Good morning, and welcome to the Permian Resources Conference Call to discuss its fourth quarter and full year 2022 earnings. Today's call is being recorded. A replay of this call will be accessed until March 9, 2023 by dialing 877-674-7070 and entering the replay access code 862610, or by visiting the company's website at www.permianres.com. At this time, I'll turn the call over to Hays Mabry, Permian Resources Senior Director of Investor Relations, for some opening remarks. Please go ahead.
Thanks, Marcella. Thank you all for joining us on the company's fourth quarter earnings call. On the call today are Will Hickey and James Walter, our Chief Executive Officers, George Glyphis, our Chief Financial Officer, Guy Oliphint, our incoming CFO, and Matt Garrison, our Chief Operating Officer. Yesterday, February 22nd, we filed a Form 8-K with an earnings release reporting fourth quarter as well as operational results for the company. We also posted an earnings presentation to our website that we will reference during today's call. You can find the presentation on our website homepage or under the News and Events section at permianres.com. I would like to note that many of the comments during this earnings call are forward-looking statements that involve risk and uncertainties that could affect our actual results and plans.
Many of these risks are beyond our control and are discussed in more detail in the Risk Factors and Forward-Looking Statement sections of our filings with the SEC, including our annual report on Form 10-K, which is expected to be filed with the SEC later today. Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance, and actual results and developments may differ materially. We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release or presentation, which are both available on our website. With that, I will turn the call over to Will Hickey, Co-CEO.
Thanks, Hays. Good morning and welcome to our fourth quarter earnings call, which represents the first full quarter of Permian Resources. I am extremely proud of everything our team has accomplished this quarter. As you can see on slide four, our team continued to deliver across all fronts, executing in the field, producing strong well results, and demonstrating cost control, which ultimately led to a 9% production beat versus the midpoint of our outlook, all while keeping costs within our range. Fourth quarter oil production was over 81,000 barrels of oil per day, which exceeded the high end of our production range. Higher production volumes were primarily attributable to better than expected well performance.
Recent post-merger activity continues to affirm our perspective on the quality and duration of the inventory across our New Mexico and Texas positions and gives us confidence in our ability to generate best-in-class capital efficiency in 2023. In addition to well outperformance, part of our production beat was due to our operations team making meaningful improvements to our infield compression across our entire asset base, which led to record-setting runtime in the fourth quarter, which we will benefit from in 2023 and beyond. I'm extremely proud of our field and production engineers who not only were able to make these significant improvements during the integration, but were also able to do this in the face of Winter Storm Elliott. Because of their hard work and careful planning, we experienced minimal production loss due to the winter weather during the quarter.
The PR DNC team also made tangible progress, increasing operational efficiencies in Q4. As highlighted on the top right side of the slide, we saw a reduction in spud to rig release during the quarter, driven in large part by approximately 11% increase in footage drilled per day across the program. These improvements were primarily the result of the implementation of offline cementing and fast drilling across most of our asset base. Similarly, on the completion side, fleet efficiencies drove a 17% increase in lateral footage completed per day. We're pleased with the progress and synergy captured thus far, we are still hungry to capture further upside throughout 2023 and confident we can do so. These efficiencies allow us to reduce our operated rig count and offset incremental inflation in 2023, which James will cover in the 2023 guidance rollout.
In addition to our relentless focus on execution, we believe that our portfolio optimization program will continue to derive meaningful value for our shareholders. As shown on slide six, Permian Resources recently announced a series of transactions that added $100 million to our balance sheet and approximately 45 high returning locations to our near-term drilling schedule. The additional locations are located in Lee County, directly offset where we have two rigs running today. Importantly, this acquisition was funded by cash generated through the sale of a non-operated position in Reeves County and a non-core water infrastructure system, both at attractive valuations. The collective transactions exemplify the PR team's dedication to creating returns for shareholders by accelerating value from non-strategic assets to reinvest in higher returning projects in our core business. Our team is focused on enhancing the value of our portfolio.
We believe that excellent execution on difficult transactions and smaller deals is a great path towards material improvements in our inventory position, NAV, and overall value proposition to our stakeholders. Our presence in Midland is one of the key drivers for our success as we seek out to execute on these types of deals.
It's much easier to foster and generate relationships with the relevant parties by being headquartered in the heart of the Permian Basin, where all the action is. During Q4 alone, outside of the transactions we announced in January, our team executed over 50 grassroots transactions, trades, and leases. The Permian Resources team is committed to continuing to look for highly accretive deals to improve our portfolio and increase shareholder value. With that, I'd like to turn the call over to George to review fourth quarter financials.
Thank you, Will. In our first full quarter as Permian Resources, we are pleased to have delivered strong fourth quarter results. As you can reference on slide three, both net oil production and total production exceeded the high end of our preliminary expectations and were approximately 9% above the midpoint of our outlook ranges. Net oil production for the fourth quarter was approximately 81,375 barrels per day, and average net equivalent production totaled 158,200 barrels per day. The company generated adjusted EBITDAX of $621 million for Q4, incurred $325 million of total capital expenditures, and reported adjusted free cash flow of $256 million. Costs for the quarter came in largely as anticipated. LOE was $5.04 per barrel of oil equivalent.
GP&T was $1.39, and cash G&A was $1.46. GP&T declined significantly for the quarter as more of the company's production is transitioning from take-in-kind processing arrangements. Turning to the balance sheet, on slide 13, we summarize our capital structure, leverage, and liquidity position. As of December 31st, we had approximately $60 million of cash and $385 million of borrowings on the revolving credit facility. Including our revolver borrowings, senior unsecured notes, and cash, total net debt was approximately $2.1 billion, and net debt to LQA EBITDAX was approximately 0.9 times. We expect to continue to utilize free cash flow to reduce net debt over time. I'd like to turn the call over to Guy Oliphint, who will succeed me as Chief Financial Officer on March 1st.
Prior to joining the company, Guy was Managing Director and Co-Head of Upstream Energy Investment Banking with Jefferies. He brings nearly two decades of experience advising upstream companies on financial and strategic transactions, including working directly with both legacy companies. His in-depth knowledge of the company, coupled with his strategic advisory and capital markets expertise, will be valuable assets to Permian Resources and its shareholders. Guy and I have worked very closely over the past several months to prepare for the transition, and I'm delighted to welcome Guy to the team.
Thank you, George. I'm very excited to join the Permian Resources team and look forward to working closely with our investors and research analysts going forward. I'd like to briefly cover our return of capital plan. First, we are pleased to announce our second quarterly base dividend of $0.05 per share, which will be paid on March 15th to shareholders of record on March 7th. As previously discussed, we are initiating our variable return program in Q1. Under that program, we will return at least 50% of our free cash flow post-base dividend. Functionally, we will evaluate free cash flow generated during the quarter and any buybacks completed in the same period and true up investors with a variable dividend to ensure payout when at least 50% is achieved. Our inaugural variable dividend for Q1 will be paid in May.
We will be thoughtful allocators of excess free cash flow and pride ourselves on a strong history of successful capital allocation and outsized equity value creation. As significant owners of the business, our management team is highly aligned with shareholders, and our mindset is focused on long-term value creation. With that, I will turn the call over to James.
Thanks, Guy. Before we go into guidance, I'd like to provide some high-level thoughts on how our operations and planning team derived our 2023 plan. At Permian Resources, our goal is to build a development plan that maximizes the returns and drives higher free cash flow through the thoughtful allocation of capital. We work to balance developing our high rate of return inventory with ensuring that zones that need to be developed together are developed together. We believe this strategy will lead to superior value creation and higher returns for investors. The optimized 2023 plan we're going to walk through now delivers just that.
Turning to slide seven, for the full year 2023, we expect total production to average 162,000 BOE per day and 85,000 barrels of oil per day, which represents increases of 3% and 4% respectively as compared to the midpoint of our preliminary outlook from September. We are still targeting 10% Q4 to Q4 oil production growth, resulting in an implied 2023 oil exit rate that is 9% higher than our prior outlook. It's worth noting that given changes in the macro environment, this plan reflects a higher allocation of capital to oily assets, which will lead to our oil growth outpacing gas growth this year. Controllable cash costs, which include LOE, GP&T, and cash G&A, are estimated to be $7.60 per BOE at the midpoint, representing a 5% reduction from our previous outlook.
Specific to cash G&A, we are already seeing the impact of merger synergies in these numbers. We anticipate G&A of approximately $1.30 per BOE, which represents a roughly 40% decrease from the $2.10 realized by standalone Centennial in the quarter prior to the merger announcement. These reductions in cash costs materially improve our operating margins. Turning to slide eight, we highlight the improvements to the preliminary outlook that was provided in early September. As we noted, total capital is anticipated to be approximately $1.35 billion for the full year. We've already discussed the higher production and lower cash costs, but it's important to note that the increase in total capital is primarily related to higher working interest and longer lateral lengths as compared to our previous plan.
As you can see on the bottom right-hand side of the page. We anticipate our average working interest to increase to 85% from 80%, and expect our average lateral length to increase to 9,300 feet from 9,000. Like Will, I'm very proud of our team's execution since the merger. In the short period of time we've all been working together, the team is doing a tremendous job driving increased operational efficiencies and reducing cycle times. The progress made in Q4 gives us confidence that we'll be able to reduce our rig count before mid-year, dropping from seven rigs to six while still delivering approximately 150 wells to production. Our updated plan delivers higher production with lower unit costs, driving higher capital efficiency and more free cash flow that we can return to shareholders.
Turning to slide nine, as you can tell from what we have laid out this morning, we're incredibly excited about the trajectory of our company. We couldn't be more pleased with how well the business is performing, as evidenced by our fantastic Q4 results. We'd like to thank all of the Permian Resources employees who remained focused through the merger in executing our plan successfully. This strong execution in the face of industry-wide headwinds has positioned us to be able to deliver a truly differentiated 2023 outlook that maximizes free cash flow to create long-term value for our shareholders. I want to conclude our prepared remarks on slide 10 by taking a step back and looking more broadly at where we fit within the larger investing universe.
Despite energy's weighting within the S&P 500 having slightly improved from the 2020 lows, the energy sector is still trading at a discounted valuation relative to the rest of the market. Within the upstream energy space, it is our belief that the Permian is the best oil-producing basin in North America, with the lowest breakevens and the longest inventory life. This asset quality will allow Permian operators to sustain strong free cash flow levels for years to come. We believe that quality businesses such as ours with core assets, organic growth, efficient operations, and strong financial positions have room to rerate to more competitive multiples, not only with our direct peers, but also with other sectors in the broader market. At Permian Resources, we are focused on continuing to build on our track record of low-cost operations, returns-focused capital allocation, and outsized returns for investors.
Before I turn the call back over to the operator, I'd be remiss not to say that this will be George's last quarterly earnings call. As many of you know, George announced his retirement late last year following a nearly 30-year career in the oil and gas industry. On behalf of the board and all of our employees, I want to thank George for his leadership and dedicated service. His impact to Legacy Centennial following the global pandemic and his contribution to Permian Resources during the merger integration cannot be overstated. Over the years, Will and I have enjoyed working alongside George and getting to know him on a personal level. We will miss having him as a colleague, but are thankful we will still be able to call him our friend. We wish him and his family the best during this well-deserved retirement.
Thank you for listening, and now we will turn it back to the operator for Q&A.
Thank you. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing star, then the one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Your first question comes from Derrick Whitfield from Stifel. Please go ahead.
Good morning, all, and great first combined quarter.
Thanks, Derrick.
With my first question, I wanted to focus on your well productivity. Are there one to two primary drivers that explain the improvement you're observing in your well performance versus your forecast?
I mean, the good news is no. It's really been outperformance across all of our asset areas. I'd say the biggest outperformance was probably in our Eddy County asset. During Q4, we've seen significant kind of outperformance across the Texas assets, the Lee County assets, and Eddy County assets, which I think really does set us up for a really strong 2023.
That's terrific. While I understand it's challenging to sustain productivity in a depletion business, how long could you sustain 2023 levels of capital efficiency based on your 15 plus years of inventory?
Yeah, it's a good question. I mean, as we think about it, of that 15 years, about two-thirds of it is all in kind of Wolfcamp and Bone Spring sands formations, which are the most productive of the kind of in the Delaware Basin. You know, feel really good about 10 years of it. There's probably the last few of those 10 years being probably a little bit of less capital efficient development. I think you could get really comfortable with for the next five, six, seven years that we can maintain the same level of capital efficiency.
That's great. Maybe just one other follow-up. In your press release and prepared comments, you noted higher runtime as one of the drivers for your production performance for the quarter. In addition to winter preparation you noted on slide five, were there other actions collectively taken or implemented that's leading to elevated runtime relative to historical performance?
Yeah. I mean, it's, you know, runtime's a hard one, and it's really all the little things that add up. I think that the overall better runtime we saw in Q4 is really just a testament to getting the integration right and all these teams working together. You hit on compression runtime. That was by far the biggest driver. We've got a lot of gas lift compressors in the field, and I think we've really got a good system in place and are seeing the kind of performance of that system from a runtime perspective. Yeah, it's not just that. You know, it's the guys are always working on the little things. It's failure rates. It's making sure you get the high producers back online first when they go down. It's optimizing the chemical program.
Really, as we went through integration, we laid down kind of best practices of both predecessor companies and made sure we got the right people in the right place with the right processes. I think what you're seeing is in just one quarter as combined PR, we're already seeing the effects of that.
Well done, guys. Thanks for your time.
Sure.
Our next question comes from Neal Dingmann from Truist Securities. Please go ahead.
Good morning, guys. Neal Dingmann. Hey, I just want to say first, George, thanks for all the help. It's been great work with you. Guys, my first question's on your updated 2023 plan, specifically. It appears now that you have a bit, you know, what I'd call a bit oilier plan, and, you know, obviously now that 10% growth is based on even a bit higher 2022 exit. I guess my question specifically is, could you give me an idea maybe how this slight plan shift impacts 2023 and maybe more importantly, what it could mean for 2024? It certainly seems to us you could have even more upside next year. Just again, knowing you don't have guidance, just something very in generalities. Thank you.
Yeah. Thanks, Neal. No, I think we think the 2023 plan does a lot. Obviously, being able to continue to grow 10% on the oil production from Q4 of 2022 to Q4 of 2023, given the kind of 9% beat in Q4 of 2022 set this up really strong. I mean, effectively our Q4 of 2023 production on oil will be 9% higher than where we previously thought, which I think gives us a great starting point for 2024. I think in addition to that, just the ability just for us to be flexible from a development plan perspective and shift kind of on short notice to a oilier development plan really demonstrates kind of how we wanna run PR.
We wanna run a business that's still nimble and willing to make changes when the kind of commodity mix or other outside factors, you know, deem that necessary. I think what you're seeing is our ability to be nimble in 23, and we'll continue to keep that, kind of that in 24 and 25 and forward.
Yeah, I agree, Will. I wish others would be doing the same. Secondly, just on takeaway. Seem to be obviously in the Delaware still top du jour. I'm just wondering specifically could you talk about, you know... I don't know. Have you all recently added any more takeaway contracts? Or give me an idea of your current Delaware infrastructure position given, you know, we've seen some issues from other operators in the play not so long ago.
Yeah, sure. No, I mean, I think we're in a fortunate position to be, I think, extremely well positioned on a relative basis, particularly out of the basin. I'd say we have zero kind of long-haul takeaway constraints. We're highly confident we've got the right partners who have the right capacity to make sure that all of our gas can move out of the basin. You know, I do think you're seeing some challenged pricing at Waha today and likely through the majority of 2023. There's some relief coming with the new pipes online in the back half of the year. You know, I think we're pretty well protected at that.
You know, I'd say we mentioned in the last call, but we have some pretty good, you know, Henry Hub plus basis swaps in place for about a third of our gas, and we sell a good amount of gas at Houston Ship Channel. Really only about a third of our natural gas that we're gonna sell this year is exposed to that, you know, lower Waha pricing. Really not a big driver of value for PR this year.
Great to hear. Thanks, James. Thanks, Will.
Thanks, Neal.
Your next question comes from Oliver Huang from TPH. Please go ahead.
Good morning, all, thanks for taking my questions. Congrats on a solid quarter. Just had a quick question on the operational efficiency front. I think last quarter or so you all talked about just getting started on various items that would drive faster drilling and completions, which we saw in the pace quarter over quarter in Q4. Just kinda wondering how much of what was planned to be implemented has been done thus far, what kinda remains, and what the best way to kinda couch the level of running room remaining?
Yeah. Good question, Oliver. I think we've kind of captured maybe call it 25%-50% of it so far. You know, I think a safe number is we have about half of it left. You can see the confidence we have in kind of accelerating the dropping of that seventh rig back to six, kind of from somewhere around mid-year to probably something closer to, you know, middle of second quarter, which I think is a testament to we're confident we can still, you know, drill 150 wells with dropping to six rigs sooner. Really the team's making a ton of progress. I'd say we are net ahead of schedule and still seeing progress every day.
you know, call it half of it's behind us, half of it's kind of on the come, and we're expecting to have all that done hopefully by the time we drop that sixth rig in Q2 or drop the seventh rig in Q2.
Awesome. For a second question, just kind of, on the working interest, the 5% shift in the program for 2023 seems to reflect the strong landing, business development team over there. Was just kinda wondering if there are any particular factors to kinda point to driving that increase and what the opportunity set for adding to this in the near term is?
Yeah, great question. Thanks, Oliver. I think you hit it right. I mean, this is just what we and what our team does. You know, I'd say our ground game is really strong. We're constantly out there, our entire team, trying to make our existing assets better. I think the most cost-efficient, kind of highest value way to do that is kind of small things around the edges. This is everything from acreage trades to kind of lease extensions to, you know, additional bolt-on working interest that I think is a real part of our value creation formula. Like I said, that ground game, we did over 50 transactions in Q4. You know, some of those as small as an acre or two.
You know, I think that really helps drive improved capital efficiency, as you can see in our revised plan, and it's something we've been doing for a long time and expect to continue to be a driver of value going forward.
Awesome. Thanks for the time.
Thank you.
Your next question comes from Zach Parham from JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my question. I guess first just maybe your latest thoughts on cost inflation. We've heard from some of your peers that they're starting to see pricing plateau and, you know, have seen some downward pressure on some line items in the AFE. Just your general thoughts on where price inflation is trending.
Yeah, I think we're probably in the same camp as how you just described it. We expected to see kind of 15% plus or minus year-over-year inflation, and I think we got that just about right. It's probably on the inflation side slightly more than that, but we've offset the kinda 1%-2% more with efficiencies since closing the merger. Then, yeah, real time in the field, I think we're finally starting to see a little bit of relief on the tubular side, which obviously was the biggest line item to the overall AFE increase over the last kind of 18 months. Are hopeful that kind of we'll see a little bit more deflation on the cost side, kinda combined with the efficiencies that we're trying to go get, and then, you know, maybe we can continue to drive well cost down.
Got it. Thanks for that color. I guess my follow-up just on the cash return program, which y'all are set to start the variable portion of next quarter. You know, what are your latest thoughts on buybacks versus variable dividends and how you plan to deploy that free cash flow back to shareholders going forward?
Zach, no, that's a great question. You know, I think we've been pretty consistent in our messaging since we rolled out this program in September, and nothing's really changed on that front. You know, I don't think you'll hear anything different from us today or going forward. That as we look to kind of longer term, we expect our default is going to be towards the variable dividend. You know, we like the share buyback. We're really excited to have that authorization out there and expect to be opportunistic as opportunities should arise over time. And as we mentioned, being opportunistic can take multiple forms. I think an obvious one is clear dislocations in the trading in our stock price. The second one is, you know, a share buyback alongside a divisional sponsor sell down.
You know, I think over time it will make sense for us to get the shares out of a less natural long-term holder into the, into the hands of, you know, long-only who can hold these shares for a long time. I think you'd see us, you know, be likely to participate alongside that and help make sure that's an efficient, clean, and organized process like we've messaged kind of over and over.
Got it. Thanks for the color, guys.
Thanks, Zach.
Again, if you'd like to ask a question, please press star followed by one on your telephone keypad. Your next question comes from Leo Mariani from ROTH MKM. Please go ahead.
Hi, guys. You obviously gave a number of the reasons for the strong beat on production in the fourth quarter. I just also wanted to get a sense, was it any factor at all, maybe you guys were just kind of executing quicker, cycle times dropping? Did you get more wells on than expected in the quarter? Just trying to get a sense if that was a, you know, potential driver as well?
No. We, we kinda popped the same amount of wells we expected. This really was just runtime and well performance, which I think is a testament just to the quality of the assets, really.
Yep. Okay. That makes sense. Just in terms of, you know, kind of portfolio optimization, you know, bolt-ons, you know, small M&A deals, could you just kinda characterize what you're sort of seeing out there in the market? You guys talked about kind of these, you know, 50-ish really, really small deals that you did in the fourth quarter. Obviously in the announcement you had a week ago, you know, there were a couple of little larger deals in there. Could maybe just give us a flavor for kinda what you're seeing floating around Midland at this point in time, and do you think it's a good environment right now, you know, for deals, just given the fact that, you know, commodity prices have kinda come in and there's obviously some economic uncertainty out there?
I mean, I think to hit your first point or Just to start, like the 50 small transactions that totaled 1,000 acres plus or minus, we're always doing that. There's really never been a point in our history we weren't finding, blocking, and tackling ground game opportunities. Just kind of that's the one of the benefits of having a position of scale and a really talented land and business development team here in Midland, is we're always drumming up the smaller deals. Frankly, those are some of the most accretive, highest rate of return transactions that you'll ever find in this sector. That we're always doing. You know, I'd say with respect to kind of more like the bolt-on that we announced couple weeks ago, we love that deal.
I think that's a incredible opportunity to bolt on really core acres in an area that we've got a lot of activity planned that's at the very front end of our capital stack. You know, those opportunities are getting harder and harder to find. You know, I'd say we're constantly looking and if we can find the right transaction, like what we announced a couple of weeks ago, I think we'd be excited to pull the trigger again. We're disciplined. You know, I think we've got a really picky team, and frankly, have a really high-quality asset base, so the bar is high for us to do transactions. You know, not sure what that looks like this year. You know, I think if we can find things that we're confident will drive further shareholder value, we're gonna do them.
If not, I think we're really pleased with our inventory quality and depth today and don't feel any pressure on that front.
Okay. That's helpful color. Just last one from me, guys. On the cost reduction, bringing the kinda cash cost down 5% here in 2023, can you provide a bit more color around that in terms of kinda what drove that? Is that just kinda hitting synergy targets faster than expected, or were there kinda some tangible operational things you guys are doing in the field to reduce costs?
Really just execution on the plan that we thought we would hit. You know, I think we've probably seen a little more kind of the total G&A number go a little lower than maybe we thought at rollout in September, which I think is positive and obviously great. It helps margins and everything else. No, I think it's just kinda continued execution, kind of blocking and tackling like we said we'd do.
Okay. Thank you.
Thanks, Leo.
There are no further questions at this time. I'll turn the call over to James Walter for closing remarks.
Thank you to everyone who participated in listening to the results of Permian Resources' first full quarter as a combined company. We are proud of what we have accomplished in the first six months and are excited about what the future holds for our business. We look forward to building long-term relationships with our investors and driving leading returns for them over the coming years. Thank you again for your time.
This concludes today's conference call.
Thank you, Marcella.
You may now disconnect.