Q1 2023 Permian Resources Corporation Earnings Call
Good morning, and welcome to Premier's Resources' conference call to discuss its first quarter 2023 earnings today.
Today's call is being recorded a replay of the call will be accessible until may 23rd 2023 by dialing 877.
6747070, and entering the replay access code four.
2514 to one.
Or by visiting the company's website at Permian Red Dot Com at this time I will turn the call over to Hays Mabry Permian resources Senior director of Investor Relations for some opening remarks. Please go ahead Sir.
Thanks Anish.
And thank you all for joining us on the company's first quarter.
On the call today are will Hickey and James Walter our Chief Executive officers.
Hi, all sent our Chief Financial Officer.
And Matt garrison, our Chief operating officer, Yes.
Yesterday.
As we.
We filed a form 8-K with an earnings release reporting first quarter results for the company.
We also posted an earnings presentation to.
To our website that we will reference during today's call.
You can find the presentation on our website homepage or under news and events section at Www Dot Permian, whereas dark.
I would like to note that many of the comments during this earnings call are forward looking statements.
They involve risks and uncertainties that could affect our actual results and plans.
Many of these risks are beyond our control and are discussed in more detail in the risk factors and the forward looking statements sections of our filings with the Securities and Exchange Commission.
Including our quarterly report on Form 10-Q for the quarter ended March 31 2023.
Which is expected to be filed with the SEC later this afternoon.
Although we believe the expectations expressed are based on reasonable assumptions. They are not guarantees of future performance and actual results or developments may differ materially.
We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers.
For any non-GAAP measure we use a reconciliation to the nearest corresponding GAAP measure can.
It 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 Wil Hickey co CEO .
Thanks, guys. Good morning, and thanks for joining our Q1 call during the quarter. We continued to successfully execute our business plan, which is focused on generating free cash flow delivering shareholder returns maintaining our commitment to balance sheet strength and optimizing our high quality, Delaware basin asset base.
Following a very strong Q4, our first quarter results delivered on the 2023 plants with total company production of 154000 barrels of oil equivalent per day.
Oil production of 78000 barrels of oil per day, and accrued capital expenditures of $360 million.
All of which were in line with or ahead of expectations. We remain on track to achieve the full year guidance, we outlined in February .
The company generated adjusted EBITDAX of $499 million for the quarter.
Total cash costs also came in as expected and within 2023 guidance ranges and are expected to trend lower in future quarters as we see production increase over the course of the year.
<unk> was $5 38 per Boe.
G. PMT was $1 12 per BOE and cash G&A was $1 36 per Boe.
You will notice a new line item in our disclosure relating to Capex. We have added in our quarterly earnings presentation, our cash capex figure the tracks our cash flow statement.
Q1, cash Capex was lower than accrued capex driven by normal course changes in working capital that we expect will normalize over time.
We also provided adjusted free cash flow on both basis with $101 million on an accrued capex basis and $146 million on a cash capex basis.
We utilized the cash capex for the year to calculate our variable dividend as we believe it better aligns with our focus on cash returns.
Our team did an amazing job executing during a challenging integration process over the past 12 months the.
The success, we have seen to date is a testament to their hard work professionalism and dedication to driving shareholder value.
We are excited that the integration of Colgate in Centennial is behind us and we can direct our sole focus on creating value for Permian resources shareholders going forward.
We have achieved the synergies and targets that we outlined at closing a significant improvement in drilling and completion costs cycle times as well as an overall reduction in cash operating costs that makes our business more efficient.
Our talented team will continue to look for additional opportunities to reduce cost and improve capital efficiency.
So that we can return that incremental free cash flow to our shareholders.
With that I will turn the call over to Guy to cover our capital return strategy and financial results for the quarter.
Thanks, well one of the highlights for the quarter as a return of capital and the initiation of a variable return program as you can see on slide four.
That we anticipate being our lowest production point for the year, we delivered $85 million of total shareholder returns, while reducing our overall debt and executing on accretive acquisition.
Since this is our first quarter paying a variable dividend we thought it would be helpful to walk you through our total return of capital calculation.
Our calculation begins with adjusted free cash flow of $146 million on a cash capex basis.
We reduced that amount by our five cent per share base dividend or $28 million.
We have committed to pay 50% of the remainder of free cash flow to shareholders via dividends or buybacks.
As you can see during the quarter, we repurchased $2 75 million shares of stock for $29 million. So to achieve the 50% target. We will return the remainder is a variable dividend of <unk> <unk> per share.
As a reminder, the buyback was executed as part of a 32 million share secondary offering by N G P and riverstone.
As a result of this transaction. The total number of sponsor owned shares decreased from 281 million shares to $247 million, representing a reduction of approximately 12%.
Publicly emphasized our objective of having an organized and thoughtful monetization process from our sponsors overtime. We are pleased to have established the template for potential future transactions.
We remain committed to balance sheet strength as demonstrated by our activity this quarter, reducing debt and increasing catching.
Turning to slide six continued debt repayment remains a focus and we were able to reduce net revolver borrowings by 20% or approximately $65 million during the quarter.
We have no near term maturities and well over $1 billion of liquidity on our RVO we.
We expect to continue to utilize free cash flow to reduce net debt over time.
You'll see on slide seven we recently took advantage of the OPEC production cut announcements in April to top up on oil swaps for the second half of 2023 as well as additional hedges and $24 25.
We added 3000 barrels a day for the second half of this year at $77 per barrel.
As a result of these additions we have hedges in place for approximately 30% of our expected crude oil production for the remainder of the year at a weighted average floor price slightly above $82.
These hedges are in line with our existing hedging strategy.
Instant with our desire to be able to act opportunistically in the event of a downturn.
With that I will turn it over to James.
Thanks, guys to start I'll point, you to slide eight where we discuss our ongoing portfolio optimization efforts in more detail.
As we referenced on our last earnings call. During Q1, we closed on both the Lee County acreage acquisition and the sale of our <unk> system in Reeves County, two transactions that we are very excited about.
We also completed a large acreage trade with an offset operator in Eddy County that allowed us to further high grade one of our best assets.
<unk> increased our working interest and high return locations and created several new operated drilling units, notably we expect to begin development activity and approximately half of the 3400 inbound acres over the next 12 months, making this type of transaction highly accretive to shareholders in.
In addition, we remain highly active in the grocery side of the business can putting over 45 smaller transactions were nearly 100% of the acquired interest is going to be developed in the next 12 months. These smaller deals are amongst the highest rate of return acquisitions that we evaluate.
We credit being based in Midland for giving us an edge on this ground game approach to growing the business.
All in the net effect of our portfolio optimization efforts in Q1 was an increase in approximately 5000 net leasehold acres and an increase of over 3000 net royalty acres, all while generating net cash proceeds of over $20 million.
These transactions allow us to focus on our core business, while enhancing overall corporate returns.
Turning to slide nine we wanted to take a quick second to shine the spotlight on a rather large portfolio of mineral and royalty interests.
You see this in past guidance, but the vast majority of our operated acreage footprint is at a higher NRI than the 75% that has become standard in the Permian with an average age of <unk> across our portfolio of 78%.
This allows us to realize additional production and free cash flow for the same capital spend significantly improving the capital efficiency of the dollars we invest in development.
To put that in perspective, an incremental 3% increase in the eight eight net royalty interest.
10% to the IRR of a typical wolfcamp, well and reducing the payback period of that same well from 12 months to 10.
It's worth pointing out that while we don't think of it as a separate business. Our royalty entity is currently generating over $50 million of free cash flow per year, if viewed on a standalone basis.
Our high net and the compounding effects of returns are one of several reasons that we have a highly capital efficient business, which can support both high return production growth and fulsome shareholder returns.
Finally, slide 10 helps to reemphasize our value proposition for current and future investors.
As seen on the slide Permian resources has outpaced the S&P 500, and our Permian peers since the closing of the merger.
Even with this recent outperformance we believe that our business continues to represent a compelling value as compared to about this peer group and the broader market index.
We believe our business has all of the attributes of a great business not just a great oil and gas business, but a great business across any sector, leading asset quality low cost operations thoughtful capital allocation organic growth balance sheet strength combined with this track record of delivering outsized returns to investors.
By continuing to enhance and cultivate these attributes we believe that we can continue to create value for our shareholders, while solidifying our position as a leader in the energy sector.
Thank you for listening and now we will turn it back to the operator for Q&A.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer session should you have a question. Please spread stifle a bite one O H I still felt should you wish you the glass and the bully breakfast lease spreads stifle a bite you.
If youre using a speaker phone please lift the handset before breast any keys one.
One moment. Please for your first question. Your first question comes from Scott Hanold with RBC capital markets. Please go ahead.
Thanks Al.
I just wanted to touch base on.
I guess the emphasis around the or royalty acreage is that.
He's talking about that just you noted.
To point out the value that is there with that lower and are alright, I guess 10.
Higher NRI or.
Is there some influence in to there being opportunity to find other monetization paths with that and if you could just give us a sense of if theres any kind of grassroots efforts to kind of build that royalty portfolio.
Yes, I mean, I think I would say to answer that last question first we're always looking for ways to Accretively increase our nets and whilst we're developing we find that to be some of the most highly accretive capital you can spend.
But not looking to build a non operated over a portfolio or a separate business more just kind of normal blocking and tackling that kind of goes with our traditional upstream development I would say the reason for highlighting this is is really twofold I would say first and foremost we've got a lot of questions just about how capital efficient our business is things that we.
We've got a very good way, if you will and I think there's a lot of different components that drive that kind of outperformance, but I think this is one that was maybe less understood and we thought it would be helpful to just shine a little bit of a light on it.
And I think to your kind of final question I do think there could be opportunities to monetize, especially some of the non operated overrides that are kind of not fully valued in our portfolio today, but.
Nothing bigger strategic I think coming down down the pipeline, we like having this in like what it does for the business as a whole.
I appreciate that and then as my follow up.
Could you kind of give us a cadence of of kind of cash capital spending through the year as well as production in the first quarter was a down production, but I would assume we're going to be on an upward trajectory. If you could help us out with that cadence as well as you know.
And any kind of working capital nuances with cash capital expenditures.
Expenditures just so we can.
Square the circle on on expectations for that variable payout.
Yes, this as well so on the production side I think Thats. How you said it is right we had a down quarter in Q1, but we're still on track to achieve the kind of 10% production growth that we talked about from Q4 to Q4 Q4 of last year to Q4 of this year and if you kind of follow you now have the starting point and ending point and if you follow you can see it's not quite <unk>.
But we feel really good that we will hit our full year guidance until we get there you have to have a little bit bigger bump into Q2, but.
Ultimately, it's you can kind of get the starting point and ending point you can you can solve for the middle and then on the Capex side, I'd say, we're expecting kind of cash and accrued capex too.
B the same over time and I think we're on pace for what we outlined in guidance from a total capex perspective, so given that cash came in under accrued in Q1 is probably going to be slightly above accrued for the rest of year, just giving some timing things in kind of but expectations are that we are on track for kind of a.
<unk>.
The guidance that we outlined on the last quarter call both on the production and Capex side.
Okay, and just out of curiosity on the Brexit you talked about getting a bump up but as you know is it I guess can be somewhat linear or is there any kind of nuance in terms of like pad being put in place that makes one quarter, a little bit bigger than the other when you look at too.
<unk> forecast.
I think somewhat linear as the right starting point.
Okay I appreciate that thank you.
Yes.
Thank you. Your next question comes from Derek White field with Stifel. Please go ahead.
Good morning, all and congrats on a second solid quarter.
Thanks Derek.
At a high level your return of capital was fairly balanced between share repurchases and variable dividends in Q1 as you think about prosecuting on the return of capital program over the coming quarters could you comment on the framework for share repurchases and your preference at current valuations.
Yes, sure I mean first of all I'd say, an echo of Guy said, where we're super excited to finally have kicked off this variable return program as you think about our business returning capital to shareholders is something that is kind of a core to who we are at Permian resources.
I'd say our view on the kind of capital return strategy and the broader framework really hasnt changed at all over the past nine months I'd say, we've been pretty clear with you guys had with investors that the default for us is going to be the variable dividend, we think thats kind of the safest most consistent way to return capital to shareholders over the long term.
And but we will be opportunistic I think we've got a we've got a share buyback authorization out there for a reason and I think opportunistic can take on two flavors here I think one what you saw in Q1 to kind of ensure a thoughtful and orderly sponsor sell down over time and I think we've been really clear that we expect our sponsors to kind of exit the business in a thoughtful non disruptive way.
And the second is if we see kind of clear in severe dislocations in the stock trading of Permian resources and <unk>.
That second one we've been fortunate we haven't seen that kind of since we came out in September I think this is a very volatile business and I think overtime, we will see those opportunities and I think you should expect us to lean into the buyback aggressively when we see those severe dislocations, but as we've said kind of all the time I think the default in the base case for everyone should be a variable dividend.
Terrific and as my follow up I wanted to focus on the portfolio work that you guys have done on the ground game side, we joked about it yesterday, but could you talk to your team and support structure that afford you the ability to continue to grind out hard to earn organic adds in a very mature basin and the market opportunity you guys see.
For Permian resources.
Yes, sure I mean, I think it really starts with being based in Midland kind of having boots on the ground and really our whole our whole team having a presence here I think thats kind of the first kind of core part of our strategy.
Second we've got a fully developed a fully built out business development team that sole purpose is doing transactions like what you see on this slide so I think it's probably eight or nine full time fully dedicated people in that business development team, but they have the ability to pour resources from the broader Permian resources group and I think having.
I would say the combination of our local presence here and a real specific focus on these kind of ground game acquisitions has been a real differentiator for us.
I mentioned, it but I think that.
These smaller deals are amongst the most attractive returns of any acquisition opportunities that we've looked at in a long time.
Thanks for your time.
Thanks, Derrick thank you.
Your next question comes from Neal Dingmann with <unk> Securities. Please go ahead.
Hi, Good morning, guys. Thanks for the time.
Well first of all just right for you. My question is just really on the operational efficiencies, which you all continue to see it I guess, a little bit different and specifically could you talk about maybe for the remainder of the year.
Number one just how things are going.
Theres talked about.
After the <unk> I think the six rig.
Are you still see the efficiencies to be able to do that and then lastly.
Just when you sort of look at the regional.
Thank you, Texas, or new Mexico, and the formation of <unk>.
Focus anything sort of different to think about what I'm getting at will just any sort of near term lumpiness is one of the quarters I mean.
It sounds like it's going to be pretty good just continued ramp but I just was trying to get at.
When you look at sort of the plan for the remainder of the year or anything that might stick out.
Yes, thanks Neil.
So with the first one I'd say, we're seeing kind of.
All of the efficiencies, we need to feel confident in our plan to drop the seventh rig around mid year and still hit the kind of 150 details that we outlined at the beginning of the year.
I kind of hit on it in the opening remarks, but.
With its been 12 months for us since we signed up the deal a little less since we closed that we've been kind of <unk>.
Head down working through how do we how do we put the best people in the right places with the right kind of processes and strategy.
To kind of get all the efficiencies, we can and I think we're very very happy with what we've seen over the 12 months since signing up for the merger.
And then kind of to your production thing Theres nothing that we see that would drive any kind of significant lumpiness on the ramp to Q4.
It's relatively linear as we model it from from kind of where we were in Q1 to Q4.
Great and then secondly.
James maybe for your guide just really on the recent hedges added understand guy's comment about protecting the downside.
My question is on even why why even add those to me given you guys have such now improved financial position, you've always had a great financial position, but then even operationally you have the ability that.
Sort of changes needed. So just maybe if you could give a little more color on why even that.
Even step up those hedges at all.
Yes, that's a great question, Neil I think for US our hedges are important part of our philosophy I think everyone knows this but this is a super volatile business and we've seen that over the last week or two and frankly expect to see more volatility in that.
Kind of months and years to come in first hedges provided great baseline kind of ensuring a certain amount of our free cash flow kind of looking forward to future quarters, and I think that we see real strategic value and hedges I think like having a strong balance sheet is obviously something thats been extremely core to us and I think do we technically need the hedges or have to have and to protect the bow.
I think at this point, we're at a place where the answer to that is probably no. But we view hedges is really strategic and I think that can allow us to be opportunistic and aggressive if we have another downturn. So I think we've seen hedges work to our favor in the past and expect them to be important part of the kind of.
<unk> going forward and I think.
You should see us continue to layer in hedges over the coming years, because that's just how we run the business.
No well such as the Florida, all the upside guys. Thanks.
Thanks Neil.
Thank you. Your next question comes from Oliver Huang with Tpa speeds go ahead.
Good morning, all and thanks for taking my question just had one on the services front. If I remember correctly, you all are fairly well positioned in terms of being able to capture any potential deflation that we might see moving through the year. So just wanted to grab the latest in terms of what you all are seeing from negotiations with service providers and how we should.
B thinking about long term contract roll offs on both the rig and crew side.
Yes. Good question. So as a reminder, I'd say, our rigs are pretty well staggered so of the seven rigs we have its about a third of them under kind of multiyear deals a third of them under a one year deal and a third of them under kind of more I call. It a pad to pad current deal.
<unk>.
Look I'd say, we've seen kind of leading indicators out there are now kind of super spec rigs available in the market, which needs to come before you can see price reductions and I'd, even say we were.
Potentially close before the OPEC cut but as it stands today there has been no kind of material cuts on rig pricing, yet having said that it does feel like kind of the market is moving more in our favor over the last few months and so we will see how that goes and then on the Frac side, it's very similar to our frac pricing as we revisit quarterly.
And we've seen.
No increases over the last quarter, it's kind of flattened from from where we were and I think thats. Good we've seen previous that we'd seen six quarters in a row of increased frac pricing.
So kind of all of that together I'd say, we feel really good about.
Our guidance on the Capex side and it does feel like there's probably more tailwind than headwind at this point, but nothing that we can kind of take to the bank yet as far as this year's capital program.
Awesome, Thanks for the time.
Thank you.
Yes, no further questions at this time, Mr. Walter back over to you.
Before we conclude today's call I wanted to briefly address a recently published article regarding Midland or the article highlighted several real challenges facing our city is be able to present the qualities that make Midland a great place to live, namely that people that live here in the community that we have together.
Headquartered in Midland has real and meaningful strategic advantages that we see every day in our business that we have.
<unk> chosen to raise our family CRA and are proud to call Midland home.
Permian resources supports our community through countless grassroots efforts to make the entire base in a better place to live and work every.
Everything from the development of a childcare center at the Midland Airborne to financially supporting local schools and civic causes.
Our efforts are substantially bolstered by larger organizations that are focused on improving the quality of life in the Permian one such organization of which we are proud member is the Permian strategic partnership, which has invested over $125 million in education health care and safety throughout the Permian Basin.
We are not naive to the fact that fighting to improve the Permian will be hard and take time, but our region and our industry are accustomed taking on challenges in overcoming them.
Thank you to everyone, who listened into Permian resources earnings call. Today, we are proud of what our team has accomplished over the past year and excited to continue to build on our track record of execution and equity value creation.
I'll now hand, it back over to the operator to conclude today's call.
Ladies and gentlemen, this concludes your conference call for today, we thank you D C banning and ask that you. Please disconnect your lines have a great day.