Permian Resources Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Permian Resources Corporation is an independent oil and natural gas company focused on the acquisition, development, and exploration of oil and gas properties.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Permian Resources Corporation (PR) is a relatively new independent oil and natural gas producer that focuses its efforts on the Permian Basin. This basin, known for its prolific hydrocarbon production, spans parts of West Texas and New Mexico. The company engages in developing, acquiring, and exploring oil and natural gas properties, particularly in the Delaware and Midland sub-basins within the Permian Basin. While not a global energy giant, it is a key player in US oil and gas production.

  • Revenue Distribution: PR’s revenue is primarily derived from the sale of oil, natural gas, and natural gas liquids (NGLs). Because it sells commodities, it is therefore exposed to price fluctuations of these resources. The Company also derives revenue from gathering, processing, and transporting midstream assets.
  • As of the latest quarterly results, 80% of Permian’s revenue comes from oil, 16% from natural gas, and 4% from NGLs. This is largely driven by the company focusing more on oil production.
  • Industry Trends: The oil and gas industry is highly cyclical, experiencing volatility related to global demand, geopolitical events, and supply factors. Technological advancements, particularly in hydraulic fracturing (fracking) and horizontal drilling, have revolutionized the industry, increasing production and accessing previously unreachable reserves. However, this advancement has also increased competition among producers.
  • There’s an increasing emphasis on environmental, social, and governance (ESG) factors, pushing companies to improve their operating practices and address climate change concerns.
  • Companies are becoming increasingly focused on capital discipline, due to pressure from investors to generate value from existing assets instead of focusing on growth at all costs.
  • Margins: Profit margins for oil and gas producers are closely tied to commodity prices. Low operating costs, which includes the cost for drilling, gathering, transport, and production, give the company a degree of profitability even when prices fluctuate or fall.
  • While prices for WTI crude oil have increased 12.1% year-over-year, prices for natural gas have dropped by 48% year-over-year during the last quarter. This has negatively affected net income in that quarter.
  • Competitive Landscape: The oil and gas industry is intensely competitive, with many established players and new entrants. Competition is also driven by the cost to extract and produce resources. Scale, efficiency, access to transportation infrastructure, and superior management expertise are key determinants for long-term survival and success in this competitive market.
  • The Permian basin is one of the most highly active areas of drilling in the US, making competition intense as companies battle for land and resources.
  • What Makes Permian Resources Different: Permian Resources is a relatively new company that is focused only on the Permian Basin. This geographic focus is a differentiator as it allows them to concentrate their efforts on maximizing their operations in this region. Also, the merger between Colgate and Centennial formed a larger company with strong technical expertise in horizontal drilling and fracking.

Financial Analysis: Permian Resources recent financial results shows that the company has benefited from higher energy prices (mostly oil). However, it also suffers from a decrease in natural gas prices. Let’s break down the financials:

  • Revenues: As of the latest quarterly report, their revenue was $1.17 billion, up almost 70% from the same period last year. This increase is primarily driven by their increase in oil revenues and due to the full price effect of their recent acquisition of FireBird.
  • Profitability: The company’s net income for that quarter was $318 million, down 40% year-over-year. Their margins are pretty good, but are dependent on the price of oil and gas. Their average well costs and average operating costs are also quite lower than other competitors, giving them a competitive advantage.
  • Cash Flow: Permian’s free cash flow (FCF) during the last quarter was $710 million, with a year-to-date FCF of $1.86 billion. This provides the company the capacity to support additional operations, debt reduction, and acquisitions. Note that this FCF can change wildly in any given quarter depending on commodity pricing and how they choose to reinvest their capital.
  • Debt: The company carries a long term debt of around $3.4 billion. However, the company is very able to repay its debt since it can generate enough cash to do so. The company is consistently improving their credit rating. They’ve also indicated their plans to reduce leverage through free cash flow generation. This helps support their strategy of balancing shareholder returns with balance sheet strength.
  • Shareholder Returns: The Company has a share repurchase program, which has been ongoing in the last two years. In the latest quarterly report, the company has bought back shares for $382 million, and has $850 million left for more buybacks. This is a significant source of return to investors.
  • They also have dividends, and although the yield is low, it has been steadily increasing.

Moat Assessment: 2 / 5 Permian Resources possesses a narrow moat due to its cost advantages stemming from focused operations in the Permian Basin, and the strategic advantage of being a large company and gaining economies of scale in the industry. The company also has high-quality producing assets. However, it lacks strong brand recognition and customer lock-in, and is highly dependent on commodity prices, and thus has a smaller moat than some other oil companies.

Risks to the Moat and Business Resilience: 1. Commodity Price Volatility: Fluctuations in oil and natural gas prices significantly impact revenues and profits. A substantial price decline can lead to reduced profitability, lower cash flows, and valuation issues.

  • This volatility can also lead to instability in the company’s operational strategy and investment decisions. 2. Regulatory and Environmental Risks: The company faces increasing regulatory scrutiny and potential costs related to environmental compliance, hydraulic fracturing regulations, and emissions standards. These can affect costs and operational freedom.
  • There’s also increasing public pressure for cleaner energy, and this may reduce or eliminate the future viability of hydrocarbon producers.
    1. Intense Competition: The Permian Basin is a competitive landscape, and new entrants or improvements in efficiency by competitors can increase the pressure on Permian’s profit margins, and thus shrink the moat.
    2. Operational Risk: The company relies on a well-functioning system for production, transportation, and distribution. Any disruption in the supply chain, or failure of key infrastructure components will hurt their business and reduce their ability to produce energy.
    3. Acquisition Risk: The company relies on acquisitions to meet its production and revenue goals. If it pays too much for their acquisitions or if they fail to produce at a high enough standard, this can hurt the value and future prospects of the company.

Understandability Rating: 2 / 5 Permian Resources’ business is moderately complex. While the basic concept of oil and natural gas exploration is somewhat easy to understand, the various metrics involved in the company (e.g. ROIC, free cash flow, market prices, production per barrel, production per day) are complex, requiring a detailed analysis of financials, as well as geological factors that go into exploration and extraction. Therefore, it has a score of 2 on the understandability metric. Also, the language is very specialized and it would be more difficult for someone unfamiliar with the industry to fully understand the ins and outs of the business.

Balance Sheet Health: 4 / 5 The company’s balance sheet is healthy, with a strong cash position and a relatively manageable debt load. The company’s long term debt is very high, but they have strong earnings and cash flow growth, which helps mitigate that concern. Also, the company’s debt to capital is below 35%, a reasonable level to operate in. Therefore it has a score of 4 on balance sheet health.

Recent Concerns and Management Response Permian Resources has come under recent pressure because of falling natural gas prices. While the price of oil has been rising, it still makes up the majority of the company’s revenues. Also, there has been negative sentiment in the market about shale producers for fear they can’t manage their capital or maintain production in the long run. The management has acknowledged this and is focusing on maintaining an economic return and reducing leverage in their operations. They have also been focusing on having enough cash and low debt to be acquisitive in a bear market. They do expect interest expense to go down in the future and for their free cash flow to increase, as production increase and they pay off old debt. Also, they have stated their belief in the long term sustainability of their production.

The CEO mentioned the market is treating all hydrocarbon producers as if they’re equal, which is a poor way to understand the industry as there are clear winners and losers. The Company is focusing on being on the winning side.