Good morning, and welcome to the Permian Resources conference call to discuss its proposed acquisition of Earthstone Energy. Today's call is being recorded. A replay of the call will be accessible until September 4, 2023, by dialing 877-674-7070 and entering the replay access code 042970, or by visiting the company's website at www.permianres.com. At this time, I will turn the call over to Hays Mabry, Permian Resources Senior Director of Investor Relations, for some opetning remarks. Please go ahead.
Thank you, thank you all for joining us on the call this morning to discuss Permian Resources' recent transaction. On the call today are Will Hickey and James Walter, our Chief Executive Officers, and Guy Oliphint, our Chief Financial Officer. This morning, we posted a 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 www.permianres.com. After the prepared remarks, we'll open it up for a question-and-answer session. Finally, I would like to remind everyone that today's call includes forward-looking statements. Any forward-looking statements that are made on today's call are based on reasonable assumptions as of this date and time, and we undertake no obligation to update these statements as a result of new information or future events.
I would refer you to our SEC filings for a full review of these risks and/or additional disclosures. With that, I will turn the call over to James Walter, Co-CEO.
Thanks, Hays, and thank you to everyone for joining us this morning. We're incredibly excited to announce that Permian Resources has signed a definitive agreement to acquire Earthstone Energy in an all-stock transaction. We are extremely proud of our people, our organization, and all that we have accomplished in the 12 months we have been a public company, and we are highly confident that this acquisition is the right next step as we seek to maximize shareholder value going forward. Before I get into the merits of the transaction, I'd just like to say how impressed we are with the Earthstone team and the company they've built. Robert and his team have done a tremendous job over the past several years, transforming Earthstone from a production-weighted company with assets in the Midland Basin to the high-quality Delaware Basin-focused horizontal business they have today.
I speak for our entire leadership team when I say that we sincerely appreciated getting to know Robert and his executive team over the last few months and would say that day in and day out, we continue to be impressed with their singular focus on doing whatever it takes to maximize value for their shareholders. This transaction is a great example that does just that. I'm proud to welcome Earthstone's employees to the Permian Resources team, and we're excited to roll up our sleeves and get to work on building the best Permian business we can together. As you can see on slide 2, we believe this transaction solidifies Permian Resources' position as a leading Permian Basin independent. First and foremost, this deal enhances value for our shareholders and is highly accretive across all metrics, including cash flow per share, free cash flow per share, and NAV.
Notably, the transaction is highly accretive in the near term, enhancing free cash flow per share by more than 30% per year in the first 2 years, and the long term, increasing free cash flow per share by over 25% per year over the next 10 years. All of that incremental free cash flow will increase our variable return to shareholders and allow us to increase our base dividend by 20%, all while maintaining a strong balance sheet with leverage less than 1x at closing. The combined business will also provide significant economies of scale, with over 400,000 net Permian acres and 300,000 BOED of production, making it one of the largest producers in the Permian Basin with a pro forma enterprise value of $14 billion.
We're excited about how this transaction significantly increases our scale in the northern Delaware and plan to harvest cash from the Midland Basin to reinvest back in the higher rate of return parts of our business. Let me quickly go over the terms of the transaction, which can be found on slide 4. The acquisition is structured as an all-stock transaction, with each share of Earthstone common stock being exchanged for a fixed exchange ratio of 1.446 shares of Permian Resources common stock, which represents an 8% premium to the 20-day volume-weighted average exchange ratio. Upon closing of the transaction, which is expected by year-end, Permian Resources shareholders will own approximately 73% of the business, and Earthstone shareholders, approximately 27%.
Sponsor ownership will remain flat at approximately 45% after the transaction. We remain committed to ensuring a thoughtful and orderly path to liquidity for our sponsors over time. Turning to slide 5, we would like to reiterate that we have maintained a very disciplined approach to M&A during our last 12 months as a public company, as well as the preceding seven years on the private side. We have a very long and successful track record of M&A that creates value for our shareholders and are highly confident we will continue to build upon that with this Earthstone transaction. Given the high quality of our business today and specifically the depth of our high-quality inventory, the bar is very high when it comes to potential acquisitions. We are confident the Earthstone acquisition exceeds all of our rigorous investment criteria.
First, we've acquired this business at an attractive valuation, where we are highly confident we can exceed our return thresholds. Our purchase price represents a slight discount to proved developed PV-10, while adding significant high-quality Delaware inventory at little or no cost. The best of this inventory, which is found in the northern Delaware, offset our legacy position and competes for capital within our portfolio immediately. We haven't seen very many opportunities in the past few years that had inventory that can compete with what we already have, and that's one of the reasons we got so excited. Second, this transaction is accretive to all key financial metrics before synergies and extremely accretive with synergies. Third, we are acquiring the business in a structure that allows us to maintain and ultimately improve our balance sheet and credit profile.
Finally, and most importantly, we believe this transaction will continue our track record of enhancing shareholder value through increased free cash flow per share and returns to investors. These are just a few of the reasons why we're so excited for this deal. As we flip to slide 6, I'd like to take a step back and provide investors with a little more color on how we got here today. Going back, shortly after we closed our merger, our team began the process of evaluating all of the larger businesses that we thought could become acquisition opportunities over the next year, both private companies we thought could be headed to market and public companies we believed could be good merger candidates. As we went through that process, we became aware that Earthstone was a much more attractive acquisition candidate than we originally would have thought.
As we did more work on Earthstone at the start of this year, we came to the conclusion that it was likely the most attractive acquisition of any deal on our radar, both public or private. The recent series of Delaware acquisitions have really elevated the quality and duration of their inventory and the caliber of their business in a big way. We watched as they acquired Chisholm, Titus, and ultimately, Novo, although our M&A focus was other places during those processes, we had done the work and really liked each of those deals. Ultimately, our evaluation made it clear that Earthstone's multiple did not reflect how good of a go-forward business they had built in Delaware.
We went on to exchange data with their team in late spring, as we got under the hood and got our hands on private data, we came to like the acquisition more and more. Just as importantly, we grew comfortable that the Earthstone team was a group of like-minded people who we'd be excited to partner with in this next chapter. As those on the call know, there have been quite a few other private Permian deals on the market over the past 9 months, with roughly 12 Permian deals totaling over $14 billion of value transacting. While none of those larger private deals met all of our acquisition criteria, we have continued to find lots of smaller ground game opportunities, completing over 130 smaller transactions over the last 9 months.
The larger deals we evaluated during the first eight months of this year offered near-term accretion, but no other deal of scale was able to offer the combination of high-quality inventory and both near-term and long-term accretion that Earthstone offered. That's why we're so excited for this acquisition. It really was the first opportunity of scale we have evaluated since becoming public that checks all of our boxes. Most importantly, we believe that this transaction makes Permian Resources a better business. Ultimately, when evaluating potential transactions, our number one goal has been, and will continue to be, to enhance value for shareholders, of which we are all big shareholders ourselves. With that, I'll turn the call over to Will to provide an overview of the Earthstone assets and discuss in more detail the synergies we expect to drive.
Thanks, James. On slide 8, we show some details on the Earthstone northern Delaware assets that got us so excited about this transaction. Our team has a lot of experience operating in the Delaware Basin, that experience gives us conviction that Earthstone's Delaware assets brings tier one inventory that competes for capital immediately. All of Earthstone's Delaware Basin assets are in areas where we are already operating, they provide significant remaining undeveloped fairways in the same benches we are drilling today. They also come with significant upside that we haven't seen in other recent opportunities. As James mentioned in his prepared remarks, this transaction is accretive to all financial metrics without synergies, the large synergy opportunity is just another thing that made this deal so attractive.
By leveraging our scale, efficient operational practices, organizational low-cost focus, and balance sheet strength, we expect to achieve $175 million in annual operational and financial synergies. On the operational side, we are currently drilling and completing wells directly offset the Earthstone position with significantly faster cycle times and lower overall spread rates, which together lead to over $1 million per well in savings. For example, our high-spec rig contracts are at lower prices than Earthstone's lower quality rigs, and we are averaging several days faster per well. Additionally, our operations team has identified significant opportunities to improve lease operating expenses on the Earthstone's assets and believe that we can lower their LOE per BOE to something closer to our current cost structure. For example, we plan on improving runtimes, reducing high-cost workovers, expanding power infrastructure, and optimizing water gathering and disposal.
Overall, between identified drilling completion and facilities, LOE, and GP&T savings, we expect to achieve $150 million per year in annual operational savings by year-end 2024. We discussed in our Q2 earnings call that we've worked hard to reach a peer-leading cash G&A position, and we expect to continue our low-cost leadership on the G&A front for the combined company. We've already identified $30 million in cash G&A savings compared to Earthstone's current cost structure, which will further improve our industry-leading G&A metrics. From a financial synergy perspective, shown on slide 11, we have identified an additional $30 million of annual savings that we expect to result from refinancing Earthstone's long-term debt.
In addition, the all-stock transaction allows the combined company to maintain a strong pro forma balance sheet with leverage at closing less than 1x and pro forma liquidity of over $1 billion, with the goal of eventually achieving investment-grade credit rating. In total, when combining the operational, G&A, and financial savings, we expect to achieve $175 million in annual synergies. The Permian Resources team has a proven track record of executing on integration and synergy capture, as evidenced by the integration of the Colgate Centennial merger, where we successfully achieved the synergies and targets outlined at closing and more. We look forward to working with the Earthstone team to execute on these identified savings and make our combined business better to deliver more value to shareholders.
As we think about the combined company on slide 12, Permian Resources and Earthstone are running 11 rigs in the Permian, with nine of those dedicated to the Delaware Basin. We plan on allocating roughly 90% of our capital towards the Delaware Basin next year, with approximately one rig in the Midland Basin. The quality of Earthstone's Northern Delaware position allows us to maintain Permian Resources' capital efficiency and well productivity year-over-year. Overall, our key priorities have remained unchanged, and we will continue to focus on maximizing free cash flow in the near to midterm and creating shareholder value going forward. As a reminder, with this transaction, we're announcing a 20% increase to the base dividend, effective in 2024, and will maintain our existing variable return framework.
In closing, it's almost been 1 year to the day since we closed the Centennial Colgate merger to form Permian Resources. We're incredibly proud of all the work our team has done to put us in the position to execute on another strategic transaction to drive further value for our shareholders. Over the last year, we've been very active in evaluating potential transactions and are excited to have found the deal that we believe is the right one, making an even better Permian Resources. We are ready to get to work on integration and continue our goal of maximizing value for shareholders. Thanks for listening, and now we'll go to Q&A.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear three tone prompts acknowledging your request. If you would like to withdraw your question, please press the star followed by the two. One moment for the first question. Our first question comes from Neal Dingmann from Truist Securities. Please go ahead. Your line is open.
Good morning, guys, on what looks like to be a great deal. James Will, my first question, you all mentioned the 11 rigs, and I believe you'll have about 4 or 5 frac spreads in it. I know you don't have the 2024 guide yet, but I'm just hoping, could you give maybe a sense of how you all are thinking about future production growth? I know you've mentioned boosting the base dividend, but I'm just wondering how you're thinking about production growth and if you any ideas on, you know, what, what acreage you might be targeting now in the pro forma first.
Yeah, Neal, I mean, I think our, our view on kind of production growth really hasn't changed. The, the, the combined business has the same quality, inventory, and depth that gives us the flexibility to kind of turn that dial based on what we see from kind of service cost, deflation, and commodity prices. Really, I, I would think about it as kind of the same framework under which we were evaluating 2024, kind of before this deal, which is we're gonna continue to watch what service costs and commodity prices look like and kind of ultimately lay out a plan. Something kind of between 0 and 10% growth are probably the bookends, and we'll just have to see kind of how it shakes out between now and then. As far as like-
Okay.
-specific allocation, it'll be a Delaware Basin allocation and, you know, probably slightly weighted towards the New Mexico side over the Texas side.
Yeah, that makes sense. Probably be remiss I didn't ask about, Will, I think, or James, I think you said about 45% pro forma overhang at, pro, pro forma for the deal. I'm just wondering, any idea what the lockup would be for the large holders? Secondly, would you all consider participating, sooner than later on, you know, in a, in a meaningful way, if any of these large holders decide to sell in the coming quarters?
Hey, Neal, it's Guy. The short answer is yes, we have lockups from the board member sponsors EnCap Pearl and Riverstone. We've had a coordinated process, as you know, for shareholder monetization, and we're gonna continue to do that through the registration rights agreement as part of the transaction. What that really does is allows PR to continue to facilitate the coordinated and thoughtful monetization process that we've had post-merger. We're really confident in our plan here. It's the same plan we've executed over the past 12 months, which has been successful for us and our sponsors. We're fortunate to have a really great and supportive sponsor group that believes in what we're doing and our focus on long-term value creation.
We'd be excited to and, and plan to use the buyback kind of, as we have in the past.
That, that makes sense. Thanks, Guy. Thanks, James.
Thanks, Neil. Sorry, operator, we can go to the next question, please. Operator, can you hear me?
Apologies. The operator speaking.
Great. Thank you.
Apologies.
Can we go to the next?
I'll go. Yeah. Well, I'll move on to the next question. The next question comes from Fernando Zavala, from Pickering Energy Partners. Please go ahead. Your line is open.
Hey, guys. Good morning. I was wanting to ask about the, the Midland, or, you know, stepping out into the Midland, new asset for you guys. Can you talk about what you find attractive in those assets and what the potential long-term plans would look like?
Yeah, I mean, I, I think I'd start by saying what really got us excited and the reason we did this deal was for Earthstone's Northern Delaware position. That's kind of the core of our investment thesis and our, you know, the vast, vast majority of our go-forward plan. I mean, the simple answer is we like that Midland Basin asset for the free cash flow that it spits off. That asset's a free cash flow machine. Our plan is to take that free cash flow and harvest it, kind of in harvest mode. We can reinvest those dollars in the Delaware Basin. That actually is a really good system that works really well.
... I think longer term, we'll just have to wait and see. You know, I think we like kind of having that off on the shelf for now while we, we harvest cash flow. I think, you know, over time, if opportunities arose, I think we'd certainly be interested in, you know, what strategic alternatives could look like for that asset. I'd say that's not something we're doing at the present time or, or plan to do so immediately, but I think over time, you know, would, would obviously explore if there's ways to kind of extract additional value from, from the Midland Basin. This is a Delaware Basin company. That's, that's how we think about the, the focus going forward.
Got it. Okay. Thank you. Congrats, guys.
Thank you. The next question comes from Leo Mariani from ROTH MKM. Please go ahead, your line is open.
Yeah. Hey, guys, wanted to follow up a little bit on, on the Midland here. You, you talk about kind of the, the 1 rig there next year. Is that gonna basically lead to kind of production declines there in the Midland for the foreseeable future? You all certainly talked about harvesting the free cash flow, reinvesting in the Delaware. That certainly makes sense, but just trying to get a little sense of the kind of profile there. What's kind of the split of Earthstone's production between Midland and Delaware?
Yeah, I mean, the plan is definitely to let that asset, the Midland Basin asset, decline. You know, I think that that one rig, Earthstone does have some really good high-quality inventory that competes for capital in kind of Midland County and call it the northwesternmost part of their position in Reagan, kind of central Reagan, and that rig will be there at least for the next, you know, probably year or two. The plan is to let that asset decline, and, and we like that. You know, as you know, our plan is always to allocate capital and rig activity to our highest rate of return projects, and, you know, for obvious reasons, the vast majority of those are in the Delaware.
Okay, do you guys have an estimate of kind of the, the split on Earthstone's production between Midland and Delaware?
Pro forma, the business is gonna be kind of the majority of the production is gonna be from the Delaware. I think it's something like 15% or less of oil production comes from the Midland.
Okay. With respect to the, the G&A that you guys talked about, you guys are targeting, I guess, $30 million in, in G&A synergies on the cash side. It looks like Earthstone probably has annual G&A of, of just over $50 million, you know, on the cash side here. Are you definitely planning on keeping, you know, some of the employees here as you kind of operate the, the much larger asset base? Can you just talk to that a little bit?
Yeah. I, I think of Earthstone's kind of post-Novo run rate as, as closer to 60. Yes, I'd say the, the vast majority of those will be from kind of synergies at the executive level and, and other just kind of duplicative software programs, things like that. I, I think from an employee perspective, we are, we are excited to, to keep and work with the Earthstone team.
Okay, thanks.
Thanks, Leo.
Thank you. Our next question comes from Nitin Kumar from Mizuho. Please go ahead, your line is open.
Hi, good morning, guys. Thanks for taking my question. I want to start with just some of these drilling efficiencies. You were obviously, as you show in your slides, a little bit ahead of Earthstone in terms of how, how efficient your operations were. Are there any challenges from a geology or geography standpoint that you see with the expanded acreage?
No. We have run rigs kind of in all the same areas across, across the northern Delaware Basin, so, I mean, we, we know exactly what we're getting into, and I, I think we know how to achieve those synergies. We just got to go get them. It'll take time to kind of incorporate our best practices, optimizing the rig fleet, but we're very confident that we can achieve those synergies.
Okay. Maybe sticking on the synergies topic, there was a pretty wide gap between your lease operating expenses and where Earthstone was. You mentioned that you have some, some projects identified, et cetera. Could you maybe describe a little bit about, you know, the nature of the projects and is it the low-hanging fruit, or is it something that would require a bit more investment on your part to achieve those, I think, $30 million or so you said, of synergies?
I think it's a little bit of both, but I mean, as we sit here today, the most of those synergies come from things that we were able to identify just from kind of, I'd say, evaluating the asset from, from kind of across the street. It, you know, LOE, as you think about those synergies, you can only get so far from an evaluation, and I'm, I'm very confident kind of once our, our team gets our hands on these assets, that we'll be able to achieve those and more. A lot of it's just things kind of from our, our scale, things like optimizing water disposal. You know, we've got a long-standing relationship with WaterBridge, et cetera, to kind of continue to expand upon our water disposal footprint. A lot of it's just blocking and tackling.
Think about it as, you know, artificial lift optimization, minimizing failures, increasing runtime, and just kind of doing the things on the ground that, that kind of over time, picking up those pennies and quarters, that, that adds up to dollars.
Got it. If I can sneak just one more in. You, you talk about how the pro forma company's oil mix is a little bit less than what your current oil mix is. I think it goes down to about 46% from 51. As you refocus on the Delaware Basin, do you expect that oil mix to be in that 45 range, or should we expect it to come back up over time?
... I think of it as our, our development wedge that we're drilling every year should be consistent with the oil mix that kind of we got from Legacy PR's development wedge, which, which should definitely kind of continue to, to bring that up over time.
Got it. Thanks, guys.
Thank you.
Thank you. The next question comes from Subhash Chandra from Benchmark. Please go ahead. Your line is now open.
Yeah, thank you, and congrats. For follow up on the synergies again. The synergies don't assume that you can drop a rig, but is it possible that, once you get through it, that you might be able to accomplish the same while, reducing the rig count, pro forma rig count?
Yeah, definitely possible, but I, I think the way that we think about rig count, it really starts with kind of a capital allocation exercise for next year, which will be ongoing over the next three or four months based on kind of service costs and commodity prices. We'll settle on a well count and then kind of back into the number of rigs to optimize kind of the execution of that well count. I, I think everything's on the table. We could drop a rig, we could add a rig, or we could keep the rig count flat. It, it'll, it'll really start from kind of the right, the right amount of capital to spend, which is, which is really dictated by what we see on the service cost and commodity price side.
Great, thanks. I don't know if there's a, you know, perfectly clear response for this, but you extolled the inventory that Earthstone brings, yet the transaction value, I think, according to the slide, is slightly below PDP value. You know, seems incongruent. How do you explain that sort of opportunity on valuation for the acquirer?
Yeah, I mean, I think the answer just goes back to how we got here. I mean, I think that, like I mentioned in my opening remarks, the Earthstone team has done a remarkable job transforming their business over the last 2 years. I can't emphasize enough that the acquisitions that they acquired are, are probably our 3 favorite Delaware Basin acquisitions that we didn't buy. We bought some other really good ones kind of around the same times. I'd say, for whatever reason, the market never adjusted and reflected the multiple that, that Earthstone trades at to reflect just how high quality that business was. You know, I can't answer the why.
I think that's something that Robert and his team have been kind of working through for a long time. The answer is, you know, their multiples kind of stayed the same as it's been. Their business has gone from one that was a, you know, production-weighted business with some development in the Midland Basin to an incredible high-quality Delaware Basin business. The market hadn't gotten there yet, and I think that's what created the opportunity for us.
Terrific. Thank you.
Thank you. The next question comes from Oliver Huang from TPH. Please go ahead. Your line is open.
Good morning, guys. Congrats on the acquisition, and thanks for taking the questions.
Thanks.
I know it's still a bit early on getting details on the 2024 program, but somewhat of a follow-up to Neal's first question. Looking at the pro forma rig map that you all have, is that how we should be thinking about just the allocation split when thinking about Lea versus Eddy County within New Mexico? Or is that something that can move around a bit more than the one rig on the Eddy assets?
I, I think it can definitely move around a bit. I, I think it's too early to kind of say exactly what the Lea to Eddy split is, but, but we, we like the Eddy assets a lot, so I, you know, just looking at that map, I would expect more rigs in Eddy than what you see on it. Again, I mean, this is stuff that we're gonna be working through in real time, and I, I can't speak to the exact allocation between the counties yet.
Okay, that's helpful. Just with respect to, I guess, Northern Delaware infrastructure, how are you all feeling about that post-deal? I know there's been some tightness and constraints in the area. Just wanted to see what plans for investment on that front might be.
I'd say, I'd say both in terms of long-term takeaway out of the basin, we've both been fortunate to be partnered with the right kind of crude transporters and gas processors, kind of some of the largest guys and the highest quality operators in the basin. Kind of to date, we haven't had any issues moving our hydrocarbons out of the basin and don't expect any to arise going forward.
Awesome. Thanks for the time.
Thanks, Oliver.
Thank you. Just one moment. Okay, thank you. There appear to be no further questions. I'll return the conference to James Walter for closing remarks.
Thank you. Since closing our merger almost a year ago, we've delivered leading returns for our sector and outperformed the S&P 500. We believe that this acquisition positions us to continue creating value and delivering outsized returns to shareholders going forward. The transaction increases the overall quality of our business, enhancing our core Delaware Basin assets, potential for organic growth, efficient operations, and strong financial position. 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. Again, finally, we're excited to welcome the Earthstone team to the Permian Resources family. Thank you, everyone, for your time today.
Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.