Permian Resources: Solid Q3 And Completed Acquisition

seekingalpha2023-11-14

Permian Resources delivered a solid Q3 where it experienced strong production growth.The company closed on its Earthstone acquisition which will begin adding production growth and free cash flow in ...

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Torsten AsmusPermian Resources (NYSE:PR) is a company valued at $10 Billion. The company reported third quarter earnings on November 8th. This quarter will be the last quarter where results are reported without the acquisition of Earthstone Energy (ESTE) integrated into their results. The Earthstone closing occurred on November 1, making the combined company the second largest company that is solely focused in the Permian Basin. Now that the acquisition has closed, the company has begun the process of integrating Earthstone operations into their own, and is focused on driving annual savings of $175 million in synergies between the two companies. As you may know, this is the second article I have written covering Permian Resources. I rated them a Strong Buy in my first article and after reviewing the Q3 results, my recommendation remains the same. Below I will review some of the highlights from their quarter that justify my rating. Quarterly Highlights Despite closing on Earthstone on November 1, which the company had previously announced, the company also acquired 740 additional acres in the Delaware Basin through various small acquisitions in the third quarter. As an investor, this is encouraging to see because it demonstrates a humility, a work ethic, and a hunger by the management team. Many companies would shy away from acquisitions of this size because it represents substantial work for the various teams within the company, for what may seem like a relatively small payoff. In other words, it doesn't \"scale.\" The company isn't going to highlight each of these small acquisitions individually, however, I love to see a company paying attention to these small acquisitions as well as the large ones. This is a good sign for investors. Q3 Highlights (Permian Resources Q3 Presentation)This slide demonstrates the highlights from the quarter. We will touch on some of these in the sections below. It also shows the company's acreage in the Delaware Basin, where 90% of the company's capital investment will be going in the coming quarters, and potentially years. Balance Sheet During the quarter, there was relatively very little change to the balance sheet. The 7% $500 million note due in 2032 was implemented in September to supplement the acquisition of Earthstone.   $ millions 2018 2019 2020 2021 2022 Q3 2023   Assets 4,260 4,688 3,827 3,805 8,493 9,209   Debt 1,016 1,418 1,223 1,054 2,836 3,243   Debt-to-Asset Ratio .24 .30 .32 .27 .33 .35   Click to enlarge Here's a view of Permian Resources' long-term debt structure along with the pro forma view after the Earthstone acquisition.   Capital Structure Overview (Permian Resources Q3)The company has a strong capital position. As mentioned, in September, they strengthened their position with the most recent 7% Senior Note due 2032. I will be interested to see how much debt the company acquires going forward. When you see the rate at which Permian Resources is growing their production while maintaining a strong balance sheet, a 7% note is still a wise capital decision in my opinion. Their return on capital far exceeds 7%. However, if interest rates continue to rise, it will be interesting to see if they continue to acquire new debt, or happily pay down their existing debt as notes come due. This is always a balancing act and I'm sure if the right acquisition came along, the company wouldn't bat an eye at using debt financing to create another accretive acquisition. The management team at Permian Resources is clearly technically strong in the field of oil and gas production, but I also trust their math as it relates to finance decisions as some of the management comes from a private equity background and are MBA educated. Shares Outstanding   millions 2018 2019 2020 2021 2022* Q2 2023 Q3 2023   Shares Outstanding 267 277 277 310 558 569 565   Click to enlarge *Merger between Colgate and Centennial completed The company repurchased 2.2 million shares during the quarter. Next quarter, there will be a jump in shares outstanding as the Earthstone Acquisition was completed partially by issuing new shares. The new total number of shares will roughly be 720 million shares outstanding, if my math is correct. Cash Flows   $ millions 2018 2019 2020 2021 2022 Q3 YTD   Operating Cash Flow 670 564 171 526 1,372 1,367   CapEx (1,217) (968) (328) (327) (784) (1,067)   Free Cash Flow (547) (404) (157) 199 588 300   Click to enlarge The company generated $165 million in adjusted FCF in the third quarter. From its FCF, the company distributed a $0.05 base dividend and $0.07 variable dividend. The company claims that it is committed to returning greater than 50% of its FCF in the form of variable dividends and share buybacks. The company will be adding $76 million in quarterly FCF from the Earthstone acquisition and 117 Mboe/day. Q3 Capital Return Strategy (Permian Resources Q3 Presentation)   ESTE Total Production and FCF (Q3 Permian Resources Presentation ) Production The company experienced solid production growth during the quarter. They saw an increase in organic growth of 5,000 barrels of oil per day. Last quarter, they experienced 6,000 barrels of oil per day growth. As I have conducted my analysis of various oil companies in various oil plays, I have not found a company that is able to grow their oil production as well as Permian Resources while keeping their balance sheet intact. (if you are aware of one, please let me know in the comments) This demonstrates superior rates of return that PR is a achieving in the Delaware Basin and specifically in Lea and Eddy counties in New Mexico.   per day Q1 2023 Q2 2023 Q3 2023   Oil(Bbls/day) 78,332 84,393 89,800   Natural Gas (Mcf/day) 266,374 275,734 283,351   NGLs(Bbls/day) 31,094 35,502 34,917   BOE per Day 153,822 165,850 171,966   Click to enlarge Permian Resources is focused on continuous improvement. This slide demonstrates how they have controlled cost while increasing production and free cash flow. Operational Execution Q3 (Q3 Permian Resources Presentation) The company saw strong increases in efficiencies across the board both as it relates to drilling as well as completions. For those unfamiliar with how the oil and gas industry works, E&P companies do not typically own the equipment that is used to drill and complete each well. That equipment is usually leased from a third party at a day rate. Therefore, companies are focused on how much work can be done in a day. Naturally, these third party companies are incentivized to work longer, however, Permian Resources also will have their team onsite supervising so that the work is getting done more efficiently each day. I am not privy to PR's contracts that they have arranged with third party contractors, but regardless of how they are structured, PR is becoming more efficient which ultimately drives down cost and increases the company's return on capital. D&C Q3 Efficiencies (Permian Resources Q3)When the Earthstone acquisition is completed and is shown in the full year results, this is the MBoe/d that you should expect to see Permian Resource's production increased by as well as the free cash flow. Q3 Permian Resources Pro Forma (Q3 Permian Resources Presentation)With the Earthstone acquisition, the company not only increased their acreage in the sweet spot of the Delaware Basin, but they also saw increases in their acreage in the Midland Basin. Despite now having substantial acreage in the Midland Basin, the company is still going to focus 90% of their capital in the Delaware Basin. This is a very wise decision as the superior returns on capital are achieved in the Delaware Basin. This demonstrates the management team's strong understanding of the time value of money. Sometimes companies are tempted to preserve their highest rate-of-return projects for later, when in fact, they should be harvesting those first. There will be a day when oil prices rise and the Midland Basin will be as profitable tomorrow, as the Delaware Basin is today. Until then, Permian Resources management is focused on deploying capital to its best projects first.   Capital Allocation Going Forward (Q3 Permian Resources Presentation)Risks Permian Resources faces similar risks as any E&P company with the primary risk being hydrocarbon prices. If the price for their commodity declines, so too will their profits. That said, Permian Resources is focused in one of the best parts of one of the best oil plays in the world right now and so they would likely weather the storm better than others. However, as an investor, you too, would have to weather that storm if equity prices declined substantially. I view this as an unlikely risk in the near-term. Based on IEA and OPEC forecasts, oil demand should remain strong at least through 2028 to 2030. I believe the fundamentals for oil remain bullish as well. Second, there could one day be a dramatic drop-off in their oil production that nobody saw coming. Perhaps the Delaware Basin reservoir becomes dried up before most believed it would. Given that Permian Resources is focused in a relatively small area, this would affect them far more than a larger, more diversified E&P company. Again, this an unlikely scenario, but a risk just the same. Conclusion Permian Resources put together another solid quarter. I remain convinced that Permian Resources deserves the strong buy rating. Primarily, Permian Resources saw another quarter where their production growth was substantial. You'll hear me harp on production growth a lot because ultimately, that is where growth in the stock price will ultimately come from. Sure, we could sit around and wait for oil prices to increase, but why do that when you can invest in companies who are also growing their production. It's also important to understand where a company's oil production is coming from. Oil production growth can come from one of a couple places. First, a company can make an acquisition. If that is the case, then it is appropriate to analyze how many shares were issued to make the acquisition. Acquisitions can be good if the company has a track record of executing on the acquisition and ensuring it is accretive to shareholders. I believe the Earthstone acquisition with its acreage in Lea and Eddy counties adding to PR's acreage will prove beneficial to the share price over the long-term. Second, production growth can come from a company reinvesting their cash flows and executing on their drilling and completions. For the past couple quarters, this has been Permian Resources primary method of production growth. The Earthstone acquisition is going to muddy the waters next quarter in their year-end results, but based on the past two quarters, investors can rest easy knowing Permian Resources can consistently grow their oil production through the drill-bit. Compared to other companies I've analyzed, I'm not sure a company has experienced greater organic production growth than Permian Resources. This goes to demonstrate that Permian Resources is a good company focused in the exact right place that investors should be focusing. Companies around the industry have indicated that the Permian Basin is the premier oil play in the United States at this moment. And it is even comparable to oil plays around the world, including the Middle East. This is a revolutionary moment in the energy industry and many people will be scared away from the oil industry thanks to the current climate alarmism narrative taking place, but I would assert that oil isn't going anywhere soon. It will be a critical part of the world's energy profile for many decades to come. As a bit of a side-topic, it is my opinion that the oil industry will only be made obsolete when the technology surrounding geothermal energy becomes advanced and plentiful enough to replace oil. I'm not going to explain this thesis here but suffice it to say that history has order. I wrote a 500 page book about this thesis and you can find it in my profile.  In conclusion, Permian Resources executed on another solid quarter and remains a strong buy and my favorite E&P company that I've written about thus far.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2383040517"}