Permian Resources Corporation (PR) Earnings Call Transcript & Summary

Good morning, and welcome to Permian Resources' conference call to discuss its second quarter 2026 earnings. Today's call is being recorded. A replay of the call will be available by visiting the company's website at www.permianres.com. At this time, I will turn the call over to Hays Mabry, Permian Resources Vice President of Investor Relations, for some opening remarks. Please go ahead.

Thanks, Eldi, and thank you, all, for joining us. On the call today are Will Hickey and James Walter, our Chief Executive Officers; and Guy Oliphint, our Chief Financial Officer. Many of the comments during this call are forward-looking statements that involve risks and uncertainties that could affect our actual results and are discussed in more detail in our filings with the SEC. We may also refer to non-GAAP financial measures. For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release or presentation. With that, I will turn the call over to Will Hickey, Co-CEO.

Thanks, Hays. Q2 is a standout quarter for Permian Resources. We delivered record free cash flow of $751 million, an increase of almost 50% quarter-over-quarter and record free cash flow per share of $0.88. These results reflect our team's ability to respond quickly and decisively to a volatile commodity environment. Our activities this quarter are a reminder of the uniqueness of PR's business model. We can respond quickly to market conditions. We have a differentiated approach to sourcing and executing acquisitions, and we are relentlessly improving the capital efficiency of our business on a go-forward basis. All of these characteristics support the goal we are all aligned on, increasing free cash flow per share over the long term to create shareholder value. Turning to the quarter. Oil production came in at approximately 198,000 barrels per day, up 3% quarter-over-quarter. Slide 4 shows the key drivers that drove that oil production growth. When oil prices moved higher, our team in the field responded immediately. We increased the number of workover rigs by 50%, which improved run times and quickly accelerated incremental barrels. At the same time, our successful ground game drove working interest in completed wells to approximately 82% for the quarter, up materially from our original expectations of 75%. Combined with strong well performance, these actions generated 6,000 barrels per day of oil growth quarter-over-quarter for cash capital expenditures of $521 million. One thing I'd highlight is our continued success in increasing working interest ahead of development. This has always been part of the PR playbook, but our BD and land team have executed at an exceptionally high level this year. We view these acquisitions as some of the highest rate of return deals that we do, given that their near-term impact as evidenced from our higher working interest not only in Q2, but also for the remainder of the year. Incremental workovers and ground game transactions are exactly the types of investments we want to make in a volatile market. Both generate incremental oil production and cash flow almost immediately, allowing us to recycle capital quickly and derisk returns through shorter payback periods. Turning to natural gas. Our team demonstrated their relentless focus on maximizing free cash flow as they navigated a severely depressed WAHA market during the quarter. As many of you are aware, WAHA natural gas prices averaged negative $3.14 per Mcf during Q2 and traded as low as negative $9.52 per Mcf. So rather than selling natural gas at negative prices, we proactively curtailed production on high GOR wells with WAHA exposure, reducing natural gas production by approximately 20% quarter-over-quarter. The curtailments, combined with our firm transportation and hedging, allowed us to realize a natural gas price of $0.38 per Mcf for the quarter and an uplift of over $75 million of revenue on our natural gas sales. When WAHA pricing improved in late June, we returned all previously curtailed wells to production without any operational issues. I want to give a big shout out to the field team of putting in the hard work to make this possible during the quarter. On the D&C side, we offset inflationary pressures from rising diesel prices with continued operational efficiency gains to longer laterals, increased water recycling, deployment of water-based mode and new wellbore designs. We've also begun surfactant trials on completion and production operations. We're still early in evaluating surfactants, but we're encouraged by the initial results. Between continued operational efficiency gains and the potential to improve recoveries, there are a lot of ways for us to continue our path of increasing capital efficiency. As you can see from today's results, the quality of our assets, combined with our basin-leading cost structure, has driven a step change improvement to our business over the last several years. As a result, we achieved record free cash flow in Q2 of $751 million. This is more than we generated in all of 2023, and we expect full year '26 free cash flow to be nearly double what we generated in 2024. And with that, I'll turn it over to James.

Thanks, Will. Before we start talking about what's been a great start to our 2026 BD effort, we wanted to sell Permian Resources approaches acquisitions and how that fits with our value creation story. When we started Colgate in 2015, we moved to Midland with exactly 0 acres, zero production and [indiscernible] sharing a single 200-square-foot office. Our goal to beginning was to buy high-quality assets, operate them efficiently and [indiscernible] conservatively so their invested capital to generate real cash-on-cash unlevered equity returns. And from those humble beginnings, we grow Colgate for an idea to the business it is today with over 500,000 net acres and over 200,000 barrels of oil per day. But our focus was never to build a large-scale business at Permian Resources now, but rather to maximize the return of every dollar we invested in the business. So how do we get here? Because we've honored the same strategy and philosophy, and how we underwrite, and how we operate, we're working relentlessly to find deals that meet our very high underwriting standards and targeted full cycle returns. And we use that time and time again, small deals add up, you create value for shareholders in the business naturally gets bigger. With that, I'm excited to talk about what we've done in 2026 today. Starting with the largest deal on Slide 8, we closed on an acquisition of approximately 2,000 net acres and 5,000 BOE a day in Ward County for $520 million. This acreage directly offsets our existing asset base is 100% held by production and provides an extended runway of high-return inventory. Shortly after we closed on the Ward County [indiscernible] in July, we signed a trade agree with an offset operator, utilizing the combination of the recently acquired bolt-on acreage, the legacy PR acreage and some other acres that we have. This acreage helps address some of the challenges with the stand-alone [indiscernible] acquisition, namely being majority non-operated, low working interest and somewhat scattered. The trade also increases the number of operating locations from 50 to 120, while increasing the average lot [indiscernible] by 20%. We view this trade as a true win-win for [indiscernible] counterparties, who is a valued industry partners that helps them to further core up their acreage position and increase their working interest in their own operated units. We expect the trade to close during Q3. Finally, the Parkway bolt-on project in Eady County is a great example of how our proprietary data and Midland relationships create opportunities others simply do not see. Following the success of a delineation well we drilled in late 2025, we quietly assembled a contingent position of approximately 15,000 net acres with 2-mile [ RO ] links and an 82.5% [indiscernible] [ ARI. ] Our partner in this deal, [ TESSCO Energy Partners ] actually brought this [indiscernible] in Midland. We've been fortunate to know this team for a long time and bought a big deal from them a couple of years back. But I think more importantly, this deal is a scaled example of the Midland born deals that we do with our friends and partners on a regular basis, and that we think provides a real competitive advantage to Permian Resources. In total, year-to-date, we've acquired approximately 55,000 net acres in the core of the Delaware Basin for a total consideration of approximately $1.05 billion, executed through roughly 190 separate transactions. These acquisitions added approximately 330 high confidence, high NRI locations that immediately compete for capital in our portfolio. Ultimately, we think the valuation metrics for the deals we have done so far this year speak to the strength of our approach. $13,000 per net acre, $8,000 per net royalty acre and $2.5 million per net location. Slide 11 summarizes why we believe our acquisition strategy is truly differentiated. Our focus on buying high-quality assets, pursuing accretive transactions where PRO as a commercial technical or operational advantage. We continuously hunt for off-market deals and look for areas where we have distinct advantages or can trade an edge that off to our underwrite higher full-cycle returns. The edge to come from our leading cost structure, proprietary service information or simply access to a deal that isn't widely marketed. While this is not easy and requires a ton of work, we pride ourselves on being creative and not afraid of doing to harder or less obvious deals. We are confident we'll be able to continue this successful track record for years to come. Our financial discipline allows us to execute meaningful transactions like we have announced today, while attaining a fortunate balance sheet, with Q2 leverage of approximately 0.5x and expected year-end leverage of approximately 0.5x. All this leads us to our updated and improved plan for 2026. As we mentioned in the prepared remarks, the success of our ground game has allowed to significantly increase our working interest for full year 2026. This will allow us to meaningfully grow production while maintaining the same completion crews, rig count and operating efficiencies we have achieved this year. Our updated production guidance of 199,000 barrels of oil a day for full year 2026 is 10% higher than 2025, while our CapEx midpoint of $1.95 billion is approximately 1% lower than the capital we spent last year. This all highlight the strides that our team is making to continue to improve the capital efficiency of our business and growth free capital per share every year. Concluding with Slide 14, our focus on full cycle returns has allowed the company to generate outsized value creation for our investors. $1 invested in Colgate in 2015 will be worth nearly $50 today, representing a greater than 50% compounded annual return. And we've continued that same philosophy and performance at scale with Permian Resources, nearly tripling our total shareholder returns since formation in 2022. Most importantly, our business model has not changed. We are confident in the combination of our high-quality asset base peer-leading cost structure and differentiated approach to acquisitions will continue our track record of long-term [indiscernible] creation. We live in an industry that in some ways has been defined by consolidation and scale, but we'd like to be defined by prudent investment of capital, free cash flow per share growth and ultimately leading total shareholder returns for our investors. Thank you for tuning in today, and now we'll turn it back to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Scott Hanold with RBC Capital Markets.

Obviously, the ground game has been a staple of you all for the last number of years. And it looks like you had a pretty successful run here in the last couple of months. Can you give us a sense of what you see moving forward on the M&A landscape? And also how do you kind of compare and contrast the activity you've been doing versus looking at some of the larger packages that are a little bit more, I guess, competitive like the federal lease sale or marketed deals?

Yes. Thanks, Scott. I mean, I think on the ground gate side, I think that's an effort that's been kind of building and consistent for the whole 11 years we've been running this business. We've got pretty much the same team, the same people that are kind of operating at extremely high level. So I mean that may ebb and flow a little bit from quarter-to-quarter, but I think over years, we are really confident we can continue to kind of execute and grow that part of our business. I think the opportunity set in front of us looks as good as it ever has, and we're kind of excited and confident that we can continue that, but it may not be the same every single quarter, but we really do believe in the kind of long-term viability of that part of our business. In terms of larger packages, look like we've always -- we kind of look at everything in the Delaware. I think you should assume we are kind of in the mix and evaluating any package of quality that is out there on the publicly marketed side. I think what we've seen in some of these deals and some of these federal lease sales or state lease sales is that, they're great assets. I mean the kind of -- there's been some really good stuff that transacted this year, but I think our focus on full cycle returns and generating outsized equity returns for investors, I think, has us being really disciplined on purchase price. And I think kind of -- or some of the assets that transacted assets we'd like to own absolutely, but were we able to to get to those purchase prices and still achieve our targeted returns, the answer is no. So I think for us, it's all about focusing on kind of full cycle and long-term value creation. And if there's bigger packages that meet those return thresholds and standards, and we'll be excited to do them [ and not, ] and we'll continue to be patient.

Got it. And my follow-up question is more kind of Permian, I guess, macro related. Certainly, with new egress coming on for pipelines. You're seeing probably a next surge of gas coming, including your production was offline. But like how do you see activity pace from a lot of kind of offset operators, any kind of non-operated activity with improved egress and do you expect a surge of production? And I'm just kind of curious on oil takeaway capacity, if you think that becomes constrained in the next couple of years or so.

Go ahead.

Yes. Go ahead. I'd say kind of hitting the loss on for. We feel really good about oil takeaway capacity for the next few years. I think I kind of think we're also hopeful that we've all learned a good lesson on kind of the gas situation we've been in the past 12 months that you got to get out there years ahead. We're fortunately on the oil side, we've got a lot of capacity today and expect that to be the case. We continue to grow for years to come in the Permian, which I think is not guaranteed, but certainly possible. I'd say at this point, we're confident our midstream partners will be working with people like us to kind of get further ahead of that. And on the gas side, we haven't seen any meaningful reaction kind of from an activity level. I think it seems like the pipelines that are coming online this quarter are able to handle the new gas that we brought back online, kind of any incremental growth today. And I think we're hopeful that we're entering a new era in WAHA gas where you get past this period of dislocation. And we have pipeline capacity that's now going to be able to keep up with Permian growth. So I certainly say the the environment and the attitude has changed. I think there's undue eagerness and desire to build pipelines coming out of the basic things we do believe this patient is going to grow its gas volumes for a long time. And there's a lot of exciting downstream demand things. So I think we feel a lot better about kind of both crude and gas than we have gas in the last few months.

Your next question is from the line of Neal Dingmann with William Blair.

James, maybe staying on the same vein, my first question just around MA specifically. Is it fair to say that the pathway bolt-on suggests you all continue to have more confidence as you move northwest to [ Netty ] County and just wondering either there or again, other than [indiscernible] would you all continue consider moving just further north in New Mexico overall?

Yes. I mean I think that kind of Eady County area where parkway bolt-ons that's been a tremendous asset for Permian Resources since we bought our first deal there back in summer of 2016. And I think, we've seen it continue to work as you push modestly west and modestly north. I'd say we've been surprised by how strong the well performance is, for example, in the kind of area that you're referencing today. And I think we see a lot of white space. I also think the white space maybe moving north to maybe moving west, but there's also still a lot to do kind of in and amongst our existing position. There's a lot of ice space on the map between our existing assets. And I think I'd say, honestly, most of the bolt-on activity, that's active now is more kind of in between the yellow on the map, if you will. But we still see a lot to do in what we call the parkway area of Eady County and are certainly excited about the well results we've seen and excited about what we think could be coming.

Perfect. And then my follow-up just on capital allocation, maybe for you or Guy or Will. Just specifically, we've seen at least a couple of your peers, if not more, now recently boost activity, I guess, in the last few months. Do you all believe production growth in this environment is appropriate given the commodity backdrop and maybe if not, is the plan just to keep building cash?

Look, we don't like to forecast our plan for next year or anything like that. I'd say with regards to 2026 and oil prices did kind of at the beginning of this year. I think we were strong believers that this is an environment where it makes sense to invest a little more capital and grow production more than the kind of flattish expectations we had coming into the year. We'll talk about this prepared to market product team, how quickly we could respond, and how quickly we could bring those barrels. As far as growth from here or growth next year, I think that's just really going to depend on the returns environment. We've always talked about growth in the returns framework, and we have high oil prices, low service costs, like you'll probably see us in growth mode and versus if we have lower oil prices and higher service costs, I think you'll see us back to maintenance mode. So I think it's just going to depend on kind of how the macro settles out. I think today, it's probably trial to tell what next year looks like, but we'll keep watching it and we've proven we can react really quickly when the time comes.

Your next question is from Neil Mehta with Goldman Sachs.

Yes. Just continued operational momentum as we think about your production. And so [indiscernible] just to talk a little bit about some of the things that you've been pulling out in the field to stay ahead of the expectations operationally.

Yes. I mentioned a few in the prepared remarks, I'd say that I feel like I hit on every quarter, which is really, really important to the kind of both the production and the completion cost of the business is water recycling. And so we had another tick up on percent water recycle in Q2. I think it's the highest quarter we've had in PR history. So we are continuing to make progress on kind of incremental water recycling. We've got a great relationship with a big water company in New Mexico. And as they continue to build out an integrated system, I'd say we are a big beneficiary of that. And then on the drilling side, which is I think if you think back to my Q1 comments where I thought there was some low-hanging fruit or maybe not low anymore, but kind of the next level of step-up would be on the drilling side. And we're making a few changes there. I'd say, one, we started to introduce water-based mud in areas where we take losses typically and with oil at high prices, I'd say the payback on taking a little bit of a loss of water-based is pretty meaningful, kind of, call it, $5, $6, $7 a foot of savings on those wells. And then the last one would be, we've kind of transitioned to a slimmer hole design in New Mexico. Same long stream to run 5.5-inch all day back to surface, but running it inside [ 8 and 5/8 ] instead of [ 9 and 5/8. ] And that savings in steel, especially as casing prices are projected to run up in the back half of the year, savings in time, just smaller holes drilled faster and then savings in Siemens. So I think that kind of if you think about looking forward, obviously, we are willing to take the increased diesel prices with the increased oil revenue, but we do have some inflationary pressures with respect to diesel and casing. And to date, have been able to offset that through gains like what I just talked through.

That's helpful. And then just your perspective on lateral lengths, too. I mean I would imagine with these bolt-ons, you'll be able to extend these laterals through given you're able to block up the acreage a little bit more. But give us a sense as you think about the portfolio, how long you can get these laterals to? And what does that mean from a P&L perspective?

Yes. I mean lateral length is the most effective way to reduce D&C per foot, I think we've slightly ticked up every year for the last 2 or 3 years, kind of moving from just under 2 miles to now kind of right at 11,000 feet. We mentioned on the -- in the deck that we drilled our first 4-mile lateral in Q2, and that was a big success. So I think what it really means is the combination of our willingness to drill longer our ability to drill u-turns when needed and the blockiness of the position that you'll continue to see lateral length tick up over time. I don't think that we are in a place where you're going to see some like step change where we go from 11,000 to 15% year-over-year, but I do think the kind of 500 plus or minus feet longer each year is probably typical of what you should expect going forward.

Your next question is from John Freeman with Raymond James.

In the slide deck, you'll sort of show the capital allocation strategy and at least the first half of the year, it's been pretty skewed to these really nice accretive acquisitions along with debt repayment. You've got leverage now at the bottom end of sort of the kind of leverage target range. So just sort of thinking, I guess, going forward, if there's any sort of maybe change in the way you all think about your cash priorities across kind of acquisitions, balance sheet, buybacks, maybe even growing the dividend?

Yes. I think growing the base dividend consistently over time is the priority and always has been a priority. So I think it's something you'll continue to see for us kind of in the future. I'd say other than that, we don't have any plans to change our capital allocation program. I think we have is working really well today. Obviously, the business is generating a lot of cash we've been able to both pay down considerable amounts of debt over the past two years and do a lot of acquisition activity, all while delevering the business to the 0.5x it is today. So I now in the foreseeable future, I think our capital allocation strategy is working, and you'll kind of see us hold the course.

Okay. And then the -- on the back of all the accretive acquisitions, obviously, most of these have been just the perfect deal where you're just kind of increasing working interest and field Jordy there. But there are some examples of you all doing some transactions kind of continuing to kind of push the kind of the boundaries further out on your kind of acreage footprint. Does that necessitate any sort of infrastructure investments that we should be kind of thinking about in the upcoming years?

No. I mean, nothing outside of what's really baked in our plan and our budget for the year. I think these areas that we're kind of more active and are still right next to existing PR offset operations today. So I think it probably is pretty easy. We've got the right partners where we need on the midstream side. And frankly, on all the stuff we're doing really is a mile or two away from the existing PR ops. So kind of nothing on the ordinary there.

I think the only exception that the Ward County bolt-on, there'll be a minimal, call it, like $25 million of incremental CapEx associated with just taking over a new asset.

Your next question is from the line of Kevin MacCurdy with Pickering Energy Partners.

I guess for the first one, can you guys bridge the old production guidance to the new production guidance? And did the same thing on CapEx, maybe breaking out the contribution from the higher working interest, the production you bought and then any pull forward or outperformance?

Kevin, it's Guy. On the production side, we were at 192,500 barrels a day at Q1, our guidance after Q1 are at $1.99 today. The only production we acquired with this $1 billion of acquisitions was 2,500 barrels a day of production at the time we closed the Ward County bolt-on a week ago. When you take that over a year, that's 1,000 barrels of the 6,500 barrels increase. The significant majority of the remainder is just higher working interest in our 2026 projects, as we talked about, with a little bit of contribution from accelerated workovers. On the capital side, we're up $100 million, $25 million of that is just kind of some of the takeover costs associated with the Ward County bolt-on just putting in equipment that's our standard and things like that. And the remainder is also just higher working interest in the '26 tills. We took our guidance from 75% to 80% to over 80% working interest in 2026 tills. I think when you put all that together, it's really capital efficient. And you can see that in the kind of increase in capital relative to the increase in production.

I appreciate that detail, Guy. And then maybe for the follow-up, is your gas production back online now the WAHA prices are better? And is -- can you give us any kind of sense of the cash flow uplift you're seeing for the back half of the year just from better gas prices.

All the wells are back online. We brought them online kind of at the very end of June, right when WAHA rebounded, and we've had all the wells online since. So Q3 and Q4 will be much more normal looking with respect t gas.

And Kevin, on cash flow uplift, I think we're hesitant to forecast gas prices in the back half. But we produce over $750 million a day net. So regardless of where we end up, given where WAHA is today, about $50 [indiscernible] in HSC and [indiscernible], it will contribute in the back half of '26. And that's why we put the commentary in there about '27 as we think about growing free cash flow over time. We've done that with the real headwind of realizing almost nothing from our dry gas stream. And I think both the curves and our transportation in '27 set us up for a much better answer year-over-year.

Your next question is from the line of John Abbott with Wolfe Research.

So a question is really on CapEx and recognizing that you don't want to give -- talk too much about 2027. But for 2026 from the increased working interest and also from some carryover from award, you increased full year guidance by about $100 million on the midpoint. If you kind of annualize that as maybe it's $200 million, is that a reasonable step-up as one sort of thinks about 2027, if you were going to maintain flat production, or are there other factors that need to be taken into account as you sort of think about the CapEx next year?

I mean I think one thing just to correct is the majority of that $100 million increase happened in Q2. And so I don't think you can double it to analyze it. I think that is the annualized increase. If you want to think about this year, we came into it, we were going to spend [ $1.85 billion ] and grow production minimal. And now we're going to spend [ $1.95 billion ] and grow production by 10,000 barrels a day. So it is a very very meaningful kind of increased production in that $100 million is annualized. I think if you look going forward, I guess if the question is, where is maintenance CapEx. I think if we continue to spend it, call it the $1.95 billion to $2 billion range, we will continue to grow production. So maintenance is south of there. And that's a growth case. And I think where we stand in '27 between do we want to grow, or do we want to be in a maintenance cases, obviously, very much subject to what the markets look like when we get there.

But I mean like that $1.95 billion group production 10%. I think that's a pretty substantial growth rate. And like I'd say that as we think about the world, that's highly capital efficient. So I'd say if you think about our business today, that's 17,000 barrels per day year-over-year growth in 10%. So I think that's a pretty cool capital efficiency story.

Extremely helpful. And then just you had the step over a step-up in activity on the workover activity in 2Q. How does this work over activity sort of trend for the remainder of the year?

We do normalize. We -- the step-up in Q2 basically chewed through our entire backlog of workovers. So we are back at normal course just kind of fixing wells as they come offline, and that will be with a rig cadence that's more like what we've done in Q1 in the past.

Your next question is from Phillip Jungwirth with BMO Capital Markets.