Q2 2023 Permian Resources Corporation Earnings Call
The call will be accessible until August 16, 2023 by dialing 8776747070 and entering the replay access code 908236 or by visiting the company's website at Www Dot Permian rest dotcom.
At this time I will turn the call over to Heath, maybe Permian resources Senior director of Investor Relations for some opening remarks. Please go ahead.
Thanks, Lina and thank you all for joining us on the company's second quarter earnings call.
On the call today are will hickey.
James Walter our Chief Executive officers.
Allison, our Chief Financial Officer.
Matt garrison, our Chief operating officer.
Yesterday August .
We filed a form 8-K with an earnings release.
<unk> first quarter 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 Www Dot Permian Red Dot com.
I would like to note that many of the comments. During this earnings call are forward looking statements that involve risk and uncertainties.
It could affect our actual results and plans.
Any 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 June 30th 2023.
Which is also 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.
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 Wil Hickey co CEO .
Yes.
This quarter represents our fourth consecutive quarter of strong execution since announcing the merger informing Permian resources, and we are still getting better every day.
During Q2, we grew production by 8% from Q1, driven by robust second quarter well results.
We dropped from 7% to six rigs due to the continued improvement in D&C efficiencies.
And we continue to deliver on our return of capital framework.
Our team continues to get better and executing in the field and we remain on track to achieve our full year and fourth quarter targets.
Our assets continue to perform as you can see on slide five and from our Q2 production numbers.
Wells placed online during the first half of the year are performing in line with 2022 results and we expect consistent performance over the remainder of the year.
This is no surprise as our large scale multi bench development philosophy has not changed and we are developing the same targets in the same areas as last year.
Said differently. Our 2023 development plan is essentially the exact same plan we prosecuted in 2022.
And what you should expect to see from us going forward.
On the operation side, our team continues to get better quarter over quarter by increasing efficiencies, resulting in reduced cycle times and lower costs.
Our drilling department has further reduced flat times by optimizing our bottom hole assemblies and high grading our rig fleet during the quarter, we drilled an average of 1100 65 feet per day and set a company record by drilling a two mile third bone spring sand well in Eddy County, and just under 11 days.
Similarly on the completion side, we were able to complete an average of 800 feet per day, driven by increases increasing and pumping hours per day on our two dedicated frac fleets.
Lastly, we've significantly expanded our water recycling efforts across both Texas and new Mexico during the quarter, our completions team utilized 60% recycled water during its completion operations.
To put our year to date watering water recycling efforts into perspective through the first six months of the year Permian resources has already pumped more recycled water than both predecessor companies combined during all of last year.
This not only advances our sustainability initiatives, but also provides both capex and LOE savings will continue to use recycled water whenever possible in our operations.
This level of execution as a testament to the quality of our operations team and we'll continue to push for more and I feel confident that we have the team in place to be able to execute on this goal.
Now looking forward, we're continuing to work across the entire supply chain to further drive down costs as we head into next year with what we know today, we expect greater than 10% cost deflation on a per lateral foot basis, when comparing from the start of this year to the start of 2024.
This paired with our asset quality and consistent development philosophy bodes well for 2020 for capital efficiency.
With that I'll turn it over to Guy to cover our financial results and capital returns for the quarter.
Thanks will and continue to deliver on our 2023 plan with total company production of 166.
Bo per day oil production of 84 Mbo per day.
Cash capital expenditures of $371 million.
Production growth of 8% over Q1 was a result of strong Q2 well results.
The company generated generated adjusted EBITDAX of $492 million for the quarter.
LOE was $5 50 per BOE <unk> was $1 44 per BOE and cash G&A was $1 17 per Boe.
LOE per BOE was 2% higher than Q1, largely due to higher water disposal costs. Following our SWT divestiture that we closed in March.
As a reminder, we received $125 million of total cash consideration for that sale at closing.
<unk> was higher in Q1, as a result of FERC pads coming on and higher <unk> areas.
G&A declined on both a per unit basis, and an absolute basis, driven by a relentless focus on reducing costs and our higher sequential production.
We reported adjusted free cash flow of $80 million on a cash capex basis a.
Accrued capex for the quarter was 300 $386 million, resulting in $65 million of adjusted free cash flow on an accrued basis.
As we discussed in Q1, we have utilized the cash capex figure to calculate our variable dividend as we believe it better aligns with our focus on cash returns.
We reported <unk> 14 per share of adjusted free cash flow on a cash capex basis, and 27 per share of adjusted net income.
As you can see on slide four we are delivering $57 million of total shareholder returns in Q2 our.
Our calculation begins with adjusted free cash flow of $80 million, we reduced that amount by our <unk> per share base quarterly dividend our $28 million.
We are committed to pay 50% of the remainder of free cash flow to shareholders via dividends or buybacks.
This quarter, we are achieving that target with a variable dividend of <unk> <unk> per share.
Turning to slide eight we remain focused on maintaining a strong balance sheet to support strategic flexibility as well as our shareholder return program.
We have no near term maturities and well over $1 billion of liquidity on our RVO, we expect.
To continue to utilize free cash flow to reduce net debt over time.
Our hedge summary is included in the appendix, where youll see 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 of approximately $82.
These hedges are in line with our existing hedging strategy and consistent with our desire to be able to act opportunistically in the event of a downturn.
With that I will turn it over to James.
Thanks Guy we're proud to report that we have continued to make progress towards our goal of being the lowest cost operator in the Permian.
We strive to be an industry leader across the entire cost structure, D&C, LOE G&A and ultimately cost of capital.
Slide seven highlights our continued quarter over quarter and year over year improvement in G&A per Boe.
We have lower G&A per Boe by approximately 40% when compared to Centennial Standalone quarter in Q2 2022.
This improvement in G&A from $1 95 per Boe to $1 17, resulting in an incremental $12 million of free cash flow for the quarter.
Not only are we improved when compared to our historical performance. We are quickly jumped to a leading position compared to our peers, but on a G&A per Boe basis, as well as the G&A per operated rig basis, which is a further testament to our talented team and highly efficient operations are.
Our team is always looking for ways to drive efficiencies across our entire cost structure to further enhance our free cash flow and drive value for shareholders.
I'd like to close our prepared remarks today by turning to slide nine where we provide a quick recap of the goals, we set out earlier in the year and our progress against those goals today.
As a result of our robust and consistent well performance, we remain on track to deliver pure leading organic oil production growth of 10% exit to exit.
Our over 15% on a full year pro forma basis.
Two we continue to execute in all spectrums, our capital return program, returning approximately $200 million or <unk> 35 per share to shareholders through our base dividend variable dividend and share repurchase program.
Three through the combination of sharing best practices and operational execution, we've driven significant operational efficiencies, which have lowered our overall cost structure reduced cycle times, and ultimately made our business more capital efficient.
We continue to optimize our portfolio driving meaningful value for shareholders between bolt on acquisitions and our active ground game, we've acquired over 5000 high quality acres offsetting our position in the core of the Delaware.
We also successfully divested noncore <unk> assets in Reeves County for $125 million, representing a significant premium to our current trading multiple.
Lastly, but perhaps most importantly, we've executed in all of the above while maintaining a strong balance sheet with ample liquidity, which will allow our business to drive and create outsize shareholder value in any commodity price environment.
We're excited about where the business stands today and feel like we have significant momentum as we head into the back half of the year. Our team has come together well and we continue to execute on the plan, we laid out to start the year.
We're well positioned to generate robust free cash flow and deliver significant returns to shareholders.
Maximizing long term value creation.
Finally, as we put out in our press release yesterday afternoon, it's worth noting that Matt garrison, our chief operating officer will be departing the company on September one for personal reasons.
As I sit here in the conference with not on what will be his last earnings call. It's worth taking a moment to reflect on the tremendous contribution Matt has made the Permian resources he.
He has shown incredible dedication leadership to this company, but during the past year Permian resources as well as the prior six years at our predecessors Centennial.
Myself and the entire Permian resources team have enjoyed rolling up our sleeves and working alongside Matt He's been a great contributor business partner and friend from.
From an organizational standpoint mass direct operational reports will report to <unk> going forward.
With both operational background and this will be a natural fit is something we're all excited about as it will allow for more streamlined communication and quicker decision, making between the field and the CEO .
In closing I'd like to again, thank Matt for everything he has done a PR, we will miss him going forward to wish him and his family the best in the future. Thank.
Thank you for listening and now we'll turn it back to the operator for Q&A.
Thank you.
I didn't answer session will be conducted electronically.
We'd like to ask a question. Please do so.
But I think the star then the number one on your telephone keypad, if you would like to withdraw your question. Please.
Sorry.
Jim.
Thank you and your first question comes from the line of Neal Dingmann from two with UBS. Please go ahead.
Good morning, guys.
Nice quarter. My first question is on slide five by looking at this and even the last couple of quarters, certainly appears you're continuing to see some very strong well consistency I'm. Just wondering can you speak to what's driving this is it targeted the key intervals or your spacing or completions.
Is it looks like the wells continue to be very consistent both on a production of GR basis.
Yeah. Thanks, Neal I mean really I think what's driving it is that we haven't significantly are really at all changed any of those things you listed and we just we're in a fortunate position that we've got a deep bench of inventory to kind of keep doing what we've always done. So we're still drilling those same targets in the same areas and we've made little tweaks to completion designs to try to drive some cost but.
Nothing that's had any kind of any change to productivity. So.
The short story is we are just doing what we've always done and this is what you should expect for the next few years going forward.
Yes, it's great to see the consistency and then my second question is on the Oss cost and operational efficiencies I'm. Just one you mentioned on slide six where you have high graded the number of your D&C services and I'm. Just wondering when you do this are you seeing as much potential cost are placed on the high spec equipment as you can see on the lesser quality side.
And what type of improvement.
<unk> do you all see.
I guess, what I'm asking is like what's the advantage of going to the highest spec.
Yes.
Potentially maybe see some lower lower cost on some of the lesser equipment.
No I think Thats right I think it's kind of across the industry. We've seen that costs have come down in the low spec stuff first and the hope is that we'll start to drive some cost out on the high spec stuff kind of between now and the end of the year.
Really what we've seen is just our ability to kind of continue to reduce cycle times and cut days out on the drilling and completion side kind of more than offsets that that slight premium we have to pay for that equipment, but but as you've always been I mean, we are we're always kind of evaluating what that equation looks like what the kind of overall cost structure, it looks like with high spec versus lower spec in.
And hopefully we'll kind of continue to both cut days and maybe get some kind of cost reductions on the high spec stuff between now and the beginning of next year.
Great details thanks, well.
Thanks Neil.
Thank you and your next question comes from the line of Jakafi Hammer from Jpmorgan. Please go ahead.
Hey, guys. Thanks for taking my question I.
I guess first just on the production trajectory youll reaffirmed the exit rate on oil growth guidance can you talk a little bit about what <unk> looks like just trying to get a sense of where production goes from here.
Yeah sure. So I think the extra days, you said <unk> will be kind of low single digit growth percentage from from where we were in Q2, and then and then slightly more kind of a higher percentage of growth from Q4 to Q3 to kind of ultimately get to that that Q4 exit rate that we discussed at the beginning of the year.
Got it thanks will.
I guess just following up on Neil's question on cost inflation.
We've heard others mentioned, 5% to 10% lower year over year, well cost in 2024 does that number seem reasonable to you.
Maybe can you just talk through what you're seeing on cost deflation now and if youre seeing any substantial declines in the larger ticket items.
Yes, I mean, I think that we'd be at the high end of that range based on what we're seeing today, primarily driven by just the <unk> and casing I mean, we can point to kind of 5% reduction based on the casing, we're purchasing today, which will ultimately run in Q1. So we've kind of got 5% in the bag and now we're starting to chip away at things on the completion side.
Other kind of line items across the whole <unk>. So I think based on what we're seeing today. We've got good line of sight to 10% and I'm, hoping we can kind of call back more between now and then and hopefully beat that number when we get to next year.
Thanks, well that's great color.
Yep.
And your next question comes from the line of Jeff <unk> from <unk> Energy Partners. Please go ahead.
Hey, guys I was just curious you know there's been a lot of commentary on some of the other calls about M&A in the Permian in particular.
I guess sort of the notion that it's a pretty picked over.
What's left there's not a lot left in material and I know you guys are kind of all seeing on this front.
So I was wondering what the what your sense of the lay of the land was bad.
Yes.
Yes, I mean, I think starting with the grassroots effort that I think our team does incredibly well, we're still finding great opportunities Catholic smaller blocking and tackling acquisitions ahead of the drill bit and as you saw we did that and this quarter. We've really every quarter for eight years and something we're highly confident we can continue to do.
And look those are some of the most highly attractive highest rate of return acquisitions that we can find.
The bigger stuff there is still stuff out there I think you would see in a lot of transactions in the Permian I think it's safe to say, we're looking at everything but as we said before we've got a really good business and that sets. The bar for acquisition is really high.
We've got one of the one of the highest quality inventory basis out there. So we're only going to do deals that provide inventory that would compete for capital and I think the better our business gets the harder that is but we're out there looking I think if we can find something that was accretive and we're confident that our business better we'd be excited to pursue it but I think at this point, we're also more than happy to stay on the sidelines.
And just keep working on our base business because it's so good.
Yes, that's perfect. Thanks, guys I appreciate it.
Thank you and your next question comes from the line of <unk> from <unk>. Please go ahead.
Good morning, all and thanks for taking my call.
A quick one.
As noted a 2% increase in that way.
They're kind of water handling expenses I guess I wanted to get an understanding of how sticky we should think about that or that trend should go forward or do you expect it to drop back down.
Yes, I mean, so that specifically that's the FWD divestiture so.
Obviously those assets are sold and so that part of it will be sticky, but I think what you'd expect from us is that probably puts us in the high end of the low <unk> range for the back half of this year, but but as we continue to kind of grow production and grow the base and just given the fixed cost nature of some of those low cost I do expect kind of as you look out over the next few years, we'll be able to drive that down if we do.
Continue to grow the base production.
Understood.
One quick follow up you guys are dropping a rig on efficiency holding production.
Steady to up.
<unk> sort of longer term what.
So he's out there that would have you bring back a rig or road, whether in 24 or beyond.
I guess, what would you need to see in order to kind of make that move.
Yes, I think for us we've been pretty clear, we're not providing any kind of outlook into 2024 at this point I think we've been really clear with the market that that's a decision we'll make as we get closer to next year I think for US as we said for the past 12 months any kind of decisions to increase or decrease activity, you're going to be driven by what maximizes near to mid term.
Free cash flow for our investors and I think today, it's too early to tell what 2024. It looks like you know I think with the.
A lower service cost environment, and a higher commodity price I think that probably leans towards growth and I think if things go the other way you could see us dial back activities I think today, it's too early to tell but it's something we're constantly kind of watching and planning around and we've got the right team and the asset base. We can we can react quickly as we put out a plan closer to next year.
Understood. Thanks for the clarity.
Thank you and your next question comes from the line of <unk> <unk> from benchmark. Please go ahead.
Thank you too.
Two questions first is.
We think of.
<unk> has sort of been the benchmark as you talked about 2024 plan.
Is that sort of the.
Math, we should be.
Looking at.
Great.
The real Frank answers, we've had our Q4 to Q4, because we didn't have a clean simple pro forma number that the market was familiar with last year I think when we get to a place where we start talking about out years, I think will probably shift and start talking annual growth rates, I think thats simpler and cleaner and and now that will have a full year under our belt at that time, I think that will make a lot more sense.
I think Q4 to Q4 made sense kind of given the context of the merger, but as we look to the future I think probably best for us and everyone else to start thinking annual growth rates.
Got it okay.
My follow up and we've seen this across multiple Permian operator is.
A bit of a declining oil cut.
There's a host of reasons, but I guess in maintenance.
Should be expected I suppose, but how do you think about that for you guys in 2004.
I would expect kind of flat oil cut if the kind of commodity price market looks like it does today, obviously, we've got the asset base that if if we saw a significant outperformance of gas.
Between now and then we can kind of shift development accordingly, but I think the base cases is flat oil cuts for 'twenty four.
That's perfect. Thanks, so much.
Okay.
Thank you once again should you have a question. Please press Star then the number one on your telephone keypad.
And your next question comes from the line of Josh Silverstein from UBS. Please go ahead.
Thanks, Good morning, guys I'm, starting to hear some more Permian operators go out towards 15000 foot laterals, even a little bit beyond that I'm wondering if what you guys have done.
What your average lateral length, maybe this year and what the inventory of some of the longer laterals may look like.
Yes, our average lateral length to date. This year is 19 300 feet, which kind of fits if you look at our position on a map it sets up really well for two mile development across the majority of our position.
So I think that's what we've done over the last two years and Thats. What you should expect going forward as far as just three mile laterals in general I think.
In the Delaware Basin, just given the overall productivity of those wells and how much fluid they make its probably slightly less efficient than what you would get on the Midland Basin. When you go that long, having said that we've got a team that can do it we've drilled plenty of two and a half mile laterals this year and over the kind of over time, So we'll keep watching it and we feel very confident that if that is the most capital.
I should answer that will move that direction, but I think as a base case, you should expect we're kind of a two mile development company.
Next year.
Okay got it understood.
And then just on the return on capital and cash to the balance sheet, you still have the 50% plus kind of return on capital framework.
Just given that you don't have any maturities out until 2026 and ramping free cash flow in the.
The stock is still trading at a low multiple how do you balance the opportunity for share repurchases versus just building cash.
Because obviously that you guys are committed to the base dividend a variable dividend, but just curious about.
Upside in buybacks versus cash on hand.
Yeah sure no I think that's right. Obviously the base dividend is is what it is I think on the variable versus the share buyback I think for us, it's just going to be opportunity set driven.
We've said before and two to say that the default for us is going to be the variable dividend, but we expect to be opportunistic and kind of take advantage of opportunities we have on the buyback side.
I think we haven't seen that in the last year, because the stocks performed really well, but I think as we see or if we see clear market dislocations or an opportunity to kind of fluctuate and organize sponsor sell down we're going to lead and hard to the buyback. So I think I think you've got it right I think the base case is going to be the the variable dividend, but over time I expect we'll find some opportunities.
And should lean harder into buyback when when those opportunities arise.
Great. Thanks, guys.
Thank you.
Yes.
Thank you.
Mr. Walter There are no further question at this time please continue.
Okay.
I'd like to conclude today's conference call on slide 10, which helps to reemphasize our value proposition for current and future investors.
Since closing our merger almost a year ago, we've delivered leading returns for our sector and outperformed the S&P.
I believe that our business continues to represent a compelling value as compared to both our high quality Permian peer set and the broader market indexes. We believe the quality of business such as ours with core assets organic growth efficient operations and strong financial positions have room to re rate to a more competitive multiples not only with our direct peers, but also with other sectors in the broader market.
By continuing to enhance the culinary. These attributes we believe that we can continue to create value for shareholders, while solidifying our position as a leader in the energy sector.
Thank you again, everyone for your time today.
Yeah.
Thank you, ladies and gentlemen that does conclude our conference for today. Thank you all for participating you may all Argus connect.
Okay.