Permian Resources Corporation (PR) Earnings Call Transcript & Summary

Good afternoon. Welcome to BofA's Virtual Global Energy Conference. Hope to see you all in Miami next year. This afternoon, we are delighted to introduce Sean Smith, CEO of Centennial, CDEV, to our fireside chat here. The format of the call would be as follows: Sean would have some opening remarks. He's going to use a slide deck that you should have access to. I'm going to go through my questions with Sean. And in the meantime, if you have any questions, feel free to input those in the Veracast system, and I will read it out to Sean. So with that, over to Sean.

Great. Thank you, Asit, appreciate the introduction and allowing us to participate in the conference. I've already started some one-on-ones, and they've been very productive calls so far and look forward to some after this as well. But thanks, everybody, for listening in. As Asit said, I've got a slide deck that hopefully everybody has up in front of them. If you do not have that, it will be or has been posted to our website, and so I'll point you to that as well. But perhaps I'll start on Slide 3 of the slide deck. This is a quick introduction overview, if you will, of Centennial. For those folks that have followed it, you've seen how we've grown over the years. But we started -- in 2016, late 2016, we went public. And from then, we've built a pretty sizable position in, what I would call, the core parts of the play in the Delaware Basin. We are a Delaware Basin pure play, oil-weighted company. We've created about -- or currently have about 80,000 net acres. In fact, it's a little over 80,000 as we stand today. Less than 5% of that is federal acreage. And obviously, that's even more pertinent now that we know the President elect Biden will be taking office. So minimal exposure there to any changes in federal policy. We operate essentially all of it at -- greater than 95% of it, and we hold greater than 85% of it by production. So as we have reduced our capital spend, we haven't been in -- under pressure to maintain leases -- or very little pressure, I guess, if you will, to maintain our position and hold it together. As I mentioned, it's a pretty high quality asset base. If you look at our well results or, obviously, any of the operators around us, you've seen some pretty outstanding wells, both in the Northern Delaware Basin in Lea County as well as in the Southern Delaware and Reeves County. Perhaps most important from our third quarter call was the cost reduction effort that our team has made. We've seen a 35% reduction in both the well costs from 2019 as well as just as important the Boe/LOE from third quarter 2019. Both of those things have very material or profound effects on our cost structure going forward, and ultimately on our cash flow. On top of that, we've got no near-term debts, maturities due, and I've got a slide to show on that. And we've got a solid position, and I'll walk through some of that as well. So turning to Slide 4. These are some of the highlights we talked about on our Q3 call. But these are -- this is a shift from where Centennial has been in the past. We've -- in the past, we've been a high growth deficit-spending company intentionally to get to a certain size and scale that makes us to where we think has some relevancy. But we've pivoted quite significantly in the second and third quarter of this year. Obviously, with the dramatic change in commodity prices as well as investor sentiment as well. In the third quarter, we were free cash flow positive to the tune of about $10 million and expect to be -- have incremental free cash flow in the fourth quarter of this year as well. We increased our liquidity by about $17 million during the quarter, and that was due to some free cash flow that we had on the books from the quarter. And we had a positive reaffirmation, if you will, of our borrowing base during the quarter as well. And that's the, I guess, a pat on the back to our CFO, as well as our bank group for giving us that. I think it shows that the quality of the team, the quality of the assets, the way that we've been able to perform reflects that in the reaffirmation of our borrowing base, again, in a very difficult market from a bank perspective. A lot of that was driven from the LOE that I mentioned in the previous slide. We reduced our LOE cost on a per unit basis, a 7% quarter-over-quarter and as I mentioned greater than 35% year-over-year. That's -- that has a profound effect on our cash flow, which then, of course, helps the borrowing base as well. And I mentioned our D&C costs came down significantly as well. $800 per lateral foot is what we are projecting going forward as a target. That's a tremendous change from where we and the industry has been in the past. So going forward, as we continue to ramp up activity, we've got a single rig running now. We do plan on likely adding another rig first part of next year. If you use those costs going forward, it's a very different looking company than it has been in the past. With those costs in mind, we were able to raise our full year production targets as well as reducing our guidance from a D&C perspective and a unit cost perspective. So positive across the board from a guidance perspective, this last earnings call. And as I mentioned, we resumed some activity, which is great. That's what we need to do as a business. And incrementally added some hedges. We have not historically been a hedging company, but it makes sense in the life cycle that we're in now to layer on some hedges to protect interest costs, G&A expenses as well as some level of operations going forward. In fact, we have a more systematic approach now to hedging. And we've added some even since the third quarter earnings call. On Slide 5, this is possibly the most important slide of the deck, which only has a few more slides. It's really about the rate of change and the efficiencies that we've driven out of the business. I won't harp on this too much, but the bar charts on the bottom of Page 5 really show the material changes we've made to the business. Starting on the left-hand side of the page, which is DC&F, so that includes facilities. You can see where we were on an average in 2019, and that's probably close to industry average there. And what we're thinking going forward, which would be towards the low end of where the industry is now, we mentioned about $800, which is the midpoint of that go forward estimate is where we're going to be on a lateral foot basis. So tremendous rate of change from last year. Similarly, what I haven't described yet is our corporate decline rate seeing that we were a young company coming into 2020, we had a fairly high corporate decline rate because we had rapidly grown our position to where it stands today. And as such, you have a high decline rate as well. Since we have slowed our capital and more -- I guess, mediated our capital spend and our activity levels, that cooperate to client rate has come down tremendously, and we expect to end the year in the low 30% range. And I think that's a pretty good go-forward run rate for our company, which makes reinvestment, I guess, from a maintenance capital point of view much easier to attain when you have a lower corporate decline rate. From an LOE perspective, again, I keep hammering that because it's such a huge part of our business. Taking cross-sell business here really helps our bottom line. And going from $6 in Q3 2019 to less than $4 in Q3 2020 has a profound impact on our company going forward and look forward to those similar kinds of gains going forward. On slide 6, we show one more time what the LOE looks like. And again, the bragging point on this slide is that if you go from the bar graph, left-hand side to the right, you can see quarter after quarter sequential reduction in LOE per unit for the last 5 quarters. And that's really a credit to our operations team for finding ways to lower costs. And we've done that in many different fashions. Electrification of the field. We've put in a electrical substation and have since wired that all in to all of our facilities, and that has dropped cost meaningfully because we get to release expensive generators that we had on site. On top of that, taking ESPs, which are electrical submersible pumps out of the field and installing gas lift, that also reduces cost in the field. Those 2 things are probably the most impactful as well as chemical costs and things like that. In addition from both an ESG and a cost perspective, we are using more recycled water than we ever had before. And so all those things combined, help lower our costs going forward and feel very good about where we are as a company going into the end of this year and into 2021. On Slide 7, we talk about the D&C cost. So a similar slide to the one before where we show -- instead of quarters, this is by half years. But you go to the first part of 2019, which is the left-hand side of the graph, where we're averaging over $1,300 per lateral foot to the right-hand side of the page, as I mentioned, $800 per foot. You can see even in August, which is what the light green bar there, that was our August estimate to what we thought we could do on a go-forward basis to dill and complete and put facilities on these wells. And the midpoint there is about $900 per foot. While our wells came in even cheaper than that as we got back to activity, and that's because of several different things. But mostly, it's due to some efficiencies. We generated some redesigns of some wellbores. We've had the time off now with a reduction in activity to kind of reevaluate better ways to drill these wells. And we feel very comfortable going forward that kind of that $800 per lateral foot range is where we think we're going to be for the foreseeable future, even with any kind of service cost inflation that might occur at a higher price environment. These are structural changes and we think are going to be with us for a period of time. So feel good about the go-forward basis on the DC&F perspective. On Slide 8, where we talk about our capital structure and liquidity. This is obviously critical for our business and how we're going to manage it going forward. As I mentioned in the first slide, we increased our liquidity last quarter by $17 million or 6%, which is outstanding. We repaid our revolver to the tune of $15 million. So increased our borrowing base there, our ability to borrow against the revolver there. And as I mentioned, we had a reaffirmation of our borrowing base. That gives us liquidity as of 9/30 of about $314 million, which is absolutely outstanding relative to the level of activity we plan on having for the back half of this year and going into next. So it gives us ample liquidity to execute our business plan for next year and going forward. You can look at our leverage statistics, our first lien debt is 1x. Our net debt-to-EBITDA is 3.2x and net debt to book cap of 29%. These are all pretty positive numbers considering what the industry has gone through in 2020. Perhaps most meaningful on this slide is the graph on the bottom left-hand side. You can see from a long-term debt maturity profile, we're in a really, I guess, enviable position relative to a lot of other companies out there, particularly some of our peers. And then you look at -- it's not until 2025 that we have our first senior note due. And so it gives us plenty of runway to execute our business plan. And as I mentioned, we're already starting to generate some free cash flow. And I think that puts us up fairly well for the future to continue to finance our business going forward. So we feel very good about our liquidity profile as well as our long-term debt maturities. Last slide, Slide 9 on the slide deck here is really what I want to leave and the investment community with is that we pivoted as a company from a deficit-spending, high growth entity that's not what the industry needs right now. The industry needs to continue to focus on shareholder returns. And what we can do there is deliver on what we very much believe in improving quarter after quarter that we've got a very high quality asset base. Our well results are outstanding. Recovery per foot basis, if you want to think of it that way, is up there with the best of the breed, and so feel very good about what we're doing from an asset point of view, both from an execution as well as rock quality. We've talked, I think, slide after slide on our cost reductions, both from a D&C perspective as well as from an operating expense perspective, how much we've taken out of the business. And on a go-forward basis, we look like a very different company from a cash flow perspective because of the costs that we've taken out of the business. What helps that is that we've shallowed our corporate decline materially, and that it takes a lot less capital to reinvest into the company to maintain a certain production level and generate free cash flow. So we feel good about where we are from a decline rate perspective. And as I just mentioned, our maturities are in good shape not -- we've got approximately 4 to 5 years before our first senior debt is due. It's a small note there. And we've got a very strong liquidity profile enough -- easily enough to execute on the program going forward. So I think we are set up very well for the back half of 2020 and heading into 2021. And I think there's a real opportunity there for us to not only execute on what we've been doing, but even find further efficiencies both in the field drilling as well as on the expense side of things. So more good things to come, but feel good about our positioning exiting the year and going into 2021. So with that, I think I'll turn it back over to Asit to take some questions that he might have thought about.

Thanks, Sean. This is super helpful and very comprehensive, and I'll follow-up with some of the slides that you have here. But perhaps I'll start big picture and work through all the good stuff that you've done on the operational side and repairing the balance sheet. But my first question is you guys have been almost the poster child moving from a deficit spending into a free cash flow-oriented business model. Question for you is when -- just not 2021 or 2022. But as you think about a multiyear business plan. How are you thinking about growth, once you get your balance sheet to a level that you're more comfortable with? So 2 parts of the question is, at what point do you actually, again, look towards grow -- and right now, the focus clearly is on free cash flow generation. But my question is more on a reinvestment rate philosophy. And then I'll have much more detailed question on that.

Sure. Sure. I appreciate the question. I think you're right. And you mentioned it, I mentioned as well that historically, we have been a growth company. That's why this company was formed and built. That's what we've done. We've proven that we can do it, the asset is capable of doing it. The team is capable of doing it. And it was needed. Honestly, in general, over the past many years, the world has needed oil growth to feed the demand side of that. The demand has been continuing to grow year-over-year and the world has needed increased amount of supply, and that's when shale came in and filled that void and then some, obviously, above and beyond what was expected or probably needed. That comes from a couple of different reasons. The ease of access to capital as well as incentivizing management teams to focus purely on growth is really kind of where we are, where we are today, which is kind of investment purgatory. And that's not what the world needs, today it's material growth. So as investor sentiment has changed, shifting kind of from that growth profile to truly getting value back to the shareholders and generating free cash flow, focusing on balance sheet. That's where CDEV has also pivoted to. And so I'll speak to your first point about free cash flow and then talk about getting back to growth. But from our perspective, when the company was formed in 2016, it was always about growth. And to get to a certain size and scale to make sure you had investor attention, if you will. Coincidentally, that was supposed to be in 2020 the way we had modeled the company out as a 4-year kind of game plan to get to a sizable scale. And then 2020 to pivot that company to a more moderated growth profile and perhaps institute a dividend, but certainly start to return excess to the shareholders. Now here we are in 2020. Obviously, the market is throwing us all for a couple of loops there or curve balls, if you will. It started with the China trade war in 2019 and the Russia Saudi price war, and then, of course, the coronavirus. All those things had very significant impact on the demand side of the equation. And then that's forced a lot of folks as well as the investment community to pivot towards a more conservative business model, if you will. And so where does that leave us? As I mentioned, we've already pivoted our company, if you will, to a more capital conservative mode. As I mentioned, we were free cash flow for the third quarter and plan to be so in the fourth quarter, and while we haven't given our 2021 guidance, I've mentioned, maintenance capital is what we're likely to do last year and maintenance being from our Q4 exit rate from a production profile. But then ultimately getting to a sustainable free cash flow position in the not-too-distant future, that's what our plan is. For the best way -- the best way for us to create value right now for our shareholders is to use excess cash flow to delever the company, not to continue to grow the company. And that's what we did in the third quarter, that's what we'll likely do in Q4 as well. And so that's where our focus is right now, not on putting it back into the ground as a reinvestment to grow the business rather to continue to delever the company. And I'll mention that, again, as I ended our slide deck, we've got one of the better looking maturity profiles out there. So we're not under a huge amount of pressure to worry about our long-term debt, but to pay down the revolver, to continue to organically delever the company is what we're focused on right now. At some point, when the market deems it appropriate and when the world deems it appropriate, if you will, to continue to add production and grow the business and continue to fill any additional void that may be needed. Obviously, when commodity prices are a bit stronger, the asset is ready to grow, and we have the ability to grow that asset. So my guess is depending on where you are with the vaccine and where you think supply demand is, my guess is it's 2022 before we truly start talking about any kind of growth. And when we do, don't look for it to be in the double-digit range. It's more likely to be, I think, industry-wide, in the single-digit range to support a more moderated demand profile going forward. Does that answer your question, Asit?

That is super, super helpful. And Sean, on your first slide, you talked about quality of your asset base and exposure to the federal lands, so it's less than 5%, very manageable. Remind us as to how you're thinking about a potential change in the regulatory regime, with the new administration? Whether it comes to methane, flaring, you guys have been way ahead on water. What are some of the things that again, things are very early stages. What should -- in producers as well investors would be focused on the regulatory regime if we get a split government?

Sure. Yes, I appreciate that. Obviously, that's the topic du jour right now as Biden starts to think about his staff, and obviously, we still need to settle a few different elections out there. But assuming we have a change in administration that has a bit more of a different view on the oil and gas industry than the previous administration. What Biden has said -- he's already announced that he's not going to ban fracking. So that is certainly something that we have kept an eye on. And I can't imagine that he's going to go back on that. So I think that risk is low. One of the more actionable risks, I think, for the industry in general is about, as you mentioned, methane, but I'll just -- we'll just say flaring. If he and the EPA decide to kind of push further restrictions or mandates on the industry, that could cause problems for certain operators. And honestly, part of that is probably overdue. We, as an industry, have been mediocre, I would say, at making sure that we are capturing all of the gases that we are generating by drilling these wells. CDEV has actually been in a pretty good position, fortunately, and I think we've spent a fair amount of both infrastructure dollars as well as working with third parties to ensure that our takeaway is sufficient for what we are producing. In fact, our most recent months, we were less than 1% flaring of our total produced volumes. So feel very good about where we stand relative to any additional regulations there. So I think the industry needs to be mindful of that. And I think it should be mindful of that, both from just doing the right thing as well as from an ESG perspective. Centennial, I think, is in a good place, as I mentioned, from a flaring perspective. He could -- Biden could also implement more strict standards, if you will, on obtaining permits on federal acreage. I think that's certainly something that is perhaps even more actionable than some of the other things. Again, Centennial is in a pretty fortunate position that we have about 4%, less than 5% of our total position on federal acreage. But we're not standing by idle and just saying that, that's sufficient. We have plenty of federal permits. I think we have north of 50 approved federal permits on -- in New Mexico, which gives us plenty of room for development, should he decide to slow permitting on federal lands or even ban it. Honestly, we've got plenty of permits for years to come to remain active both in New Mexico as well as on our other acreage as well. So it's not going to change any of our trajectory that we have going forward. On the regulatory side of things, we do monitor. We've got folks plugged in to all the various agencies, both internal organization as well as external, and we make sure that we are on top of any proposed legislation, and we plan to stay ahead of that. I don't think that anything out there is going to inhibit that -- what we've got going on, particularly in light of our limited exposure to federal land. So feel good about our position in general.

Great, Sean. So just shifting to the operational side. You completed 5 DUCs in 3Q, and you're expected to run 1-rig program through year-end. And then you talked about potentially adding a rig next year. Could you speak to where -- what area would the rig potentially target first? And what's the thought process around timing?

Sure. Yes. Appreciate the question there. We haven't issued, as you mentioned, our 2021 guidance yet. But in general, we have mentioned a maintenance mode. Maintenance mode for us is likely, approximately, I'll use lots of qualifying words there. 2 rigs. We think that 2 rigs approximately will hold our production levels flat from exit 2020 throughout 2021. And that likely means that we'll be adding a rig in the first part of next year, obviously, commodity price dependent. But as it looks right now, that is likely what we're going to do. From a DUC point of view, as you mentioned, we completed 5 DUCs in the previous quarter. We typically don't build up a bunch of DUCS. So from a cadence point of view, look for us to complete wells more likely than not essentially when we TD them, meaning that the rig cadence as well as the completion schedule will be relatively even throughout the year. From a location point of view, we have a single rig running. It's drilling a 4-well pad right now in Texas. That rig will then move to New Mexico. If we bring that second rig in at the first part of next year, which again, is likely, it will likely be in Texas, and then we'll have one rig running in both states. That's a probable plan without giving formal guidance.

That's great, on particularly, your commentary on sustaining rig activity or sustaining CapEx that it implies. But on the decline rate side, the improvement has been fairly phenomenal for Centennial. And you mentioned low 30% range that you kind of see ending up at. Could you speak to what led to -- again, other than the obvious, what led to this dramatic improvement in the decline rates? Obviously, the items that you mentioned are great. And then to speak to kind of the oil versus Boe numbers, if you could.

Sure. Yes. So as I mentioned earlier, we kind of came out of the gate very quickly to develop this acreage and get our production levels up from -- I think when the asset was purchased, it was about 6,000 barrels of oil per day and in our last quarter was over 30,000 barrels a day. So pretty rapid rise in production. I think at one point, we had up to 7 rigs running. And when you accelerate your drilling and development program that quickly, with the shale assets, they have a steep early decline. And so it's -- it should not be surprising to anyone that we had a elevated corporate decline rate because of the assets that we were developing and the pace at which we are developing them. As we have slowed down our capital investment, it has allowed the assets to decline at a more normalized rate, if you will, meaning that they've come off their initial declines, these wells have come off their initial declines, and they're more in a, what we'll call, closer to steady state, meaning that we plan to end the year, again, as I mentioned, about at a mid-30% range. And I think that is the way going forward. And just when I speak about that, you mentioned Bo versus Boe. When we talk about our corporate decline rate, we always talk about it in a Bo perspective. We're an oil-weighted company. That's what drives the revenue of the company. So that's how we think about it. So the mid-30% range is from a Bo. If you were to think about it in a Boe perspective, it would be less than that. So it would be an even shallower decline if you include the liquids and the gas perspective. So I feel good about where we are going forward. As I mentioned, it allows us to have to put less money into the ground to -- in order to maintain production, or at some point, to grow the production again. Our reinvestment rate will be lower. You mentioned the what would be reinvestment rate, and then I just mentioned it as well. It's not a number that we guide to. We're not at that stage in the life of the company. Excess capital right now is going to go towards delevering the business. That's what I can say without putting a certain percentage on reinvestment rate. We're going to organically delever whenever we can with excess free cash flow.

That's fair. And on -- just sticking to the sustaining CapEx or sustaining spending level. Could you speak to -- and the D&C part is fairly clear. What about the non-D&C part? How is that expected to trend in 2021 and 2022? Because you had a bunch of investments early on.

We did. And first off, I'll complement those investments in saying that because we put those investments in the ground, both the electrical substation as well as investing in our water business, we're seeing the fruits of our labor show up this past quarter, and then those are perpetual in nature. So that investment, while it can be painful at the time, pays out over time, and we're certainly seeing that. I would say both of those projects are north of 100% rate of return projects when you think of it from an LOE savings perspective. I think that, as you mentioned, the majority of the large projects has been done. There's not a whole lot more build-out to be done. There are little things here and there that will always pop up and whether it's hooking up wells or honestly, looking for additional opportunities. If we have opportunities to spend capital that we think could generate outsized rates of return, we would do that. I just think that those opportunities are fewer going forward. So from an infrastructure, purely infrastructure perspective, you can look at our numbers going down next year and into '22 as well. But we guide towards infrastructure and facilities combined. Our facilities number is likely to go up a little bit year-over-year because of our activity level, assuming we put a second rig on in the first part of the year. If you're going to be drilling more wells, you're going to have more facilities so that they go up together. But from an infrastructure perspective, all the big projects are already -- those dollars are already spent. And so hope for that number to go down pretty materially year-over-year.

Great. And just going to some of the numbers that you shared with us on cost improvement. DC&F going from $1,275 on an average in 2019 to kind of midpoint $800 a foot. Could you speak to how much did lateral length change during that time frame? And what are the buckets of -- you went through a variety of items. But if I think big picture, what are the key buckets that led to those fairly impressive change on a per foot basis?

Sure. I think lateral length year-over-year has not changed dramatically. I think we would always continue to look for ways to drill longer laterals because on a per foot basis, the numbers look better. That being said, you have certain acreage positions that are set up as you develop them, and they are essentially unitized at that point in time, and then that's the length that you can develop those units at. So our average lateral length is approximately 7,500 feet, and that's what it will be on average going forward, and they bounce a few hundred feet above or below that on any given quarter. But that's about how we look at ourselves on our current acreage position. So I don't think -- it's not really driven by drilling longer laterals. Some operators have decreased their per foot basis by going from 1 mile laterals to 1.5 to 2 mile laterals. That's not really what's been our drive or our change most recently. It's really more structural in nature in that we've drilled enough wells in and around our location. We understand the rock, what mud systems you need, what bits to run. We have recently been able to eliminate a string of pipe in certain areas. And so all of those things add up to, as I mentioned, more structural efficiencies that we've gained that aren't related to inflation or deflation, although we certainly have seen that as well. Some of those costs, I do -- are coming from a deflationary environment from last year to this year. But the majority of the costs are from within the company, just being more efficient and effective with drilling our wells. It's really impressive, when you go out to the field and you talk to some of our supervisors out there, it used to be -- we could shave a half day here or maybe even a few hours here. Now we're talking about, we think we can get 5 minutes of this connection time. And if you multiply that up enough times, it has material impact on your per foot basis. So we're down to minutes instead of hours, which -- and hours was down from days. And so I guess the next step is we'll be working in the seconds category. So I look forward to talking about when we shave 60 seconds off of a connection time. But that's how we've been driving those improvements.

Great. And then similar questions on the LOE unit. LOE cost reduction going from roughly $6 to less than $4. You mentioned power, you mentioned ESPs and order recycling, along with other items. But the question that I have is what is -- how should we think about the sustainability of such improvement and potential improvement or maintaining the unit LOE would be a goal? Or you're still seeing driving that per unit number down further?

Yes. It's a very good question. Because we've been so successful quarter after quarter for the last 5 quarters, you look ahead. And from where I sit, I would expect us to go down a quarter again. But when you actually look at the numbers and say, okay, it's difficult to sustain continued improvement in your unit costs when our production will fall from third quarter to fourth quarter. If you look at our guidance for our production levels and you just look forward, that makes an assumption that production will be down slightly from Q3. So if your notional cost on LOE were flat and your production is falling, then your per unit cost would go up. I would say that -- you mentioned kind of holding LOE flat going forward. I think if you look at our Q4 LOE notional number on a unit cost basis because, again, we haven't given any forward-looking numbers, particularly for '21. I think that's what a goal of ours will be is that if -- Q4 LOE, if we could hold that flat because our production is flat next year, then that will be a good target. I do think there are things that we are going to continue to push on. There's one more stage of the electrification that's going to come online. There are some more wells that need to be converted to gas lift. So there's a few more things that I think we can push on to help at least keep the LOE where it is. And my push will always be to lower it. But I think keeping it flat from Q4 would be a solid goal for Centennial.