Q4 2022 Permian Resources Corp Earnings Call
Good morning, and welcome to the Premarin.
<unk> conference call to discuss fourth quarter and full year 2020 earnings.
This call is being recorded.
A replay of this call will be.
Until March nine 2023.
Hey, Kevin Kevin.
747070, and entering the replay access code.
Six Q.
One zero or by visiting the company's website at Www Dot dot.
Dot com.
At this time.
Sure.
For Marianne <unk> senior director of Investor Relations for some opening remarks. Please go ahead.
Thanks Marcella.
And thank you all for joining us on the company's fourth quarter earnings call.
On the call today are will Hickey and James Walter our Chief Executive.
George Calippus, our Chief Financial Officer.
Hi, Allison our incoming CFO .
And Matt garrison, our Chief operating officer.
Yesterday February 22nd.
We thought a form 8-K with an earnings release reporting fourth quarter as well as operational results for the company.
We also posted an earnings presentation to our website, we will reference during today's call.
You can find the presentation on our website homepage or under the news and events section at Permian raise dotcom.
I would like to note that many of the comments during this earnings call are forward looking statements.
Risks and uncertainties.
Could affect our actual results and plans many.
Many of these risks are beyond our control and are discussed in more detail.
And the risk factors and forward looking statements sections of our filings with the SEC.
Including our annual report on Form 10-K.
Which is expected to be filed with the SEC later.
Although we believe the expectations expressed are based on reasonable assumptions they are not guarantees of future performance.
And actual results and 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.
Can be found in our earnings release or presentation, which are both available on our website.
That I will turn the call over to Wil Hickey co CEO .
Good morning, and welcome to our fourth quarter earnings call, which represents the first full quarter of Permian resources.
I'm extremely proud of everything our team has accomplished this quarter.
As you can see on slide four our team continued to deliver across all fronts executing in the field producing strong well results and demonstrating cost control, which ultimately led to a 9% production beat versus the midpoint of our outlook all while keeping costs within our range.
Fourth quarter oil production was over 81000 barrels of oil per day, which exceeded the high end of our production range higher production volumes were primarily attributable to better than expected well performance recent.
A recent post merger activity continues to affirm our perspective on the quality and duration of the inventory across our new Mexico, and Texas positions and gives us confidence in our ability to generate best in class capital efficiency in 2023.
In addition to well outperformance part of our production beat was due to our operations team, making meaningful improvements to our infield compression across our entire asset base, which led to record setting run time in the fourth quarter, which we will benefit from in 2023 and beyond I am extremely proud of our field and production engineers, who not only were able to make these significant improvements during the integration.
We were also able to do this in the face of winter Storm Elliot.
Cause of their hard work and careful planning, we experienced minimal production loss due to the winter weather during the quarter.
The PR D&C team also made tangible progress increasing operational efficiencies in Q4 as highlighted on the top right side of the slide we saw reduction in spud to rig release during the quarter driven in large part by approximately 11% increase in footage drilled per day across the program. These improvements are primarily the result of the implementation of offline cementing.
And thats drilling across most of our asset base.
Similarly on the completion side fleet efficiencies drove a 17% increase in lateral footage completed per day.
We're pleased with the progress in synergy capture thus far but we are still hungry to capture further upside throughout 2023 and confident we can do so these.
These efficiencies allow us to reduce our operated rig count and offset incremental inflation in 2023, which James will cover in the 2023 guidance rollout.
In addition to our relentless focus on execution, we believe that our portfolio optimization program will continue to drive meaningful value for our shareholders as shown on slide six Permian resources recently announced a series of transactions to added $100 million to our balance sheet and approximately 45 high returning locations to our near term drilling schedule. The additional locations are located in <unk>.
Tony directly offset where we have two rigs running today importantly, this acquisition was funded by cash generated through the sale of non of a non operated position in Reeves County, and a noncore water infrastructure system, both at attractive valuations.
Collective transactions exemplify the PR teams dedication to creating returns for shareholders by accelerating value from non strategic assets to reinvest in higher returning projects in our core business.
Our team is focused on enhancing the value of our portfolio.
We believe that excellent execution on difficult transactions and smaller deals is a great path towards material improvements in our inventory position.
And overall value proposition to our stakeholders.
Our presence in Midland is one of the key drivers of our success as we seek out to execute on these types of deals.
It's much easier to foster and generate relationships with the relevant parties by being headquartered in the heart of the Permian Basin, where all the action is during Q4 alone outside of the transactions, we announced in January our team executed over 50 grassroots transactions trades in leases.
The Permian resources team is committed to continuing to look for highly accretive deals to improve our portfolio and increase shareholder value and with that I'd like to turn the call over to George to review fourth quarter financials.
Thank you will and our first full quarter as Permian resources. We are pleased to have delivered strong fourth quarter results. As you can reference on slide three both net oil production and total production exceeded the high end of our preliminary expectations and were approximately 9% above the midpoint of our outlook ranges.
Net oil production for the fourth quarter was approximately 81375 barrels per day.
And average net equivalent production totaled 158200 barrels per day.
The company generated adjusted EBITDAX of 621 million for Q4.
We incurred $325 million of total capital expenditures and reported adjusted free cash flow of $256 million.
Costs for the quarter came in largely as anticipated.
LOE was $5 <unk> per barrel of oil equivalent G. PMT was $1 39 and cash G&A.
Was a $1 46 G.
<unk> declined significantly for the quarter as more of the Companys production is transitioning from taken kind processing arrangements.
Turning to the balance sheet on slide 13, we summarize our capital structure leverage and liquidity position.
As of December 31, we had approximately $60 million of cash and $385 million of borrowings on our revolving credit facility.
Including our revolver borrowings senior unsecured notes and cash total net debt was approximately $2 1 billion.
Our net debt to <unk> EBITDAX was approximately <unk> nine times, we expect to continue to utilize free cash flow to reduce that debt over time.
Now I'd like to turn the call over to Guy Olefin, who will succeed me as Chief Financial Officer on March one.
Prior to joining the company Guy was managing director and co head of upstream energy investment banking with Jefferies.
Brings nearly two decades of experience advising upstream companies on financial and strategic transactions, including working directly with both legacy companies as.
His in depth knowledge of the company, coupled with his strategic advisory and capital markets expertise will be valuable assets to Permian resources and its shareholders Guy and I have worked very closely over the past several months to prepare for the transition and I am delighted to welcome guy to the team.
Thank you George I'm very excited to join the Permian resources team and look forward to working closely with our investors and research analysts going forward.
I'd like to briefly cover our return of capital plan.
First we are pleased to announce our second quarterly base dividend of <unk> <unk> per share, which will be paid on March 15, two.
To shareholders of record on March seven.
As previously discussed we are initiating our variable return program in Q1.
Under that program, we will return at least 50% of our free cash flow posted base dividend.
Functionally we will evaluate free cash flow generated during the quarter.
Buybacks completed in the same period and true up investors with a variable dividend to ensure payout of at least 50% of achieved.
Our inaugural variable dividend for Q1 will be paid in may.
We will be thoughtful allocators of excess free cash flow and pride ourselves on a strong history of successful capital allocation and outsized equity value creation.
Significant owners of the business our management team is highly aligned with shareholders and our mindset is focused on long term value creation.
I will turn the call over to James.
Thanks Guy before we go into guidance I'd like to provide some high level thoughts on how our operations and planning team derived our 2023 plan.
In Permian resources, our goal is to build a development plan that maximizes the returns and drives higher free cash flow through the thoughtful allocation of capital. We worked about developing our high rate of return inventory with ensuring that zones that needs to be developed together are developed together.
We believe this strategy will lead to superior value creation at higher returns for investors.
The optimized 2023 plan, we're going to walk through now deliveries just that.
Turning to slide seven for the full year 2023, we expect total production to average a 162000 Boe per day, and 85000 barrels of oil per day, which represents increases of 3% and 4% respectively as compared to the midpoint of our preliminary outlook from September .
We're still targeting 10% Q4 to Q4 oil production growth, resulting in implied 2023 oil exit rate that is 9% higher than our prior outlook.
It's worth noting that given changes in the macro environment. This plan reflects a higher allocation of capital to oily assets, which will lead to our oil growth outpacing gas growth this year.
Controllable cash costs, which include <unk> <unk> and cash G&A are estimated to be $7 60 per Boe at the midpoint, representing a 5% reduction from our previous outlook.
Specific to cash G&A, we are already seeing the impact of merger synergies in these numbers, we anticipate G&A of approximately $1 30 per Boe.
Which represents roughly 40% decrease from the $2 <unk> realized by Standalone centennial in the quarter prior to the merger announcement.
These reductions in cash costs materially improve our operating margins.
Turning to slide eight we highlight the improvements to the preliminary outlook that was provided in early September .
As we noted total capital is anticipated to be approximately $1 35 billion for the full year.
We've already discussed the higher production lower cash costs, but it's important to note that the increase in total capital is primarily related to higher working interest and longer lateral links as compared to our previous plan.
As you can see on the bottom right hand side of the page, we anticipate our average working interest to increase to 85% from 80 and expect our average lateral length to increased to 9300 feet from 9000.
Like well I'm very proud of our team's execution since the merger in the short period of time, we've all been working the team is doing a tremendous job driving increased operational efficiencies and reducing cycle times.
The progress made in Q4 gives us confident that we'll be able to deliver that we were able to reduce our rig count before mid year dropping from seven or eight to six while still delivering approximately 150 wells to production.
In summary, our updated plan delivers higher production with lower unit costs, driving higher capital efficiency and more free cash flow that we can return to shareholders.
Turning to slide nine as you can tell from what we have laid out. This morning, we're incredibly excited about the trajectory of our company, we couldnt be more pleased with how well the business is performing as evidenced by our fantastic Q4 results and would like to thank all of the Permian resources and poised to remain focus through the merger and executing our plan successfully.
This strong execution in the face of industry wide headwinds has positioned us to be able to deliver a truly differentiated 2023 outlook that maximizes free cash flow to create long term value for our shareholders.
Now I want to conclude our prepared remarks on slide 10 by taking a step back and looking more broadly at where we fit within the larger investment universe.
Despite energy weighting within the S&P 500, having slightly improved in the 2020 lows. The energy sector is still trading at a discounted valuation relative to the rest of the market.
And within the upstream energy space. It is our belief that the Permian is the best oil producing basins in North America with the lowest breakeven is in the longest inventory lives.
This asset quality will allow Permian operators to sustained strong free cash flow levels for years to come.
We believe that quality businesses, such as ours with core assets organic growth efficient operations and strong financial positions have room to re rate to more competitive multiples not only with our direct peers, but also with other sectors in the broader market.
Our Permian resources, we are focused on continuing to build on our track record of low cost operations returns focused capital allocation and outsize returns for investors.
But before I turn the call back over to the operator I'd be remiss not to say that this will be George's last quarterly earnings call.
As many of you know, Georgia announced his retirement late last year. Following a nearly 30 year career in the oil and gas industry on.
On behalf of the board in all of our employees I want to thank George for his leadership and dedicated service his impact to legacy Centennial following the global pandemic and its contribution to Permian resources during the merger integration cannot be overstated.
Over the year as well and I've enjoyed working alongside George that you didn't know him on a personal level, we will miss having him as a colleague, but thankfully we will still be able to call. My friend, we wish him and his family the best during his well deserved retirement. Thank.
Thank you for listening and now we will turn it back to the operator for Q&A.
Thank you.
<unk> and answer session will be conducted electronically if you'd like to ask a question. Please do so by pressing star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by <unk>.
Your first question comes from Derrick Whitfield from Stifel.
Please go ahead.
Good morning to all and great first combined quarter.
Okay.
With my first question I wanted to focus on your well productivity are there one to two primary drivers that explain the improvement you're observing into your well performance versus your forecast.
I mean, the good news is no it has really been.
Outperformance across all of our asset areas I'd say the biggest outperformance is probably in our Eddy county asset but.
During Q4, we have seen significant kind of outperformance across the Texas assets, the Lea County asset and Eddy County assets, which I think really does set us up for a really strong 23.
That's terrific, while I understand it's challenging to sustained productivity a depletion business.
How long could you sustain 2023 levels of capital efficiency based on your 15 plus years of inventory.
Yes, it's a good question I mean, as we think about it of that 15 years about two thirds of it is is all in kind of Wolfcamp and bone spring sands formations, which are the most productive of the kind of in the Delaware basin. So.
We feel really good about about 10 years of it theres probably the last few of those 10 years being probably a little bit of.
Less capital efficient development, but I think you could get really comfortable with for the next 567 years that we can maintain the same level of capital efficiency.
That's great maybe just one other follow up in your press release and prepared comments you noted higher run time is one of the drivers for your production performance for the quarter. In addition to winter preparation you noted on slide five where there other actions collectively taken are implemented that's leading to elevated run run Tom relative to historical.
Performance.
Yes.
Run times are hard won and its really all the little things that add up I think that the overall better run time, we saw in Q4, it's really just a testament to the.
To getting the integration right and all of these teams working together.
On compression run time that was by far the biggest driver, but we've got a lot of gas lift compressors in the field and I think we've really got a good system in place and and are seeing the kind of performance of that system from our runtime perspective, but but yes. It's not just that the guys are always working on the little things its failure rates.
Sure you get the high producers back online first when they go down.
Optimizing the chemical program.
But really as we went through integration, we laid down kind of best practices of both predecessor companies and make sure. We got the right people in the right place with the right processes and I think what Youre seeing is in just one quarter is combined PR, we're already seeing the effects of that.
Well done guys. Thanks for your time.
Sure.
Our next question comes from Neil Mcmahon.
Trust Securities. Please go ahead.
Good morning, guys Neil Digman.
Hey, I just want to say first George Thanks for all the help has been great working with you.
Hey, guys. My first question is on your updated 23 planned specifically it appears now that you have a bit what I would call a bit earlier plan.
Obviously now that 10% growth is based on even a bit higher 20 to exit. So I guess my question specifically is could you give me that.
And maybe how this slight planned shift impact 'twenty, three and maybe more importantly, what it could mean for 'twenty four because it certainly it.
Seems to US you could have even more upside next year just to get knowing you don't have guidance just something buried in generalities. Thank you.
Yes, thanks Neil.
No I think we think of 'twenty three plan does a lot obviously being able to continue to grow 10% on oil production from Q4 of <unk>.
22% in Q4 of 'twenty three given the kind of 9% beat in Q4 of 'twenty two sets us up really strong I mean, effectively our our Q3.
Our Q4 of 2023 production on oil will be 9% higher than where we previously thought which I think gives us a great starting point for 'twenty four.
I think in addition to that just the ability for us to be flexible from a development plan perspective, and and shifts kind of on short notice to oily or development plan really demonstrates kind of how we want to run PR. We are we want to run a business that still nimble and willing to make changes when the kind of.
Commodity mix or other outside factors Deane.
Deem that necessary and I think what youre seeing is our ability to be nimble in 'twenty three and we will continue to keep that kind of that in.
In 2025 and forward.
Yes, great well I wished others that would be doing the same and then secondly, just on takeaway should be obviously in the Delaware is still tough does Europe , just wondering specifically could you talk about.
I don't know have you all recently added any more takeaway contracts or maybe just maybe give me an idea of your current delray, It's Delaware infrastructure position given we've seen some issues from other operators in the play not so long ago.
Yeah sure no I think we're finished.
Fortunate position to be I think extremely well positioned on a relative basis, particularly out of the basin I'd say we have.
Zero kind of long haul takeaway constraint or highly confident we've got the right partners, who have the right capacity to make sure that all of our gas can move out of the basin I do think youre seeing some challenged pricing at wall Hot today and likely do the majority of 2023, there is some relief coming with the new pipes online in the back half of the year, but.
I think we're pretty well protected at that I'd say, we mentioned in the last call, but we have some pretty good Henry hub plus basis swaps in place for about a third of our gas and we saw a good amount of gas that Houston ship channel and then so really only about a third of our natural gas that we're going to sell this year is exposed to that.
<unk> pricing, so really not a big driver of value for PR This year.
Great to hear thanks, James Thanks, a lot.
Thanks Neil.
Your next question comes from Oliver Huang from TPG.
Please go ahead.
Good morning, all and thanks for taking the question.
Congrats on a solid quarter just had a quick question on the operational efficiency front I think last quarter or so you all talked about just getting started on various items that would drive faster drilling and completions with returning the pace quarter over quarter. In Q4, just kind of wondering how much of what was planned to be implemented has been done thus far.
What kind of remains in what's the best way to kind of couch the level of running room remains.
Yes. Good question Oliver So I think we've kind of captured maybe.
Call it 25% to 50% of it so far we've probably I think it's safe numbers you have about half of it left.
And you can see the confidence we have in kind of accelerating the dropping of that 700 rig back to six kind of from somewhere around mid year to probably something closer to mid up middle of second quarter, which I think is a testament to we were confident we can still drill 150 wells with dropping to six rigs sooner in and really the team is making a ton of progress I would say we are.
Our net ahead of schedule and still seeing progress everyday so.
Call it half of it is behind US half of it is kind of on the come and we're expecting to have all of that done hopefully by by the time, we dropped that sixth rig in Q2 or dropped to 7% in Q2.
Awesome and for a second question just kind of on the working interest that 5% shift in the program for 2023 seems to reflect a strong land and business development team over there, but just kind of wondering if there are any.
Particular factors to kind of point to driving that increase and what the opportunity set for adding to this in the near term.
Yes, great question. Thanks, Oliver I think I think you heard Ed or I mean, this is just what what we and what our team does I'd say our ground game is really strong Ralph we're constantly out there our entire team trying to make.
To make our existing assets better and I think the most cost efficient kind of highest evaluated due that is kind of small things around the edges. So this is everything from acreage trades kind of lease extensions to <unk>.
Additional bolt on working interest that I think is a real part of our value creation formula like you said that ground game. We did 50 over 50 transactions in Q4, some of those as small as an acre too so.
That really helps drive improved capital efficiency as you can see in our revised plan and it's something we've been doing for a long time and expect to continue to be a driver of value going forward.
Awesome, Thanks for the time.
Thank you.
Your next question comes from Zach Parker.
J P. Morgan. Please go ahead.
Hey, guys. Thanks for taking my question.
I guess first just maybe your latest thoughts on cost inflation, we've heard from some of your peers that they are starting to see pricing plateau.
I've seen some downward pressure on some line items, just just your general thoughts on where price inflation is trending.
Yes, I think I think we're probably in the same campus is how you just described it.
We expected to see kind of 15% plus or minus year over year inflation and I think we got that just about right. It's probably on the inflation side slightly more than that but we've offset that kind of 1% to 2% more with efficiencies since closing the merger.
Yes real time in the field I think we're finally, starting to see a little bit of relief on the tubular side, which obviously was the biggest line item to the overall A&P increased over the last kind of 18 months and and are hopeful that kind of we will see a little bit more deflation on the cost side kind of combined with the efficiencies that we're trying to get in there maybe we can continue to drive well costs down.
<unk>.
Got it thanks for that color.
Yes, my follow up just on the cash return program, which you all are set to start the variable portion of next quarter.
What are your latest thoughts on buybacks versus variable dividends and how you plan to deploy that free cash flow back to shareholders going forward.
That's a great question and I think we've been pretty consistent in our messaging since we rolled out this program in September .
And nothing has really changed on that front I don't think youll anything different months today or are going forward.
As we looked at kind of longer term, we expect our default is going to be towards the variable dividend.
But we like to share buyback, we're really excited to have that authorization out there and expect to be opportunistic as opportunities should arise over time and as we mentioned being opportunistic to take multiple forms I think an obvious one is clear dislocations in the trading in our stock price and the second one is.
Our share buyback alongside under Vinci sponsor sell down I think over time, it will make sense for us to get the shares out of our less natural long term holder into that into the hands of <unk>.
Long only if you can hold these shares for a long time, and I think you'd see us.
Would be likely to participate alongside of that and how it make sure thats, an efficient clean and organized process like we've messaged to kind of over and over.
Got it thanks for the color guys.
Thanks, Doug.
Again, if you ask a question. Please press star followed by one on your telephone keypad.
Your next question comes from Leo Mariani from Roth. Please go ahead.
Yes, hi, guys.
We gave a number of the reasons for the strong beat on production in the fourth quarter. I. Just also wanted to a sense was it any factor at all maybe you guys were just kind of executing quicker cycle times dropping could you get more wells on and expected in the quarter I'm just trying to get a sense if that was a potential driver as well.
No.
We kind of pop the same amount of wells. We expected. So this is this really was just run time and well performance, which.
I think is a testament to the quality of the assets really.
Yes, okay that makes sense.
And just in terms of kind of portfolio optimization.
Bolt ons small M&A deals could you just kind of characterize what youre sort of seeing out there in the market you guys talked about kind of 50 ish really really small deals that you did in the fourth quarter, but obviously in the announcement you had a week ago. There were a couple of larger deals in there can you maybe just give us a flavor for kind of what youre seeing floating around.
Midland at this point in time, and you think it's a good environment right now for deals just given the fact that commodity prices have kind of come in and Theres, obviously, some economic uncertainty out there.
Yes, I think to hit your first point.
Just to start.
The 50 small transactions that totaled 1000 acres plus or minus we're always doing that there's really never been a point in our history, we werent finding blocking and tackling ground game opportunities just kind of one of the benefits of having a position to scale in a really talented landed business development team here in Midland is we're always drumming up they're smaller deals.
And frankly those are some of the most accretive highest rate of return transactions that you'll ever find in this sector. So that we're always doing I'd say with respect to kind of more like the bolt on that we announced a couple of weeks ago, We love that deal I think thats, a incredible opportunity to bolt on really core acreage in an area that we've got a lot of activity planned.
At the very front end of our capital stack, but.
Those opportunities are getting harder and harder to find I would say we are we're constantly looking and if we can find the right transaction like like what we announced a couple of weeks ago, I think we'd be excited to pull the trigger again.
But we're disciplined I think we've got a really picky team and frankly have a really high quality asset base. So the bar is high for us to do transactions and.
Not sure what that looks like this year I think if we can find things that were confident will drive further shareholder value, we're going to do them, but but if not I think we're really pleased with our inventory quality is depth today and don't feel any pressure on that front.
Okay. That's that's helpful color and just last one from me guys on the cost reduction, bringing the kind of cash cost down 5% here in 'twenty. Three can you provide a little more color around that in terms of kind of what what drove that is that just kind of hitting synergy targets faster than expected or were there kind of some.
All operational things you guys are doing in the field and reduce costs.
It's really just execution on the plan that we that we thought we would have I think we've probably seen a little more of kind of that the total G&A number go a little lower than maybe we thought at rollout in September which I think is positive and obviously greater helps margins in <unk> and.
And everything else, but but no I think it's just kind of continued execution kind of blocking and tackling like like we said we would do.
Okay. Thank you.
Thanks Leah.
There are no further questions at this time I will turn the call over to James Walter for closing remarks.
Thank you to everyone, who participated and listened in to the results of Permian resources first full quarter as a combined company. We are proud of what we've accomplished in the first six months and are excited about what the future holds for our business. We look forward to building long term relationships with our investors can driving leading returns for them over the coming years. Thank you again for your time.
This concludes thank you Marcel you may now disconnect.
[music].
Okay.
[music].
Okay.
[music].
Okay.
[music].
Okay.
[music].
Thank you.
Okay.
[music].
Okay.
[music].
Okay.