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spk08: Good morning and welcome to Permian Resources conference call to discuss its third quarter 2022 earnings. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Today's call is being recorded. A replay of the call will be accessible until November 16, 2022 by dialing 877-344-7529 and entering the replay access code 5341497 or by visiting the company's website at www.permianres.com. At this time, I will turn the call over to Hayes Mabry, Permian Resources Senior Director of Investor Relations, for some opening remarks. Please go ahead, sir.
spk05: Thank you. Thank you, Vishnavi. And thank you all for joining us on the company's third quarter earnings call. On the call today are Will Hickey and James Walter, our Chief Executive Officers, George Glyphos, our Chief Financial Officer, and Matt Garrison, our Chief Operating Officer. Yesterday, November 8th, we filed a Form 8K with an earnings release reporting third quarter earnings results as well as operational results for the company. We also posted an earnings presentation to our website that we will reference during today's call. You can find the presentation on our website homepage or under the news and events section at www.permianres.com. I would like to note that many of the comments during this earnings call are forward-looking statements that involve risk 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 in the forward-looking statement sections of our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter ended September 30th, which was filed with the SEC this morning. Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance, and actual results or developments may differ materially. We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measure we use, a reconciliation to the nearest corresponding gap measure, can be found in our earnings release or presentation, which are both available on our website. With that, I'll turn the call over to Will Hickey, co-CEO.
spk07: Will Hickey Thank you, Hayes. Good morning and welcome to our first quarterly earnings call as Permian Resources. We are extremely excited, having recently closed the merger of equals between Colgate and Centennial. Both teams have been working hard prior to and post closing, and I couldn't be more proud and appreciative of our employees' efforts. People are the foundation of any business, and if there's one thing the integration process has highlighted for me, it's the quality and talent of the employees from both legacy companies. I firmly believe that we have one of the highest caliber employee bases in the industry, which will continue to create outsized returns for our investors. During Q3, Our team executed very well in the field with no issues, producing strong well results while demonstrating cost control in a difficult operating environment, all while working through the integration of a corporate merger. On a pro forma basis, we operated eight drilling rigs and three frac fleets during the majority of the third quarter, which spud and completed 36 and 38 wells, respectively. In addition to driving solid well results across both New Mexico and Texas, our production team has done an excellent job in the field, as we saw a reduction in surface-related downtime quarter over quarter. As a result, we remain on track to achieve our fourth quarter 2022 and full year 23 targets. I'd also like to provide a quick update on merger synergies on slide seven. On the DNC side, we've been implementing shared best practices and design changes to reduce cycle times and well costs. Our drilling department has reduced flat times, incorporated offline cementing, and optimized our bit selection since closing. During the quarter, we had Two standout successes in our parkway asset, where we drilled a two-mile second-bone spring sand well and a two-mile third-bone spring sand well in eight days and 12 days, respectively. While these are fantastic early-time results, we expect to pull additional levers in hopes of further reducing cycle times over the next 12 months. Additionally, we recently used our own recycled water during completions for the first time on legacy Colgate acreage, which not only advances our sustainability initiatives, but also provides both CAPEX and LOE savings. Going forward, we plan to use recycled water whenever possible in our operations. As you can see from our progress to date, we remain on track to achieve the 65 million annual synergy target laid out at announcement. I would remind everyone that our combined team has only been together for two months since closing. As a result, I'm confident that we'll continue to get better and really begin to show what this new company can do over the next several quarters. Before we touch on financial results, I'd like to quickly hit on the topic of full field development as it's certainly become quite topical this earnings season. For the past several years, both Colgate and Centennial have been targeting larger scale multi-well co-development projects to efficiently develop our asset bases. Our strong technical teams work to make sure we are optimizing the development of our assets by simultaneously developing zones that we believe need to be co-developed, maximizing the profitability of each pad while minimizing any future well degradation. Importantly, The idea of full field development does not represent a change from how either company has developed their assets previously and won't change how Permian Resource develops the assets going forward. We are fortunate to be located in the Delaware Basin, where we have over 4000 feet of high quality overpressured rock with over eight proven intervals and significant frac barriers between many of the zones. Thus, we feel very confident in our 2023 plan and don't anticipate any major changes to our development philosophy or capital efficiency as compared to previous years. And with that, I'd like to turn the call over to George to review third quarter financials.
spk03: Thank you, Will. As a result of the merger closing on September 1st, the quarterly results include two months of centennial standalone for July and August, and combined company results for both legacy companies for the month of September. Given this dynamic, comparisons to prior quarters are not meaningful, and the fourth quarter will be the first clean quarter for Permian Resources. With that said, I'll briefly review quarterly financial results, which you can reference on slide three of the presentation. Net oil production for the third quarter was approximately 48,500 barrels per day, and average net equivalent production totaled 92,000 barrels per day. During Q3, the company generated adjusted EBITDAX of 380 million, incurred approximately 200 million of total capital expenditures, and reported adjusted free cash flow of approximately 160 million. Costs for the quarter came in largely as anticipated. Cash G&A, as you can reference on page 41 of the 10Q filed this morning, was $15.1 million, or $1.78 per BOE. We expect that both cash G&A and GP&T per barrel will continue to decline in the near term. I'd also like to touch on a few specific merger-related clarifications. First, during Q3, we had approximately $59 million of merger and integration-related expenses, which were in addition to the $6 million that were incurred during Q2. We estimate that the expenses realized to date represent approximately 75% of the total merger costs that we will incur. The balance of the expenses, which are primarily related to severance costs, will occur over the next four quarters and will taper over time. Turning to our corporate outlook for Q4 and beyond, as Will mentioned, as a result of our team's execution in the field, we are confident in the fourth quarter and full year 2023 targets that we provided in early September when the merger closed. On slides eight and nine, we summarize our capital structure, maturity profile, and liquidity position. In a cyclical industry like ours, maintaining a strong balance sheet and low leverage profile is critically important. As of September 30, we had approximately $45 million of cash on hand and $550 million of borrowings on the revolving credit facility. The company's $1.5 billion facility is governed by a $2.5 billion borrowing base and provided approximately $1 billion of liquidity at September 30. We expect to repay the revolving credit facility borrowings utilizing free cash flow over the next several quarters. Total net debt was approximately $2.3 billion. and we estimate that net debt to LQA EBITDAX was less than one times. Finally, we are pleased to have announced our first quarterly base dividend of $0.05 per share, which will be paid on November 29th to shareholders of record on November 21st. With that, I will turn the call over to James.
spk11: Thanks, George. One other item that has been very topical this quarter is natural gas marketing and takeaway. Like most of our peers, we expect regional gas markets and takeaway out of the basin to get tight as we head into 2023. As you can see on slide 10, we've been proactively managing our midstream exposure ahead of potential weaknesses at Waha next year. Across commodities, our goal is to ensure takeaway and maximize our netbacks by pricing as many hydrocarbons as we can at end markets rather than regional hubs. And we're excited to announce that we continue to make real progress in that regard. We recently entered into a revised contract with one of our primary midstream providers to sell a significant amount of our residue natural gas at Houston Ship Channel pricing. This contract revision allows us to both realize better prices for a large portion of our residue gas and increase flow assurance out of the basin. At current commodity prices, we expect this contract revision to result in over $20 million of incremental free cash flow in 2023. In addition to advantageous Gulf Coast pricing, we further mitigate our exposure to WAHOF through the use of basis hedges. For full year 2023, we have Waha basis swaps in place for 67,500 MMBTU of gas at a weighted average price of minus $1.25. As a result, we estimate that in 2023, only one-third of our natural gas production will be exposed to Waha pricing, with the remainder being protected by Houston shift channel pricing and basis hedges. Overall, we believe our existing midstream agreements provide for advantage pricing and flow assurance during periods of potential weakness next year. and we look forward to continuing to find ways to further enhance pricing over time. As you can probably tell, we are excited about where the business stands today and feel like we have significant momentum as we head into next year. We are well positioned to generate robust free cash flow and deliver significant returns to shareholders in nearly any commodity price environment. Turning to slide five, as George highlighted, we look forward to paying our first quarterly base dividend less than three months after the closing of the merger, further reiterating our commitment to shareholder returns. The $0.05 per share base dividend represents an annualized yield of 1.8%, which is competitive with our large-cap peers and the S&P 500. We view paying this first dividend as a key milestone for the combined business and are committed to sustainably growing this base dividend over time as we execute our long-term strategy. In addition to our base dividend, we previously announced a variable return program whereby we will return an additional 50% of the free cash flow remaining after deducting the base dividend. This variable program is described in further detail on slide six, but in summary, at the end of each quarter, we will evaluate free cash flow generated during the quarter, any buybacks completed during the quarter, and then true up investors with a variable dividend to ensure the minimum payout of 50% is achieved. After careful deliberation, we ultimately decided on a pay it ratio of 50% as we felt that it provided the right balance between shareholder returns and strategic flexibility for a company of our size. Our investors can rest assured that we will be thoughtful allocators of this excess free cash flow, and we pride ourselves on a strong history of successful capital allocation and outsized equity value creation. As significant owners of the business, our management team is highly aligned with shareholders and laser focused on creating long-term value. I'd like to quickly wrap up on slide 12. In summary, we believe that Permian Resources represents a unique investment opportunity as a true mid-cap E&P, that has both the scale to be relevant to institutional investors and the asset quality to compete with the larger independents. The company's robust shareholder return program is underpinned by its high-quality asset base, long-dated inventory life, and fortress balance sheet. Given these attributes, we are confident that Permian Resources has all the characteristics to excel in today's market and drive outsized value creation for our shareholders across commodity cycles. Thank you for listening today, and now we will turn it back to the operator for Q&A.
spk08: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster.
spk09: Our first question comes from Zach Parham with JP Morgan.
spk08: Please go ahead.
spk04: Hey, guys. Thanks for taking my questions and congrats on your first quarter as a combined company. In the release and in your prepared remarks, you mentioned the SPUD to TD times of eight days and 12 days and the second and third boat springs in Eddy County. Can you talk a little bit more about the drivers of those efficiency gains and maybe give us some color on how fast Colgate was drilling wells in the area prior to the merger?
spk07: Yeah, sure, Zach. This is Will. I'd say those two were kind of the standout best wells of the quarter. You know, kind of I'd say that the average for Colgate are going to be three or four days slower than that, kind of respectively to each zone. So call it 10 to 12 days in the second and closer to 16 in the third bone spring. So yeah, quite a bit of improvement. And I note that, you know, these are changes that we could make day one. Think, you know, things, changes with the BHA, changes with drilling parameters, kind of changes that don't require long lead times. There's still kind of a slew of changes that are on the come that require kind of more changes with surface equipment, you know, kind of further integrating offline cementing and things like that. So, you know, I'd say as we look at the team and what they're doing already, they're really just getting started.
spk04: Got it. Thanks for that color. And then maybe just one on the marketing side. Could you give us a little more color on the natural gas contract you signed? What's the duration of the contract? And James, I know you mentioned the $20 million uplift in free cash flow at the current strip, but do you have any color on how that contract will impact cost or price realizations specifically?
spk11: Yeah, so that contract, that revision that we entered into, goes through 2026. And, yeah, I think kind of super high level, you know, I think it's going to increase our realizations kind of next year for the gas that pertains to that contract between $1 and $1.50. So kind of meaningful uplift kind of next year, given where the basis stands today.
spk10: Got it. Thank you, Alex. Thanks, Zach.
spk08: Our next question comes from Neil Dingman with Truist. Please go ahead.
spk00: Morning, guys. Thanks for the time. My first question is on your planned activity to arrive at that 23 estimate. I think you're showing about 150, 165, and I'm just wondering, right there, Will, specifically, would you all consider most of that activity for next year would be mostly developmental in nature. And I'm just wondering if so, could you comment on how do you see potential for further incremental efficiencies that you've already seen versus obviously the potential for continued OFS inflation?
spk07: Yeah, I mean, I'd say the 23 plan, you know, if developmental meaning kind of in areas that we already have activity, it's 100% that, you know, we are Phil Kleisler- Very confident in the plan and really we're just kind of coming back to areas and drilling the the packages that we feel confident in in the results will get as far as kind of. Phil Kleisler- What that means for further efficiencies, I mean kind of I think the way we've put it is. Phil Kleisler- The base case we're expecting to drop from kind of the seven rigs will be running to start the year down to six over the course of the year and and in order to hit the well counts. at the kind of six rigs at the back half of the year, we'll need to continue to gain efficiencies. And, you know, from what I've seen in just two months post-close, I'd say we are very confident that we'll see them. It's just a matter of kind of when we'll see them, if that makes sense.
spk00: No, that's great to hear. And then my second, maybe just on topic du jour of shareholder return and cap allocation, specifically, you know, maybe James, for you, or George, if you have the opportunity to participate today, in buybacks of any, you know, if any potential equity owner sells, would y'all consider that or if you did that part of the 50% payout for that particular period, or would you still consider paying out 50% plus with a variable and potentially other buybacks on top of that? And I guess I'm just wondering, you know, if you had an opportunity to buy back some of this private, would you consider using Revolver to repurchase those shares if it still meant keeping the leverage around one times? Thank you.
spk11: Yeah, no, great question, Neal. You know, I think the answer to your first part of the question is absolutely. You know, I'd say we've said time and again that we plan to be opportunistic with the share buyback program, and I think participating alongside a sponsor sell-down is a great way to use the buyback. You know, I think we've been pretty clear with the market that we expect sponsors to have an orderly and kind of thoughtful exit, and I think us playing a role in that is really, really key. I'd say with regards to do we view that as incremental, I'd say as a base case, we would view that as part of an ordinary course share buyback, which would go into the 50%. As we've messaged it to date, it's at least 50%. I'd say any incremental returns beyond that are going to be dependent on market conditions at the time and what our other opportunities look like. I don't think we view any real constraints there beyond that and are excited to get aggressive on the buybacks if the opportunities are there.
spk10: Thanks, guys. Thanks, Neil.
spk08: Our next question for today comes from Leo Mariani with MKM Partners. Please go ahead.
spk06: Hey guys, wanted to follow up quickly on the gas deal. Just a couple more details looking for here. So does that begin like January 1st, 2023? Is there any benefit in the fourth quarter of 2022? And then additionally, you spoke about kind of roughly $1 to $1.50 uplift on your gas price realization next year. Wanted to see if there's some corresponding increase in GP&T expense that potentially would come along with that as well here.
spk11: Yeah, so that revision became effective November 1st of this year, so nine days ago. And then, so no, the way that contract works is we sell that gas at the wellhead, so you'll see it as a deduct to revenue, but kind of super high level. If Waha pricing is $2 off of the hub... You know, we pay an extra, call it 50, 60 cents between additional fees and fuel to get that gas to Houston. So that's how you get to that kind of $1.25, $1.30 of uplift. Does that answer that?
spk06: Yep. Helpful for sure. And I guess just wanted to dive into the buyback a little bit more here. I just wanted to get a sense if that's something we could see in the next couple quarters as we work our way into fourth quarter and first quarter next year, or do you guys think that really the focus is on, you know, knocking down this revolver as quickly as possible over the next couple quarters and it's really something that might kind of kick in, you know, more kind of mid-year next year?
spk11: Yeah, I mean, I think the buyback authorization is in place today. You know, I think to the degree that we're to be a sponsor today, looking to sell down, I think I could see us participating on the sooner end of that. But I think absent that opportunity, I think kind of this quarter is probably focused on using that incremental free cash flow elsewhere.
spk06: Okay, that's helpful. And then just on the op side, can you talk about, obviously I know you've got some synergies that you're working on, but what are you just kind of seeing on just the inflationary side of things out there in the oil field? Are you still seeing kind of rising costs? Are you starting to see anything settle down What do you see in the field?
spk07: I mean, it feels like the lion's share of kind of the significant inflation is behind us at this point. You know, we laughed at the casing has now become the single highest line item on our AFE, just given how much kind of steel and how tight that market has gotten. And it feels like kind of as we look at where casing stands today and project that through next year, there's probably more upside or kind of more likely to see that come down than up at this point. And then, you know, over the course of this year, we were fortunate to lock in a lot of these contracts, you know, things like sand, you know, about half our rigs, and then water via our recycling efforts. So, you know, we feel good about our kind of 23 outlook from a CapEx perspective, kind of given what we know today.
spk10: Okay. Appreciate the color. Thanks. See you.
spk08: Our next question comes from John Annes with CFO. Please go ahead.
spk02: Hey, good morning all and congrats on initiating the dividend. For my first question, you reiterated capital guidance at a time when peers are experiencing inflationary pressures above expectations. Could you speak to some of the self-help initiatives that have enabled you to hold your CapEx guide and other levers you have to maintain your capital efficiency? Thanks.
spk11: Yeah, no, I mean, I think a big part of that is we put out this guidance kind of early September in a market that looks a lot like, I think, where the market is today. So I think there's a little bit of a difference there just from a timing perspective, and then I'll let Will head to the operational side.
spk07: Yeah, I mean, I'd say on the operational side, we have been – we put some aggressive synergy targets out there and really kind of worked hard. You know, if you think about from announcement to closing, we had, you know, months with the teams to get together and really put a plan in place and make sure we knew exactly what levers we were going to pull on closing of September 1st. And, you know, that plan's coming into fruition very quickly. You know, from everything we've seen kind of two months post-close, it feels like we really are getting the best of both worlds, the best of what Colgate did, the best of what Centennial did, and we're seeing it quickly. And I think that gives us confidence that, you know, we're going to be able to kind of achieve the targets we put out there.
spk02: Got it. That makes sense. And then for my follow-up, turning to slide six, you're forecasting $1.1 billion of free cash flow in 2023. And with $600 million slated for shareholder returns and your leverage within your long-term target range, how are you thinking about the use of excess free cash flow?
spk11: Yeah, so I think we really value the flexibility there and obviously there's a lot of things we could do with that and I'd say kind of as we get further along into this quarter and then into next year, I think we'll be evaluating what the opportunity set looks like and that could be anything from continuing to repay the outstanding borrowings on the revolver, that's probably the first thing that we're doing kind of this month, but also kind of comparing the opportunity cost of that with other opportunities, strategic acquisitions, you know, further shareholder returns, et cetera. And from our perspective, we're going to always use that capital in what way we think drives the most equity value creation for our shareholders.
spk02: Got it. Great update, and thanks for taking my questions. Thanks, John.
spk08: The next question comes from Oliver Huang with Tudor Pickering Holt & Co. Please go ahead.
spk01: Good morning, everyone. Congrats on a solid quarter and thanks for taking the questions. First off, just wanted to ask, we've seen some of your peers run into some issues on both supply chain and labor fronts or kind of talk about it. Was hoping that you all might be able to speak a bit more on certain things that you all are doing behind the scenes to kind of mitigate this risk.
spk07: Sure, sure, Oliver. I mean, I think I'm glad you asked that question. It really gives me an opportunity to give a shout out to our team. It's really truly remarkable that they were able to get this merger completed, get these two companies put together, and really not miss a beat on the operations side. I think it's one thing worth pointing out that with this merger, there was no incremental activity picked up. We were running the eight rigs that we ran for the majority of Q3 and the three FRAC fleets at the predecessor company's pre-deal. we were fortunate that both companies had kind of put in place, contracted out the sand volumes they needed, you know, the water they needed, the casing they needed, et cetera, to kind of hit the plan we had in place. So really it's just a testament to kind of both Colgate and Centennial really had their ducks in a row and had procured everything they needed to execute pre-merger. And now you're starting to see the benefits of the merger being that, you know, there were a lot of best practices that we can incorporate across the business. So, you know, I'd like to think that's the kind of the blocking and tackling we do on the ground that makes this company what it is. And hopefully this is just, you know, another quarter for us and you'll continue to see great execution going forward.
spk01: Awesome. And for a second question, just from an operational perspective, could you all talk about the progression of pad sizing and even lateral lengths from the current 9,000 foot level moving forward? Just kind of considering a large portion of the Colgate acreage is still a highly undeveloped and virgin fairway and should allow for this?
spk07: Yeah, no, that's a great question. I'd say from a lateral link perspective, you know, the 9,000, we kind of feel like Delaware Basin optimal lateral length is right at that call it 10,000 foot lateral link level. So the 9,000 we're drilling over the course of 23 is a mix of, you know, heavily weighted towards two mile laterals with a few mile and a half sprinkled in there. And And that's probably about where we'll be, kind of 9,000 to 9,500, trying to target that optimal lateral length that we think in the Delaware Basin of a two-mile lateral. And then from a pad size perspective, you know, we're very fortunate that kind of with the combined size and scale of this business that we have the flexibility to scale pad sizes as needed to optimally develop our assets. I think what you'll see is, you know, it's quite a range of pad sizes. There are some areas where we're very fortunate that kind of the benches that we're targeting in 23 are, you know, thousands of feet of vertical separation away from other well packages and have good frack barriers in between. And as such, we can develop them with kind of smaller pad sizes, call it three, four, five well pads. And then we have plenty of pads in other areas where we feel you need to have a large scale pad to most efficiently develop the asset. In that case, there's plenty of pads in the 23 program that are kind of 10 or more. So it's a mix, but I think we feel really good both that the pad sizes we're targeting are go forward are not that different from what we have done backward looking and that we've got kind of the financial flexibility to kind of execute on the right pad size for the assets.
spk10: Awesome. Thanks for the call.
spk07: Yep.
spk08: As a reminder, if you have a question, please press start and want to be joined into the queue. The next question comes from Jeff J. with Daniel Energy Partners. Please go ahead.
spk12: Hey, guys. I just had a quick question about where you feel you are in terms of your current scale post-deal. And I know you've got a lot to say greats over. But, you know, how are you sort of thinking about the, you know, consolidation potential going forward in the Delaware? And, you know, what's your kind of, I guess, what's your sort of roadmap if you look over the next couple of years?
spk11: Jeff, good question. I think we feel really good about the kind of business that we have today, kind of asset quality, return to capital scale. So I'd say we don't feel any pressure to do anything. We've got an incredible business and incredible path forward to equity value creation. But I'd say we do have a really strong track record of accretive M&A and are constantly evaluating the market and don't see anything in the immediate term. But if there were ways we could do deals to really make a better business and drive a creative shareholder value creation, you know, we'd be open to that. You know, I'd say with regards to scale, I mean, I think there's definitely today some correlation, if not a pretty direct one, between scale and kind of how businesses trade. But I think a large part of that is quality, and we really believe with the business that we've got today that ultimately we can re-rate with the size that we have today, where we do have the asset quality of the larger cap independents. We've got the return of capital of the larger cap independents. We've got the balance sheet of the larger cap independent, so I think really what you're hearing from us is no pressure to do anything. We really like the business we have today, but if we had opportunities to make that business better, we'd be open to them.
spk12: Excellent. Hey, thanks. The rest of my questions have been answered, so thanks a lot.
spk10: Great. Thanks, Jeff.
spk09: As we see no further questions, let's conclude the question and answer session.
spk08: I would like to turn the conference back over to James Walter for any closing remarks.
spk11: Thank you to everyone who participated and listened in to Permian Resources' first official investor call. We look forward to everyone tuning back in in February when we'll announce Q4 results, which will be the first full quarter operating as Permian Resources. We're really excited about everything we're doing out here in the Permian and look forward to building long-term relationships with our investors and a track record of outsized value creation.
spk10: Thank you again, everyone, for your time.
spk09: Conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.
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