Permian Resources Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company, formerly Centennial Resource Development, completed its merger with Colgate Energy Partners III on September 1, 2022 and changed its name and ticker to Permian Resources (NYSE: PR). Results include Colgate for September only; reported year-over-year comparisons are therefore not like-for-like.
Business context and merger
Permian Resources is an independent oil and gas producer focused on the Delaware Basin. The merger added approximately 105,000 net leasehold acres and 25,000 net royalty acres. Colgate owners received $525 million cash, 269.3 million Class C shares and corresponding OpCo units, leaving them with about 48% of OpCo and a corresponding noncontrolling interest. The merger’s preliminary purchase-price allocation remains subject to adjustment.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Oil and gas sales | $549.8 million | $288.5 million | $1,369.7 million | $713.5 million |
| Income from operations | $222.1 million | $96.2 million | $668.9 million | $197.4 million |
| Net income (loss) | $343.5 million | $37.1 million | $551.1 million | $(22.6) million |
| Net income (loss) attributable to Class A | $224.4 million | $37.1 million | $432.0 million | $(22.6) million |
| Diluted EPS | $0.70 | $0.12 | $1.36 | $(0.08) |
| Cash from operating activities | Not provided for quarter | $843.4 million | $333.1 million |
Q3 net income included a $181.3 million derivative gain, compared with a $44.5 million loss in Q3 2021. Nine-month derivative results were a $17.7 million gain versus a $150.7 million loss. These gains and losses include noncash fair-value changes and can materially affect reported earnings.
Q3 average daily production was 92,003 Boe/d, up 41% year over year; nine-month production averaged 74,646 Boe/d, up 24%. Q3 realized oil price before hedge settlements rose 36% to $89.02/Bbl and natural gas rose 65% to $6.57/Mcf; NGL price declined 10% to $36.21/Bbl. After hedge settlements, realized oil and gas prices were $86.31/Bbl and $5.16/Mcf, respectively.
Cash from operations less cash drilling and development expenditures of $397.9 million was approximately $445.5 million for the first nine months; this is a simple calculation, not a company-defined free-cash-flow measure. Cash used in investing was $896.4 million, including $496.7 million of net cash merger consideration. Financing provided $89.2 million net, including revolving-credit borrowings and repayments.
At September 30, cash was $45.5 million; current assets were $445.8 million and current liabilities $615.8 million. Long-term debt, net, was $2.304 billion, compared with $825.6 million at year-end 2021. The company had $550 million outstanding on its revolving facility and $944.2 million of available capacity, net of letters of credit. Total equity was $5.521 billion, including $2.696 billion of noncontrolling interest.
Material changes and unusual items
- Revenue growth reflected higher commodity prices and production, as well as the merger. Colgate contributed approximately $125 million revenue and $46.6 million direct operating expenses during the post-close month included in Q3.
- Merger and integration expense was $59.3 million in Q3 and $65.0 million for the nine months, including advisory fees, professional fees and severance.
- Interest expense rose to $28.8 million in Q3 from $14.7 million, principally due to assumed Colgate notes, higher debt-cost amortization and higher facility borrowings. Nine-month interest expense was $56.3 million versus $47.4 million.
- Q3 operating expenses included $109.5 million DD&A and $41.7 million severance and ad valorem taxes. LOE was $4.84/Boe; gathering, processing and transportation expense was $3.55/Boe.
- The merger added $1.0 billion principal amount of senior notes: $300 million of 7.75% notes due 2026 and $700 million of 5.875% notes due 2029. The revolving facility commitments increased to $1.5 billion and borrowing base to $2.5 billion.
Outlook, risks and contingencies
- Management planned to reduce the operated drilling program from eight rigs to seven in November and operate at seven for the remainder of 2022. Fourth-quarter drilling, completion and facilities capital expenditure was expected to be $300–$325 million; management expected to fund remaining 2022 capex from operating cash flow. No explicit full-year production target is stated in the supplied filing text.
- The company cited volatile oil, gas and NGL prices, inflation and rising service costs, supply constraints, interest-rate exposure, reserve-estimation uncertainty, and potential effects of lower prices on cash flow, borrowing capacity and covenants.
- The facility requires a current ratio of at least 1.0 and leverage ratio no greater than 3.5; the company reported covenant compliance at September 30 and through filing. A lender redetermination could reduce borrowing capacity and require repayment if borrowings exceed the revised amount.
- Commodity derivatives partially reduce downside price exposure but also limit upside. The company reported a $203.1 million net fair value asset position; a 10% move in the oil forward curve was estimated to change fair value by roughly $111 million, and a 10% gas-curve move by $9.7 million.
- A Winter Storm Uri transportation dispute presents a reasonably possible loss estimated at $0–$7.6 million, with no amount in the range considered a better estimate. An EPA air-emissions penalty was under negotiation and could exceed $300,000; management did not expect a material effect.
- Contractual obligations included $40.1 million asset-retirement obligations and $55.5 million purchase obligations. A frac-sand take-or-pay agreement accounted for a $33.4 million minimum commitment through March 2024.
- On November 8, 2022, the board declared a $0.05 quarterly dividend per Class A share and a $0.05 distribution per OpCo common unit, payable November 29 to holders of record November 21.
Important facts for investors to verify
- Assess merger-adjusted performance: the reported quarter includes only one month of Colgate, while unaudited pro forma nine-month 2022 revenue and net income were $2.472 billion and $653.5 million, respectively; these pro forma figures are not forecasts and exclude anticipated synergies.
- Review whether merger integration, cost savings and operational plans deliver the benefits management expects, and track any further purchase-price allocation adjustments.
- Monitor debt balances, floating-rate exposure, borrowing-base redeterminations, covenant headroom and the effect of commodity prices and hedges on cash generation.
- Evaluate the significance of derivative mark-to-market volatility, the Winter Storm Uri dispute, the EPA matter and continuing contractual commitments.
- Consider the two-class ownership structure, the Colgate owners’ approximately 48% OpCo interest, potential future unit exchanges, and resulting dilution or cash requirements.