Permian Resources Corp (PR) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data” in this Annual Report. The following discussion and analysis contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, future market prices for oil, natural gas and NGLs, future production volumes, estimates of proved reserves, capital expenditures, economic and competitive conditions, inflation, regulatory changes, the implementation and actual result of the Merger (defined below) and other uncertainties, as well as those factors discussed in “Cautionary Statement Concerning Forward-Looking Statements” and “Item 1A. Risk Factors” in this Annual Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Overview
We are an independent oil and natural gas company focused on the responsible acquisition, optimization and development of high-return oil and natural gas properties. Our assets are located in the core of the Delaware Basin. Our principal business objective is to increase shareholder value by efficiently developing our oil and natural gas assets in an environmentally and socially responsible way, with an overall objective of improving our rates of return and generating sustainable free cash flow.
Market Conditions
The demand for oil and natural gas was significantly impacted by the worldwide outbreak of COVID-19 during 2020 and 2021, and global oil and natural gas supplies have been impacted by production curtailment agreements among the Organization of Petroleum Exporting Countries and other oil producing countries (“OPEC+”) and reduced drilling and completion activity from U.S. producers. Both OPEC+ output and U.S. drilling activity has increased since 2020 levels which has led to a gradual increase in oil and gas supply. Meanwhile, demand for oil and gas has risen steadily throughout 2021 and 2022 due to the global reopening post-pandemic and the global-wide transition away from coal to natural gas. However, Russia’s invasion of Ukraine in early 2022 and subsequent global sanctions placed on Russia in response have created additional downward pressures on the supply of natural gas and, to a lesser extent, on oil. While governmental actions from several countries to release a portion of their strategic petroleum reserves caused global inventories to increase temporarily, the lack of global capital expenditure growth and limited spare capacity has resulted in a relatively balanced oil supply and demand market. The aforementioned factors, among others, have aided in the recovery of global commodity prices throughout 2021 and have also led to heightened commodity prices during periods of 2022, particularly during the beginning of Russia’s invasion of Ukraine. Specifically, NYMEX WTI spot prices for crude oil reached a high of $123.70 per barrel on March 8, 2022, from a low of negative $37.63 per barrel on April 20, 2020. Similarly, the NYMEX Henry Hub index price for natural gas reached a high of $9.85 per MMBtu on August 23, 2022, from a low of $1.33 per MMBtu on September 22, 2020.
The oil and natural gas industry is cyclical, and it is likely that commodity prices, as well as commodity price differentials, will continue to be volatile due to fluctuations in global supply and demand, inventory levels, the continued effects from COVID-19 and variant strains of the virus, geopolitical events, federal and state government regulations, weather conditions, the global transition to alternative energy sources, supply chain constraints and other factors. The following table highlights the quarterly average NYMEX price trends for crude oil and natural gas since the first quarter of 2020:
| 2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | Q1 | Q2 | Q3 | Q4 | |||||||||||||||||||||||||||||||||||
| Crude Oil (per Bbl) | $ | 46.19 | $ | 28.00 | $ | 40.93 | $ | 42.66 | $ | 57.84 | $ | 66.06 | $ | 70.56 | $ | 77.09 | $ | 94.40 | $ | 108.34 | $ | 91.56 | $ | 82.64 | ||||||||||||||||||||||
| Natural Gas (per MMBtu) | $ | 1.88 | $ | 1.65 | $ | 1.95 | $ | 2.47 | $ | 3.44 | $ | 2.88 | $ | 4.28 | $ | 4.74 | $ | 4.60 | $ | 7.39 | $ | 7.96 | $ | 5.55 |
Lower commodity prices and lower futures curves for oil and gas prices can result in impairments of our proved oil and natural gas properties or undeveloped acreage and may materially and adversely affect our operating cash flows, liquidity, financial condition, results of operations, future business and operations, and/or our ability to finance planned capital expenditures, which could in turn impact our ability to comply with covenants under our credit agreement and senior notes. Lower realized prices may also reduce the borrowing base under OpCo’s credit agreement, which is determined at the discretion of the lenders and is based on the collateral value of our proved reserves that have been mortgaged to the lenders. Upon a redetermination, if any borrowings in excess of the revised borrowing capacity were outstanding, we could be forced to immediately repay a portion of the debt outstanding under the credit agreement.
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Due to the cyclical nature of the oil and gas industry, fluctuating demand for oilfield goods and services can put pressure on the pricing structure within our industry. As commodity prices rise, costs of oilfield goods and services generally also increase, while during periods of commodity price declines, oilfield costs typically lag and do not adjust downward as fast as oil prices do. In addition, the U.S. inflation rate has been steadily increasing during 2021 and 2022. These inflationary pressures may also result in increases to the costs of our oilfield goods, services and personnel, which can in turn cause our capital expenditures and operating costs to rise.
2022 Highlights and Future Considerations
Colgate Merger
On May 19, 2022, we entered into a Business Combination Agreement (the “Merger Agreement”) with CRP, Colgate, and Colgate Energy Partners III MidCo, LLC (the “Colgate Unitholder”). The Merger Agreement provided for a merger of equals transaction, with CRP (which was renamed Permian Resources Operating, LLC or “OpCo” following the Merger) continuing as the surviving entity in the Merger and a subsidiary of Permian Resources Corporation.
On September 1, 2022, the Merger was completed, and all membership interests in CRP issued and outstanding immediately prior to the closing were converted into units of Permian Resources Operating, LLC (“Common Units”) equal to the number of shares of our Class A Common Stock that were outstanding immediately prior to the closing. All of the Colgate Unitholder’s membership interests in Colgate were exchanged for 269,300,000 shares of Class C Common Stock, 269,300,000 Common Units and $525 million in cash consideration. Following the closing of the Merger, the Colgate Unitholder distributed the merger consideration to its equity holders (the “Colgate Owners”), who collectively continue to own in the aggregate 100% of the outstanding shares of Class C Common Stock of the Company and approximately 48% of the outstanding Common Units in OpCo, which represents a noncontrolling interest in OpCo. This ownership of all our shares of Class C Common Stock by the Colgate Owners represents approximately 48% of the Company’s total outstanding shares of Class A Common Stock and Class C Common Stock taken together (the “Common Stock”).
As a result of the Merger, we acquired approximately 105,000 net leasehold acres and 25,000 net royalty acres located primarily in Reeves and Ward Counties in Texas and Eddy County in New Mexico. We believe that the Merger provides a significant increase to our operational and financial scale, drives accretion across our key financial and operating metrics, and enhances the combined company’s shareholder returns. Certain operational and financial information set forth in this Annual Report on Form 10-K does not include the activity of Colgate for periods prior to the completion of the Merger on September 1, 2022.
Acquisitions & Divestitures
On December 9, 2022, we entered into a definitive agreement to acquire approximately 4,000 net leasehold acres, 3,300 net royalty acres and 1,100 barrels of oil equivalent per day of net production for an unadjusted purchase price of $98 million. The acquired assets consist largely of undeveloped acreage and are contiguous to one of our existing core acreage in Lea County, New Mexico. The transaction closed on February 16, 2023.
On December 23, 2022, we completed the sale of producing, non-operated properties in Reeves County, Texas consisting of approximately 3,500 net leasehold acres for an unadjusted sales price of $60 million. The divested assets represent the majority of our non-operated position in Texas. The Company also sold non-operated acreage consisting of approximately 300 net leasehold acres in Eddy County, New Mexico for an unadjusted sales price of $10 million. The Company used the net proceeds from these sales to fund acquisitions.
Financing Highlights
On February 18, 2022, we closed on a five-year revolving credit facility (the “Credit Agreement”), which replaced our previous credit agreement that was set to mature on May 4, 2023. The elected commitments under the new Credit Agreement increased to $750 million from $700 million under our previous facility, and the borrowing base increased to $1.15 billion from $700 million previously. The new Credit Agreement will mature in February 2027.
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On July 15, 2022, we entered into the first amendment to our Credit Agreement (the “Amendment”). The Amendment, among other things, waived compliance with certain restrictive covenants and provided the lenders’ consent to a planned Pre-Merger Reorganization (as defined within the Amendment) in order to enable the Merger to occur. In addition, the Amendment increased the elected commitments under our Credit Agreement to $1.5 billion from $750 million, increased the borrowing base to $2.5 billion from $1.15 billion, and became effective as of the September 1, 2022 Merger closing date.
In February 2022, our Board of Directors authorized a stock repurchase program to acquire up to $350 million of our outstanding Common Stock, which program is approved to run through April 1, 2024 (the “Repurchase Program”). In connection with the Merger, the Repurchase Program was increased to $500 million and was extended through December 31, 2024. The Repurchase Program can be used to reduce shares of our Common Stock outstanding. There were no shares purchased under the Repurchase Program during the year ended December 31, 2022.
In November 2022, the Company declared its first cash dividend of $0.05 per share of Class A Common Stock and a cash distribution of $0.05 per common unit of OpCo. The dividend and distribution, which totaled $27.9 million, was paid on November 29, 2022.
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Results of Operations
For the Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021
The following table provides the components of our net revenues and net production (net of all royalties, overriding royalties and production due to others) for the periods indicated, as well as each period’s average prices and average daily production volumes:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ | % | |||||||||||
| Net revenues (in thousands): | ||||||||||||||
| Oil sales | $ | 1,622,035 | $ | 743,069 | $ | 878,966 | 118 | % | ||||||
| Natural gas sales | 276,957 | 149,478 | 127,479 | 85 | % | |||||||||
| NGL sales | 232,273 | 137,345 | 94,928 | 69 | % | |||||||||
| Oil and gas sales | $ | 2,131,265 | $ | 1,029,892 | $ | 1,101,373 | 107 | % | ||||||
| Average sales price: | ||||||||||||||
| Oil (per Bbl) | $ | 88.95 | $ | 63.50 | $ | 25.45 | 40 | % | ||||||
| Effect of derivative settlements on average price (per Bbl) | (4.85) | (10.19) | 5.34 | 52 | % | |||||||||
| Oil net of hedging (per Bbl) | $ | 84.10 | $ | 53.31 | $ | 30.79 | 58 | % | ||||||
| Average NYMEX price for oil (per Bbl) | $ | 94.24 | $ | 67.89 | $ | 26.35 | 39 | % | ||||||
| Oil differential from NYMEX | (5.29) | (4.39) | (0.90) | (21) | % | |||||||||
| Natural gas (per Mcf) | $ | 4.64 | $ | 3.67 | $ | 0.97 | 26 | % | ||||||
| Effect of derivative settlements on average price (per Mcf) | (0.53) | (0.32) | (0.21) | (66) | % | |||||||||
| Natural gas net of hedging (per Mcf) | $ | 4.11 | $ | 3.35 | $ | 0.76 | 23 | % | ||||||
| Average NYMEX price for natural gas (per Mcf) | $ | 6.38 | $ | 3.84 | $ | 2.54 | 66 | % | ||||||
| Natural gas differential from NYMEX | (1.74) | (0.17) | (1.57) | (924) | % | |||||||||
| NGL (per Bbl) | $ | 34.41 | $ | 36.61 | $ | (2.20) | (6) | % | ||||||
| Net production: | ||||||||||||||
| Oil (MBbls) | 18,235 | 11,701 | 6,534 | 56 | % | |||||||||
| Natural gas (MMcf) | 59,692 | 40,741 | 18,951 | 47 | % | |||||||||
| NGL (MBbls) | 6,750 | 3,752 | 2,998 | 80 | % | |||||||||
| Total (MBoe)(1) | 34,934 | 22,243 | 12,691 | 57 | % | |||||||||
| Average daily net production: | ||||||||||||||
| Oil (Bbls/d) | 49,958 | 32,058 | 17,900 | 56 | % | |||||||||
| Natural gas (Mcf/d) | 163,539 | 111,619 | 51,920 | 47 | % | |||||||||
| NGL (Bbls/d) | 18,494 | 10,278 | 8,216 | 80 | % | |||||||||
| Total (Boe/d)(1) | 95,708 | 60,939 | 34,769 | 57 | % |
(1) Calculated by converting natural gas to oil equivalent barrels at a ratio of six Mcf of natural gas to one Boe.
Oil, Natural Gas and NGL Sales Revenues. Total net revenues for the year ended December 31, 2022 increased by $1.1 billion, or 107%, compared to the year ended December 31, 2021. Revenues are a function of oil, natural gas and NGL volumes sold and average commodity prices realized.
Average realized sale prices for oil and natural gas increased for the year ended December 31, 2022 as compared to 2021 by 40% and 26%, respectively, while the average realized sales price for NGLs decreased 6% period over period. The 40% increase in the average realized oil price was mainly the result of higher NYMEX crude prices between periods, which was minimally offset by wider oil differentials. The average realized sales price of natural gas increased 26% due to higher average NYMEX gas prices between periods, partially offset by wider gas differentials. The 6% decrease in average realized NGL prices between periods was primarily attributable to lower weighted average Mont Belvieu spot prices for plant products in 2022 compared to 2021. The market prices for oil and natural gas have been impacted by global supply constraints for oil and gas throughout 2021 and 2022, as well as increasing demand worldwide as global economies emerge from COVID-19 era lockdowns and restrictions, as discussed in the market conditions section above.
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Net production volumes for oil, natural gas, and NGLs increased 56%, 47% and 80%, respectively, between periods. The oil production volume increase resulted from placing 95 wells on production since December 31, 2021, which added 6,212 MBbls of net oil production to the year ended December 31, 2022 as compared to 42 wells brought online during the year ended December 31, 2021 that added 3,490 MBbls of oil to our 2021 annual production volumes. Oil production also benefited from wells acquired in the Merger with Colgate, which added 3,517 MBbls of net oil production to the year ended December 31, 2022. These oil volume increases were partially offset by normal production decline across our existing wells. Natural gas and NGLs are produced concurrently with our crude oil volumes, typically resulting in a high correlation between fluctuations in oil quantities sold and natural gas and NGL quantities sold. However, the main processor of our raw gas operated in partial ethane-recovery during 2022, as compared to operating in full ethane-rejection during 2021, and this resulted in a lower percentage of natural gas volumes and a higher percentage of NGLs being recovered from our wet gas stream during the 2022 period.
Operating Expenses. The following table sets forth selected operating expense data for the periods indicated:
| Year Ended December 31, | Increase/(Decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Change | % | |||||||||||
| Operating costs (in thousands): | ||||||||||||||
| Lease operating expenses | $ | 171,867 | $ | 106,419 | $ | 65,448 | 62 | % | ||||||
| Severance and ad valorem taxes | 155,724 | 67,140 | 88,584 | 132 | % | |||||||||
| Gathering, processing, and transportation expense | 97,915 | 85,896 | 12,019 | 14 | % | |||||||||
| Operating cost metrics: | ||||||||||||||
| Lease operating expenses (per Boe) | $ | 4.92 | $ | 4.78 | $ | 0.14 | 3 | % | ||||||
| Severance and ad valorem taxes (% of revenue) | 7.3 | % | 6.5 | % | 0.8 | % | 12 | % | ||||||
| Gathering, processing, and transportation expense (per Boe) | 2.80 | 3.86 | (1.06) | (27) | % |
Lease Operating Expenses. Lease operating expenses (“LOE”) for the year ended December 31, 2022 increased $65.4 million compared to the year ended December 31, 2021. Higher LOE for 2022 was primarily related to (i) additional costs associated with the 309 gross operated horizontal wells acquired in the Merger on September 1, 2022; (ii) higher fixed and semi-variable costs, such as monthly equipment rentals, repair work, labor, and wellhead chemical costs stemming from the production increase between periods; and (iii) a $5.4 million increase in workover expense between periods.
Severance and Ad Valorem Taxes. Severance and ad valorem taxes for the year ended December 31, 2022 increased $88.6 million compared to the year ended December 31, 2021. Severance taxes are based on the market value of our production at the wellhead, while ad valorem taxes are generally based on the assessed taxable value of our proved developed oil and gas properties and vary across the different counties in which we operate. Severance taxes for the year ended 2022 increased $75.4 million compared to the same 2021 period primarily due to higher oil, natural gas and NGL revenues between periods. Ad valorem taxes between periods also increased by $13.2 million due to higher tax assessments on our oil and gas reserve values as well as an increase in our oil and gas properties as a result of the Merger.
Severance and ad valorem taxes as a percentage of total net revenues increased to 7.3% for the year ended December 31, 2022 as compared to 6.5% for the year ended December 31, 2021. This increase in rate was the result of a larger portion of our oil and gas volumes being produced in New Mexico, which levies higher severance tax rates than Texas as well as higher ad valorem taxes as discussed above, during the year ended December 31, 2022.
Gathering, Processing and Transportation Expenses. Gathering, processing and transportation costs (“GP&T”) for the year ended December 31, 2022 increased $12.0 million compared to the year ended December 31, 2021. This increase was mainly attributable to additional expenses incurred from the properties added following the Merger closing in the third quarter of 2022.
GP&T on a per Boe basis, however, decreased 27% from $3.86 for the year ended December 31, 2021 to $2.80 per Boe for the year ended December 31, 2022. This decrease is due to a higher portion of GP&T costs reducing our realized gas and NGL prices, as the majority of gas gathering and processing contracts acquired in the Merger, as well as some of our existing gas gathering contracts that were amended in 2022, transfer control of our product at delivery points prior to, or at, the inlet of gas processing plants. Refer to Note 15—Revenues under Part II, Item 8 of this Annual Report for additional information on our natural gas gathering and processing contracts.
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Depreciation, Depletion and Amortization. The following table summarizes our depreciation, depletion and amortization (“DD&A”) for the periods indicated:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands, except per Boe data) | 2022 | 2021 | ||||
| Depreciation, depletion and amortization | $ | 444,678 | $ | 289,122 | ||
| Depreciation, depletion and amortization per Boe | $ | 12.73 | $ | 13.00 |
For the year ended December 31, 2022, DD&A expense amounted to $444.7 million, an increase of $155.6 million from 2021. Higher DD&A expense in 2022 was due to the increase in our overall production volumes between periods, which increased DD&A expense by $165.0 million period over period. This increase was slightly offset by a decline in DD&A rates between periods which decreased DD&A expense by $9.4 million.
Our DD&A rate can fluctuate as a result of finding and development costs incurred, acquisitions, impairments, as well as changes in proved developed and proved undeveloped reserves. DD&A per Boe was $12.73 for the year ended December 31, 2022 compared to $13.00 in 2021. This decrease in the rate was driven by the inclusion of depletion related to the production from the oil and gas properties acquired in the Merger.
General and Administrative Expenses. The following table summarizes our general and administrative (“G&A”) expenses for the periods indicated:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| Cash general and administrative expenses | $ | 60,584 | $ | 48,269 | ||
| Stock-based compensation - equity awards | 113,759 | 35,658 | ||||
| Stock-based compensation - liability awards | (24,174) | 20,662 | ||||
| Stock-based compensation - cash settled awards | 9,385 | 5,865 | ||||
| General and administrative expenses | $ | 159,554 | $ | 110,454 |
G&A expenses for the year ended December 31, 2022 were $159.6 million compared to $110.5 million for the year ended December 31, 2021. Higher G&A in 2022 was primarily the result of (i) $46.5 million of additional stock-based compensation expense recognized for employees that were terminated and received accelerated vesting of their unvested stock awards and performance stock units (“PSU”) as a result of the Merger and (ii) higher stock-based compensation expense associated with new restricted stock and PSU awards granted to employees following the Merger. These increases were partially offset by a decrease of $15.5 million in expense related to the portion of liability classified restricted stock units that became fully vested following a maximum return event that was triggered in the third quarter of 2021. Refer to Note 7—Stock-Based Compensation under Part II, Item 8 of this Annual Report for additional information regarding these awards. Cash G&A additionally increased $12.3 million period over period due to higher payroll and other personnel costs as a result of increased headcount associated with the Merger that closed on September 1, 2022.
Merger and integration expense. Merger and integration expense for the year ended December 31, 2022 was $77.4 million. These costs primarily relate to (i) $40.0 million in bankers’ advisory fees, (ii) $24.0 million in severance and related benefits associated with employees that were terminated in connection with the Merger and (iii) legal, accounting and consultancy fees.
Impairment and Abandonment Expense. For the year ended December 31, 2022, impairment and abandonment expense was $3.9 million compared to $32.5 million for the year ended December 31, 2021. Both periods consist solely of amortization of leasehold expiration costs associated with individually insignificant unproved properties.
Exploration and Other Expenses. The following table summarizes exploration and other expenses for the periods indicated:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| Geological and geophysical costs | $ | 7,401 | $ | 3,508 | ||
| Stock-based compensation — equity awards | 2,721 | 1,883 | ||||
| Stock-based compensation — liability awards | — | (89) | ||||
| Stock-based compensation — cash settled awards | — | 314 | ||||
| Other expenses | 1,256 | 2,267 | ||||
| Exploration and other expenses | $ | 11,378 | $ | 7,883 |
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Exploration and other expenses were $11.4 million for the year ended December 31, 2022 compared to $7.9 million for the year ended December 31, 2021. Exploration and other expenses mainly consist of topographical studies, geographical and geophysical (“G&G”) projects, salaries and expenses of G&G personnel and include other operating costs. The period over period increase was primarily related to higher G&G personnel costs during the year ended December 31, 2022.
Net Gain (Loss) on Sale of Long-Lived Assets. During the year ended December 31, 2021, we completed the sale of approximately 6,200 net leasehold acres for an unadjusted sales price of $101 million. This divestiture represented the sale of an entire field, which resulted in a net gain on sale of $33.9 million. Refer to Note 3—Property Divestiture under Part II, Item 8 of this Annual Report for additional information.
Other Income and Expense.
Interest Expense. The following table summarizes interest expense for the periods indicated:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| Credit Facility | $ | 15,974 | $ | 10,771 | ||
| 8.000% Senior Secured Notes due 2025 | — | 2,908 | ||||
| 5.375% Senior Notes due 2026 | 15,557 | 15,556 | ||||
| 7.750% Senior Notes due 2026 | 7,750 | — | ||||
| 6.875% Senior Notes due 2027 | 24,500 | 24,500 | ||||
| 3.250% Convertible Senior Notes due 2028 | 5,525 | 4,315 | ||||
| 5.875% Senior Notes due 2029 | 13,708 | — | ||||
| Amortization of debt issuance costs and debt discount | 15,652 | 4,992 | ||||
| Interest capitalized | (3,021) | (1,754) | ||||
| Total | $ | 95,645 | $ | 61,288 |
Interest expense was $34.4 million higher for the year ended December 31, 2022 compared to the year ended December 31, 2021 mainly due to (i) $21.5 million in additional interest expense from the senior notes that were assumed in the Merger; (ii) $10.7 million in additional debt issuance costs amortized during the 2022 period mainly related to fees incurred for an incremental commitment letter we entered into in connection with the Merger; and (iii) $5.2 million in higher interest expense incurred on our credit facility due to a higher weighted average effective interest rate during 2022. These increases were partially offset by $2.9 million in decreased interest expense on our Senior Secured Notes due 2025 that were redeemed in April of 2021.
Our weighted average borrowings outstanding under our credit facility were $235.5 million during 2022 compared to $265.8 million in 2021. Our credit facility’s weighted average effective interest rate was 4.5% and 3.3% for the years ended December 31, 2022 and 2021, respectively.
Gain (loss) on extinguishment of debt. During the year ended December 31, 2021, we redeemed at par all of our $127.1 million aggregate principal amount of Senior Secured Notes outstanding. In connection with this redemption, we incurred a loss on debt extinguishment of $22.2 million related to the write-off of all unamortized debt issuance costs and debt discounts associated with these notes.
Net Gain (Loss) on Derivative Instruments. Net gains and losses are a function of (i) changes in derivative fair values associated with fluctuations in the forward price curves for the commodities underlying each of our hedge contracts outstanding and (ii) monthly cash settlements on any closed out hedge positions during the period.
The following table presents gains and losses on our derivative instruments for the periods indicated:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| Realized cash settlement gains (losses) | $ | (120,105) | $ | (132,125) | ||
| Non-cash mark-to-market derivative gain (loss) | 77,737 | (16,700) | ||||
| Total | $ | (42,368) | $ | (148,825) |
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Income Tax (Expense) Benefit: The following table summarizes our pre-tax income (loss) and income tax (expense) benefit for the periods indicated.
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | ||||
| Income (loss) before income taxes | $ | 870,132 | $ | 138,744 | ||
| Income tax (expense) benefit | (120,292) | (569) |
Our provision for income taxes for the years ended December 31, 2022 and 2021 differs from the amounts that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax book income (loss) primarily due to (i) permanent differences; (ii) state income taxes; and (iii) any changes during the period in our deferred tax asset valuation allowance.
For the year ended December 31, 2022 we generated pre-tax net income of $870.1 million and recorded income tax expense of $120.3 million. The primary factors decreasing our income tax expense below the U.S. statutory rate was (i) the portion of pre-tax income that was attributable to our non-controlling interest partners, and (ii) the release of our deferred tax valuation allowance due to the generation of net income in the current year.
During the year ended December 31, 2021, generated pre-tax net income of $138.7 million and recorded income tax expense of $0.6 million. The primary factors decreasing our income tax expense below the U.S. statutory rate was a $40.1 million reduction to our deferred tax asset valuation allowance for the year ended December 31, 2021.
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2021 Annual Report on Form 10-K filed with the SEC for a discussion of the results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020.
Liquidity and Capital Resources
Overview
Our drilling and completion activities require us to make significant capital expenditures. Historically, our primary sources of liquidity have been cash flows from operations, borrowings under our revolving credit facility, proceeds from offerings of debt or equity securities, or proceeds from the sale of oil and gas properties. Our future cash flows are subject to a number of variables, including oil and natural gas prices, which have been and will likely continue to be volatile. Lower commodity prices can negatively impact our cash flows and our ability to access debt or equity markets, and sustained low oil and natural gas prices could have a material and adverse effect on our liquidity position. To date, our primary use of capital has been for drilling and development capital expenditures and the acquisition of oil and natural gas properties.
We continually evaluate our capital needs and compare them to our capital resources. We operated a two-rig drilling program during the first eight months of 2022, and an average eight-rig drilling program after the Merger closing on September 1, 2022. We reduced our drilling rigs to seven in December 2022 and began 2023 operating a seven-rig drilling program. Our total capital expenditures incurred for the year ended December 31, 2022 was $779.4 million. We expect our total drilling, completion and facilities capex budget for 2023 to be between $1.1 billion to $1.2 billion. We funded our capital expenditures for 2022 entirely from cash flows from operations, and we expect to fund our 2023 capex budget entirely from cash flows from operations given our anticipated level of oil and gas production, current commodity prices and our commodity hedge positions in place.
In May 2022, we announced the Merger with Colgate that was completed on September 1, 2022. As a result of the Merger, our 2022 operational plans and sources and use of capital, among others things, as a combined entity have changed, and such changes include (i) the Company assumed $1.0 billion of Colgate’s senior notes, (ii) the Company refinanced Colgate’s credit facility borrowings outstanding at closing through borrowings under the Company’s Credit Agreement, (iii) borrowings under our Credit Agreement to fund a portion of the $525 million in cash Merger consideration, and (iv) funding of transaction costs incurred related to the Merger.
We plan to return capital to shareholders through a combination of base dividends plus a variable return program, including variable dividends, share repurchases or a combination of both. In November 2022, we declared a quarterly cash dividend of $0.05 per share of Class A Common Stock and a quarterly cash distribution of $0.05 per common unit of OpCo. The first dividend and distribution, which totaled $27.9 million, was paid on November 29, 2022.
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In February 2022, our Board of Directors authorized the Repurchase Program to acquire up to $350 million of our outstanding Common Stock. In connection with the Merger, the Repurchase Program was increased to $500 million and was extended through December 31, 2024. The Repurchase Program can be used to reduce our shares of Common Stock outstanding. Such repurchases would be made at terms and prices determined by us based upon prevailing market conditions, applicable legal requirements, available liquidity, compliance with our debt and other agreements and other factors. In addition, we may, from time to time, seek to retire or purchase our outstanding senior notes through cash purchases and/or exchanges for debt in open-market purchases, privately negotiated transactions or otherwise.
Because we are the operator of a high percentage of our acreage, we can control the amount and timing of our capital expenditures. We can choose to defer or accelerate a portion of our planned capex depending on a variety of factors, including but not limited to: prevailing and anticipated prices for oil and natural gas; oil storage or transportation constraints; the success of our drilling activities; the availability of necessary equipment, infrastructure and capital; the receipt and timing of required regulatory permits and approvals; seasonal conditions; property or land acquisition costs; and the level of participation by other working interest owners.
We cannot ensure that cash flows from operations or other sources of needed capital will be available on acceptable terms or at all. Further, our ability to access the public or private debt or equity capital markets at economic terms in the future will be affected by general economic conditions, the domestic and global oil and financial markets, our operational and financial performance, the value and performance of our debt or equity securities, prevailing commodity prices and other macroeconomic factors outside of our control.
Analysis of Cash Flow Changes
The following table summarizes our cash flows for the periods indicated:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2022 | 2021 | 2020 | |||||||
| Net cash provided by operating activities | $ | 1,371,671 | $ | 525,619 | $ | 171,376 | ||||
| Net cash used in investing activities | (1,205,049) | (226,476) | (326,323) | |||||||
| Net cash (used in) provided by financing activities | (106,625) | (297,547) | 147,743 |
Cash Flows from 2022 Compared to 2021. For the year ended December 31, 2022, we generated $1.4 billion of cash from operating activities, an increase of $846.1 million from 2021. Cash provided by operating activities increased primarily due to higher realized prices for oil and gas, higher production volumes, and the timing of vendor payments during 2022 as compared to 2021. These increasing factors were partially offset by higher merger and integration expense, severance and ad valorem taxes, lease operating expenses, GP&T, cash G&A expense and the timing of our receivable collections for the year ended December 31, 2022 as compared to the same 2021 period. Refer to Results of Operations for more information on the impact of volumes and prices on revenues and on fluctuations in our operating expenses between periods.
For the year ended December 31, 2022, cash flows from operating activities and net borrowings under our revolving credit facility were used to fund $771.6 million of drilling and development cash expenditures, finance $496.7 million of net cash consideration paid for the Merger, repay $400.0 million of borrowings outstanding from Colgate’s credit facility that were assumed at closing of the Merger and pay a total cash dividend and distribution to noncontrolling interest owners of $27.9 million.
Cash Flows from 2021 Compared to 2020. For the year ended December 31, 2021, we generated $525.6 million of cash from operating activities, a decrease of $354.2 million from 2020. Cash provided by operating activities increased primarily due to higher realized prices for all commodities, lower exploration and other expense, cash interest payments, lease operating expenses, and the timing of vendor payments during 2021 as compared to 2020. These increasing factors were partially offset by lower production volumes, higher GP&T and severance and ad valorem costs, the timing of our receivable collections, and cash settlement losses from derivatives for the year ended December 31, 2021 as compared to the same 2020 period.
For the year ended December 31, 2021, cash flows from operating activities, proceeds from the sale of oil and natural gas properties and net proceeds from the issuance of the Convertible Senior Notes were used to finance $319.6 million of drilling and development cash expenditures, repay net borrowings of $305 million under our credit facility, redeem $127.1 million of our 2025 senior secured notes outstanding and to fund $14.7 million in capped call transactions.
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Credit Agreement
On February 18, 2022, OpCo entered into an amended and restated five-year secured credit facility with a syndicate of banks, which replaced its previous credit facility that was set to mature in May 2023. The restated Credit Agreement extended its maturity date to February 2027.
On July 15, 2022, OpCo and the Company entered into the first amendment to its Credit Agreement (the “Amendment”). The Amendment increased the elected commitments under the Credit Agreement to $1.5 billion from $750 million, increased the borrowing base to $2.5 billion from $1.15 billion, and became effective as of the September 1, 2022 Merger closing date.
As of December 31, 2022, the Company had $385.0 million in borrowings outstanding and $1.1 billion in available borrowing capacity, which was net of $5.8 million in letters of credit outstanding, under its credit facility.
The Credit Agreement contains restrictive covenants that limit our ability to, among other things: (i) incur additional indebtedness; (ii) make investments and loans; (iii) enter into mergers; (iv) make restricted payments; (v) repurchase or redeem junior debt; (vi) enter into commodity hedges exceeding a specified percentage of our expected production; (vii) enter into interest rate hedges exceeding a specified percentage of its outstanding indebtedness; (viii) incur liens; (ix) sell assets; and (x) engage in transactions with affiliates.
The Credit Agreement also requires OpCo to maintain compliance with the following financial ratios:
(i) a current ratio, which is the ratio of OpCo’s consolidated current assets (including an add back of unused commitments under the revolving credit facility and excluding non-cash derivative assets and certain restricted cash) to its consolidated current liabilities (excluding the current portion of long-term debt under the Credit Agreement and non-cash derivative liabilities), of not less than 1.0 to 1.0; and
(ii) a leverage ratio, as defined within the Credit Agreement as the ratio of total funded debt to consolidated EBITDAX (as defined within the Credit Agreement) for the most recent quarter annualized, of not greater than 3.5 to 1.0.
The Credit Agreement includes fall away covenants, lower interest rates and reduced collateral requirements that OpCo may elect if OpCo is assigned an Investment Grade Rating (as defined within the Credit Agreement).
OpCo was in compliance with the covenants and financial ratios under the Amended Credit Agreement described above through the filing of this Annual Report.
For further information on the Credit Agreement, refer to Note 5—Long-Term Debt under Item 8 of this Annual Report.
Convertible Senior Notes
On March 19, 2021, OpCo issued $150.0 million in aggregate principal amount of Convertible Senior Notes. On March 26, 2021, OpCo issued an additional $20.0 million of Convertible Senior Notes pursuant to the exercise of the underwriters’ over-allotment option to purchase additional notes. These issuances resulted in aggregate net proceeds to OpCo of $163.6 million, which were used to repay borrowings outstanding under the Credit Agreement and to fund the cost of entering in to capped call spread transactions of $14.7 million. Subsequently in April 2021, we redeemed at par all of our Senior Secured Notes (defined below), which was the intended use of proceeds from the Convertible Senior Notes offering.
The Convertible Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company and each of OpCo’s current subsidiaries that guarantee OpCo’s outstanding Senior Unsecured Notes as defined below.
The Convertible Senior Notes bear interest at an annual rate of 3.25% and are due on April 1, 2028 unless earlier repurchased, redeemed or converted. The Convertible Senior Notes may become convertible prior to April 1, 2028, upon the occurrence of certain events or conditions being met as disclosed in Note 5—Long-Term Debt under Item 8 of this Annual Report. As of December 31, 2022, certain conditions have been met, and as a result, noteholders have the right to convert their Convertible Senior Notes during the first quarter of 2023. OpCo can settle the Convertible Senior Notes by paying or delivering cash, shares of the Class A Common Stock, or a combination of cash and Class A Common Stock, at OpCo’s election.
In connection with the Convertible Senior Notes issuance, OpCo entered into privately negotiated capped call spread transactions (the “Capped Call Transactions”), that are expected to reduce potential dilution to our Class A Common Stock upon a conversion and/or offset any cash payments OpCo is required to make in excess of the principal amount of the Convertible Senior Notes, subject to a cap. The Capped Call Transactions have an initial strike price of $6.28 per share of Class A Common Stock and an initial capped price of $8.4525 per share of Class A Common Stock (each subject to certain customary adjustments per the agreements).
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Senior Notes
On September 1, 2022, in connection with the Merger, OpCo entered into supplemental indentures whereby all of Colgate’s outstanding senior notes were assumed at closing and became the senior unsecured debt of OpCo. The senior notes assumed by OpCo included $300 million of 7.75% senior notes due 2026 (the “2026 Colgate Senior Notes”) and $700 million of 5.875% senior notes due 2029 (the “2029 Colgate Senior Notes,” and together with the 2026 Colgate Senior Notes, the “Colgate Senior Notes”). The Company recorded the Colgate Senior Notes at their fair values as of the Merger closing date, which were equal to 100% of par for the 2026 Colgate Senior Notes and 92.96% of par (a $49.3 million debt discount) for the 2029 Colgate Senior Notes.
On November 30, 2017, OpCo issued $400.0 million of 5.375% senior notes due 2026 (the “2026 Senior Notes”) and on March 15, 2019, OpCo issued $500.0 million of 6.875% senior notes due 2027 (the “2027 Senior Notes” and, together with the 2026 Senior Notes, the “Senior Unsecured Notes”) in 144A private placements. In May 2020, $110.6 million aggregate principal amount of the 2026 Senior Notes and $143.7 million aggregate principal amount of the 2027 Senior Notes were validly tendered and exchanged by certain eligible bondholders for consideration consisting of $127.1 million aggregate principal amount of 8.00% second lien senior secured notes due (the “Senior Secured Notes”). The Senior Secured Notes were fully redeemed at par in connection with the Convertible Senior Notes issuance during the second quarter of 2021.
The Senior Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by Permian Resources and each of OpCo’s current subsidiaries that guarantee OpCo’s Credit Agreement.
The indentures governing the Senior Unsecured Notes contain covenants that, among other things and subject to certain exceptions and qualifications, limit OpCo’s ability and the ability of OpCo’s restricted subsidiaries to: (i) incur or guarantee additional indebtedness or issue certain types of preferred stock; (ii) pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; (iii) transfer or sell assets; (iv) make investments; (v) create certain liens; (vi) enter into agreements that restrict dividends or other payments from their subsidiaries to them; (vii) consolidate, merge or transfer all or substantially all of their assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. OpCo was in compliance with these covenants as of December 31, 2022 and through the filing of this Annual Report.
For further information on our Convertible Senior Notes and Senior Unsecured Notes, refer to Note 5—Long-Term Debt under Item 8 of this Annual Report.
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Obligations and Commitments
We routinely enter into or extend operating and transportation agreements, office and equipment leases, drilling rig contracts, among others, in the ordinary course of business. The following table summarizes our obligations and commitments as of December 31, 2022 to make future payments under long-term contracts for the time periods specified below.
| (in thousands) | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Operating leases(1) | $ | 31,372 | $ | 19,532 | $ | 5,139 | $ | 4,074 | $ | 3,802 | $ | 16,324 | $ | 80,243 | ||||||||||||
| Purchase obligations(2) | 27,488 | 10,780 | 5,192 | 5,192 | — | — | 48,652 | |||||||||||||||||||
| Asset retirement obligations(3) | 266 | 794 | 9,347 | 3 | 52 | 30,485 | 40,947 | |||||||||||||||||||
| Long term debt obligations(4) | — | — | — | 589,448 | 741,351 | 870,000 | 2,200,799 | |||||||||||||||||||
| Cash interest expense on long-term debt obligations(5) | 138,783 | 138,783 | 138,783 | 103,530 | 56,687 | 63,199 | 639,765 | |||||||||||||||||||
| Cash based severance payments(6) | 8,858 | — | — | — | — | 8,858 | ||||||||||||||||||||
| Total | $ | 206,767 | $ | 169,889 | $ | 158,461 | $ | 702,247 | $ | 801,892 | $ | 980,008 | $ | 3,019,264 |
(1) Operating leases consist of our office rental agreements, drilling rig contracts and other wellhead equipment. Please refer to Note 16—Leases under Part II, Item 8 of this Annual Report for details on our operating lease commitments.
(2) Consists of an energy purchase agreement to buy a minimum amount of electricity at a fixed price or pay for underutilization as well as a take-or-pay agreement to purchase a minimum volume of frac sand at a fixed price. The obligations reported above represent our remaining minimum financial commitments pursuant to the terms of these contracts as of December 31, 2022, however actual expenditures may exceed the minimum commitments presented above.
(3) Asset retirement obligations reflect the present value of the estimated future costs associated with the plugging and abandonment of oil and gas wells and the related land restoration in accordance with applicable laws and regulations.
(4) Long-term debt consists of the principal amounts of our senior notes due and borrowings outstanding under the Credit Agreement as of December 31, 2022.
(5) Cash interest expense on our senior notes is estimated assuming no principal repayment until the maturity of the instruments. Cash interest expense on the Credit Agreement includes unused commitment fees and assumes no additional principal borrowings, repayments or changes to commitments under the agreement through the instrument due date.
(6) Long-term severance and related expenses associated with the Merger.
Recently Issued Accounting Standards
There were no significant new accounting standards adopted or new accounting pronouncements that would have a potential effect on us as of December 31, 2022.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these statements requires us to make certain assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, as well as, the disclosure of contingent assets, contingent liabilities and commitments as of the date of our financial statements. We base our assumptions and estimates on historical experience and other sources that we believe to be reasonable at the time. Actual results may vary from our estimates due to changes in circumstances, weather, politics, global economics, commodity prices, production performance, drilling results, mechanical problems, general business conditions and other factors. A summary of our significant accounting policies can be found in Note 1—Basis of Presentation and Summary of Significant Accounting Policies under Item 8 of this Annual Report.
We have outlined certain of our accounting policies below which require the application of significant judgment by our management.
Oil and Natural Gas Reserve Quantities
We use the successful efforts method of accounting for our oil and gas producing activities. The successful efforts method inherently relies on the estimation of proved crude oil, natural gas and NGL reserves. Reserve quantities and the related estimates of future net cash flows are used as inputs to our calculation of depletion, evaluation of proved properties for impairment, assessment of the expected realizability of our deferred income tax assets, and the standardized measure of discounted future net cash flows computations.
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The process of estimating quantities of proved reserves is inherently imprecise and relies on the following: i) interpretations and judgment of available geological, geophysical, engineering and production data; ii) certain economic assumptions, some of which are mandated by the SEC, such as commodity prices; and iii) assumptions and estimates of underlying inputs such as operating expenses, capital expenditures, plug and abandonment costs and taxes. All of these assumptions may differ substantially from actual results, which could result in a significant change in our estimated quantities of proved reserves and their future net cash flows. We continually make revisions to reserve estimates throughout the year as additional information becomes available, and we make changes to depletion rates in the same reporting period that changes to reserve estimates are made.
Business Combinations
From time to time, we may acquire assets and assume liabilities in transactions accounted for as business combinations, such as the Merger. In connection with the Merger, we allocated the $2.5 billion of purchase price consideration to the assets acquired and liabilities assumed based on estimated fair values as of the Merger closing date.
For business and asset acquisitions, we generally recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their estimated fair values on the acquisition date. Determining fair value requires management’s judgment and involves the use of significant estimates and assumptions with respect to projections of future production volumes, pricing and cash flows, discount rates, expectations regarding customer contracts and relationships, and other management estimates. The judgments made in the determination of the estimated fair value assigned to the assets acquired, liabilities assumed and any noncontrolling interest, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition. See Note 2—Business Combination in Item 8 of this Annual Report on Form 10-K.
Impairment of Oil and Natural Gas Properties
We assess our proved properties for impairment when events or changes in circumstances indicate that the carrying value of such proved property assets may not be recoverable. For purposes of an impairment evaluation, our proved oil and natural gas properties must be grouped at the lowest level for which independent cash flows can be identified. If the sum of the undiscounted estimated cash flows from the use of the asset group and its eventual disposition is less than the carrying value of an asset group, the carrying value is written down to its estimated fair value. Fair value for the purpose of measuring impairment write-downs are calculated using the present value of expected future cash flows that are estimated to be generated from the asset group. Fair value estimates are based on projected financial information which we believe to be reasonably likely to occur, as of the date that the impairment write-down is being measured. However, such future cash flow estimates are based on numerous assumptions that can materially affect our estimates, and such assumptions are subject to change with variations in commodity prices, production performance, drilling results, operating and development costs, underlying oil and gas reserve quantities, and other internal or external factors.
Unproved properties consist of the costs we incurred to acquire undeveloped leasehold acreage as well as the costs we incurred to acquire unproved reserves. Unproved properties with individually significant acquisition costs are periodically assessed for impairment based on remaining lease term, drilling results, reservoir performance, seismic interpretation or changes in future plans to develop acreage. Unproved properties which are not individually significant are amortized by prospect, based on our historical experience, current drilling plan, existing geological data and average remaining lease terms. Changes in our assumptions as to the estimated nonproductive portion of our undeveloped leases could result in additional impairment charges.
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