TipRanks Smart Value #24: Upstream Upside
1
Dear Investors,
Dear Investors,
Welcome to the 24th edition of our recently launched TipRanks Smart Value Newsletter!
1
This Week’s Top Value Pick: Permian Resources (PR)
Permian Resources (PR) is an independent oil and gas company focused on the acquisition, development, and production of unconventional resources in the Permian Basin, one of the most prolific hydrocarbon regions in North America. The company operates a balanced portfolio of high-quality acreage across the Delaware and Midland basins, targeting efficient, low-cost growth in crude oil, natural gas, and natural gas liquids production. Leveraging advanced drilling techniques, disciplined capital allocation, and operational scale, Permian Resources maximizes well productivity and resource recovery.
1
Merger Momentum
Permian Resources traces its origins to 2015, when it was incorporated in Midland, Texas, as Centennial Resource Development, with a focus on developing oil and liquids-rich natural gas reserves in the Delaware Basin.
A pivotal transformation came in 2022, when Centennial merged with Colgate Energy Partners III in a “merger of equals.” At closing, the company was rebranded as Permian Resources Corp. and its NYSE ticker was updated to “PR.” The combination merged complementary asset bases, expanded scale, and enhanced its ability to generate free cash flow across commodity price cycles.
In 2023, Permian Resources completed a transformative all-stock acquisition of Earthstone Energy, which added roughly 223,000 net leaseholds, including more than 56,000 in Lea and Eddy Counties, New Mexico, boosting production toward ~300,000 barrels of oil equivalent per day. That same year, the company sold Earthstone’s legacy Eagle Ford assets and divested non-operated properties in Reeves County, Texas, along with saltwater disposal wells and related infrastructure, to focus on core, high-margin, and scalable assets in the Delaware Basin while monetizing non-core holdings to drive shareholder value and operational efficiency.
Expansion continued in 2024 with the acquisition of southern Delaware Basin assets from Occidental Petroleum and the sale of Reeves County natural gas and oil gathering systems to Kinetik Holdings. Between 2023 and 2024, the company also executed multiple bolt-on deals, including a purchase in Eddy County, adding over 17,000 net acres and 7,300 net royalty acres.
In June 2025, Permian Resources acquired 13,000 net leasehold acres from Apache Corp. for $608 million, adding high-quality, low-cost assets adjacent to its New Mexico operations. The bolt-on deal expands its footprint in a core Delaware Basin area and is expected to enhance production, improve efficiency, and boost free cash flow. This strategic combination of major mergers and bolt-on acquisitions has expanded PR’s drilling inventory and solidified its position in the core of the Delaware Basin. Today, with a market cap of about $11 billion, TTM revenues of around $5.1 billion, and extensive leasehold holdings, Permian stands as one of the leading independent oil and gas producers in the Permian Basin.
1
Oil Optimization
Permian Resources operates as a pure-play exploration and production (E&P) company specializing in oil and natural gas development in the Delaware Basin, a sub-region of the larger Permian Basin that spans West Texas and southeastern New Mexico. As of the end of Q2 2025, the company controlled approximately 450,000 net leasehold acres in this prolific hydrocarbon area.
The company’s revenues are primarily generated from crude oil sales, with natural gas and natural gas liquids (NGLs) helping diversify cash flow streams. Crude oil remains the largest revenue driver, benefiting from both production volumes and prevailing market prices, while gas and NGL sales help balance cash flows and reduce reliance on a single commodity.
Permian Resources’ strategy focuses on acquiring, developing, and producing high-quality acreage with low breakeven costs, which allows it to remain profitable across commodity price cycles. The company employs advanced drilling methods – most notably horizontal drilling, where wells are drilled sideways through oil- and gas-rich rock layers, along with multi-stage hydraulic fracturing, which involves injecting fluid at high pressure in multiple stages to fracture the rock and release hydrocarbons. This combination maximizes the amount of oil and gas recovered from each well, improving efficiency and lowering per-barrel production costs.
Its development strategy emphasizes operating scale, contiguous acreage, and efficient programs that allow for longer laterals, optimized well spacing, and reduced operating expenses. PR’s extensive portfolio offers decades of high-return opportunities, supporting long-term production and cash flow.
Permian Resources also benefits from a lean cost structure, achieved through modern well completion techniques, centralized infrastructure, and shared services across its acreage. Strategic partnerships with midstream providers – companies that transport and process oil and gas – allow PR to move its production efficiently and reduce bottlenecks, keeping transportation and processing costs low. The company’s diversified marketing arrangements give it access to multiple sales points for crude oil, gas, and NGLs, allowing it to capture better prices across markets.
Operational efficiency has further advanced recently as PR drilled its fastest well ever in Q2, achieved its highest footage drilled per day, and recorded the lowest completion cost per foot in its history. Five of the ten fastest wells ever drilled by the company were completed during the past quarter, with the top wells finished in just 5.5 to 6 days, well ahead of the typical 10.5–11-day average. These efficiency improvements are expected to lower well costs in the second half of 2025, despite modest cost pressures from tariffs on steel casing used in wells.
Over the past year, Permian Resources has built a dedicated marketing and midstream team in Midland, Texas, to help it get better prices for the oil and natural gas it sells. The goal is to increase netbacks, defined as the actual price PR gets for each barrel of oil or cubic foot of gas after subtracting transportation and processing costs.
On the natural gas side, PR has secured firm transportation agreements that guarantee pipeline capacity to move 75 million cubic feet per day (MMcf/d) by the end of 2025, expanding to 450 MMcf/d by 2028. These volumes will be directed away from the Permian’s Waha hub1 toward higher-value markets on the Gulf Coast and in Central and East Texas. This shift is expected to add more than $0.10 for every thousand cubic feet sold. The long-term goal is to reduce the proportion of gas sold in the local Permian market from 75–80% today to just 20–25%, enabling more sales into premium markets.
For crude oil, PR has signed new purchase agreements that improve selling prices, diversify customer bases, and provide access to the Gulf Coast export market. These crude agreements are expected to add more than $0.50 per barrel in value. Collectively, these initiatives could boost free cash flow by approximately $50 million in 2026 compared to 2024, with further upside potential by 2028.
While the company evaluated owning its midstream assets, it opted instead to focus capital on upstream activities where returns are generally higher.2 By partnering with third-party midstream providers through long-term agreements, the company secures transportation and market access without capital-intensive investment and lower returns associated with asset ownership.
—
1- Waha hub is is a major natural gas pipeline intersection located in Pecos County, West Texas, setting regional natural gas prices through its Waha index. Prices at the Waha hub frequently trade at notable discounts to other benchmarks, and often turn negative due to bottlenecks and excess production, meaning producers sometimes pay to move their gas away. .
2- Upstream activities are exploring, drilling, and producing oil and gas. Midstream business refers to transportation, storage, and initial processing of crude oil, natural gas, and natural gas liquids.
1
Regulatory Tailwinds
Favorable regulatory developments are complementing PR’s marketing improvements. The company also stands to benefit from recent regulatory changes under the “One Big Beautiful Bill Act.” This new legislation is expected to reduce the company’s cash tax payments to less than $5 million in 2025 and to under $50 million for the combined years of 2026–2027. This additional after-tax cash flow can be reinvested in drilling programs, acreage acquisitions, or strengthening the balance sheet. The bill also streamlines the process for obtaining federal drilling permits, an important advantage for PR’s operations on federal lands in New Mexico, reducing the time between securing permits and bringing wells into production.
Additionally, the law allows “commingling,” enabling oil from multiple leases to be combined in shared tank batteries (large on-site storage tanks) before sale or transport. This reduces the need for separate infrastructure for each lease, lowering capital expenditures and improving operational efficiency. Although the bill includes tariffs on certain steel and equipment imports, the resulting cost increases are expected to be minimal relative to the broader financial and operational benefits.
To manage commodity price volatility, Permian Resources employs a disciplined hedging3 program. This helps stabilize revenues and provides greater visibility for planning capital spending, even if market prices move sharply up or down.
Currently, about 30% of the company’s expected oil and gas production for the next 12 months is hedged at predetermined prices, providing near-term revenue stability. Hedge coverage tapers to 20% for the second year and 10% for the third year, allowing PR to participate in potential future price increases while maintaining a protective base.
Rather than setting hedges on a fixed schedule, PR takes an opportunistic approach, adding new contracts when market conditions, such as heightened volatility or price spikes, make them attractive. This flexibility allows the company to lock in favorable prices while preserving upside potential.
PR’s strong liquidity position at the end of the second quarter gives the company significant “firepower” to act on strategic opportunities without needing to raise expensive external capital or take on excessive debt.
A key part of the company’s growth strategy is its “ground game” – smaller, targeted acreage acquisitions near existing operations. These deals require minimal new infrastructure and quickly improve efficiency by lowering per-barrel costs. In Q2, Permian Resources added 1,300 net acres through 130 grassroots acquisitions for approximately $10 million, with management expecting activity to accelerate in the second half of the year as prior integrations free up capacity and commodity price shifts create new opportunities.
The company remains flexible regarding its M&A strategy, willing to shed non-core holdings or even pursue a full sale if it enhances shareholder value. With insiders holding over 6% of the outstanding shares, management’s interests are closely aligned with those of investors, reinforcing its focus on long-term value creation.
—
3- Hedging involves entering into financial contracts, such as swaps or collars, that “lock in” or protect a certain price for a portion of future production.
1
Disciplined Growth
Over the past five years, Permian Resources has grown its revenue at a CAGR of nearly 6%, driven primarily by higher production volumes and a series of strategic acquisitions that expanded its operating footprint. The company has capitalized on favorable commodity markets to broaden its revenue base. However, earnings have declined at a rate of 4.8% over the same period. This weaker earnings trend reflects a combination of rising operating costs, one-off expenses associated with debt repayment, integration expenses from acquisitions, non-cash accounting adjustments, and reinvestment strategies aimed at long-term growth, which have at times offset the benefits of higher sales.
In the second quarter, Permian Resources generated $1.2 billion in revenues, slightly below consensus estimates of $1.22 billion, and reported adjusted net income of $224.5 million, or $0.27 per share, down 27% year-over-year and just shy of the expected $0.28 per share. The company produced $817 million in adjusted operating cash flow and $312 million in adjusted free cash flow, supported by $505 million in cash capital expenditures. Its leverage remained conservative at roughly 1x net debt-to-EBITDA – considered low for the industry, where this ratio averages around 1.3X and can be as high as 2.5x – and liquidity stood at about $3 billion at quarter’s end. In a notable milestone, PR received its first investment-grade credit rating of “BBB-” from Fitch, with management expecting additional upgrades from other credit rating agencies.
The company’s financial strategy centers on maintaining a strong balance sheet to provide flexibility across commodity cycles. This approach allows PR to pursue multiple priorities simultaneously, repaying debt, funding acquisitions, repurchasing shares, and building cash reserves. These elements form the basis of its “downturn playbook,” which focuses on opportunistic share buybacks, countercyclical acquisitions, such as the purchase of Apache assets at favorable valuations, and disciplined capital deployment.
Following the Apache integration, strong operational performance in Q2, and efficiency gains, PR raised its full-year production outlook while lowering its capital spending forecast. The midpoint for oil production guidance increased by 3% to 178.5 thousand barrels per day, while total production guidance rose to 385 thousand barrels of oil equivalent per day. Capital expenditures were trimmed by 2% at the midpoint to $1.97 billion, reflecting $50 million in savings from standalone operations, partially offset by $20 million in spending for Apache’s work-in-progress wells. Near-term growth is expected to remain flattish to low single digits as the company maintains a measured production cadence amid ongoing macroeconomic uncertainty.
1
Shareholder Rewards
Permian Resources has steadily expanded its shareholder return program in step with strong revenues and free cash flow generation. The company introduced a quarterly base dividend in 2022 following its merger with Colgate Energy and has since delivered consistent payouts. As of the latest quarter, the dividend stands at $0.15 per share, or $0.60 annualized. Management has reiterated its commitment to sustaining this base dividend through commodity cycles, funding it with free cash flow from its low-breakeven Delaware Basin operations. At a current yield of 4.96%, the payout exceeds the energy sector average of 3.34%. The company returns roughly 43% of its earnings to shareholders, retaining sufficient capital flexibility for acquisitions and other growth-inducing strategies.
Beyond dividends, Permian Resources has been active in share repurchases. In 2023, the board authorized a $1 billion buyback program aimed at opportunistic purchases when management believes the stock is undervalued. In April 2025, the company acted on this strategy, repurchasing $43 million worth of shares, with the remaining buyback capacity at $957 million at the end of Q2.
Over the past year, PR’s stock has declined by about 9%, largely due to lower commodity prices and higher costs, which pressured earnings despite production growth. The pullback has also reflected cautious investor sentiment amid broader market volatility. From a valuation standpoint, the stock trades at more than a 14% discount to the sector median on non-GAAP trailing and forward P/E ratios, and about a 7% discount to its own five-year forward P/E average. Against peers such as Diamondback Energy and EOG Resources, PR remains in the low valuation range on multiple metrics, including non-GAAP trailing and forward P/E, EV/EBITDA, price-to-book, and price-to-cash flow.
Operationally, the company ranks in the top 30% of the industry for return on equity (ROE) and in the top 20% for both return on assets (ROA) and return on invested capital (ROIC). Its free cash flow yield, at nearly 3%, is higher than that of many mid-cap and large-cap Permian-focused peers.
Analyst sentiment remains broadly positive, with consensus forecasts suggesting nearly 34% upside potential and some estimates pointing to gains of up to 58%. Optimism centers on PR’s strong financial performance, attractive valuation with a low P/E ratio, and high dividend yield. A discounted cash flow analysis reinforces this bullish view, indicating the stock could be undervalued by about 79%, supporting the case for PR as a high-quality, cash-generating operator with meaningful long-term upside potential.
1
Investing Takeaway
Permian Resources offers an appealing case for value-oriented investors, with a combination of disciplined growth, strong cash generation, and shareholder-friendly policies. The company has built scale through transformative acquisitions, which strengthened its position in the core of the Delaware Basin and expanded its low-cost drilling inventory. Efficiency gains, lean operations, and smart partnerships enhance margins and support reliable free cash flow, even in volatile commodity markets. Importantly, management has demonstrated a consistent commitment to shareholder returns through dividends and opportunistic buybacks, aligning investor interests with long-term value creation. Trading at a discount relative to peers and its own history, the stock provides exposure to a high-quality asset base, prudent financial strategy, and strong execution at an attractive entry point for investors seeking undervalued energy opportunities.
