Presidio Production Company (FTW) Earnings Call Transcript

Good morning, everyone, and welcome to the Third Quarter 2026 Earnings Conference Call of Presidio Production Company. Connor Fair here, Director of Investor Relations. With me today are Will Ulrich, our Chairman and Co-CEO; Chris Hammack, Co-CEO and Director; John Brawley, Executive Vice President and CFO; and Brett Barnes, Executive Vice President and General Counsel. Our third quarter results came out yesterday once the market had closed. You can find an updated investor presentation in the Investor Relations section of our website at ir.bypresidio.com. As a reminder, forward-looking statements are part of today's call. Such statements rest on management's current expectations and assumptions, and they carry risks, uncertainties and other factors, many of which lie beyond the company's control and could make actual results differ materially from those expressed or implied on this call. To learn about these risks, please see the cautionary language in yesterday's earnings release along with the risk factors in our SEC filings, which you can access in the Investor Relations section of our website. We will also refer to certain non-GAAP financial measures, among them adjusted EBITDA, net debt and leverage. Yesterday's earnings release includes the most directly comparable GAAP measures as well as definitions and reconciliations. With that, I will hand the call over to Will.

Thanks, Connor, and good morning to all of you. A few weeks back, I found myself in Austin for the United States Grand Prix. As someone new to F1, I enjoyed the speed and the spectacle, but what truly struck me was the teamwork and the strategy, and how each team on the grid confronts the same fundamental question: what do we buy, and what do we build? Consider Mercedes. Early in 2009, Honda withdrew from Formula 1, abandoning a team into which it had poured years of effort at a Fortune. Ross Brawn purchased that team for a reported GBP 1, and that season it captured both world championships. At the close of 2009, Mercedes acquired the champion. After that, the company brought its own engineering expertise to the engine—the one component nobody had managed to sell—and created a hybrid power unit. Starting in 2014, Mercedes won 8 Constructors' Championships in a row, which stands as a record in the sport. In Austin, I got a close look at that team. I liked watching Toto Wolff, the man in charge at Mercedes, do an interview in the paddock, and I ran into a number of Mercedes team members down by the podium. What struck me was how calm, exact, and cheerful every one of them appeared. Still, the biggest lesson I carried away from Austin is this: winning doesn't come from making every single piece yourself. When you buy a platform and then bring your own distinctive capabilities to bear, you can create more value from it than anybody else ever could. That team wasn’t something Mercedes invented—it was purchased, and then shaped into the finest in the sport; that’s Presidio. For 150 years and with trillions of dollars, this industry has proven it knows how to drill; those wells are already there. They’re producing right now. Somebody else absorbed the cost of the learning curve. So this is how we think about it. We buy assets, and then we put in place our engine built on the 3 things no one can sell us. Operational expertise comes first. By that I mean our engineers, our field teams, and the discipline they show from the very first day we take over. We lowered expenses, trimmed downtime, and picked improved workover strategies, so that today our wells produce greater cash flow than they did under the previous owner. Next comes our technology layer — the intelligence placed on top of every well we run; it tracks each well relative to what it ought to be producing, tells the field what to repair first, and improves as we bring on each additional well. The third element is the way we generate value from acreage: we monetize it via carried interest, joint ventures, and acreage sales. That means another party puts up the drilling capital while we retain upside; as a private company this approach has already produced over $100 million, and as a public one it has yielded $17 million thus far in 2026. Mercedes went out and acquired a team and developed an engine; our approach is to purchase wells and then put our own engine in place — the operations, the technology, and the acreage strategy that raise their value. That's where the race gets decided in our model. Now to the quarter. In my view, shareholders of a public company deserve a clear thesis along with proof that it's working. Throughout this quarter, we kept delivering on both. What we offer includes among the highest dividend yields on the New York Stock Exchange, backed by steady PDP cash flow and a simple framework for growing it. We said we would raise the dividend based on realized cash flow. With Canyon Creek now counted in our results for a complete quarter, the Board has approved a third-quarter dividend of $0.375 per share—$1.50 on an annualized basis—up from $1.35 before, and that increase comes from the contribution Canyon Creek makes. Growing the dividend is what acquisitions allow us to do; we buy producing assets at levered returns well above our cost of capital. As a result, each deal builds long-term shareholder value. Canyon Creek closed in July as the initial draw on our ABS warehouse, integration is complete, and our acquisition pipeline is still deep. We optimize those acquisitions by dropping in our engine. Every well we purchase gets the same treatment: our operations, our technology and our acreage strategy. On the operations side, the alpha comes after the purchase. With the two acquisitions we've completed this year, we've cut operating costs at EQVR by about 30%, and at Canyon Creek we're expecting 32%; lease operating expense for this quarter was $9.10 per BOE, the year's lowest. Output averaged 26,133 BOE per day, the strongest quarter we've had since going public, and through 2026 we've recorded 0 safety incidents. Our workover playbook targets returns exceeding 50%. So far this year, the wedge workover program has finished 37 jobs, and those produced 8% more barrels than we had forecast while costing 13% less. On the technology side, we stated that FTW Technologies would boost production by 3% to 5% this year with no well drilling and no capital spending. In the second quarter, we reported 2.3%. In the third quarter, we're at 3.2%. With one quarter left, we're within our target, and the programs now coming online give us exit rate potential of roughly 4%. In October, the first of the idle wells on our piped water system was brought back online, and by year-end we plan 10 additional reactivations. There's an AI-driven initiative that pinpointed and built out a business case for economically restoring wells to production. Chris will share more details on that. Regarding acreage, we've closed $17 million in leasehold sales year to date, which includes $2.1 million during the third quarter and $7.1 million in the fourth quarter so far. That reflects the engine at work on wells we already hold, the dividend and the engine; that's the argument for Presidio. Let me return to the paddock briefly. In some areas, a team develops things internally since they aren't available for purchase. For us, that's Mainspring. Mainspring serves as FTW Technologies' operating system for oil and gas. A lot of you are familiar with Doug, our first AI agent. Mainspring now incorporates Doug's technology, and Doug has since retired. Field Intelligence operates on that technology as we speak. Our AI-assisted acquisition underwriting, Deal Intelligence, is currently being developed atop it. Over the coming months, we'll release that alongside our remaining intelligence modules — spanning lands, legal, finance, corporate development and geology, among others. Given how strongly our pilot programs performed, we made the call this year to halt the piecemeal construction of AI products. We recruited a seasoned Silicon Valley group reporting to our CTO, Jason Hudak, and we constructed the foundation first: one platform, one front door, with security and controls baked in from the start. Next came the Gauntlet, which is our software factory powered by AI. The idea mirrors what we call factory-mode drilling: you get standardization done once, and afterward you apply it repeatedly to every product. There's a lesson here, and our industry has already paid the price for learning it once. Do you recall Shale 1.0? The technology was real—fracking and horizontal drilling changed this country's energy future. But for the bulk of that decade, the industry measured success the wrong way; we tallied rigs and wells spud, and we cheered output gains regardless of expense. Capital markets gave rewards for all of it, so the industry chased growth and assumed returns would show up eventually. And as we all know, for a lot of companies those returns never did. Right now, AI agents are experiencing what you could call their Shale 1.0 moment. The technology is every bit as real, but take a look at the way companies measure themselves. They tally the number of agents they've launched, the tokens they've consumed, the lines of code they've delivered. Certain firms even maintain internal leaderboards tracking AI usage. We saw an agent produce 300,000 lines of code within a few days, which is a lot of activity, no question. And then somebody raised the very question every E&P investor was trained to raise. How much did you spend, and to build what? Activity doesn't equal returns, as we all know; so here at Presidio, our approach to AI mirrors how Shale 2.0 taught us to manage a drilling program — treating it as a capital project. Each program starts by defining a concrete result up front. We compare that result to the baseline established prior to launch. We run a pilot first, then scale only what proves out. AI generates suggestions, but the final decision stays with our field personnel. Come 2027, we will take that identical method across all aspects of managing oil and gas assets. And we track a single scoreboard — barrels and dollars. For this quarter, that scoreboard shows output up 3.2% from the same wells. That is the point where compounding kicks in. Any acquisition we complete gets folded into Mainspring on day one, together with the over 2,300 wells under our operation now. Each well added sharpens the system further, and each acquisition onboards quicker than the one before it. More to come in 2027 from FTW Technologies; and now over to Chris.

Thanks, Will. I'll start with operations. Put simply, when it comes to delivery, our team is running at full capacity. For both the quarter and the year, we're beating our production targets and landing under our expectations on controllable expenses. Will talked about what we're building with AI. Now I'll tell you what it's actually delivering. For '26, our goal is to use AI to lift production across our existing asset base by 3% to 5% with no extra capital spending; in the third quarter, our AI programs contributed about 3.2%, up from the 2.3% we saw in the second quarter. Here's where that comes from. First, production surveillance. Our field intelligence agent monitors every well against its expected rate, ranks the largest misses and identifies the probable cause. It then informs the field about which well to address first, along with the reason and the method. Second, weekend coverage. Weekend well check ranks every well within a territory so that a weekend crew working shorthanded visits the wells requiring attention first. We estimate it contributes about 1.4% to production annually from the same wells and the same crew, and building it took only hours because the platform was already in place. Third, the AI plunger box, which is now on 25 wells and sets each well's plunger cycles based on its own production data rather than fixed timers. We also introduced 2 new programs. The first is the well reactivations Will mentioned; in September, we used AI to identify the shut-in wells on our piped water system that could be profitable to restart at lower water disposal rates and to model the business case for bringing them back. With this analysis, we negotiated lower disposal rates, which makes it economic to bring back wells that had been cash flow negative. The first of those wells came back online in October, with 10 more to follow by year-end. These reactivations are among the programs behind the exit rate potential Will described. The second item is an AI workover adviser. We brought it in during October so that each workover job gets reviewed and the following one gets better. Field judgment is not replaced by any of this. The recommendation comes from AI, while the call belongs to the field. A preprogram baseline is used to measure every program; each one is piloted first and only scaled once it proves effective. Turning to integration: at the EQVR assets that we acquired at IPO, lease operating expenses came down by roughly 30%. Upon the July close of Canyon Creek, we immediately took over field operations and, on day 1, moved its 42 wells onto our production systems. We're projecting roughly a 32% cut in lease operating expenses, achieved through optimizing labor, adjusting our chemical programs, and eliminating compression at sites where it's no longer required. In addition, we finished 5 workovers that the previous operator had put off, and all 5 came in successfully. Integration has proceeded without issues, and we're hitting the goals we laid out. You can see the outcome in our figures. Now that Canyon Creek is part of the picture, lease operating expense across the company dropped from $9.39 to $9.10 per barrel of oil equivalent. Speaking of Canyon Creek, I should note as well that we recently picked up a modest working interest in those Canyon Creek assets, for a cost of approximately $4.3 million. Beyond our field work, we continue finding new sources of value in our assets by selling leasehold interests. At the time of our IPO, we hadn't anticipated any of this, so it never entered our guidance. This is one area where results have come in far above what we planned; so far this year we've closed $17 million of leasehold sales, and that profit was never in our models and drops straight to the bottom line. We still own hundreds of thousands of acres, which may provide additional upside through asset sales. Even though we don't drill, we have regularly turned upside into cash through partnerships that carry our costs, through retained overriding royalty interest, and through undeveloped land sales. We're demonstrating real skill here, and there's more to come. With that, I'll hand things over to John.

Thank you, Chris. It's been another solid quarter, and it lines up exactly with what we've talked about before. On the previous call, I said the last three quarters would add up to $90 million of EBITDA, and we believe that still holds. We posted $33.2 million in the prior quarter and $29.1 million in this one. Most of the EBITDA gap comes from price and how pricing is shaped in our hedge book. Outside of EBITDA, sales of nonproducing assets have been surprisingly strong this year, and Chris covered that earlier. We expect that to keep going for the rest of the year. Just a reminder that those asset sales aren't part of the EBITDA figures we report. Regarding the remaining financial metrics, rather than going through each one on these calls—since everything is already available in our filings—I'll just point out the items that merit attention and where a bit of explanation is useful. This was Presidio's second complete quarter since going public and the first that includes Canyon Creek, which we closed in July. The results are in, and we continue to perform in line with the outlook we gave you in August. Output increased approximately 15% versus the previous quarter, thanks to the addition of our newly acquired Canyon Creek asset as well as our AI initiatives, which continue to boost production at our legacy assets. The press release contains the revenue and expense figures, which align with what we expected and show the first complete quarter that includes Canyon Creek. One item to highlight for this quarter is the net loss attributable to Presidio, which was $46.4 million. That loss resulted from a $66.5 million unrealized noncash loss on our hedge book, driven by rising prices during the period. Keep in mind that we mark our hedge portfolio to fair value at the close of every quarter, and any value change runs through net income as an unrealized noncash expense. Moving to the balance sheet, total debt principal outstanding at quarter's end was $400.6 million, and net debt was $349.4 million. With net debt at $349.4 million and adjusted EBITDA of $124.5 million — that's the trailing two quarters annualized — leverage stood at 2.8x. Since we now have two full quarters under our belt as a public company, annualizing that stretch gives a clearer view than the one-quarter annualization we showed you last time. Our materials call this trailing two-quarter annualized figure L6A, which stands for last six months annualized. Turning to liquidity, we're still in a very strong position, thanks in part to surplus cash flow from leasehold sales after our land team did an outstanding job. Tapping our balance sheet, unrestricted cash and RBL capacity, liquidity totaled just under $100 million as of September 30. As a reminder, we expect our RBL borrowing base to fall in our winter redetermination because of hedge cash flow roll-off. I expect the borrowing base to drop from $60 million to around $45 million following the next redetermination. The facility is completely undrawn, so there's no impact beyond a relatively small reduction in our liquidity. Of course, we have plenty of cash flow and liquidity to back our acquisition efforts, dividends, and other high-returning investment opportunities whenever they come up. Our Goldman and Citizens warehouse facility still has $54 million drawn after a bit of amortization during the period; we plan to term that out in the first half of 2028. By September 30, the balance on our core ABS stood at $344 million, and I want to point out that this ABS is doing really well. When it comes to debt, interest rates have become the hot topic of the day—that is, unless you set aside the Microsoft politics around NVIDIA. With inflation worries and anticipated Fed rate increases in mind, Polymarket right now shows a 98% probability of a hike of at least 25 basis points at the December FOMC meeting, plus further 25 basis point increases anticipated during the first half of 2027. Higher rates generally make things more difficult for borrowers. Regarding Presidio, our timing could hardly have been better. Back in June, we locked in a 6.38% interest rate on our core debt of $344 million. As of today, with rates having climbed, I'd estimate that same facility would cost us about 50 basis points more; so refinancing that paper on a fixed-rate basis at the time worked out really well for us. Our warehouse is a variable-rate instrument, though I should point out that following quarter end, we effectively fixed the interest rate on 75% of the warehouse debt by way of a floating-to-fixed interest rate swap. On the $54 million of debt currently outstanding under the warehouse, the rate is now effectively fixed at roughly 7.2%. We locked in the rate on nearly all of our debt, so rising rates don't really touch our current operations in any meaningful way. Across the warehouse and ABS, our blended effective rate is essentially pinned at 6.6%. On the subject of upcoming transactions, people have asked us how rates bear on our capacity to buy new assets. To start with, we target an ROE near 20%. A shift of 50 to 100 bps in rates won't really move our acquisition model. There's ample room to work with. My view is that elevated rates will hit other players harder than they will hit us, and elevated rates could also push acquisition discount rates wider, and all of that actually works in favor of our strategy. Our sensitivity is lower here since we don't push leverage to the maximum the way others do when they purchase producing assets, and since a meaningful portion of our expected return comes from operations rather than purely from financing leverage. Broadly speaking, the ABS market is still extraordinarily robust. We're observing new asset classes, like gathering and midstream, entering the market, and assets with much greater concentration and declines than ours are entering the market. Against that backdrop, we keep establishing the benchmark for ABS as an issuer of gold-standard quality, and each quarter we've seen deeper participation from new investors entering the market. Where commodity hedges are concerned, a multiyear program remains in place that covers oil, natural gas and NGLs. The full hedge table appears in the earnings release, and in our view hedging continues to be a central piece of our risk strategy — it provides visibility into cash flow, underpins the durability of the dividend, and allows us to underwrite acquisitions with far greater confidence. I'll close with the acquisition market. To put it plainly, we are quite active. At any point in time, we could be involved in several acquisition conversations, each at a different stage. There's still a lot out there for us to go after. Across three basins, we've pinpointed more than $17 billion in targets we can actually act on. Our standards haven't changed — we want wells that produce for a long time with slow decline rates, that we can run ourselves, and where our people and our technology let us cut costs and boost output once a deal is done. And we've got the money to move, thanks to our $1 billion ABS warehouse facility, so sellers know we'll get to closing. Alongside bigger deals, we've kept our attention on upgrading the portfolio — divesting wells that are at the end of their lives, selling off undeveloped acreage with no wells on it, and picking up accretive bolt-on working interests such as the one Chris brought up earlier. We'll keep actively managing the portfolio, steadily lifting its value as time goes on. Underwriting is starting to be reshaped by technology as well. As Will noted, we're developing deal intelligence within our Mainspring AI system. Its purpose is to check acquisition data against the history of our own wells. This means that when our team opens a deal, they start from a reviewed first part instead of an empty page. As usual, we won't discuss particular transactions until there's something for us to announce. With that, I'll return the call to Will.

Thanks, John. Here's one additional point from Austin. A Grand Prix isn't decided in a single Sunday afternoon; it comes down to the hundreds of choices made well before the car ever leaves the garage. What to purchase, what to construct, where to assign your strongest people. At Presidio, those choices get made by us daily. We purchase proven producing wells at appealing prices. We put in our engine — the engineering, the operations and the intelligence — so they perform better than before, and we hand the cash back to you while also producing long-term equity returns. As always, we strive to deliver on our straightforward business model: acquire, optimize, grow the dividend, repeat. And my hope is that we'll be back to you shortly with further evidence of Presidio executing against this thesis. Operator, we'll now open the line for questions.

Let's dive straight in. Will, my first question is about something that you and Chris mentioned regarding portfolio optimization. It was encouraging to see Canyon Creek complete its first full quarter, and then you sold some nonproducing assets at what looked like an excellent price. What I'd like to know is how active you can remain in this optimization during '27, and how much upside you could keep generating from it — meaning what sorts of opportunities exist, whether to add another Canyon Creek or to divest another non-producer like that one?

Yeah. I'd frame that as really 2 distinct questions, but the likelihood of another Canyon Creek, I'd say, is clearly quite strong. That's in 2027, and our intention will be to keep growing through acquisitions. At this point in the Arkoma, we have a handful of opportunities under review that would make very appealing bolt-ons. Adding additional working interest is fairly standard for us and is what we've done across essentially all of our earlier acquisitions — once we enter a basin, people tend to approach us, or we go visit people, to purchase their interest in wells we already operate, at attractive prices. On the acreage side, this has really been part of our business since 2022, when we became active in forming joint ventures to unlock value from the large undeveloped leasehold sitting beneath all those PDP wells we go out and buy. So although you won't hear us discuss drilling and completing those wells on our own, we do have a team studying these opportunities; occasionally we'll market drilling opportunities to outside companies, and we've had success bringing outside operators in to drill on the acreage, where we get attractive carry economics and keep an override in those wells. Then, if we believe an area is perhaps less tested, or if we think it's better or we're receiving a more appealing relative price compared with the developed PV-10 per acre on the acreage, we'll consider selling acreage — which is roughly the direction we took this year. In earlier years, I'd say it was more joint venture oriented; in 2026, it was acreage oriented; in 2027, obviously, much of this will hinge on the oil. But at the same time, every other call you'll hear is discussing inventory. And the reality is that we have inventory. So at the right prices, we're glad to part with that inventory to help other operators who want to drill wells, and to create and bring forward value from undeveloped leasehold that we wouldn't develop ourselves.

Yes. The one point I would make in addition, Neal, is this — and I believe it holds for the Arkoma assets and roughly what we intend to do there — is that most, if not everything, we have accomplished so far has been on our lab assets. So when you think about grasping the undeveloped potential in the Arkoma, our own technical read on what it amounts to and roughly what value sits there, and then determining the smartest route to monetize it, that is among the paths Will mentioned — JVs, or divestitures of nonproducing lands so someone else goes and drills them. Those efforts are already moving. And I believe once we have a solid technical picture internally of what those opportunities look like, we would expect the same kinds of strategies and results from our Arkoma assets too, since, again, it is another area we have concentrated on that carries plenty of different pay potential and that has performed really, really well for us on our existing lab assets over time. So I believe there is more work to do there. So from an operations standpoint, I believe we keep doing what we are doing. And from an upside standpoint, I believe we are just getting started on that, and we will keep working at it and find ways to see value there.

Thanks, that's a solid question. My follow-up concerns operational efficiency. Chris, looking specifically at that area, you've already implemented plenty of what I'd describe as conventional upgrades — compression work, chemical enhancements, that kind of thing — and you also mentioned Gauntlet brings substantial potential AI-driven savings down the road. So is it fair to say you'll keep seeing comparable savings, whether across properties you already own or ones you newly take over — on both fronts? Or should we think about this: will the traditional savings — whether that's compression chemicals, all those kinds of good things — still be more impactful in '27 than AI?

Yes. I'm not sure we know that answer. Will and I were at a conference yesterday, and we joked that when we set those production goals of 3% to 5% gains for '26, I think we believed we were being aggressive, and it turns out we were probably actually being very conservative. I think the results have been more impactful than we expected, and we've found things we didn't know we would find. And I think that's what we're discovering in this AI development — it's simply spotting things that we just didn't spot. So I think while right now the operational efficiency case — coming in and altering cost structure and altering how we do things — is probably still a bigger lever, as AI keeps growing and we have more tools there, the smarter it gets, the more understanding it gets for what impacts profitability from a production expense reactivation standpoint, it could probably be equal to what we're doing today. We haven't reached that point so far, though I believe — considering the path we're on given what we observed in '26 and what I expect we'll witness once our technology team makes a full-throttled push from '26 through '27. Where the ceiling sits, I can't say. It's worth keeping in mind that during recent years, our AI work has essentially been a do-it-yourself undertaking, to put it plainly; and only within the past few months have we truly committed wholeheartedly, with our technology team and Jason's efforts at the company. So watching what comes out of that during the coming 6 months to a year will be genuinely thrilling.

Yes. I’d just add that with our traditional underwriting, the real focus has been on the items Chris concentrates on and those you brought up, namely resetting the cost structure. As we’ve become better at enhancing workovers and other ways of raising output from PDP at attractive low cost and solid returns, we’ve begun including some of those projects, where applicable, in our acquisition underwrite. We also consider items such as gas marketing efficiencies and how we can achieve a pricing uplift by taking gas in kind. We sort of have all these separate legs of value creation. And I would certainly see us adding AI as another leg of value creation. And to Chris’ point, if that means, for instance, a 3% to 5% uplift in production, I think 2 things. One, that will likely amount to roughly a doubling of the efficiencies we’ll gain from assets by, in addition to resetting the cost structure, also increasing production. And two, if we have that ability, I do believe that will give us a distinct competitive advantage in the market to be able to go and acquire and aggregate more assets.

I'd like to begin with the dividend, Will. You said you have one of the highest yields among any public company. I'm hoping to get some insight into how you and the Board weighed that choice to raise the dividend against, say, paying down debt or keeping more cash on the balance sheet.

Yes. So a quick answer. We have paid down debt; we do so quarterly via the scheduled and variable amortization on the ABS bonds. So for the...

Yeah, John Brawley speaking. On the amortization question: our RBL sits undrawn, and with ABS debt you really can't pay it down early unless it's unscheduled, so all the debt outside the ABS systems has been paid off. So...

As we were working on building up liquidity...