Permian Resources (PR) - 2022 Q4 - Annual Report

Part I This section provides an overview of Permian Resources' business, asset portfolio, operational performance, and the key risks it faces Business and Properties Permian Resources is an independent oil and gas company focused on the Delaware Basin. The company's scale was significantly increased by the September 2022 merger with Colgate Energy, which added substantial acreage and production. As of year-end 2022, the company holds approximately 176,380 net leasehold acres, with 96% held by production, providing significant operational flexibility. Total proved reserves more than doubled in 2022, driven by the merger and successful drilling. The company markets its production to a few key purchasers and is subject to extensive federal and state regulations, particularly concerning environmental and safety matters Company Overview and Business Combination Permian Resources, an independent oil and gas company, significantly expanded its scale through the September 2022 merger with Colgate Energy, adding substantial acreage and production - Permian Resources is an independent oil and natural gas company focused on the acquisition, optimization, and development of reserves in the Delaware Basin[46] - On September 1, 2022, the company completed a merger of equals with Colgate Energy Partners III, LLC ("Colgate"). In connection with the merger, the company changed its name from Centennial Resource Development, Inc. to Permian Resources Corporation and its ticker to "PR"[48][49] - The merger added approximately 105,000 net leasehold acres and 25,000 net royalty acres. Colgate's former equity holders received 269.3 million shares of Class C Common Stock and $525 million in cash, resulting in an approximate 48% noncontrolling interest in the operating subsidiary, OpCo[48][256] Asset Portfolio and Operations The company holds extensive net leasehold and royalty acres, primarily operated and held by production, with a high success rate in development wells - As of December 31, 2022, the company holds approximately 176,380 net leasehold acres and 40,000 net royalty acres, with 96% operated and 96% held by production. Assets are concentrated in West Texas (Reeves, Ward counties) and New Mexico (Lea, Eddy counties)[50] - As of December 31, 2022, the company had an interest in 966 gross operated productive wells and 322 gross non-operated productive wells[62] - In 2022, the company placed 95 development wells into production with a 97% success rate (3 wells were dry due to mechanical issues)[66][67] Proved Oil and Gas Reserves Proved reserves more than doubled in 2022, driven by the Colgate merger and successful drilling, with PUDs scheduled for development within five years Proved Reserves and PV-10 (as of Dec 31) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Proved Reserves (MBoe) | 582,146 | 305,204 | 298,902 | | - Oil (MBbls) | 287,032 | 153,453 | 150,492 | | - Natural Gas (MMcf) | 1,033,571 | 577,005 | 527,787 | | - NGL (MBbls) | 122,851 | 55,583 | 60,445 | | Proved Developed % | 59% | 53% | 50% | | Pre-tax PV 10% (in millions) | $11,714.7 | $3,877.5 | $1,189.1 | - Proved undeveloped (PUD) reserves increased by 99.0 MMBoe in 2022, primarily due to the acquisition of 132.7 MMBoe from the Colgate merger and 77.8 MMBoe from extensions and discoveries. This was offset by the conversion of 55.6 MMBoe to proved developed reserves and negative revisions of 55.1 MMBoe, mainly from development plan changes post-merger[54] - All PUD locations are scheduled to be drilled within five years of their initial booking. The company spent $445.2 million in 2022 to convert 55.6 MMBoe of PUDs to proved developed reserves[54] - Proved reserves are estimated by the independent engineering firm Netherland, Sewell & Associates, Inc. (NSAI)[56] Production and Operating Data The company's production volumes and average sales prices significantly increased in 2022, alongside higher operating costs per Boe Annual Production and Price Summary | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- |\ | Net Production | | | | | Oil (MBbls) | 18,235 | 11,701 | 13,207 | | Natural Gas (MMcf) | 59,692 | 40,741 | 41,302 | | NGL (MBbls) | 6,750 | 3,752 | 4,490 | | Total (MBoe) | 34,934 | 22,243 | 24,581 | | Average Sales Price (per Boe) | $61.01 | $46.30 | $23.61 | | Operating Costs (per Boe) | | | | | Lease Operating Expenses | $4.92 | $4.78 | $4.45 | | Severance & Ad Valorem Taxes | $4.46 | $3.02 | $1.60 | Marketing, Customers, and Competition The company markets production to key purchasers, with significant firm sales agreements, and operates in a highly competitive industry Significant Customers (% of Total Net Revenues) | Purchaser | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | BP America | 34% | 50% | 47% | | Shell Trading (US) Company | 21% | 22% | 20% | | Enterprise Crude Oil, LLC | 18% | —% | 4% | - The company has firm sales agreements for crude oil totaling 27.4 million barrels from 2023 through 2025, with a financial ship-or-pay penalty on 29,000 Bbls/d through May 2025[68] - The oil and natural gas industry is highly competitive. The company competes with major integrated and independent companies for acquisitions, development, operations, and marketing[72] Regulatory Environment Operations are subject to extensive federal and state regulations, with increasing risks from climate change policies and evolving hydraulic fracturing rules - Operations are subject to extensive federal, state, and local laws regulating drilling, production, water disposal, and well abandonment. This includes regulations from authorities like the EPA and FERC[75] - The company faces increasing regulatory risks related to climate change, including potential restrictions on GHG emissions (methane) and new disclosure requirements from the SEC, which could increase costs and reduce demand[77][110][111] - Hydraulic fracturing is subject to evolving state and federal regulation. New restrictions on the process, water usage, or wastewater disposal (due to seismic activity concerns) could increase costs and cause operational delays[102][115][202] Human Capital The company employs 218 full-time staff and is committed to workforce diversity - As of February 7, 2023, the company had 218 full-time employees and hires independent contractors as needed[127] - The company is committed to a diverse workforce. As of early 2023, approximately 36% of employees identify as female and 22% as non-white[129][130] Risk Factors The company faces significant risks, primarily from the volatility of oil, natural gas, and NGL prices, inherent uncertainties in reserve estimation, operational hazards, financial leverage, and extensive evolving regulations Risks Related to Commodity Prices and Reserves Financial results are highly sensitive to volatile commodity prices, and reserve estimates carry inherent inaccuracies and development risks for PUDs - The company's financial results are heavily influenced by volatile commodity prices, which are affected by global supply/demand, OPEC actions, and geopolitical conditions. A sustained price decline could adversely affect revenues, cash flows, and capital access[137][139] - Estimating oil and gas reserves is a complex process with inherent inaccuracies. Any material inaccuracies in these estimates, which depend on geological data and economic assumptions, could significantly affect the company's reported asset values[141] - As of December 31, 2022, 41% of total estimated proved reserves were classified as proved undeveloped (PUD). The development of these PUDs is subject to risks such as cost increases, development delays, and commodity price declines, which could lead to reclassification or write-downs[146] Risks Related to Operations Operational risks include high-risk drilling activities, geographic concentration in the Delaware Basin, and reliance on third-party infrastructure with minimum volume commitments - Drilling for and producing oil and gas are high-risk activities with uncertainties that could adversely affect financial results. The company may not be adequately insured against all operational risks[154] - Operations are geographically concentrated in the Delaware Basin, making the company vulnerable to regional risks like transportation constraints, water shortages, and localized market conditions[165] - The marketability of production depends on third-party transportation and facilities. Any interruption or lack of access to these facilities could reduce revenues[166] - The company has multi-year agreements with minimum volume commitments. Failure to meet these commitments could lead to contractual penalties[167] Risks Related to Financials and Capital Financial risks stem from derivative activities, substantial long-term debt, and restrictive covenants that limit financial flexibility - Derivative activities used for hedging could result in financial losses or reduced earnings, particularly if production is less than hedged volumes or if counterparties fail to perform[179][180] - As of December 31, 2022, the company had approximately $2.1 billion of total long-term debt. This leverage could limit operational flexibility, increase vulnerability to economic downturns, and restrict the ability to obtain additional financing[185] - Debt agreements contain restrictive covenants that limit the ability to incur more debt, make investments, and sell assets. Failure to comply could result in default and acceleration of debt payments[189][191] Risks Related to Regulatory and ESG Matters Regulatory and ESG risks include increasing costs from climate change laws, evolving hydraulic fracturing regulations, and negative investor sentiment towards the industry - Climate change laws and regulations restricting GHG emissions could increase costs and reduce demand for oil and gas. The Biden administration's policies and international agreements like the Paris Agreement pose significant regulatory risk[198][201] - Federal, state, and local initiatives related to hydraulic fracturing could result in increased costs, operating restrictions, or delays in well completions[202] - A negative shift in investor sentiment towards the oil and gas industry due to ESG concerns could adversely impact the company's stock price and access to capital markets[213][215] Risks Related to the Merger and Corporate Structure Risks include significant shareholder influence, challenges in integrating the Colgate business, and adapting a former private company to public reporting standards - Principal stockholders (NGP, Pearl, Riverstone) hold substantial voting power (~21%, 16%, and 13% respectively), allowing them to strongly influence corporate actions[220] - The failure to successfully integrate the business and operations of Colgate in the expected time frame may adversely affect future results[233] - Integrating Colgate, a former private company, into a public company's internal control and reporting framework may require significant resources and management attention[235] Legal Proceedings The company is exposed to various legal and environmental risks, including a settled air emissions issue with the EPA and an ongoing dispute related to Winter Storm Uri - In September 2022, the company agreed to a Consent Agreement and Final Order (CAFO) with the U.S. Environmental Protection Agency (EPA) to resolve an air emissions issue, assessing penalties of $610,000[239] - The company is in a legal dispute with a transportation provider over force majeure declarations during Winter Storm Uri in February 2021. The company believes a loss is reasonably possible, with a potential range from zero to $7.6 million[561] Part II This section details the company's financial performance, liquidity, capital resources, market risks, and audited financial statements Market for Common Equity and Shareholder Matters Following the Colgate merger on September 1, 2022, the company's Class A Common Stock moved to the NYSE, initiating a stock repurchase program and a shareholder return framework including a base dividend - Following the merger, the company's Class A Common Stock was transferred to the New York Stock Exchange (NYSE) under the ticker symbol "PR" on September 1, 2022[242] - The Board of Directors authorized a stock repurchase program, which was increased to $500 million in connection with the merger and extended through December 31, 2024. No shares were repurchased under the program in 2022[246][529] - The company initiated a capital return program, declaring its first cash dividend of $0.05 per share in November 2022. A variable return program, distributing at least 50% of free cash flow after the base dividend, is planned to begin in Q2 2023 based on Q1 2023 results[247] Management's Discussion and Analysis (MD&A) The company's financial performance in 2022 was significantly enhanced by the Colgate merger and strong commodity prices, leading to substantial revenue and net income growth, with strong liquidity funding capital expenditures 2022 Highlights and Strategic Developments Key strategic events in 2022 included the Colgate merger, asset acquisitions and divestitures, and significant financing activities - The merger with Colgate, completed on September 1, 2022, was the key strategic event, significantly increasing the company's operational and financial scale[254][255] - In December 2022, the company agreed to acquire ~4,000 net leasehold acres in Lea County, NM for $98 million and completed the sale of ~3,500 net non-operated acres in Reeves County, TX for $60 million[257][258] - Financing highlights include amending and upsizing the credit facility to a $1.5 billion commitment with a $2.5 billion borrowing base, increasing the stock repurchase program to $500 million, and declaring the first cash dividend of $0.05 per share[261][262][263] Results of Operations (2022 vs 2021) Total revenues and net income significantly increased in 2022 due to higher production volumes and commodity prices, alongside rising operating expenses Revenue and Production Comparison (2022 vs 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Oil and Gas Sales (in thousands) | $2,131,265 | $1,029,892 | 107% | | Oil Sales (in thousands) | $1,622,035 | $743,069 | 118% | | Natural Gas Sales (in thousands) | $276,957 | $149,478 | 85% | | NGL Sales (in thousands) | $232,273 | $137,345 | 69% | | Total Production (MBoe) | 34,934 | 22,243 | 57% | Operating Expense Comparison (2022 vs 2021) | Expense (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Lease Operating Expenses | $171,867 | $106,419 | 62% | | Severance and Ad Valorem Taxes | $155,724 | $67,140 | 132% | | Gathering, Processing, & Transportation | $97,915 | $85,896 | 14% | | Depreciation, Depletion & Amortization | $444,678 | $289,122 | 54% | | General & Administrative | $159,554 | $110,454 | 44% | | Merger and Integration Expense | $77,424 | $— | N/A | - Net income attributable to Class A Common Stock increased to $515.0 million ($1.80/basic share) in 2022, compared to $138.2 million ($0.49/basic share) in 2021[371][534] Liquidity and Capital Resources Operating cash flow significantly increased in 2022, funding capital expenditures, with strong liquidity and a substantial credit facility Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,371,671 | $525,619 | | Net cash used in investing activities | ($1,205,049) | ($226,476) | | Net cash (used in) provided by financing activities | ($106,625) | ($297,547) | - Total capital expenditures for 2022 were $779.4 million. The 2023 capex budget is projected to be between $1.1 billion and $1.2 billion, expected to be funded entirely from cash flows from operations[290] - As of Dec 31, 2022, the company had $385.0 million in borrowings outstanding under its credit facility and $1.1 billion in available borrowing capacity[302] Contractual Obligations Summary (as of Dec 31, 2022, in thousands) | Obligation Type | Total Commitment | | :--- | :--- | | Operating leases | $80,243 | | Purchase obligations | $48,652 | | Asset retirement obligations | $40,947 | | Long term debt obligations | $2,200,799 | | Cash interest on debt | $639,765 | Market Risk Disclosures The company's primary market risks are commodity price volatility and interest rate fluctuations, mitigated by derivative instruments for a portion of expected production - The company's primary market risk is commodity price volatility. Based on 2022 production, a 10% change in oil prices would change annual sales by $162.2 million, a 10% change in NGL prices by $27.7 million, and a 10% change in natural gas prices by $23.2 million[329] Summary of Hedging Positions as of Dec 31, 2022 | Commodity | Instrument Type | 2023 Hedged Volume (Avg Daily) | 2024 Hedged Volume (Avg Daily) | | :--- | :--- | :--- | :--- | | Crude Oil | Swaps & Collars | ~25,500 Bbls/d | ~19,000 Bbls/d | | Natural Gas | Swaps & Collars | ~93,000 MMBtu/d | ~20,000 MMBtu/d | - The company is exposed to interest rate risk on its $385.0 million of borrowings under its SOFR-based credit facility. A 1.0% change in the weighted average interest rate would impact annual interest expense by approximately $3.9 million[337][338] Financial Statements and Supplementary Data The audited consolidated financial statements reflect a significant transformation in 2022 due to the Colgate merger, showing substantial growth in assets, liabilities, net income, and proved oil and gas reserves Consolidated Financial Statements Overview The company's financial position and performance significantly expanded in 2022, driven by the Colgate merger, with substantial increases in assets, liabilities, and net income Key Financial Data (in thousands) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $8,492,592 | $3,804,594 | | Total Liabilities | $2,836,296 | $1,053,874 | | Total Equity | $5,656,296 | $2,750,720 | | Income Statement (FY) | | | | Total Operating Revenues | $2,131,265 | $1,029,892 | | Income from Operations | $1,007,536 | $370,618 | | Net Income | $749,840 | $138,175 | Note 2—Business Combination The Colgate merger, accounted for as a business combination, involved significant noncontrolling interest and cash consideration, acquiring substantial oil and gas properties and assuming debt Colgate Merger Consideration (in thousands) | Consideration Component | Value | | :--- | :--- | | Fair value of noncontrolling interest (Class C Stock) | $1,967,053 | | Cash consideration | $525,000 | | Total Merger Consideration | $2,492,053 | - The merger was accounted for as a business combination. Key assets acquired included $3.3 billion in proved oil and gas properties and $633 million in unproved properties. Key liabilities assumed included $1.35 billion in long-term debt[418][423] Note 5—Long-Term Debt The company's long-term debt portfolio as of December 31, 2022, comprises various senior notes and a credit facility, totaling over $2.1 billion net Long-Term Debt Composition (Dec 31, 2022, in thousands) | Instrument | Carrying Value | | :--- | :--- | | Credit Facility due 2027 | $385,000 | | 5.375% Senior Notes due 2026 | $289,448 | | 7.750% Senior Notes due 2026 (assumed) | $300,000 | | 6.875% Senior Notes due 2027 | $356,351 | | 3.25% Convertible Senior Notes due 2028 | $170,000 | | 5.875% Senior Notes due 2029 (assumed) | $700,000 | | Less: Unamortized costs/discount | ($60,001) | | Total Long-Term Debt, Net | $2,140,798 | Supplemental Oil & Natural Gas Producing Activities (Unaudited) Proved reserves significantly increased in 2022, primarily due to acquisitions, leading to a substantial rise in the standardized measure of discounted future net cash flows Changes in Proved Reserves (MBoe) | | 2022 | 2021 | | :--- | :--- | :--- | | Balance, Beginning of Year | 305,204 | 298,902 | | Extensions and discoveries | 95,346 | 34,950 | | Revisions to previous estimates | (50,027) | (1,868) | | Purchases of reserves in place | 272,879 | — | | Divestitures of reserves in place | (6,322) | (4,537) | | Production | (34,934) | (22,243) | | Balance, End of Year | 582,146 | 305,204 | Standardized Measure of Discounted Future Net Cash Flows (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Future cash inflows | $36,444,649 | $13,224,260 | | Less: Future development & production costs | ($12,432,904) | ($5,389,668) | | Less: Future income tax expenses | ($4,821,696) | ($1,162,657) | | Future net cash flows | $19,190,049 | $6,671,935 | | 10% discount to reflect timing | ($9,764,471) | ($3,275,615) | | Standardized Measure | $9,425,578 | $3,396,320 | Part III & IV This section covers the company's internal controls, corporate governance, and other required disclosures Controls, Governance, and Other Disclosures The company's management, including its principal executive and financial officers, concluded that disclosure controls and procedures were effective as of December 31, 2022. The assessment of internal control over financial reporting excluded the recently acquired Colgate business, as permitted by SEC rules. Detailed information regarding directors, executive compensation, security ownership, and principal accountant fees is incorporated by reference from the company's definitive proxy statement for its 2023 annual meeting - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2022[597] - Management's assessment of internal control over financial reporting as of December 31, 2022, concluded that controls were effective. This assessment excluded the internal controls of Colgate, acquired on September 1, 2022, which represented approximately 50% of total assets[601][602] - Information required for Items 10 (Directors, Executive Officers and Corporate Governance), 11 (Executive Compensation), 12 (Security Ownership), 13 (Certain Relationships), and 14 (Principal Accountant Fees) is incorporated by reference from the company's 2023 definitive proxy statement[607][608][609][610][611]