Permian Resources Corporation (PR) Earnings Call Transcript & Summary

Well, welcome, everyone, back to the Barclays CEO Energy and Power Conference. It is my pleasure to introduce Sean Smith, CEO of Centennial Resource. Centennial operates in the Delaware Basin, and Sean took the helm back in April, having previously served as VP and Chief Operating Officer in 2016. Welcome, Sean, and thank you for joining us.

I appreciate that, Will. Thank you. And thank you for having me. Obviously...

I'll give you an opportunity. Obviously, I'll prepare questions and I'm going to follow up with some Q&A. So go ahead.

Great. Awesome. I appreciate the introduction. So good afternoon and thank you for participating for everybody on this video call. I know this is different than usual and obviously it's late in the day, so you guys have all participated in these throughout the day. I know it's not as good as in-person, but I think we've got an interesting story to tell, and I'm glad I get to share it with everybody. I've had the pleasure of speaking with a fair amount of folks already today, and I'm appreciative of the interest in our business. So for those that have been tracking Centennial since the inception of the company in late 2016, you've kind of seen the company build through a sizable position in the Delaware Basin through various methods of acquisitions and ground for leasing. Here on Page 3, is a reminder of the location of our high-quality acreage in both Lea County, New Mexico; and Reeves County, Texas, where we've assembled approximately 80,000 net acres, of which essentially is all operated with approximately 90% of it held by production. So it's -- we certainly control the asset, and it's not going anywhere from a lease obligation point of view. We continue to be an oil-weighted company, producing approximately 37,000 barrels of oil per day. And this top-tier position, as I just mentioned, has very little exposure to federal lands. In fact, it's something less than 5% of our total acreage has federal land exposure, thus limiting any risk associated with the November elections. That seems to be a reoccurring theme that's come up, and I want to nip that in the bud right off the bat. As we discussed on our second quarter earnings call, the company continues to focus on lowering costs with a keen eye on the balance sheet. Debt has always been something that we've talked about and that today is no different. So we'll walk through some of that. I'm going to walk through a few slides to show how the business continues to improve, how our balance sheet provides ample liquidity and how our company is positioned for the back half of the year and beyond. So turning to the next slide here. In response to the macro environment, in April, we quickly decreased our activity levels, reducing our rig count from 5 rigs to 0 rigs, halted our completion activities and materially lowered our capital budget by 60% from our original guidance. At the same time, we also lowered our G&A and LOE unit cost for the year. Along with many other producers, we did decide to curtail some production, approximately 20% in May when commodity prices were near their low, but all of those barrels are currently back online and producing at economic rates. On top of that, the wells did not show any signs of reservoir deterioration or damage or pressure decreases, and we incurred less expense bringing those wells back online than we anticipated. And in fact, very little expense at all. So feel good about treating those wells in was the right thing to do at the time, but the fact that we brought them back online and they're all producing the same rates is a fantastic outcome. We were also successful in executing a debt exchange that reduced our senior unsecured notes and lowered our interest expense. So during the process, we amended our credit facility to replace our total leverage covenants with a first lien covenant. So that's additional financial relief that provides. In addition to protecting the business from both a debt and cost perspective, we also started to layer on hedges to ensure the company could withstand any further commodity price deterioration. Thus, lowering our risk profile in what has certainly been a very tumultuous market as we've seen over the past couple of days, in fact. To summarize, clearly, we've had a very busy few months, reacting to the commodity market and protecting the business. But as you can see in the remaining slides, we believe we've set ourselves up for a successful back half of 2020 with some nice momentum heading into 2021. Slide 5 highlights efficiencies gained by our drilling and completion teams. As you can see from the graph on the left side of the page, our spud to rig release times have continued to improve, including a 25% improvement from 2019 average times. As you're all aware, time spent drilling equals costs such as your rig contracts, rental equipment and personnel, fuel, et cetera, so as you cut days, you are impacting your total well cost. And we've made some material improvements over the past couple of years really, but even over the last quarter or so. Our completions team also continues to find ways to increase efficiency. And the graph on the right side of the page shows some of the improvements we've made to the number of stages completed per day since 2018 with, again, the largest gain in the first half of 2020. This is not service cost-related, this is efficiency-related. And that last move from 2019 to 2020 is an impressive 34% increase in the number of stages per day relative to the average in 2019. So tip of the hat to our operations and completions producers. Both of these are efficiency gains, the reduced drilling days and the increased number of completed stages per day helped reduce D&C costs and are not subject, as I mentioned, to any service company price fluctuations. These are structural in nature, and these types of increases and efficiency gains should be seen going forward. I continue to be and repeatedly impressed by how our teams continue to find ways to improve the business and to lower cost. We're doing an outstanding job there. As a result of these improvements, you will see on Slide 6 our drilling and completion costs have come down significantly. Note that when we show our D&C costs, we include all costs necessary to bring the well online, which includes not only the drilling and completion dollars but also facilities and flowback equipment. We provide this information to try and give a fulsome report on our capital cost. We think it's the fairest way to view business if you incur all your costs and we show all that. So it's what it costs to bring a well from initial pad development to flowing the well back online, all is in our numbers. The operations team is not only getting more efficient in drilling and completing wells but they're also innovating as well. We continue to look for more efficient ways to drill these wells. And where possible, we've started doing a slightly different program, an updated way of drilling these wells and setting pipe to the tune of setting one less string of casing in these wells. That benefits in a lot of different ways. A, it's cheaper if you're putting those pipe in the ground, but it's also a reduction on time spent on locations. So you're saving it across the board. And it's been a good program, and we look forward to continuing to roll that out through the rest of this year and into next. So water recycling is obviously another area that we've talked about in the past, but it's an emphasis for Centennial, for sure. It's helped us to lower our overall cost in that the more water that we recycle, the less we have to purchase and dispose of so it reduces both our capital and our LOE. So it's kind of a win-win on both sides of the cost equation. Combined, the team has been able to consistently, as you can see from the bar chart, drive down cost to current levels, which are approximately 33% lower than they were in early 2019. Regarding activity, we get asked about that, we've talked a little bit about it in the second quarter, but we are likely to stand up a rig in the fourth quarter. And we expect these costs that I've just gone through to continue with an average of less than $900 per foot for the remainder of 2020 and into 2021. Obviously, these lower costs will have a material impact -- a positive impact on our cash flow, which is one of the primary drivers for Centennial, alongside debt management, of course. To further reiterate our focus on cost control, Slide 7 shows the improvement to LOE and G&A. Starting with G&A, as a result of lower activity levels, we had a workforce reduction that we've already disclosed to rightsize the business. We also reduced compensation for all employees with the largest cuts being made at the executive and Board levels equating to a 10% to 25% reduction in salaries. Turning to LOE. As you can see on the top right-hand side of the page, LOE unit costs have meaningfully reduced over the past several quarters. This was a result of improved artificial lift, the removal of field generators and increased water recycling, all of which contribute to a lower LOE quarter-over-quarter and certainly year-over-year. But let's spend another minute kind of breaking down what those initiatives are. I think it's important to kind of walk people through how we got to that level and how sustainable that is. The next slide, Slide 8, we break down all of the various initiatives that led to that overall reduction in LOE. So we continue to push the ops team, which is really who deserves all the credit, to look for new ways to improve costs. And as usual, they delivered. The first was a move towards gas lift, which is now the preferred lift methodology. And this lowers failure rates and therefore workover expense and downtime. So it's a great situation when we can do it, where we can do it, and you'll see from the graph, we've been installing more and more. In fact, as of Q2, we had twice as many wells on gas lift compared to the same time in 2019, and we look to add to that number in coming quarters. So again, downward pressure from a cost perspective when we install these gas lifts rather than ESP. So powering the field is obviously another important part of our business. We need it to run our facilities. And it's prevalent to run our pumps, those that are still on ESP and whatnot. So relying on small generators, which is part of what we've been doing in the past, as well as local municipalities to tap into their grid is not the most efficient way of doing business. In fact, I'd say it's inadequate and expensive. They don't have the same priorities that we do in these municipalities and the generators are just generally expensive and obviously have maintenance issues as well. So we decided to take matters into our own hands, invest some capital into infrastructure. And actually, we started spending that money in mid- to late 2019, and we're just now starting to see the fruits of our labor there. I think we've talked about our substation for a while. So it's good to see it on the other side, where we're starting to benefit on the LOE side of the expense column. So we've installed an electrical substation in the field, and it's going to help manage and distribute power to all extremities of the field. And this is going to allow us to remove those costly generators that I just mentioned. We've completed Phase 1 so far of the rollout, meaning we've put the substation in, it is powered, we've done our first leg of 3 reaching out to some of the extremities of the field. We have 2 more to go, but the cost associated with that is essentially all spent. It's very nominal cost going forward. And we expect to have the rest of that online by year-end 2020. So excited for the LOE cost savings that are going to continue to roll in at the back half of the year with very minimal amount of capital expenditure associated with it. Disposal of water is another high-cost LOE item. We continue to remove trucks from the field due to the investment, again, in the infrastructure that we've made over the previous years and the increased amount of water that we recycle, both of those are impactful for LOE. You can see from the bar chart, we've removed nearly all trucked barrels from the field, down from nearly 11% in 2019 to approximately 3% in 2020. Trucking barrels is obviously the most expensive way of moving things around the field. Anything you can put on pipe, whether that's oil or water, is much more expensive and efficient to do so, and we are materially there in both of those regards. Regarding water recycling, not only is it just good practice from an ESG perspective, which we certainly want to focus on, it also helps with costs. We are now completing our wells with approximately 70% recycled water in New Mexico, 7-0, that's an outstanding number, and about 30% of recycled water in Texas. Slight differences there in how we handle water mostly due to fee owners versus state owners, but we're continuing to push as much as we can the recycled water back into the well as opposed to purchasing it. I'm proud of the shift that we've made towards water reuse and look forward to incremental improvements to water handling costs and best practices in the future. And I think we still have a little bit of room to go there. But overall, the operations team, I call them relentless. They are always looking for ways to attack costs whether that's negotiating or finding more efficiencies, and they're just doing an outstanding job of identifying opportunities to lower LOE. And it shows up in the numbers, which is outstanding. Slide 9 here shows how much the business has evolved from the first quarter of this year when we're running 5 rigs. As you can see from the bar chart, the second half of 2020 has a very minimal amount of capital assumed. The vast majority of capital to the tune of approximately 80% has already been incurred. It was incurred in the first quarter of this year while we were still running those 5 rigs. You can see the back half of the year has very little capital associated with it, which is why we are going to be operating within cash flow, assuming things go as forecast, for the back half of the year, which is a great place to be in this kind of market. In addition to lowering our cost for the year, the reduction in completed wells has had the added benefit, although kind of backhandedly, but added benefit of lowering our corporate decline. As we mentioned during our earnings call, our corporate decline will end the year in the low-30% range, which is significantly lower than how we began the year and even certainly lower than what we announced in 2019. So a positive benefit by slowing our capital down is the reduction in our corporate decline, and that's going to allow us then to support the business going forward. So the reduction in capital, coupled with the continued shallowing of our corporate decline, as I mentioned, will allow Centennial to operate within cash flow for the back half of the year. This includes the capital that we referenced in our second quarter earnings call to complete 5 drilled uncompleted wells of 5 DUCs and potentially stand up a rig in the fourth quarter. So all those plans are included in what we are assuming is the capital spend for the back half of the year and still operate within cash flow. Slide 10 walks through our capital structure and liquidity. This is a very critical point for Centennial and certainly a fair amount of questions that we get on it. And it's -- here are the numbers. This is the company. The table on the right-hand side of the page highlights some of the key metrics for the company. So as of our Q2 earnings, we had a first lien debt-to-EBITDA ratio of 0.9x, well below the 2.75 covenant requirement. And net debt-to-EBITDA ratio of 2.6x and a borrowing base of $700 million with $300 million of liquidity. So I feel good about our covenants and good about our liquidity position at Q2. And as I mentioned from the previous slide, since we're operating within cash flow, feel pretty good about our position. As I also mentioned previously, we did close the debt exchange or a debt exchange in May, which reduced our senior notes by $127 million and is expected to lower interest expense by approximately $6 million annually. So that was a good deal for us. I think we would have liked to have placed a little bit more on that, but I think it was the right decision to do to delever the company a bit and lower our interest expense. So as a reminder, since we plan to operate within cash flow for the balance of the year, the company should be very well positioned at the exit of the year with solid financial records. On Slide 11 here, I think the graph speaks for itself. So I don't have a whole lot to say except for not only do our near-term numbers look solid, as I just went through in the previous slide, but you see that Centennial has no near-term note maturities with the first occurring in 2025. Those are the newly placed secured notes of $127 million. So again, nothing for several years now to worry about from a note perspective. And the fact that we have no near-term maturities, along with our current low operating cost and improved D&C costs, all set up pretty favorably for Centennial's future. Slide 12, I wanted to talk about -- a little bit about managing risk. So we've had a recent change of heart, if you will. And for those who've tracked Centennial over time, you'll note that hedging was not much of our background, but we've had a philosophical shift partly because of change in management, partly because of the times and the strategy of the company. As you can see from the bar chart that we have a fair amount of our production hedged in the back half of 2020. And as this year comes to an end, I think you can look for us to add additional hedges for the coming quarters. You'll notice that we've already started to do that, and we've begun to hedge in 2021. Right now, we have some production hedged at $45 -- an average price of $45 per barrel of WTI. I think that's a good place to be, particularly in light of where the market is right now. If you look at strip pricing, that's right in line with where we are, and I think it's a good number to think about to support the business. And while we want to reduce risk, and this is one way to do that to help protect our liquidity, that's a key thing for us, we also want to balance our risk profile by leaving a portion of our production unhedged to give exposure to any upside commodity price. And there are those scenarios out there that, although you don't -- may not believe it today, that come mid-year or back half of '21, it could be a pretty interesting story for commodities. We're not banking on that. We're going to manage our company a little bit more conservative than that. But we also want to allow for some portion of our production to allow it to take advantage of upside commodity prices. Final slide here on Slide 13. Who is Centennial and what are we focused on? I think there has been a change in strategy and what we are calling it is a rebrand of the company, if you will, and the fact that -- and internally, even we call it Centennial 2.0. So what is Centennial 2.0? It's a company that has improved capital efficiency versus where we were in previous years. We've got line of sight on free cash flow in the not-too-distant future. All of that is while we are maintaining a manageable liquidity profile. So the presentation highlighted lower D&C costs, which we believe are sustainable into 2021 and beyond; material improvements to our unit costs, particularly LOE, which is outstanding for the business in general but also from a borrowing base perspective; and a lowering of our corporate decline. So all of those things are materially moving in our direction. So you combine all those traits, coupled with the same high-quality assets that we've always talked about and they're still there and the ability that we've continued to deliver top results quarter-after-quarter, it's a pretty good setup for the company. You complement everything I just said with no near-term note maturities and ample liquidity, and there's a reason to be optimistic about Centennial's future. So with that, I conclude. I thank you for your time. Thank you for your interest in Centennial. And I think Will maybe has a couple of questions from the presentation, but thank you all for listening.

It's a pretty comprehensive overview. So just a few I want to follow up on. Kudos to you, you've done a very good -- very impressive job of reducing the operating and capital costs. The D&C costs are down to like $900 per foot, which appears to be more competitive with other Delaware peers. Just maybe understanding, prior to the downturn, CDEV was focused on hitting our oil production target, and I got the sense that cost optimization really wasn't the #1 priority. World has obviously changed and so has Centennial's priorities. In terms of costs, where do you feel you are in terms of playing catch-up on operating costs and capital costs? Just maybe get a sense on where we were and where we've come to and where the opportunity lies in front of you?

Sure. I think that's a good question. So first of all, I do complement our operations team. We have been asking them to pivot a bit more into efficient strategy. And not that they were not efficient before, but I think that this has allowed us to concentrate a bit more on cost and really drive home the point that getting to free cash flow is where we want to be, and lower cost is one way to get there. So I'm proud that we've been able to make the strides. There is more room, I think, both on the capital side and the LOE side. I think that our team has already identified a few different opportunities to continue to push on both sides of the capital and the operating expense side to continue to drive down cost. That said, I do think we are fairly competitive with our neighboring peers in the southern and the northern part of the basin. So I feel like we're in a good place, but we do have a little bit of room to drive down further costs.

Okay. And then in terms of the corporate base decline, I think one of the concerns around Centennial was it had very immature production base, very high base decline. Obviously, the disclosure around mid-30s is quite impressive in terms of shallowing, the sort of maintenance capital intensity of kind of keep holding production, but obviously, we're going to a lower level. Maybe just understanding -- assuming you held production flat at exit rate at this year's, is it 35%? Is that kind of a good sort of steady state at that level? Just help us understand where the opportunity lies in terms of continuing to shallow that base decline.