Permian Resources Corporation (NYSE:PR) just announced another acquisition. This time the seller was Occidental Petroleum (OXY). The acreage appears to be very closely located to the company operations. As the last article noted, this company focuses on bolt-on acquisitions. Bolt-on transactions tend to limit the risk of larger acquisitions because the management knows the acreage. The main focus of the growth is in the very important Reeves County. There is some acreage in New Mexico, which also has some very profitable Permian acreage. This is yet another company that is growing by acquisition while meeting market demands to return money to shareholders through a stock purchase program and dividends.
The Acquisition
The acquisition fits very well with existing acreage, as shown below:
Permian Resources Summary Of Occidental Petroleum Acreage Acquisition (Permian Resources Corporation Presentation Of Occidental Acreage Acquisition)
The lure of bolt-on acquisitions like this one is large contiguous positions. Often times, longer and more profitable wells can be drilled. Plus, there are usually more drilling locations when the acreage is combined rather than separately owned parcels.
This likely happened because the acreage will not compete for capital with Occidental Petroleum. But a smaller company like this one can often make a good living off this acreage.
What makes it quite a deal for Permian Resources is the location of the acreage compared to acreage that Permian Resources already has. That location likely means that Permian could profitably bid more for the acreage than many other operators.
Financing
The company announced several transactions to both rearrange the debt due and raise enough money to pay for the acquisition. 26,500,000 shares of the company’s Class A common stock will be sold to finance part of the acquisition. At the same time, the company is doing a $750 million debt offering while calling bonds that are due in 2026.
If management needs to, there is also a bank line for any necessary amounts.
Stock Price Action
This has been one of the stronger stocks in what has been a really poor market for oil and gas.
Permian Resources Common Stock Price History And Key Valuation Measures (Seeking Alpha Website July 29, 2024)
While the price earnings ratio itself is more than reasonable, the market appears to like the growth story here (in contrast to many stocks I follow). It therefore makes quite a bit of sense to use stock to handle at least part of the purchase price.
The combination of stock and debt allows the company to continue to promote the growth story that has resulted in considerable share price appreciation the last few years.
The stock price may well get a boost as management continues to optimize past transactions while completing the one at hand. This management has the sizable Earthstone acquisition to optimize because Earthstone never got the chance to go through the optimization process before it was acquired. Therefore, earnings could receive quite a boost from that process in the near future.
I am always asked why the next quarterly earnings do not show the total progress that management places on a slide. This is because the existing production does not automatically become more efficient.
Instead, there is a period where the Permian Resources procedures produce better results. But there needs to be time for those better results to become significant through enough wells drilled and producing. Therefore, the process of showing the optimal costs is one that plays out over time. The existing production becomes less significant over time (or gets reworked for better costs) while the latest techniques begin to predominate as more new production comes online.
With the Occidental Petroleum acquisition, the company likely inherits production that is already using the latest techniques. However, that production is also older, higher cost production, with lower decline rates. In this case, all that will be needed is some newer production to lower the average production costs on the acreage.
Main Acreage Details
The largest block of acreage will combine a sizable amount of the Permian Resources acquisition. It also comes with a lot of supporting structure already existing.
Permian Resources Description Of Main Part Of Acreage Acquisition Advantages (Permian Resources Acquisition Of Occidental Petroleum Acreage July 2024)
The bolt-on nature of the acquisition is difficult to overstate. As shown above, the acquisition acreage is going to make one big block out of a lot of disparate acreage positions. That could make at least this part of the acquisition extremely valuable for Permian Resources.
Once the acquisition is made, then optimizing the midstream operations will likely happen fairly quickly. Saltwater disposal wells are similarly a massive asset, as that saves the permitting process and other potential delays. Overall, this could save or delay some midstream needs for a few years.
The acreage also comes with some royalty acres. Owning the royalty part means a considerable cost savings as the company does not have to pay royalty on that acreage.
Clearly, this acreage is very valuable to the company. The difference is likely enough to allow the company to outbid competitors and still make a decent return. A large combination located like the one above is not all that common. Usually, bolt-on acquisitions are far smaller.
Summary
Permian Resources has long made acquisitions and then optimized those acquisitions to provide a growth story that has been acceptable to Mr. Market. Not many in this market have made acquisitions that the market likes, as is the case with this stock.
This stock is still a strong buy consideration as long as the buyer can accept small company risks and a significant growth story through acquisitions. The latest acquisition is being done with both debt and stock to keep the debt ratio near 1.0. That reduces some investment risk.
So far, this company has managed to stay out of the market doghouse (unlike much of the industry). It would appear that the latest acquisition will keep that trend going. Investors should likely expect more acquisitions in the future because what management is doing is clearly working.
Risks
Anytime a management makes a fair number of decent sized acquisitions in a short period of time, there can be risks that the whole thing will not work well together. There are further risks that the logistics of optimizing the “put together” company can be more daunting than originally thought. Any one acquisition can fail to meet management expectations (let alone all of them) and then management can end up with a mess rather than an attractive proposition. So far, management has done rather well. But there is no assurance that continues into the future.
Any upstream company is subject to the volatility and low visibility of commodity prices. A sustained and severe downturn can change the company outlook. This company is a lower cost producer. Therefore, others would suffer far more in such a scenario before this company has financial stress.
A loss of key personnel could be a material setback to the company.
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