in surface related downtime quarter over quarter. As a result, we remain on track to achieve our fourth quarter 2022, and full year 'twenty three targets.
I'd also like to provide a quick update on merger synergies on slide seven on the D&C side, we've been implementing shared best practices and design changes to reduce cycle times and well costs are joined department has reduced flight times incorporated offline cementing and optimized our bid selection since closing during the quarter we had.
Two standout successes in our parkway asset, where we drilled a two mile second bone spring sand, well and a two mile third bone spring sand wells and eight days in 12 days respectively. While these are fantastic early time results, we expect to pull additional levers in hopes of further reducing cycle times over the next 12 months.
Additionally, we recently used our own recycled water drink completions for the first time on legacy Colgate acreage.
Which not only advances our sustainability initiatives, but also provides both capex and LOE savings going forward, we plan to use recycled water whenever possible in our operations.
As you can see from our progress to date, we remain on track to achieve the $65 million annual annual synergy target laid out at announcement I would remind everyone that our combined team has only been together for two months since closing.
As a result, I'm confident that we'll continue to get better and really begin to show what this new company can do over the next several quarters.
Before we touch on financial results I'd like to quickly hit on the topic of full field development as it certainly become quite topical this earning season for the past several years, both Colgate and Centennial had been targeting larger scale multi well co development projects to efficiently develop our asset bases. Our strong technical teams work to make sure. We are optimizing the development of our assets by.
Chinese Lee developing zones that we believe need to be co developed maximizing the profitability of each pad, while minimizing any future well degradation importantly, the idea of full field development does not represent a change in how either company has developed their assets previously and won't change our Permian resorts develops the assets going forward. We are fortunate to be located in the deli.
We're basin, where we have over 4000 feet of high quality over pressured rock with over eight proven intervals and significant frac barriers between many of the zones. Thus we feel very confident in our 2023 plan and don't anticipate any major changes to our development philosophy more capital efficiency as compared to previous years and with that I'd like to turn the call over to.
George to review third quarter financials.
Thank you will as a result of the merger closing on September <unk> the quarterly results.
Results include two months of Centennial Standalone for July and August and combined company results for both legacy companies for the month of September .
Given this dynamics comparisons to prior quarters are not meaningful in the fourth quarter will be the first clean quarter for Permian resources.
With that said I'll briefly review quarterly financial results, which you can reference on slide three of the presentation.
Net oil production for the third quarter was approximately 48500 barrels per day.
Average net equivalent production totaled 92000 barrels per day during.
During Q3, the company generated adjusted EBITDAX of $380 million.
Incurred approximately $200 million of total capital expenditures and reported adjusted free cash flow of approximately $160 million.
Cost for the quarter came in largely as anticipated.
Cash G&A as you can reference on page 41 of the 10-Q filed this morning was $15 1 million or $1 78 per Boe.
We expect that both cash G&A and <unk> per barrel will continue to decline in the near term.
I'd also like to touch on a few specific merger related clarifications.
First during Q3, we had approximately $59 million of merger and integration related expenses, which were in addition to the $6 million that were incurred during Q2.
We estimate that the expenses realized to date represent approximately 75% of the total merger costs that we will incur.
The balance of the expenses, which are primarily related to severance costs will occur over the next four quarters and will taper over time.
Turning to our corporate outlook for Q4 and beyond as will mentioned as a result of our team's execution in the field. We are confident in the fourth quarter and full year 2023 targets that we provided in early September when the merger closed.
On slides eight and nine we summarize our capital structure maturity profile and liquidity position.
In a cyclical industry like ours, maintaining a strong balance sheet and low leverage profile is critically important.
As of September 30th we had approximately $45 million of cash on hand, and $550 million of borrowings on our revolving credit facility.
The company's $1 5 billion facility is governed by a $2 5 billion borrowing base and provided approximately $1 billion of liquidity at September 30, we expect to repay the revolving credit facility borrowings utilizing free cash flow over the next several quarters.
Total net debt was approximately $2 3 billion and we estimate that net debt to LTM EBITDAX was less than one times.
Finally, we are pleased to have announced our first quarterly base dividend of <unk> <unk> per share, which will be paid on November 29 to shareholders of record on November 20, <unk> with that I will turn the call over to James.
Thanks, George one other item that has been very topical this quarter as natural gas marketing and takeaway like most of our peers, we expect regional gas markets and takeaway out of the basin to get tight as we head into 2023.
As you can see on slide 10, we've been proactively managing our midstream exposure ahead of potential weaknesses at Wahoo next year.
Across commodities, our goal is to ensure takeaway and maximize our net backs by pricing as many hydrocarbons as we can at end markets rather than regional hubs and we're excited to announce that we've continued to make real progress in that regard.
We recently entered into a revised contract with one of our primary midstream providers to sell a significant amount of our residue natural gas at Houston ship channel pricing.
This contract Division allows us to both realize better prices for a large portion of our residue gas and increase flow assurance out of the basin.
At current commodity prices, we expect this contract division.
And over $20 million of incremental free cash flow in 2023.
In addition to advantageous Gulf Coast pricing, we further mitigate our exposure to walk through the use of basis hedges.
For full year 2023, we have law basis swaps in place for 67500 Btu of gas at a weighted average price of minus $1.25.
As a result, we estimate that in 2023, only one third of our natural gas production will be exposed to wall, how pricing with the remainder being protected by Houston ship channel pricing and basis hedges.
Overall, we believe our existing midstream agreements provide for advanced advantaged pricing and flow assurance during periods of potential weakness next year, and we look forward to continuing to find ways to further enhance pricing over time.
As you can probably tell we are excited about where the business stands today and feel like we have significant momentum as we head into next year, we are well positioned to generate robust free cash flow and deliver significant returns to shareholders and nearly any commodity price environment.
Turning to slide five as George highlighted we look forward to paying our first quarterly base dividend less than three months after the closing the merger.
Further reiterating our commitment to shareholder returns.
<unk> per share based dividend represents an annualized yield of one 8%, which is competitive with our large cap peers and the S&P 500.
We view paying this first dividend as a key milestone for the combined business and are committed to sustainably growing this space dividend over time as we execute our long term strategy.
In addition to our base dividend, we previously announced a variable return program, whereby we will return an additional 50% of the free cash flow remaining after deducting the base dividend.
This variable program as described in further detail on slide six but in summary at the end of each quarter, we evaluate free cash flow generated during the quarter any buybacks completed during the quarter and then true up investors with a variable dividend to ensure the minimum payout of 50% is achieved.
After careful deliberation, we ultimately decided in a payout ratio of 50% as we felt that it provided the right balance between shareholder returns and strategic flexibility for a company of our size.
Our investors can rest assured that we will be thoughtful allocators of this excess free cash flow and we pride ourselves on a strong history of successful capital allocation and outsized equity value creation.
As significant owners of the business our management team is highly aligned with shareholders and laser focused on creating long term value.
I'd like to quickly wrap up on slide 12.
In summary, we believe that Permian resources represents a unique investment opportunity as a true mid cap E&P that has got the scale to be relevant to institutional investors in the asset quality to compete with the larger independents.
The company's robust shareholder return program is underpinned by its high quality asset base long dated inventory life and fortress balance sheet.
Given these attributes we are confident that Permian resources has all the characteristics characteristics to sell in today's market and drive outsize value creation for our shareholders across commodity cycles.
Thank you for listening today and now we would turn it back to the operator for Q&A.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing Nicky.
Dan Your question has been that debt that you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our doctor.
Our first question comes from that Ballroom with JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions and congrats on your first quarter as a combined company.
In the release and in your prepared remarks, you mentioned the spud to TD times of eight days 12 days in the second and third bone Springs in Eddy County.
Can you talk a little bit more about the drivers of those efficiency gains and maybe give us some color on how fast Colgate was drilling wells in the area prior to the merger.
Yes sure Zach this is will I would say those two are kind of the standout best wells of the quarter kind of I'd say the average for Colgate are going to be three or four days slower than that kind of respectively to each zone. So call. It 10 to 12 days in the second and closer to 16 in the third bone spring, so quite a bit of improvement.
I note that.
These are changes that we could make day, one thinking of things changing with the BHA changing with drilling parameters kind of changes that don't require long lead times theres still kind of a slew of changes that are on the come that require kind of more changes with surface equipment, you know kind of further integrating offline cementing and things like that so.
I'd say as we look at the team and what they are doing already they're really just getting started.
Got it thanks for that color.
And then maybe just one on the marketing side.
Could you give us a little more color on on the natural gas contract you signed.
What's the duration of the contracts that James I know you mentioned, the 20 million uplift in free cash flow at the current strip, but do you have any color on how that contract go attack cost or price realizations specifically.
Yeah, so that that contract that revision that we entered two goes through 2026 and.
Yeah, I think kind of Super high level, I think it's going to increase our realizations kind of next year by for the gas that pertains to that contract between the dollar and $1 50, so kind of meaningful uplift kind.
Next year, given where the basis stands today.
Got it thank you guys.
Thanks Jack.
Our next question comes from Neal Dingmann with <unk>. Please go ahead.
Morning, guys. Thanks for the time My first question is on your planned activity to arrive at that 23 estimate I think you were showing about one six to $1 50, 165 and I'm just wondering.
Alright, there will specifically would you all consider most of that activity for next year would be mostly developmental in nature and I'm. Just wondering if so could you comment on how do you see potential for further incremental efficiencies that you've already seen versus obviously the potential for continued Olaf has inflation.
Yes, I mean, I would say the 'twenty three plan.
If developmental meaning kind of in areas that we already have activity. It's 100% that we are very confident in the plan and really we're just coming back to areas in drilling that the packages that we feel confident in the results we will get as far as kind of what that means for further efficiencies I mean kind of I think the way we've put it is.
The base case, we are expecting to drop from kind of the seven rigs you'll be running to start the year down to six over the course of the year and and in order to hit the well counts at the kind of six rigs at the back half of the year, we will need to continue to gain efficiencies in.
From what I've seen in just two months post close I'd say, we are we are very confident that we will see them. It's just a matter of kind of when the when we'll see them if that makes sense.
No that's great to hear and then my second and maybe just on top of Azure of shareholder return and capital allocation. Specifically you know maybe James for you or George if you have the opportunity to participate in.
And buybacks, if any if any potential equity owner cells would you all consider that or if you did that part of the 50% payout for that particular period or would you still consider paying out 50% plus with a variable and potentially other buybacks on top of that and I guess I'm. Just wondering you know if you had an opportunity to buy back some of this private would you consider.
Using a revolver draw.
To repurchase those shares if it still keeping the leverage around one times. Thank you.
No great question Neal I think I think the answer to your first part of the question is absolutely I'd say, we we've said time and again that we plan to be opportunistic with the share buyback program and I think participating alongside our sponsor shutdown is a great way to use the buyback I think we've been pretty clear with the market that we expect sponsors to have on order.
Lee and kind of thoughtful exit and I think us playing a role in that is really really key.
I'd say with regards to to kind of do we view that as incremental I would say as a base case, we would view that as part of an ordinary course share buyback, which would kind of go into the 50%, but I would say.
As we've messaged it to date, it's it's at least 50% and I'd say any incremental returns beyond that are going to be dependent on market conditions at the time and what are the other opportunities look like but I think you know.
I don't think we view any real constraints there beyond that and are excited to get aggressive on the buybacks if the opportunities are there.
Thanks, guys.
Thanks Neil.
Our next question for today comes from Leo Mariani with <unk> partners. Please go ahead.
Hey, guys I wanted to follow up quickly on the gas deal.
Just a couple of more detailed looking forward here. So does that begin my January one 2023 is there any benefit in the fourth quarter of 2022, and then Additionally, you spoke about kind of roughly a dollar to dollar 50 uplift on your gas price realization next year wanted to see if there's some corresponding increase in GP.
N T expense that potentially can come along with that as well here.
Yes, so that revision became effective November one of this year, so 90 days ago.
And then.
So no there are kind of the way that contract works is there's kind of we saw that gas at the wellhead. So youll see it as a deduct to revenue but.
And a super high level.
If wahhab pricing is it's $2 off of of the hub.
An extra call. It 50 60 between additional fees and fuel to get that gas to Houston. So that's how you get to that kind of dollar $25 30.
<unk> left.
Does that answer that yes.
Helpful for sure.
And I guess, just wanted to dive into the buyback a little bit more here.
Just wanted to get a sense.
Something that might kind of kick in you know more kind of mid year next year.
Yes, I mean, I think the buyback authorization is in place today I think to the degree there were to be a sponsor looking to sell down I think I could see us participating on the sooner and of that but I think absent that opportunity I think kind of this quarter is probably focused on using that incremental free cash flow elsewhere.
Okay. That's helpful. And then just on the op side can you talk about obviously I know you've got some synergies that you're working on but what are you just kind of seeing on just the inflationary side of things out there in the oilfield or are you still seeing kind of rising costs are you starting to see.
Settle down what are you seeing the deal.
I mean, it feels like.
The lions share of kind of the.
Significant inflation is behind us at this point.
Kind of with.
We lapped the casing has now become the single highest highest line item on our <unk> E. Just given how much kind of steel and how tight that market has gotten and it feels like kind of as we look at where casing stands today and project that through next year, there's probably more upside or more likely to see that come down and then up at this point.
And then over the course of this year, we were fortunate to lock in a lot of these contraction of things like sand.
About half of our rigs and then water via our recycling efforts so.
We feel good about our kind of 'twenty three outlook from a capex perspective kind of given what we know today.
Okay I appreciate the color. Thanks.
Yeah.
Your next question comes from John <unk> with Stifel. Please go ahead.
Hey, good morning, all and congrats on initiating the dividend.
Or my first question you reiterated capital guidance at a time when peers are experiencing inflationary pressures above expectations can you speak to some of the self help initiatives that have enabled you to hold your Capex guide and other levers you have to maintain your capital efficiency.
Yes.
I think a big part of that as we put out this guidance kind of early September and in a market that looks a lot like I think where the market is today.
So I think theres, a little bit of a difference there just just from a timing perspective, and then I'll, let will head to the operational side.
Yeah, I'd say on the operational side, we have been we put some aggressive synergy targets out there and really kind of worked hard if you think about from announcement to closing we had.
Months with the teams to get together and really put a plan in place and make sure. We knew exactly what levers we're going to pull on closing of September 1st and that plant is coming into fruition very quickly from everything we've seen kind of two months post close it feels like we really are getting the best of both worlds the best of what Colgate did the best about Centennial did and were seeing.
It quickly and I think that gives us confidence that.
We're going to be able to kind of achieve the targets we put out there.
Got it that makes sense and then for my follow up turning to slide six you are forecasting $1 1 billion of free cash flow in 2023, and with the 600 million slated for shareholder returns.
Your leverage within your long term target range, how are you thinking about the use of excess free cash flow.
Yes, so I think we really value the flexibility there and obviously there is a lot of things, we could do with that and I'd say kind of as we get further along into that this quarter and then into next year I think we'll be evaluating what the opportunity set looks like in and that can be anything from continuing to repay the outstanding.
Borrowings on the revolver Thats, probably the first thing that we're doing kind of this month and but also kind of comparing the opportunity cost of that with other opportunities strategic acquisitions.
Further shareholder returns et cetera, and from our perspective, we're going.
To always use that capital in what way, we think drives the most equity value creation for our shareholders.
Got it great update and thanks for taking my questions.
Thanks, John .
The next question comes from Oliver Huang with Tudor Pickering, Holt <unk> co. Please go ahead.
Good morning, everyone. Congrats on a solid quarter and thanks for taking the questions.
First off.
Just wanted to ask a we've seen some of your peers run into some issues on bulk supply chain labor fronts or kind of talk about it was hoping that you all might be held.
Speak a bit more on certain things that you all are doing behind the scenes to kind of mitigate this risk.
Sure sure Oliver I mean I think.
I'm glad you asked that question and it really gives me an opportunity to give a shout out to our team of this is.
It's really truly remarkable that they were able to kind of get this merger completed get these two companies put together and really not missed a beat on the operation side.
I think it's one thing worth pointing out that kind of with this merger. This was not there was no incremental activity picked up we were running kind of the eight rigs that we ran for the majority of Q3 and the three frac fleets kind of.
As at the predecessor companies pre deal. So we were fortunate that both companies had kind of put in place contracted out the sand volumes they needed the water they needed the casing they needed et cetera to kind of hit the plan. We had in place. So really just a testament to kind of both Colgate and Centennial really had the reduction of ROE and <unk>.
Procured everything they needed to execute pre merger and now youre starting to see the benefits of the merger being that.
There were a lot of best practices that we can incorporate across the business. So.
I'd like to think that's the kind of the blocking and tackling we do on the ground. It makes this company what it is and hopefully this is just another quarter for us and you'll continue to see great execution going forward.
Awesome and for a second question just from an operational perspective could you all talk about the progression of pod sizing and even lateral lengths from the current.
Level four.
Considering a large portion of the Colgate acreage is still.
Highly undeveloped and Virgin stairway in should allow for this.
Yes, no that's a great question.
I'd say from a lateral link perspective, the 9000, and we kind of feel like Delaware basin optimal lateral length is right at that call. It 10000 foot lateral link level. So the 9000 were drilling over the course of 'twenty three is a mix of <unk>.
Heavily weighted towards two mile laterals with a few mile and a half sprinkled in there and thats, probably about where it will be kind of 9000 to 9500 trying to target that optimal lateral length, we think in the Delaware basin or a two mile lateral.
And then from a pad size perspective.
We're very fortunate that the kind of with the combined size and scale of this business that we have the flexibility to scale pad sizes as needed to optimally develop our assets I think what youll see is.
It's quite a range of pad sizes. There are some areas, where we're very fortunate that kind of the debentures that were targeting in 'twenty three are thousands of feet of vertical separation away from other well packages and have good frac barriers in between and as such we can develop them with kind of.
Smaller pad sizes call. It 345, well pads and then we have plenty of pads and other areas, where we're we feel you need to have a large scale pad to most efficiently develop the asset in that case. There is plenty of pads into 'twenty. Three program that are kind of 10 10 or more so it's a mix, but I think we feel really good both debt the pad sizes, we're targeting.
Go forward are not that different from what we have done backward looking and we've got kind of the financial flexibility to execute on the right pad size for the assets.
Awesome, Thanks for the color.
Yep.
Yeah.
As a reminder, if you have a question. Please press star then one can be joined into the queue.
The next question comes from Jeff <unk> with Daniel Energy Partners. Please go ahead.
Hey, guys I just had a quick question about where do you feel you are in terms of your current scale post deal and I know you've got a lot to say grace over.
But how do you sort of thinking about that.
Consolidation potential going forward in the Delaware and whats your kind of.
I guess, what's your sort of road map if you look over the next couple of years.
Yes, Jeff Good question I think we feel really good about the kind of business that we have today is kind of asset quality you return to capital scale.
So I would say, we don't feel any pressure to do anything we've got an incredible business incredible path forward to equity value creation, but I'd say, we do have a really strong track record of accretive M&A and are constantly evaluating the market and don't see anything in the immediate term, but if there were ways. We could we could do deals to really make a better business and drive.
Accretive shareholder value creation.
We'd be open to that I would say with regards to scale, but I think theres definitely today, some correlation if not a pretty direct one between between scale and kind of how business is trade, but I think a large part of that is quality and we really believe with the business that we've got today that ultimately we can re rates with the size that we have today.
We do have the asset quality of the larger cap independents, we've got the return of capital of the larger cap independents, we've got the balance sheet of the larger cap independent. So I think really what you hear from US is no pressure to do anything we really like the business. We have today, but if we had opportunities to make that business better we'd be open to them.
Excellent. Thanks.
The rest of my questions have been answered so thanks a lot.
Thanks, Jeff.
We see no further questions.
Concludes our question and answer session I would like to turn the conference back over to James <unk> for any closing remarks.
Thank you to everyone, who participated and listened into Permian resources first official investor call. We look forward to everyone tuning back in February when we announce Q4 results, which will be the first full quarter operating as Permian resources, We're really excited with everything we're doing out here in the Permian and look forward to building long term relationships with our investors and a track record of outsize value.
<unk>.
Thank you again, everyone for your time.
Conference has now concluded thank you for it.
Today's presentation you may all now disconnect.