Permian Resources

Where we land

Permian Resources pumps oil and gas in the southern United States, and that is the whole business. With US oil at $103 a barrel, its yearly net profit has climbed to $1.2bn. We award it gold.

The puzzle is the share price. Even after a strong run, it assumes earnings shrink slightly over the next five years, as though the oil windfall cannot last. The question is whether that caution is sensible or overdone.

What the business is

Permian Resources has one business line: finding and producing oil and gas, mostly oil from the Delaware Basin in West Texas and New Mexico. That line made up all of its sales three years ago and still does today, and sales have grown 125% since July 2023.

Of each dollar of sales, 39 cents is left after the direct cost of getting the oil and gas out of the ground. That share is the gross margin. After the cost of running the company, 36 cents remains, which is the operating margin. The gap between the two is small, so overheads are light once the wells are paid for.

The gross margin is not fixed. Over five years its median has been 43%, and it has typically moved about 8 points either side, because the market, not the producer, sets the selling price. Today's 39% sits below that median even with oil this high. That points to rising costs or to selling prices that lag the headline benchmark.

Why now

WTI, the US benchmark, stood at $103 a barrel at the end of October, up 66% from $62 a year earlier. For a producer whose output is mostly oil, a move of that size flows almost directly into revenue.

Forecasters have reacted. In the last 45 days, 31 changes to earnings estimates were upward and only 2 were downward. These are counts of forecast changes, not of individual analysts, but the direction is plain.

By our measures, the quality of the business puts it among the strongest companies we rate. Its growth standing against every listed company has slipped over the past year, though from a high level. It has been held in the Gold Income 10 since July 2026 and still meets the rules for a place there.

The case for

The five-year record is striking. Twelve-month operating profit rose from $95m in June 2021 to $2.1bn by June 2026. A modest producer has become a large and highly profitable one, and the margins show the growth was not bought at the expense of profitability.

Yet even after the upgrades, the consensus sees earnings per share rising only 2.8% next year, a very cautious forecast for a company selling oil at these prices. The likeliest explanation is that forecasters assume today's price will not hold, or that hedges, contracts that lock in a selling price in advance, will cap the gain. If the price holds, those forecasts look too low.

Growth is slowing. Sales grew 31% a year over the past three years but 12.8% in the latest year, and US gas prices, the company's other product, are down 16% on the year. The case is not that growth is accelerating. It is that a highly profitable producer is being priced as though its best years are already behind it.

Where the growth could come from

With a single production line, the question is not which division grows but what drives the one business. The drivers below are our inference from the figures, not something the company or the news has reported.

The first is the oil price itself. Our revenue figures do not split oil from gas, but oil is the bulk of the value for a producer like this, and each move in its price changes earnings far more than any operating decision can. The sign this driver is working would be the price the company receives per barrel moving toward the benchmark, alongside continued upgrades to next year's forecasts.

The second is what the company does with the extra cash. A windfall only reaches shareholders if management hands it over rather than spending it on more drilling. The pattern fits a steady base dividend topped up with buybacks or variable payouts, plus paying down debt. At these prices, holding drilling steady and returning the surplus would lift cash returns per share sharply; chasing more output would risk the discipline investors reward. With the Federal Reserve having raised its policy rate to 4.00% in September and US borrowing costs rising, paying down debt is also worth more.

The third is adding drilling land through small trades and bolt-on purchases next to existing acreage. This extends the years of good wells the company has left and supports its value beyond today's prices. But high oil prices push up what sellers ask, and dearer borrowing makes debt-funded deals costlier, so the test is discipline: deals priced below what the market pays for the company's own land, with debt flat or falling.

Two smaller levers matter at the margin. The gas that comes up alongside the oil sells at weak local West Texas prices, while the national benchmark, Henry Hub, is little changed at $2.76; new pipelines out of the region could narrow that discount, a modest option rather than an engine. The other is cost control. Higher oil prices tend to bring dearer rigs, crews and materials, and low well costs have long been central to this company's appeal. Holding cost per well flat while rivals face inflation would keep more of the windfall as profit.

The case against

First, this is purely an oil and gas producer, and its gross margin already sits below its five-year median despite a powerful oil market. If margins are slipping at these prices, it is worth asking what happens when conditions change.

Second, the shares have already moved a long way. Over the past year they have risen faster than almost any others in the market and have become much less cheap by our measures. Much of the upside from higher oil may already be in the price, and anyone arriving now is paying for a story others have already profited from.

Third, the company is less distinctive than its record suggests. Among its peers it is one of the fastest growers, with an operating margin near the top of the group, and trades at a mid-pack 17 times earnings; only Diamondback grows faster, and it trades at 41 times. But SM Energy offers similar growth and margins at just 8 times earnings, and every peer has stayed profitable through recent years. Anyone wanting exposure to this kind of producer has cheaper options.

What the price assumes

The share price has risen 109% over the past year and 18% over the past six months, yet it still asks remarkably little of the company. Suppose it stays flat for five years and the company then trades at 18.5 times earnings, the median of every profitable listed company we cover. On those assumptions, today's price needs earnings to shrink by about 1% a year, to earnings per share of 1.41 in five years.

We set no projection against that, because earnings have moved too unevenly to show a trend worth carrying forward. The bar is low: the market asks only that earnings not fall by much, while the analysts' cautious forecast points to rising earnings next year. Either the price is right that today's profits are a peak, or it leaves room for the company to surprise.

The other side of the medal

The risk to keep in view is the plainest. Permian Resources sells essentially one product, and its profits move almost directly with oil. Were WTI to drop back from $103, the loss would cut straight into revenue and into the spare cash that funds dividends and buybacks.

There is nowhere else for the company to stand: no second business, no stable fee income, no different market to fall back on. The margin record already shows how fully profit follows the selling price, and the market's cautious price is itself a bet that this risk will arrive.

What to watch

First, the price the company actually receives per barrel, and whether it keeps tracking the benchmark. That number moves before the results do, and a widening gap would warn that the windfall is not fully reaching the company.

Second, where the extra cash goes. Larger buybacks or special dividends alongside an unchanged drilling budget would show discipline; a bigger drilling budget would show the windfall being spent rather than returned. Reported cost per well is worth following alongside, since service prices tend to rise in a strong oil market.

Our reading would be proved wrong by a pullback in WTI from $103, with the gross margin sinking further below its 43% median, forecasters switching from raising estimates to cutting them, and year-on-year sales growth stalling below 12.8%. Any one of these is a signal; together they would mean the market's caution was justified.

The numbers

Qualifications that apply to every figure above: gross margin has varied by 8% around a 43% median: not a stable-margin business.

The same industry, for comparison

Research for information, not personal investment advice or a recommendation to buy, sell or hold any security: see Important information. Data as at 31 October 2026.