Permian Resources Corporation (PR) Earnings Call Transcript & Summary

Hi. Good afternoon, everyone. Thanks so much for joining us. We're very pleased today to have Sean Smith with us, CEO of Centennial Resource Development. Centennial, for those who aren't familiar, is a pure-play Permian E&P with operations in the Delaware Basin. The company has 82,000 net acres that's largely contiguous and 97% operated. They only have about 4% exposure to federal lands. And we like that Centennial is focused on free cash flow and has been free cash flow positive for 4 consecutive quarters now, with 2Q being a record quarter for free cash. And that cash was used, importantly, to enhance the balance sheet by paying down debt. So Sean, thank you so much for joining us today. So we've got your presentation, and if there's time afterwards, we can get into some Q&A.

That sounds great. Thanks, Jeanine. And we'll get started here, I think. Hopefully, everyone can see the slide presentation. We've got our opening slide up. But Jeanine, thank you for the introduction. I appreciate it. It's great to see you, as always. I think she stole half of the thunder that I'm going to talk about today. But that's all right. I don't mind going into more detail. So with that, we'll get started on the slide deck here. So the intro page is [ ISBC ]. Hopefully, everybody can view it. Slide 2 is the forward-looking statements, just in case I say anything that I shouldn't. Hopefully, this is my get-out-of-jail-free kind of commentary. I will make a few references to 2022, so with some caveats that all those things are based on how we see the world today. As we pivot forward to Slide 3 here, really, this is an overview of what the company is today that we've built over the past several years. I've been with the company since inception. And we've always had a view of what type of company we wanted to make. But it's been our plan since the beginning to build up to a certain size and scale and then pivot to a sustainable free cash flow company. I'm very pleased with the progress we've made towards that goal. We now generate meaningful free cash flow on a pretty consistent basis. For the past several quarters, we've generated a meaningful free cash flow. So I'd say we are checking the box and accomplishing that goal at least early on. And in fact, our Q2, as Jeanine mentioned, was a record free cash flow quarter for the company, so very pleased with what we're doing. And we'll talk a little bit about what caused that. It's not just commodity prices. Of course, those always help. But there's other reasons for that as well. The use of proceeds is really the question that we get quite often. We talk about who we are as a company and where we're going. Right now, we are solely focused on paying down debt, and that is what is going to generate the most value for our stakeholders. And that debt was really accumulated over the past several years as we are building the company up into what it is today. That said, we plan to end 2021 with less than 2x net debt to EBITDAX with plenty of liquidity and no near-term senior note maturities. So we're in a very good position. Operationally, we're currently running 2 rigs, and this 2-rig program was designed around a production maintenance philosophy that we instituted late last year and the beginning of this year. Our team, our operations team continues to successfully find ways to improve on capital efficiency, which not only help improve margins in the near term but also, the way they've reengineered some of our wells and our facilities, will also withstand inflationary pressure that we're all seeing out in the field. So the team has continued to really improve upon what was already a very successful program. From an asset quality perspective, we continue to expand our footprint. Currently, we sit at approximately 82,000 net acres, and we continue to block up core acreage in both the Northern and the Southern Delaware Basins. If you look at the map, you can kind of see that it's not a shotgun pattern. Everything is pretty well tied together. We've continued to add acreage where we see it adding to longer laterals and increasing our working interest. So our land team continues to do a good job with a very minimal budget, I might add, a lot of swaps and trades going in there. We've successfully delineated 10 distinct productive zones across our acreage position. In doing so, we've accumulated more than 15 years of economic inventory at $45 per barrel of WTI, so a pretty enviable position, I would say. On top of that, as Jeanine mentioned, we only have minor exposure to federal acreage, lowering any risk of material changes that the new administration, which seems to change constantly, may or may not enforce on our business. So I feel very fortunate there that we have low exposure to federal acreage. The final point on this first slide is really about our commitment to ESG. We continue to push ourselves to not only be compliant with the current regulations but also to look for ways to exceed them, whether it's our successful gas capture program, our water recycling program, our dual fuel operations, just to name a few. The team is motivated to look for ways to minimize our impact on the environment. We've implemented ESG teams that provide oversight both inside the company as in teams within the management and below but also at the Board level. So we've got it throughout our business. And additionally, we've got compensation goals tied to certain ESG metrics, so that further aligns our operations team and the management team with the investment community. We've all heard the cry for additional stricter ESG metrics, and we are financially compensated to go after those as well. So I think we're fully aligned with the investment community. Lastly, during the first quarter of 2021, we published our inaugural Sustainability Report, and we continue to receive very positive feedback, I would say, both with the information that's provided within the book but actually the document itself. The way it's laid out, I think it's very straightforward and provides a really good insight as to what we're doing on the ESG front. And I look forward to continuing to update that and improve upon that inaugural release. Moving over to Slide 4. On 2021, we had a lot of key initiatives, but there were 2 kind of primary things that we wanted to focus on. And that's really free cash flow generation and then therefore, leverage reduction with that free cash flow generation. I would say due to our cost control program, which really revolves around the DC&F -- and I'll stress the F part of that. Whenever I talk about capital along with D&C, the facilities is part of that. So DC&F improvements, strong well results and, of course, commodity prices. We've more than doubled our free cash flow target for the year, which is pretty impressive. As seen on the top right bar chart, we are now targeting $140 million to $170 million of free cash flow versus the original $55 million to $75 million anticipated at the beginning of the year, so an impressive movement up. The use of these proceeds, as I mentioned kind of on the first slide, will be to continue to pay down debt, which we're doing at, I would say, a very impressive rapid pace. At the beginning of the year, we forecast, as you can see in the bottom right-hand side of the page, a target of net debt to EBITDAX with something in and around -- something below 2.5x. Whereas now, we believe we'll end the year below 2x net debt to EBITDAX, with line of sight even beyond that of being sub-1.5x in the not-too-distant future, assuming again prices are where they are and we continue to operate like we have been. But a very, very promising, bullish, I guess, way to look at our leverage going forward. This is all while continuing to invest in our 2-rig maintenance capital program, so continuing to feed the business, continuing to maintain our production levels and still deleveraging at a very, very rapid pace. The debt payment remains top priority on top of generating the free cash flow. Those 2 go hand in hand. But from a financial point of view, we are very well situated for the balance of this year and then looking into 2022. As we pivot to Slide 5, this highlights what I consider to be a very important topic and one that, in my opinion, does not get enough investor attention. It's really about inventory depth and quality. You shouldn't have one without the other. If you can have both, that's the sweet spot. On the right-hand side of Slide 5, we show a stratigraphic column that represents approximately 3,000 feet of reservoir in the Delaware Basin. So Centennial has successfully completed wells in all 10 of the checkmarks you can see there and all of those distinct zones highlighted on this page. So that, coupled with our structural lower well cost that we've been able to achieve, and we'll discuss more about that in a slide or 2, that's allowed us to generate more than 15 years of economic inventory at $45 per barrel, as I've mentioned, which is obviously substantially lower than what we're realizing today. So I think we've got a bountiful inventory of high-quality locations to drill. To stress that again, Centennial has economic wells that produce from each and every one of these zones. These are not thought of as high-risk zones. This is already producing on our acreage across our position, both in the Northern and Southern Delaware, confirming that we have top-quality inventory that we will continue to drill utilizing co-development of multi-well intervals and extended laterals in order to maximize the returns we're getting on our capital employed. On top of that, you can see the pie chart at the bottom of the page. Our exposure to various leases is outlined there in that pie chart, with approximately 4% of our acreage falling on federal lands. We -- so thus, we have minimal exposure, as I mentioned, to any federal regulatory changes that might come up, allowing us to fully develop our position with any risk that might be involved with a federal position. That being said, it has reduced over time. It was a big concern as the new administration took over. There was a moratorium in place. We're past that now. We've got years' worth of permits even on our small position. So feel very good about not only the fact that we've got a low 4% exposure to federal position but also that we've got in front of any permitting issues that may arise in the future. Slide 6 provides some examples of some wells that we recently discussed on our 2Q earnings call. We continue to be very pleased with the well performance and further development and positions of both, I would say, I would stress that, Texas and New Mexico. Our most recent completions in Texas focus on the co-development of the 3rd Bone Spring and the Wolfcamp C. If you recall our story early on anyway, the Wolfcamp A was a primary zone of development in the Southern Delaware. We are now expanding that to say that the 3rd Bone and the Wolfcamp C are competitive, I would say, with the Wolfcamp A on a returns point of view, particularly in light of the current run on gas and NGL prices. We've all seen them spike lately, and that's really supporting strong, strong rate of returns in areas that we have higher GOR in certain portions of our Texas asset. All of this gives us further confidence to our future development of this asset and really all of our Southern Delaware position. In New Mexico, the example on the right side of the page highlights the recently drilled 3-well Chorizo pad. So it's an important test because the 3 newly completed 2nd Bone Spring wells directly overlie the wells developed in the 3rd Bone Spring Sand, as you can see in the illustration at the bottom right-hand side of the page. You'll note that the 3rd Bone Spring wells, which were again drilled previously, have been on production for some time now. So there was some question as to potential pressure depletion or interference between the zones since we stack them directly on top of them intentionally. But as you can see from the production chart on the right-hand side of the page, the new wells are performing just as robustly as the original wells and gives us further confidence in our development plans for this area in that we'll be able to come over the top of some of these wells that have produced for, again, a period of time and still be very successful. In addition with the new Chorizo wells performing at or above production expectations, the costs associated with these wells were substantially lower than the original wells. The new Chorizo 500 wells averaged $675 per lateral foot or nearly 50% lower than the original Chorizo 600 wells, which were drilled again approximately 1.5 years earlier. It's just a prime example of how our operations team has found ways to drill what is essentially the same well, same location, same -- similar depths for a much lower total capital which, as we all know, drives increased rate of return for our entire program. So very pleased with what the operations team is doing both in Texas and New Mexico. And we've been able to drive down costs even in the face of some inflation. On Slide 7, in fact, you can see how this focus of efficiency translates across an entire quarter. Our spud to rig release days continue to improve, and we brag about this quite often. During the second quarter, our average time was 14.2 days versus 17.3 days in the prior quarter. This number is even more impressive when you consider that we were drilling much longer laterals during the second quarter to the tune of 9,400 feet on average versus 8,100 feet on average for Q1, so longer laterals, fewer days, quite impressive. In fact, during the second quarter, we had a record spud-to-TD well of 8.6 days for a 22,500-foot well in New Mexico. So very, very impressive and a challenge to the ops team to repeat that time and time again, and they're setting the bar very high for themselves. Some of the changes that have allowed our team to drill faster are permanent in nature such as reduced downtime and mobilization time, casing design improvements and facility redesigns have all helped bring costs down and the time it takes to bring these wells turned online. So the drill time also affects not just getting the wells to TD but also affects completions and allows the team to complete additional footage per quarter as well. The bar chart on the bottom right shows a 27% increase in lateral footage versus Q1. When you combine all of that, our DC&F costs for Q2 were $800 per foot, which is a 37% decrease compared to full year 2019. So the overall takeaway is that the continued focus on capital efficiency is allowing us to drill and complete wells substantially quicker than in days past, which -- as we all know, time is money, so thus driving a better return on our capital employed. On top of that, we still see some opportunity for continued improvement going forward, so look forward to what's to come from the ops team there. Slide 8 encapsulates how all of the previous information we just reviewed fits really within our business model. Number one, starting at the top left of the slide, supported by a much more stable production base, our corporate decline rate has materially lowered from the early days of the company to now reside at approximately 35%, down from approximately 50% in 2019. While some of this was driven by the reduction in capital, a good portion of that reduction was also due to lower downtime in the field, which is really supported by gas lift operations as well as, we've talked several times now about our electrical substation that we have installed, allows us to have a much more reliable power source. Number two as we move across the page. As I have mentioned, our DC&F costs have improved meaningfully, about 37% since 2019 levels. Notably, a large portion of this improvement is structural in nature, meaning that it's less impacted by service costs and, therefore, should be resilient somewhat to future cost inflation. Examples, again, as I mentioned, include both the casing and facility redesigns. We will continue to implement those, obviously, regardless of inflation. It still reduces time to drill and complete wells. Number three, we are not only focused on capital costs but also on controllable cash costs such as G&A and LOE. When comparing to 2019, we are running a much more efficient business, which directly affects the bottom line and expands our operating margins. And finally, number four, free cash flow. I have said repeatedly and I'll continue to say repeatedly that sustainable free cash flow has been a goal of ours. Not only have we established for the past several quarters that we have a very sustainable plan but also that our free cash flow generation continues to improve. As I mentioned, we are now forecasting to generate between $140 million and $170 million of free cash flow by year-end '21, substantially above years past. In fact, as I roll forward to Slide 9, you can see how our free cash flow has improved over time. I like this slide because it really kind of demonstrates it is a bit forward-looking. But while I'm pleased of our free cash flow that we've generated in 2021, if you look at the current consensus numbers that are out there, we will generate substantially more free cash flow in 2022, which will continue to drive organic deleveraging while delivering long-term value to our stakeholders. I will likely refer back to this slide actually in a few slides down the road as we discuss our debt profile later in the presentation. On Slide 10, this is an interesting slide that really, I think, I hope the rest of the sector starts to embrace and really starts to charge the hill because the energy sector has really gone through a transition, and this is what this is meant to capture. This slide shows an estimated 2022 free cash flow yield as a percent of market cap using consensus numbers, of course, for both Centennial as well as the subsectors within the rest of the S&P 500. As E&Ps have shifted away from their growth mode to becoming more capital disciplined, the industry now provides a very attractive free cash flow yield versus the market. And we all remember this is quite a change from how the E&P sector has run itself in days past. I really like this graph, and again, I hope other people start to embrace this type of methodology because it demonstrates how far our industry has come over the past few years and is a first step, in my opinion, to attracting investors back into the space, even in the light of kind of some of the ESG issues that the industry is facing. There's just too much free cash flow being generated to ignore, particularly as you look across the entire sector. And specifically, if you look at Centennial, again, using consensus figures, we are estimated to have a 2022 free cash flow yield of approximately 20%. And this -- first of all, I think it's an outstanding number when you look at the rest of the sector. But it's a direct result of our personal transition to a sustainable free cash flow company, which again has been driven by continued cost control, expanded margins, solid well results and, of course, supported by higher commodity prices as well. Ultimately, we believe Centennial represents a very compelling investment opportunity not only versus the other E&Ps, big and large, but also compared to the entire S&P. So it's really interesting to look at cash flow yields relative to where the industry has pivoted over the past year or so. Slide 11 is a similar slide to what we've shown in the past. But I like showing it every time we sit down with investors because it's really important how all businesses manage their maturities and their debt profile. What this demonstrates though is the strength of our balance sheet and our runway on senior debt, with 2026 being our first maturity, again, 2026, several years away being the first maturity of our senior debt. But what I like most about this slide, what I think is most powerful is really highlighted in that light blue bar, which shows $255 million of revolver debt outstanding. If you think back to the cash flow slide that I referenced earlier, where we show $140 million to $170 million of free cash flow generation this year and even higher consensus projected free cash flow next year, we have the ability to fully repay the revolver in the summer of next year. I'll pause and then repeat that, I suppose. Assuming strip prices, our revolver will be completely repaid by the summer of 2022. I think that's just a very powerful statement, which again is driven by our well results, our capital efficiency that our ops team is pushing and the generation of the meaningful free cash flow that we've had over the past several quarters and what's in front of us to be generated. Very powerful outstanding balance sheet. Turning to our capital structure on Slide 12. The first bar chart shows how our leverage has evolved over time. You can see the effect of lower commodity prices associated with the onset of COVID, with leverage peaking out in Q1 of this year but also the rapid deleveraging that occurs as we recover from the pandemic, ending this year, as I said, at less than 2x net debt to EBITDAX with line of sight on being sub-1.5x leverage shortly thereafter. The other story on this page is our liquidity. You can see the bar chart at the bottom of the page demonstrating the continued increase in liquidity quarter after quarter as our free cash flow has allowed us to continue to pay down the revolver. As I stated in the previous slide, we plan to be able to fully repay our revolver by midyear, thus continuing to increase our liquidity. Slide 13 gives a very high-level overview of our continued focus on ESG. This is something that perpetuates throughout our business model, and our team continues to look for opportunities to make improvements throughout the company. As you can see from the slide, we have materially decreased our flare volumes, increased our recycled water, reduced our truck water and essentially -- to 0 and nearly eliminated our generator usage in the field. So whether it's gas capture, recycled water, removing vehicles from the roads or limiting other combustible engines, Centennial continues to strive to have the least amount of impact in the environment as possible while still investing in higher rate of return projects. In fact, we have added ESG goals to our compensation program in order to continue to inspire employees to generate fresh ideas and bolster our already impressive Sustainability Report. To wrap things up, the final slide here is just a summary of the company and what I personally believe is just an outstanding investment opportunity, of course, being a bit biased. But we have pivoted this company to generate meaningful, sustainable free cash flow. That was the goal of where we want to get to, and we are there now. This is driven, again, by solid well results, structurally lower costs across the board. And we've started the process of massive deleveraging, with our revolver expected to be paid off by summer of next year. We have very strong liquidity and no near-term senior note maturities. And to top all of that off, we have high-quality acreage and the top producing basin in the United States, 15 years of it, in fact, and an operations team that continues to find ways to increase efficiency. And you add all that together, and I just think it's a very appealing investment opportunity And a sector, as we just discussed, that looks to be severely undervalued relative to a cash flow yield when compared to the S&P 500. So with that, Jeanine, that's what I'd like to really get across to folks today, is just, I think, an outstanding opportunity to invest in a company that has meaningful upside to it. So maybe with that, I'll pass the mic back over to you if there's any questions. I think you're on mute, Jeanine.

That's like the third time I've done that today. It's unbelievable. Okay. Here we go. So we have about 4 minutes left and I definitely want to use them. So maybe the first question. In the beginning of your presentation, you talked about 15-plus years of economic inventory at $45 [ WTI ]. And I've got to ask just because M&A, it just continues to be very top of mind. And so could you just provide your thoughts around M&A and the potential for CDEV to really gain size and scale? And I think in particular, on the scale, that has been cited more and more frequently in some of the consolidation that we've seen recently. So I'm just wondering your thoughts on that and how it relates to Centennial.

I think that one question could take about 4 minutes, but I'll do my best and would love to follow up any time. I do think industry consolidation is a good thing. I think that there are some opportunities there to continue to add value by consolidating some businesses and really taking some cost out of the space, which then is only going to allow additional free cash flow to come back in the sector, increasing free cash flow yield even further. So I think we continue to need to do that to get generalists to move back into the sector. I think that's a good thing. How does Centennial participate? What I think we provide is a very experienced successful operations team that has proven quarter after quarter that we can deliver on the numbers and drive value out of our series of acquisitions that we've made over the past several years. I've said on the past several quarterly calls that I would like to be bigger, but bigger is not necessarily better. I want to be bigger and better. So we are very specific on the types of opportunities that we think we would transact on. It needs to be accretive essentially across the board to all of our financial metrics but also has to compete for capital with, as you mentioned, a 15-year inventory of high-quality locations. It has to be able to compete for that at the front end of that curve. And so I think there are some opportunities out there, but we're very specific on what we're going to look at and certainly what we're going to bid on.

Okay. And then in my last minute, I want to sneak in another one. In terms of just free cash flow, return on capital, at strip prices, your leverage is projected to improve pretty quickly over the next 18 months, less than 2x by the end of this year, heading quickly down to 1x. What's your thoughts on return of capital to shareholders? And when might CDEV be in a position to potentially execute on that?

Sure. Yes. #1 focus for us -- and I appreciate you pointing out our leverage because I think that is a huge draw and I think we are massively deleveraging over the next 6 months and longer. And as we approach -- what I have told folks that have asked this question is as we approach 1.5x, we'll have some detailed discussions at the Board level to decide what's appropriate for our stakeholders, right? How we want to put our capital to work, whether that's through a dividend or whether that's share repurchases, whether that's other various metrics that other companies have put out there that may work for them, it doesn't work for others, we're going to evaluate all of those opportunities. We have a little bit of time, and time is on our side here. I think the best way to generate value for the company is to delever the business over the next 6 months. And so that's what you're going to hear us focus on and talk about. That's how we're going to drive value. Every dollar that we put towards the debt really should go towards the market cap side of things. So feel very fortunate that we are generating so much free cash flow. And I think there's just a ton of value to be driven out of the business by deleveraging ourselves over the near term.

Okay. Great. And we are exactly out of time, but I wish we can go on forever here, but I want to be respectful of your time. But Sean, thank you so much. This has been such a pleasure.

My pleasure, Jeanine. Thanks for your time, and thanks, everyone, for listening. Thank you.

Yes. Take care. Bye.

Bye-bye.