Good morning, and welcome to Permian Resources Conference Call to discuss its first quarter 2023 earnings. Today's call is being recorded. A replay of the call will be accessible until May 23rd, 2023 by dialing 877-674-7070 and entering the replay access code 425142, or by visiting the company's website at permianres.com. At this time, I will turn the call over to Hays Mabry, Permian Resources Senior Director of Investor Relations, for some opening remarks. Please go ahead, sir.
Thanks, Anas. Thank you all for joining us on the company's first quarter earnings call. On the call today are Will Hickey and James Walter, our Chief Executive Officers, Guy Oliphint, our Chief Financial Officer, and Matt Garrison, our Chief Operating Officer. Yesterday, May 8th, we filed a Form 8-K with an earnings release reporting first quarter 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 & Events section at www.permianres.com. I would like to note that many of the comments during this earnings call are forward-looking statements that involve risks 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 the Forward-Looking Statement sections of our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q for the quarter ended March 31st, 2023, which is expected to be filed with the SEC later this afternoon. Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance, and actual results or 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. Thanks for joining our Q1 call. During the quarter, we continued to successfully execute our business plan, which is focused on generating free cash flow, delivering shareholder returns, maintaining our commitment to balance sheet strength, and optimizing our high-quality Delaware Basin asset base. Following a very strong Q4, our first quarter results delivered on the 2023 plan, with total company production of 154,000 BOE per day, oil production of 78,000 barrels of oil per day, and accrued CapEx of $360 million, all of which were in line with or ahead of expectations. We remain on track to achieve the full year guidance we outlined in February. The company had generated adjusted EBITDAX of $499 million for the quarter.
Total cash costs also came in as expected and within 2023 guidance ranges and are expected to trend lower in future quarters as we see production increase over the course of the year. LOE was $5.38 per BOE, GP&T was $1.12 per BOE, and cash G&A was $1.36 per BOE. You will notice a new line item in our disclosure relating to CapEx. We have added in our quarterly earnings presentation a cash CapEx figure that tracks our cash flow statement. For Q1, cash CapEx was lower than accrued CapEx, driven by normal course changes in working capital that we expect will normalize over time. We've also provided adjusted free cash flow on both basis, with $101 million on an accrued CapEx basis and $146 million on a cash CapEx basis.
We've utilized the cash CapEx figure to calculate our variable dividend as we believe it better aligns with our focus on cash returns. Our team did an amazing job executing during a challenging integration process over the past 12 months. The success we have seen to date is a testament to their hard work, professionalism, and dedication to driving shareholder value. We are excited that the integration of Colgate and Centennial is behind us, and we can direct our sole focus on creating value for Permian Resources shareholders going forward. We have achieved the synergies and targets that we outlined at closing, with significant improvement in drilling and completion costs, cycle times, as well as an overall reduction in cash operating costs that makes our business more efficient.
Our talented team will continue to look for additional opportunities to reduce costs and improve capital efficiency so that we can return that incremental free cash flow to our shareholders. With that, I will turn the call over to Guy to cover our capital return strategy and financial results for the quarter.
Thanks, Will. One of the highlights for the quarter is our return of capital and the initiation of our variable return program, as you can see on slide four. In a quarter that we anticipate being our lowest production point for the year, we delivered $85 million of total shareholder returns while reducing our overall debt and executing on accretive acquisitions. Since this is our first quarter paying a variable dividend, we thought it would be helpful to walk you through our total return of capital calculation. First, our calculation begins with adjusted free cash flow of $146 million on a cash CapEx basis. We reduce that amount by our $0.05 per share base dividend or $28 million. We have committed to pay 50% of the remainder of free cash flow to shareholders via dividends or buybacks.
You can see during the quarter, we repurchased 2.75 million shares of stock for $29 million. To achieve the 50% target, we will return the remainder as a variable dividend of $0.05 per share. As a reminder, the buyback was executed as part of a 32 million share secondary offering by NGP and Riverstone. A result of this transaction, the total number of sponsor-owned shares decreased from 281 million shares to 247 million, representing a reduction of approximately 12%. Having publicly emphasized our objective of having an organized and thoughtful monetization process from our sponsors over time, we are pleased to have established the template for potential future transactions. We remain committed to balance sheet strength, as demonstrated by our activity this quarter, reducing debt and increasing hedging.
Turning to slide six, continued debt repayment remains a focus, and we were able to reduce net revolver borrowings by 20% or approximately $65 million during the quarter. We have no near-term maturities and well over $1 billion of liquidity on our RBL. We expect to continue to utilize free cash flow to reduce net debt over time. You'll see on slide seven, we recently took advantage of the OPEC production cut announcement in April to top up on oil swaps for the second half of 2023, as well as additional hedges in 2024 and 2025. We added 3,000 barrels a day for the second half of this year at $77 per barrel.
As a result of these additions, we have hedges in place for approximately 30% of our expected crude oil production for the remainder of the year at a weighted average floor price slightly above $82. These hedges are in line with our existing hedging strategy and consistent with our desire to be able to act opportunistically in the event of a downturn. With that, I will turn it over to James.
Thanks, Guy. To start off, I want you to slide eight, where we discuss our ongoing portfolio optimization efforts in more detail. As we referenced on our last earnings call, during Q1, we closed on both the Lea County acreage acquisition and the sale of our SWD system in Reeves County, two transactions that we are very excited about. We also completed a large acreage trade with an offset operator in Eddy County that allowed us to further high-grade one of our best assets. This trade increased our working interest in high return locations and created several new operated drilling units. Notably, we expect to begin development activity in approximately half of the 3,400 inbound acres over the next 12 months, making this type of transaction highly accretive to shareholders.
In addition, we remain highly active on the grassroots side of the business, completing over 45 smaller transactions where nearly 100% of the acquired interest is going to be developed in the next 12 months. These smaller deals are amongst the highest rate of return acquisitions that we evaluate. We credit being based in Midland for giving us an edge on this ground game approach to growing the business. All in, the net effect of our portfolio optimization efforts in Q1 was an increase in approximately 5,000 net leasehold acres and an increase of over 3,000 net royalty acres, all while generating net cash proceeds of over $20 million. These transactions allow us to focus on our core business while enhancing overall corporate returns.
Turning to slide nine, we wanted to take a quick second to shine the spotlight on our rather large portfolio of mineral and royalty interests. You've seen this in past guidance, but the vast majority of our operated acreage footprint is at a higher NRI than the 75% that has become standard in the Permian, with an average eight-eighths NRI across our portfolio of 78%. This allows us to realize additional production and free cash flow for the same capital spend, significantly improving the capital efficiency of the dollars we invest in development. To put that in perspective, an incremental 3% increase in the eight-eighths net royalty interest adds over 10% to the IRR of a typical Wolfcamp well and reduces the payback period of that same well from 12 months to 10.
It's worth pointing out that while we don't think of it as a separate business, our royalty entity is currently generating over $50 million of free cash flow per year if viewed on a standalone basis. Our high nets and their compounding effects on returns are one of several reasons that we have a highly capital-efficient business, which can support both high return production growth and fulsome shareholder returns. Finally, slide 10 helps to reemphasize our value proposition for current and future investors. As seen on the slide, Permian Resources has outpaced the S&P 500 and our Permian peers since the closing of the merger. Even with this recent outperformance, we believe that our business continues to represent a compelling value as compared to both this peer group and the broader market index. We believe our business has all of the attributes of a great business.
Not just a great oil and gas business, but a great business across any sector. Leading asset quality, low cost operations, thoughtful capital allocation, organic growth, balance sheet strength, combined with this track record of delivering outsized returns to investors. By continuing to enhance and cultivate these attributes, we believe that we can continue to create value for our shareholders while solidifying our position as a leader in the energy sector. Thank you for listening. Now we will turn it back to the operator for Q&A.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by one on your touch-tone phone. Should you wish to declare from the polling process, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Scott Hanold with RBC Capital Markets. Please go ahead.
Thanks, all. Hey, just wanted to touch base on the, I guess, the emphasis around the royalty acreages. Is that talking about that just to, you know, to point out, you know, the value that is there with that lower NR or I guess higher NRI? Or, you know, or is there some inference into there being opportunity to find other monetization paths with that? And if you could just give us a sense of if there's any kind of grassroots efforts to, kind of, build that, you know, royalty portfolio.
I mean, I think I'd say to answer that last question first, we're always looking for ways to accretively increase our nets and wells that we're developing. We find that to be some of the most highly accretive capital you can spend. But not looking to build a non-operated override portfolio or a separate business, more just kinda normal blocking and tackling that kinda goes with our traditional upstream development. I'd say the reason for highlighting this is really twofold. I'd say first and foremost, we've got a lot of questions just about how capital efficient our business is, you know, things that we've got a very good widget, if you will, and I think there's a lot of different components that drive that kind of outperformance.
I think this is one that was maybe less understood and we thought it'd be helpful to just shine a little bit of a light on it. I think to your kind of final question, I do think there could be opportunities to monetize, especially some of the non-operated overrides that are kinda not fully valued in our portfolio today. Kinda nothing big or strategic, I think, coming down the pipeline. We like having this and like what it does for the business as a whole.
Appreciate that. As my follow-up then, you know, Could you kinda give us a cadence of kinda cash capital spending through the year as well as, you know, production? I know the first quarter was a down production, I would assume we're gonna be on an upward trajectory. If you could help us out with that cadence as well as, you know, any kind of working capital nuances with cash capital expenditures, just so we can, you know, square the circle on, you know, expectations for that, you know, variable payout.
This is Will. On the production side, I think that's how you said it is right. We had a down quarter in Q1, but we're still on track to achieve the kind of 10% production growth that we talked about from Q4 of last year to Q4 of this year. If you kind of follow, you now have the starting point and the ending point. If you follow, you can see it's not quite linear, but we feel really good that we will hit our full year guidance. To get there, you have to have, you know, a little bit bigger bump into Q2, but ultimately, you have the starting point and the ending point, you can solve for the middle.
On the CapEx side, I'd say we're expecting kind of cash and accrued CapEx to be the same over time. I think we're on pace for what we outlined in guidance from a total CapEx perspective. Given that cash came in under accrued in Q1, it's probably going to be slightly above accrued for the rest of the year, just giving some timing things and kind of... Expectations are that we are on track for kind of the guidance that we outlined on the last quarter call, both on the production and CapEx side.
Okay. Just out of curiosity, on the production, you talked about getting a bump up, but is, you know, is it, I guess, gonna be somewhat linear? Is there any kind of nuance?
Yeah
... in terms of like pads being put in place that, you know, makes, you know, one quarter a little bit bigger than the other when you look at 2Q, 3Q, 4Q?
No, I think somewhat linear is the right starting point.
Okay. Appreciate that. Thank you.
You bet.
Thank you. Your next question comes from Derrick Whitfield with Stifel. Please go ahead.
Good morning, all. Congrats on a second solid quarter.
Thanks, Derrick.
At a high level, your return of capital was fairly balanced between share repurchases and variable dividends in Q1. As you think about prosecuting on the return of capital program over the coming quarters, could you comment on the framework for share repurchases and your preference at current valuations?
Yeah, sure. I mean, first of all, I'd say and echo what Guy said, we're super excited to finally have kicked off this variable return program. As you think about our business, returning capital to shareholders is something that's kind of core to who we are at Permian Resources. Our view on the kinda capital return strategy and the broader framework really hasn't changed at all over the past nine months. You know, I'd say we've been pretty clear with you guys and with investors that the default for us is gonna be the variable dividend. We think that's kind of the safest, most consistent way to return capital to shareholders over the long term. We will be opportunistic.
I think we've got a share buyback authorization out there for a reason, and I think opportunistic can take on two flavors here. I think one, which you saw in Q1, to kind of ensure a thoughtful and orderly sponsor sell down over time. I think we've been really clear that we expect our sponsors to kind of exit the business in a thoughtful, non-disruptive way. The second is if we see kind of clear and severe dislocations in the stock trading of Permian Resources. That second one, we've been fortunate we haven't seen it kinda since we came out in September. I think this is a very volatile business, and I think over time we will see those opportunities, and I think you all should expect us to lean into buyback aggressively when we see those severe dislocations.
As we've said kind of all the time, I think the default and the base case for everyone should be a variable dividend.
Terrific. As my follow-up, I wanted to focus on the portfolio work that you guys have done on the ground game side. We joked about it yesterday, but could you talk to your team and support structure that affords you the ability to continue to grind out hard to earn organic adds in a very mature basin and the market opportunity you guys see for Permian Resources?
Yeah, sure. I mean, I think it really starts with being based in Midland, kinda having boots on the ground and really our whole team having a presence here. I think that's kind of the first kinda core part of our strategy. Second, we've got a fully built out business development team that's sole purpose is doing transactions like what you see on the slide. I think it's probably 8 or 9 full-time, fully dedicated people in that business development team, but they have the ability to pull resources from the broader Permian Resources group.
I think I'd say the combination of a local presence here and a real specific focus on these kinda ground game type acquisitions has been a real differentiator for us. I mentioned it, but I think that, you know, these smaller deals are amongst the most attractive returns of any, you know, acquisition opportunities that we've looked at in a long time.
Agree. Thanks for your time.
Thanks, Derrick.
Thank you. Your next question comes from Neal Dingmann with Truist Securities. Please go ahead.
Hi, morning, guys. Thanks for the time. Will, first one's probably for you. My question is just really on the operational efficiencies which you all continue to see. I guess a little bit different, specifically, could you talk about maybe for the remainder of the year, number one, just how things are going. You know, there's talk about going from the seven, I think, to the six rig. Are you still seeing the efficiencies to be able to do that? Lastly, just when you sort of look at the regional, thinking Texas or New Mexico and the formational focus, anything sort of different to think about? What I'm getting at, Will, is just any sort of near term lumpiness, one of the quarters.
I mean, it sounds like it's gonna be pretty good, just continued ramp, but I just was trying to get at, when you look at sort of the plan for the remainder of the year, anything that might stick out?
Yeah. Thanks, Neal. With the first one, I'd say we're seeing kind of all the efficiencies we need to feel confident in our plan to drop the 7th rig around mid-year and still hit the kind of 150 TILs that we outlined at the beginning of the year. You know, I kind of hit on it in the opening remarks, but, you know, it's been 12 months for us since we signed up the deal, a little less since we closed, but we've been kind of head down working through how do we put the best people in the right places with the right kind of processes and strategy to kind of get all the efficiencies we can. I think we're very, very happy with what we've seen over the 12 months since signing up for the merger.
Kind of to your production thing, there's nothing that we see that would drive any kind of significant lumpiness on the ramp to Q4. You know, it's, it's relatively linear as we model it from kind of where we were in Q1 to Q4.
Great. Secondly, James, maybe for you or Guy, just really on the recent hedges added. I understand, you know, Guy's comment about predicting the downside, but I guess my question is on even why even add those? I mean, given you guys have such a now improved financial position. You've always had a great financial position, even operationally, you know, you have the ability to, you know, sort of change as needed. Just maybe if you could give a little more color on, you know, why even add, you know, even step up those hedges at all.
Yeah, that's a great question, Neal. I think for us, hedges are an important part of our philosophy. I think everyone knows this, but this is a super volatile business and we've seen that over the last week or two and, you know, frankly expect to see more volatility in the kind of months and years to come. For us, hedges provide a great baseline, kind of ensuring a certain amount of our free cash flow, kind of looking forward to future quarters. I think that we see real strategic value in hedges. I think like having a strong balance sheet is obviously something that's been extremely core to us. I think do we technically need the hedges or have to have them to protect the balance sheet?
I think at this point, we're at a place where the answer to that is probably no. We view hedges as really strategic and I think that can allow us to be opportunistic and aggressive if we have another downturn. I think we've seen hedges work to our favor in the past and expect them to be an important part of the kind of strategy going forward. I think, you know, you should see us continue to layer in hedges over the coming years because that's just how we run the business.
No. Well said, James. Look forward to all the upside, guys. Thanks.
Thanks, Neal.
Thank you. Your next question comes from Oliver Huang with TPH. Please go ahead.
Good morning, all, and thanks for taking my question. Just had one on the services front. If I remember correctly, you all are fairly well positioned in terms of being able to capture any potential deflation that we might see moving through the year. Just wanted to grab the latest in terms of what you all are seeing from negotiations with service providers and how we should be thinking about long-term contract roll-offs on both the rig and crew side.
Yeah, good question. Yeah, as a reminder, I'd say our rigs are pretty well staggered. Of the seven rigs we have, it's about a third of them under kind of multi-year deals, a third of them under a 1-year deal, and a third of them under kind of more of a, I'd call it pad to pad current deal. Look, I'd say we've seen kind of leading indicators of there are now kind of super-spec rigs available in the market, which needs to come before you can see price reductions. I'd even say we were, you know, potentially close before the OPEC cut. As it stands today, there has been no kind of material cuts on rig pricing yet.
Having said that, it does feel like kind of the market's moving more in our favor over the last few months. We'll see how that goes. On the frack side, it's very similar. I'd say our frack pricing is we revisit quarterly and, you know, we've seen no increases over the last quarter. It's kind of flattened from where we were. I think that's good. We've seen, you know, previous to that, we had seen 6 quarters in a row of increased frack pricing. Kind of all that together, I'd say we feel really good about our guidance on the CapEx side. It does feel like there's probably more tailwinds than headwinds at this point, but nothing that we can kind of take to the bank yet as far as this year's capital program.
Awesome. Thanks for the time.
Thank you. There are no further questions at this time. Mr. Walter, back over to you.
Before we conclude today's call, I wanted to briefly address a recently published article regarding Midland. While the article highlights several real challenges facing our city, it failed to present the qualities that make Midland a great place to live. Namely, the people that live here and the community that we have together. Being headquartered in Midland has real and meaningful strategic advantages that we see every day in our business. We have chosen to raise our families here and are proud to call Midland home. Permian Resources supports our community through countless grassroots efforts to make the entire Permian Basin a better place to live and work. Everything from the development of a childcare center at the Midland Airport to financially supporting local schools and civic causes. Our efforts are substantially bolstered by larger organizations that are focused on improving the quality of life in the Permian.
One such organization of which we are a proud member is the Permian Strategic Partnership, which has invested over $125 million in education, healthcare, and safety throughout the Permian Basin. We are not naive to the fact that fighting to improve the Permian will be hard and take time. Our region and our industry are accustomed to taking on challenges and overcoming them. Thank you to everyone who listened in to Permian Resources earnings call today. We are proud of what our team has accomplished over the past year and excited to continue to build on our track record of execution and equity value creation. I'll now hand it back over to the operator to conclude today's call.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.