Q2 2023 Permian Resources Corp Earnings Call

Participants

Guy Oliphint; Executive VP & CFO; Permian Resources Corporation

Hays Mabry; Director of IR; Permian Resources Corporation

James H. Walter; Director & Co-CEO; Permian Resources Corporation

William M. Hickey; Director & Co-CEO; Permian Resources Corporation

Benjamin Zachary Parham; Research Analyst; JPMorgan Chase & Co, Research Division

Geoff Jay

Joshua Ian Silverstein; Analyst; UBS Investment Bank, Research Division

Neal David Dingmann; MD; Truist Securities, Inc., Research Division

Paul Michael Diamond; Research Analyst; Citigroup Inc., Research Division

Subhasish Chandra; Senior Equity Analyst; The Benchmark Company, LLC, Research Division

Presentation

Operator

Good morning, and welcome to Permian Resources conference call to discuss its second quarter 2023 earnings. Today's call is being recorded. A replay of the call will be accessible until August 16, 2023 by dialing (877) 674-7070 and entering the replay access code 908236 or by visiting the company's website at www.permianres.com. At this time, I will turn the call over to Hays Mabry, Permian Resources Senior Director of Investor Relations, for some opening remarks. Please go ahead.

Hays Mabry

Thanks, Ina, and thank you all for joining us on the company's second quarter earnings call. On the call today are Will Hickey, and James Walter, our Chief Executive Officer; Guy Oliphint, our Chief Financial Officer; and Matt Garrison, our Chief Operating Officer.
Yesterday, August 2, we filed a Form 8-K with an earnings release reporting first quarter results for the company. We also posted an earnings presentation to our website that we will reference during today's call. You can find the presentation on our website homepage or under the News and Events section at www.permianres.com.
I would like to note that many of the comments during this earnings call are forward-looking statements that involve risks and uncertainties that could affect our actual results and plans. Many of these risks are beyond our control and are discussed in more detail in the risk factors and the forward-looking statements sections of our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter ended June 30, 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 and actual results or developments may differ materially.
We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release or presentation, which are both available on our website.
With that, I will turn the call over to Will Hickey, Co-CEO.

William M. Hickey

Thanks, Hays. This quarter represents our fourth consecutive quarter of strong execution since announcing the merger and forming 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 6 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 in executing 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 5 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 operations 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 1,165 feet per day and set a company record by drilling a 2-mile Third Bone Spring Sand Well in Eddy County in just under 11 days.
Similarly, on the completion side, we were able to complete an average of 1,800 feet per day driven by increasing in pumping hours per day on our 2 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 water recycling efforts into perspective, through the first 6 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. We'll continue to use recycled water whenever possible in our operations.
This level of execution is 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 2024 capital efficiency.
With that, I'll turn it over to Guy to cover financial results and capital returns for the quarter.

Guy Oliphint

Thanks, Will. We continue to deliver on our 2023 plan with total company production of 156 MBOE per day, oil production of 84 MBO per day and cash capital expenditures of $371 million. Production growth of 8% over Q1 was a result of strong Q2 well results. The company generated adjusted EBITDAX of $492 million for the quarter. LOE was $5.50 per BOE, GP&T was $1.44 per BOE, 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 SWD divestiture that we closed in March. As a reminder, we received $125 million of total cash consideration for that sale at closing.
GP&T was higher than Q1 as a result of certain pads coming on and higher GP&T areas. G&A declined on both a per unit basis and an absolute basis driven by our relentless focus on reducing costs in our higher sequential production. We reported adjusted free cash flow of $80 million on a cash CapEx basis. Accrued CapEx for the quarter was $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 $0.14 per share of adjusted free cash flow on a cash CapEx basis and $0.27 per share of adjusted net income. As you can see on Slide 4, we are delivering $57 million of total shareholder returns in Q2. Our calculation begins with adjusted free cash flow of $80 million. We reduced that amount by our $0.05 per share base quarterly dividend or $28 million. We have committed to pay 50% of the remainder of free cash flow to shareholders via dividends or buybacks. This quarter, we are achieving that target with a variable dividend of $0.05 per share.
Turning to Slide 8. We remain focused on maintaining a strong balance sheet that supports strategic flexibility as well as our shareholder return program. We have no near-term maturities and well over $1 billion of liquidity on our RBL. We expect to continue to utilize free cash flow to reduce net debt over time. Our hedge summary is included in the appendix, where you'll 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.

James H. Walter

Thanks, Guy. We are 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 7 highlights our continued quarter-over-quarter and year-over-year improvement in G&A per BOE. We have lowered G&A per BOE by approximately 40% when compared to Centennial's stand-alone quarter in Q2 2022. This improvement in G&A from $1.95 per BOE to $1.17, resulted in an incremental $12 million of free cash flow for the quarter. Not only have we improved compared to our historical performance, we have quickly jumped to a leading position compared to our peers, but on a G&A per BOE basis as well as a G&A per operated basis, which is a further testament to our talented team and highly efficient operations.
Our team is always looking for well 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 9, where we provide a quick recap of the goals we set out earlier in the year and our progress against those goals today. First, as a result of our robust and consistent well performance, we remain on track to deliver peer-leading organic oil production growth of 10% exit to exit or over 15% on a full year pro forma basis. Two, we continue to execute on all spectrums of our capital return program, returning approximately $200 million or $0.35 per share to shareholders through our base dividend variable dividend and share repurchase program. Three, through the combination of shared 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. Four, we continue to optimize our portfolio, driving meaningful value for shareholders. Between bolt-on acquisitions and our active ground game, we've acquired over 5,000 high-quality acres offsetting our position in the core of the Delaware.
We've also successfully divested noncore STV assets in Reeves County for $125 million, representing a significant premium to our current trading multiple. Lastly, but perhaps most importantly, we've executed all of the above while maintaining a strong balance sheet with ample liquidity, which will allow our business to thrive and create outsized 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, while maximizing long-term valuation.
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 1 for personal reasons. As I sit here in the commentary with Matt, on what would be his last earnings call, it's worth taking a moment to reflect on the tremendous contribution that has made to Permian Resources. He has shown incredible dedication and leadership to this company, both during the past year, Permian Resources as well as the prior 6 years at our predecessor, Centennial. Will, 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 an organizational standpoint, Matt's direct operational reports will report to Will Hickey going forward. With Will's operational background, this will be a natural fit and 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's done at PR. We'll miss him going forward to wish him and his family the best in the future.
Thank you for listening, and now I will turn it back to the operator for Q&A.

Question and Answer Session

Operator

(Operator Instructions)
And your first question comes from the line of Neal Dingmann from Truist Securities.

Neal David Dingmann

Nice quarter. My first question is on Slide 5. By looking at this and even the last couple of quarters, certainly appears you all continue to see some very strong well consistency. I'm just wondering, can you speak to what's driving this? Is it the target of the key intervals or your spacing or completions as it looks like the wells continue to be very consistent, both on a production and GOR basis?

William M. Hickey

Yes. Thanks, Neal. I mean, really, I think what's driving it is that we haven't significantly or really at all changed any of those things you listed. 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 kind of the short story is we're just doing what we've always done, and this is what you should expect for the next few years going forward.

Neal David Dingmann

Yes, it's great to see the consistency. And then my second question is on the OFS cost and operational efficiencies. I'm just wondering you mentioned on Slide 6. where you've 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 to place on the high-spec equipment as you can see on the lesser quality side, and what type of improvement or results do you all see? I guess what I'm asking is like, what's the advantage of going to the high-spec if potentially maybe see some lower cost on some of the lesser equipment?

William M. Hickey

No, I think that's right. I think kind of across the industry, we've seen that costs have come down on the low-spec stuff first. And the hope is that we'll start to drive some cost down 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 intent side, kind of more than offsets that site premium we have to pay for that equipment. But as we've always been, I mean, we're always kind of evaluating what that equation looks like, what the kind of overall cost structure looks like with high spec versus lower spec. 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.

Operator

And your next question comes from the line of Zach Parham from JPMorgan.

Benjamin Zachary Parham

I guess, first, just on the production trajectory. You all reaffirmed the exit rate on oil growth guidance. Can you talk a little bit about what 3Q looks like, just trying to get a sense of where production goes from here?

William M. Hickey

Yes, sure. So I think the expertise so 3Q will be kind of low single-digit growth percentage from where we were in Q2, and then slightly more kind of higher percentage growth from Q4 to Q3 to kind of ultimately get to that Q4 exit rate that we discussed at the beginning of the year.

Benjamin Zachary Parham

Got it. I guess just following up on Neal's question on cost deflation. We've heard others mention 5% to 7% lower year-over-year well costs 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 you're seeing any substantial declines on any of the larger ticket items?

William M. Hickey

S 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 2-wheelers 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 and kind of other kind of fine items across the whole AFE. So I think based on what we're seeing today, we've got kind of 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.

Operator

And your next question comes from the line of Geoff Jay from Daniel Energy Partners.

Geoff Jay

I was just curious, there's been a lot of commentary on some of the other calls about M&A in the Permian in particular, with, I guess, sort of the notion that it's pretty picked over and that what's left, there's not a lot left in the till, and I know you guys are kind of all seeing on this front. So I was wondering what your sense of the land or land was there?

James H. Walter

Yes. I mean, I think starting with the grassroots effort that I think our team does incredibly well. Like we're still finding great opportunities, kind of think smaller blocking and tackling acquisitions ahead the drill bit. And as you saw, we did that in this quarter. We've really done that every quarter for 8 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. I think on bigger stuff, there's still stuff out there. I think you've seen a lot of transactions in the Permian. I think it's safe to say we're looking at everything. But as we've said before, we've got a really good business, and that sets the bar for acquisitions really high.
I'd say we've got one of the highest quality inventory bases out there. So we're only going to do deals that provide inventory that compete for capital. And I think the better our business gets, the harder that is. But looking, I think if we can find something that was accretive, and we were confident to make 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.

Operator

And your next question comes from the line of Paul Diamond with Citi.

Paul Michael Diamond

Just a quick one. The -- you guys noted a 2% increase in LOE on kind of water handling expenses. I guess I wanted to get an understanding of how sticky we should think about that or if that trend should go forward? Or do you expect it to kind of drop back down?

William M. Hickey

Yes. I mean specifically, that's the SWD 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 to the high end of the LOE range for the back half of this year. But as we continue to kind of grow production and grow the base and just given the fixed cost nature of some of those LOE costs, 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.

Paul Michael Diamond

Understood. Maybe just one quick follow-up. You guys are dropping a rig on efficiency, holding production steady to up. Just on a longer term, what -- are there any bogeys out there that would have you bring back a rig for growth, whether in '24 or beyond is what we need to see in order to kind of make that move?

James H. Walter

Yes. I mean I think for us, we've been pretty clear. We're not providing any kind of outlook on to 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've said for the past 12 months, any kind of decisions to increase or decrease activity are going to be driven by what maximizes midterm free cash flow for our investors. And I think today, it's too early to tell what 2024 looks like. I think with a low 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 activity. So 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 in the asset base. We can react quickly as we put out a plan closer to next year.

Operator

And your next question comes from the line of Subhasish Chandra from Benchmark.

Subhasish Chandra

Two questions. First is, do we think of 4Q to 4Q as sort of being the benchmark as you talk about 2024 plans, is that sort of the math we should be looking at?

James H. Walter

The real frank answer is we put 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 when we start talking about out years, I think we'll probably shift and start talking annual growth rates. I think that's simpler and cleaner. And now that we'll have a full year under our belt at that time, I think that will make a lot more sense. So 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.

Subhasish Chandra

Got it. Okay. My follow-up, and we've seen this across multiple Permian operators is a bit of a declining oil cut, a host of reasons, but I guess, in maintenance that should be expected, I suppose. But how do you think about that for you guys in '24?

William M. Hickey

I'd 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 we saw a significant outperformance of gas between now and then that we could kind of shift development accordingly. But I think the base case is flat oil cuts for '24.

Operator

And your next question comes from the line of Josh Silverstein from UBS.

Joshua Ian Silverstein

We've started to hear some more Permian offers go out towards 15,000-foot laterals even a little bit beyond it. I'm wondering if what you guys have done, what your average lateral length may be this year and what the inventory or some of the longer laterals may look like?

William M. Hickey

Yes. So our average lateraling to date this year is 9,300 feet, which kind of fits. If you look at our position on the sets up really well for 2-mile development across the majority of our position. So I think that's what we've done over the last 2 years, and that's what you should expect going forward. As far as just 3-mile laterals in general, I think in the Delaware Basin, just given the overall productivity of those wells and how much fluid they make, it's probably slightly less efficient than what you'd 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 2.5-mile laterals this year and over the -- kind of over time. So we'll keep watching it. We feel very confident that if that is the most capital efficient answer that we'll move that direction. But I think as a base case, you should expect we're kind of a 2-mile development company next year.

Joshua Ian Silverstein

Got it. Understood. And then just on the return on capital and cash to the balance sheet. You still have the 50% plus return on capital framework. Just given that you don't have any maturity of that until 2026 and ramping free cash flow and stock is still trading at a low multiple. How do you balance the opportunity for share repurchases versus just building cash? Because obviously, you guys are committed to the base dividend and variable dividend, but just curious about upside and buybacks versus cash on hand?

James H. Walter

Yes, sure. No, I think that's right. Obviously, the base dividend is what it is. I think on the variable versus share buyback, I think for us, that's just going to be opportunity set driven. We said before and continue to say that the default for us is going to be the variable dividend, but we expect to be opportunistic to kind of take advantage of opportunities we have on the buyback side. And I think we haven't seen that in the last year because the stock has performed really well. But I think as we see or if we see clear market dislocations or to kind of effectuate an organized sponsor sell-down, we're going to lead in hard to the buyback. So I think I think you got it right. I think the risk case is going to be the variable dividend. But over time, I expect we'll find some opportunities and should lean harden the buyback when those opportunities arise.

Operator

Mr. Walter, there are no further questions at this time. Please continue.

James H. Walter

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. But we 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 that quality business such as ours with core assets, organic growth, efficient operations and strong financial positions confirmed to rerate to more competitive multiples, not only with our direct peers but also with other sectors in the broader market.
By continuing to enhance and cultivate these attributes, we believe that we can continue to create value for shareholders while solidifying our position as a leader in the energy sector. Thank you, everyone, for your time today.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.