Permian Resources - Q2 2024

Transcript

Operator (participant)

Good morning, and welcome to Permian Resources conference call to discuss its Second Quarter 2024 Earnings. Today's call is being recorded. A replay of the call will be accessible until August 21, 2024 by dialing 800-925-9354 and entering the replay access code 24995, or by visiting the company's website at www.permianres.com. At this time, I would like to turn the call over to Hayes Mabry, Permian Resources Vice President of Investor Relations, for some opening remarks. Please go ahead.

Hayes Mabry (VP of Investor Relations)

Thank you, Brittany, and thank you all for joining us on the company's second quarter earnings call. On the call today are Will Hickey and James Walter, our Chief Executive Officers, and Guy Oliphint, Chief Financial Officer. Yesterday, August sixth, we filed a Form 8-K with an earnings release reporting second quarter results for the company. We also posted an earnings presentation to our website that we will reference during today's call. I would like to note that many of the comments during this earnings call are forward-looking statements that involve risk and uncertainties that could affect our actual results and plans. Many of these risks are beyond our control and are discussed in more detail in the Risk Factors and the Forward-Looking Statement sections of our filings with the SEC, including our Form 10-Q, which is expected to be filed later on this afternoon.

Although we believe the expectations expressed are based on reasonable assumptions, they are not guarantees of future performance, and actual results or developments may differ materially. We may also refer to non-GAAP financial measures that help facilitate comparisons across periods and with our peers. For any non-GAAP measure we use, a reconciliation to the nearest corresponding GAAP measure can be found in our earnings release or presentation, which are both available on our website. With that, I will turn the call over to Will Hickey, Co-CEO.

Will Hickey (Co-CEO)

Thanks, Hayes. Permian Resources continued to deliver strong results during the second quarter, highlighted by improvement in operational efficiencies that support us raising our full-year production guidance for the second consecutive quarter while maintaining other guidance ranges. Additionally, we announced the highly accretive Barilla Draw acquisition from Oxy last week, which added significant high return inventory in the core of the Texas Delaware that immediately competes for capital. The PR team continues to perform at a very high level operationally while executing on accretive M&A, and we look forward to sharing some more detail on Q2 today. Moving into quarterly results, I'm pleased to announce Q2 production exceeded expectations, with oil production of 153,000 barrels of oil per day and total production of 339,000 barrels of oil equivalent per day.

Our strong performance was attributable to multiple factors, including DNC efficiencies that accelerated cycle times, strong runtimes in the field, and consistent well performance. For example, we averaged 1,500 drilled feet per day and over 21 pumping hours per day in Q2, which are both company records for a quarter. As a result, we're raising our full-year oil guidance for the second consecutive quarter, amounting to a 4,500-barrel-of-oil-per-day increase in total when compared to our initial guidance in February. Notably, 3,700 barrels of oil per day of our guidance increase this year is a direct result of outperformance of our base business.

Given the strong DNC efficiencies, which drove a 13% cost improvement in Q2 when compared to 2023, we are also increasing our 2024 full guidance by approximately 15 wells, with no change to our CapEx guidance ranges. Additionally, we saw particularly strong gas and NGL performance this quarter, which was driven primarily by an increase in gas processors switching to ethane recovery due to the current Permian gas market. On the cash cost side, Q2 is one of the strongest quarters we've had to date. Workover costs were significantly reduced in Q2 due to low failure rates on downhole lift equipment and a reduction in cost per failure. We continue to optimize all of our recently acquired wells and were able to quickly improve equipment and implement our best practices to drive efficiencies.

Additionally, we've expanded our water recycling efforts to minimize freshwater use while also reducing costs. As a result, Q2 LOE of $5.18 exceeded our expectations. Our relentless focus on cost controls also supported low cash G&A of $0.85 per BOE in the quarter. Strong production results, reduced cash cost, and CapEx of $516 million in the quarter resulted in adjusted operating cash flow of $849 million or $1.10 per share, and adjusted free cash flow of $332 million or $0.43 per share. Turning to Slide 5, our all-in quarterly return of capital was $0.25 per share.

This was comprised of our base dividend of $0.06 per share, a variable dividend of $0.15 per share, and a repurchase of 1.8 million shares in the quarter in connection with the May secondary offering. It is worth noting that we recently extended our Project Allies initiative, an alignment between our private equity shareholders and PR. This program helped facilitate a reduction in private equity ownership from a high of over 50% to 15% today. With PR delivering peer leading total shareholder returns during that period. Going forward, we expect the remaining 3 shareholders to be much more long-term oriented, with significantly fewer and less frequent secondary sales. With that, I'll now turn it over to James.

James Walter (Co-CEO)

Thanks, Will. On July 29th, we announced a highly accretive $817 million acquisition of Oxy. This acquisition consists of the Barilla Draw assets in Reeves County and approximately 2,000 net acres offset our existing position in Eddy County. These are assets that we have been keeping an eye on for quite a long time, that fit extremely well with our existing footprint. The Eddy County acreage was identified as part of our ongoing grassroots acquisition program in New Mexico, and the Barilla Draw assets share approximately 20 miles of lease line with our legacy Texas position. The acquisition comes with an attractive production base and free cash flow profile, which are paired with over 200 long lateral high NRI locations that immediately compete for capital.

The purchase price of $817 million reflects a 3.4x EBITDA multiple and a 17% free cash flow yield. The asset is further enhanced by an attractive portfolio of midstream infrastructure and surface acreage that supports the long-term development of the asset. The infrastructure consists of over 100 miles of operated oil, gas, and water gathering pipelines, with ample capacity to handle additional PR and third-party volumes. These assets provide optionality to enhance margins or to pull forward value via asset sales at some point in the future. PR's leading cost structure and the proximity of our existing operations provide confidence that we will be able to drive attractive incremental returns from our shareholders over the near term, mid-term, and long term.

Turning to slide 7, we highlight that maintaining a strong balance sheet continues to be a top priority for PR, as it has been since we founded the predecessor business all the way back in 2015. It all starts with our world-class asset base and low-cost leadership that drives strong cash flow margins and low breakevens. Our commitment to protecting our balance sheet is demonstrated by our low leverage, long dated maturity profile, and maximum liquidity position. Last week, we executed a $400 million equity offering and issued $1 billion of bonds to finance the Oxy acquisition, fully paid on our RBL, and pay off a 2026 bond maturity. Since April, we have now redeemed over $650 million of notes, further extending our bond durations.

Also in April, we upsized our RBL's elected commitments from $2 billion to $2.5 billion, making our current RBL the largest in the industry. This provides us with approximately $2.5 billion of liquidity pro forma for the Oxy closing, and the $4 billion borrowing base that accompanies it ensures we'll have access to this capital at lower than mid-cycle commodity prices. We've also maintained a consistent hedge strategy to support free cash flow generation and low leverage. We've hedged approximately 30% of expected oil production for the remainder of 2024 at $74 a barrel, and have over 40,000 barrels per day hedged for 2025 at $73 per barrel. In July, we received upgrades from both Moody's and S&P. We have comparable attributes to our investment-grade peers and are targeting our own investment-grade credit ratings in 2025.

The cumulative effect of all this activity is that we have the strongest balance sheet with the most liquidity at any point since PR's formation in 2022. Since Q1 2023, we have maintained leverage of approximately 1x, while substantially growing the size and scale of the business through over $6 billion of highly accretive acquisitions. Those transactions, combined with our strong operational execution, have allowed us to grow free cash flow per share by over 60% without increasing leverage. This now marks our eighth consecutive quarter of operational excellence as a public company and furthers our track record as the leading operator in the Delaware Basin. We're proud of our team's continued execution, which is highlighted on slide 9 by our ability to increase both turning lines and production guidance while maintaining all other previous guidance ranges.

We have now increased our oil guidance by 3% this year, the majority of which comes from the continued outperformance of our base business. The revised guidance outlined on slide 9 does not include the impact of the Oxy Barilla Draw acquisition we announced last week. We expect that acquisition to close in late Q3 and to add approximately 15,000 BOE a day during the fourth quarter. 2024 is shaping out to be a very strong year for PR, and we are excited to continue to build on our track record of strong operational performance, financial discipline, and leading shareholder returns. I'll be concluding today's prepared remarks on slide 10, where we reemphasize our value proposition for investors.

The strength of our business is underpinned by an industry-leading cost structure, low breakevens, and long-dated, high-return inventory, which together have driven leading free cash flow per share growth for our investors. Since the company was formed in 2022, we have delivered best-in-class returns for our sector, and outpaced the S&P 500 by over 2x. Our performance over the last years has been driven primarily by low-cost execution, financial discipline, and accretive transactions, rather than a material rerating of our multiple. We remain committed to doing anything and everything we can to maximize value for our shareholders going forward. Thank you for tuning in today, and we will now turn it back to the operator for question and answer session.

Operator (participant)

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press star two. We'll take our first question from Neal Dingmann with Truist Securities. Your line is now open.

Neil Dingmann (Analyst)

Good morning, fellas. Nice quarter. My-- guys, my first question is on your operating efficiency. Specifically, given your continued improved cycle times, I'm just wondering, do you all anticipate lowering DNC activity this year? And maybe could you speak to how you're thinking about the DNC activity once the Barilla Draw closes? I guess, I guess what I'm asking there is, is the goal, once that closes, to remain sort of stable production, or would you think about maybe incremental production growth?

Will Hickey (Co-CEO)

Yeah, Neil, this is Will. I'd say the plan as it stands today is to kind of maintain the rig count and frac count that we have today. So we've obviously kind of picked up the pace here a little bit, bringing what we think will be about 15 incremental wells into the year. The fortunate position we're in is that we've seen kind of a pretty material drop in well costs on a per-foot basis, just given these efficiencies. So I think that our current plan is to kind of keep up with the activity and let those reductions in cost per well kind of keep us well within our CapEx range.

And then, once we close Barilla Draw, I think the current plan today is we are gonna drill a pad on Barilla Draw back half of this year, call it Q4. But I think it'll be more kind of substituting Barilla Draw for something else that was scheduled in Q4. So think of it more as kind of a swap out than adding incremental activity. And then 25, it's really too early to tell. I think that one thing's very clear is that the kind of capital efficiency of our business with kind of lower cash costs, flat well productivity, and reduced CapEx is the widget is as good as it's ever been.

But that's against a backdrop of commodity prices that's obviously kind of taken a step change or at least a little bit of a change in the last week or two. So we'll see how all those play out over the coming kind of months and quarters, and then make the decision on what makes sense for the business in 2025.

Neil Dingmann (Analyst)

Yeah, I think the market likes to hear that, Will. Thanks. And then my second question is on the royalty acres. Specifically, you all now have a material position. I think in the deck it shows around 85,000. Can we assume much of the upcoming targeted activity will be, you know, on those acres or on those mineral acres? Or is there, I guess, maybe ask another thing there, is there any reason to consider monetizing some of these minerals, given how high prices are for minerals these days?

James Walter (Co-CEO)

Yeah, no, that's a great question, Neal. I appreciate you pointing that out. I think that's kind of an important part of our business. I'd say, look, as we're thinking about where to send rigs, we're always focused on allocating capital to our highest rate of return projects and highest rate of return areas. And I think you hit the nail on the head, that royalty portfolio is a big part of that. You know, I think we can't understate enough how important that is to overall driving economics and capital efficiency. You know, I think an 80% ROI compared to a 75% is a real step change in returns and capital efficiency.

I do think, though, given kind of how impactful that could be to the business and the kind of rates of return that we see on projects, I don't see us doing anything to monetize that position today, especially on the operated footprint. It's just kind of too important to our overall system and our longer term returns. So I think we love it, and we're really glad to have it in our portfolio. No immediate plans to monetize it.

Neil Dingmann (Analyst)

Great details. Thank you all.

Will Hickey (Co-CEO)

Thanks, Neil.

James Walter (Co-CEO)

Thanks, Neil.

Operator (participant)

Thank you. We'll take our next question from Scott Hanold with RBC Capital Markets. Your line is open.

Scott Hanold (Analyst)

Thanks. Good morning, all. Hey, just back to sort of activity pace and Barilla Draw. You know, look, it seems like, you know, obviously, you're having some good operational efficiency, good well performance. Do you think even, you know, loading in Barilla Draw into the mix, and again, I know you're not going to give 2025 guidance, but do you generally think your current pace of activity without adding any activity and lumping in Barilla Draw, I mean, is that at... You know, are we at a maintenance pace, at least right now, with current activity, even adding those assets?

Will Hickey (Co-CEO)

Yeah, I think kind of just given the, you know, we've increased the number of wells per rig per year, we can drill pretty meaningfully over the last two or three quarters. And that increase, I think, definitely has us under the current rig count, we can, it, it would be more than a maintenance case, pro forma for Barilla Draw. I don't think it's a lot more. It's probably a couple% growth, something like that, you know, very close to a maintenance case. But, but we are in a great position that as we kind of look at what's the right rig count and what's the right frack fleet count in 2025, that, you know, being able to do more with less gives us a lot of flexibility. If we want to kind of small amount of growth, we can maintain the current rig count.

If we want to dial up the growth engine, obviously, we'd probably go grab a little bit more equipment. But the answer to your question is yes, it's more than a maintenance case today.

Scott Hanold (Analyst)

Okay. Okay, great to hear. And then just sticking on just general M&A kind of landscape, and, you know, look, you guys have been successfully able to integrate assets quickly, you know, cut cost. So, you know, obviously, you know, have been, you know, been very, very good at that. And I couldn't help but notice you talked a couple of times in your prepared comments about, you know, having amongst the most liquidity, you know, since, you know, the combination of, you know, Colgate, and Centennial. So, you know, look, you know, what do you see on the M&A front right now, and what is your, you know, appetite to do things from a small, bolt-on case versus, you know, larger acquisitions at this point?

James Walter (Co-CEO)

Yeah, no, that's a great point. I do think I'll point out the references to liquidity. I would say we're more focused on the kind of strength and consistency of our business in up cycles and down cycles than probably anything related to M&A. You know, I think the most important part of the balance sheet is not that it allows us to go do these strategic acquisitions, it's that it protects our business and protects our ability to create value in down cycles. So I think that was the main point we were trying to make in those prepared remarks. I do think the M&A question is a good one. Look, I'd say we have the same attitude towards M&A we have had, you know, since our founding.

You know, I think we will continue to look at and evaluate things that we can do to make our business better, and drive long-term value creation for shareholders. You know, I think we've said it a lot, but we've got an awesome base business with a really attractive inventory and reinvestment opportunity set. So anything we do actually has to make our business better, and the bar is really high. You know, I think we'll continue to evaluate anything and everything that's out there. You know, I think we've got a great track record of demonstrating our ability to do accretive M&A, really at every scale. You know, I think for us, probably more focused today on the smaller opportunities.

I think we've seen that ground game continues to be the highest rate of return opportunity set for Permian Resources and where we spend a lot of time and effort. But,

Will Hickey (Co-CEO)

... you know, nothing big coming down the pipeline as we see it, but as opportunities come along, I think it's a safe bet to assume that we will be evaluating them, and we'll make the right decision for shareholders.

Scott Hanold (Analyst)

Thanks for the color.

Will Hickey (Co-CEO)

Scott.

Operator (participant)

Thank you. We'll take our next question from John Freeman with Raymond James. Your line is open.

John Freeman (Analyst)

Good morning. Nice quarter. Well, the first topic, I know that, you know, last quarter, y'all felt that you basically kind of closed the gap on the, on a DNC basis on the legacy Earthstone relative to PR. But, there was still a gap there on the, on the LOE side between kind of legacy Earthstone, the PR, stuff like, you know, SWD disposal agreements, recycling, et cetera. And I'm just kind of curious, how long does that process take before that you feel that gap is closed? Just trying to get a sense of how much more running room we have on the LOE improvement side.

Will Hickey (Co-CEO)

I think the gap's closed on the LOE side, would be the short answer. A little color behind it, you know, we—Q2 was a extremely strong quarter from an LOE side on both legacy Earthstone assets, but also on legacy PR. Just kind of, we had a really good quarter from a—I mentioned some of the prepared remarks, but from just a overall workover cost perspective, like our failure rates in Q2 were as good as we've ever seen. And then even kind of to add to that, our cost per failure is down. So we've been, you know, having to work over less wells, and when we do, it's been cheaper.

Then also Q2 is a really good weather quarter, just like typically, if you think about Q2, it's hot and you need your chemical usage goes up, failure rate goes up, et cetera, and this was more of a mild summer. So, kind of to answer a different question, but I think the same, is like, my expectation is LOE go forward looks more like legacy PR than some kind of PR plus Earthstone because integration is done. But I do think the $5.18 that we put out in Q2 is probably not the right run rate go forward. The run rate is probably closer to, say, the bottom half of our $5.50-$6 guidance range.

John Freeman (Analyst)

Perfect, thanks. And then just my, my follow-up question, and just from a, from a high-level basis, I'm not trying to get any necessarily details on 2025 plan, but if, if this year, you know, 25% of y'all's budget was, was non-DNC, and obviously, y'all, y'all remained really active on, on the M&A side, so this is probably a little bit of a moving target. But just directionally, would we assume that that percentage of non-DNC starts to move closer to maybe the historical run rate of, like, 15%? Or because you've been so active on the M&A side, does it, does it kind of stay at the, the current kind of percentage as it was this year?

Will Hickey (Co-CEO)

I— It's all kind of deal, and what we're integrating dependent, as you mentioned. I do think that integrating Earthstone was kind of a step change or quite a bit incremental to the non-DNC piece relative to what we're used to. So it'll come down from the 25% we saw in 2024. I don't quite exactly know what Barilla Draw brings in. That's not a huge needle mover, so I don't expect that. That's not going to fully offset that from where we are normally, but maybe it adds a little bit. So, it's kind of a— I'm not going to give a specific answer, but it will be less than 25% and closer to where we were historically.

John Freeman (Analyst)

Great. Thanks. Well done.

Will Hickey (Co-CEO)

Thanks, John.

Operator (participant)

Thank you. We'll take our next question from Zach Parham with J.P. Morgan. Your line is open.

Zach Parham (Analyst)

Yeah, thanks for taking my question. Wanted to ask on well costs. You were at 830 per foot this quarter versus the guide that underwrote, your, your full year down into 860 per foot. Can you just talk about how you think well cost will trend in the, the second half of the year and maybe, address the potential to, to drive down well cost further?

Will Hickey (Co-CEO)

Yeah. So look, I think the way we got to $830 is almost 100% efficiency driven. So, you know, mostly on the rig side, just drilling more feet per day. We averaged 1,500 feet per day during Q2, which, you know, given the majority of the cost on the rig price on a per day basis, all that accretes, like, straight to our bottom line. I think that's sticky. Like, I think that is the new run rate, 1,500 feet per day, call it $830 a foot is kind of where we are outside of a lot of inflation or deflation on the service cost side. I think there's still small amounts of efficiencies to go get.

The Delaware Basin is still kind of in early innings relative to other onshore U.S. basins, and so we'll keep getting better, but it's, it's hard to predict when you're going to get a step change like we had from Q1 to Q2. And then where I think the rest of the opportunity lies is, as we're seeing across the industry, is all of us continue to drill more feet per day, drill more wells per year with less rigs. Like, at some point, we should see a little bit of recessions, I would hope, on the service cost side. So I, I don't know exactly how it plays out, but I'd say $830 is the new norm as it stands today, and there's probably more likelihood to see it go down from here than up in the coming quarters.

At least that's kind of how we're thinking about it internally.

Zach Parham (Analyst)

Thanks. And just a follow-up, I wanted to ask on kind of the volume guide from here, particularly on the NGL and gas side. You know, I think you had higher NGL volumes this quarter due to more ethane extraction and weak gas pricing. Do you expect that to reverse at all in the back half of the year? Just trying to get a sense of how total volumes will trend from here.

Will Hickey (Co-CEO)

Yeah, I mean, I think kind of the biggest change, as you've seen for PR and, and really across the basin, is an increase in ethane recovery this quarter, given poor in-basin gas prices. You know, I think if future markets play out, and I think our expectation internally as well is that gas price should recover as you approach the end of the year. I do think you'll see kind of a reversion to more normal trends on kind of gas, NGLs, and percent oil.

Zach Parham (Analyst)

... Thanks, James.

Operator (participant)

Thank you. We'll take our next question from Kevin MacCurdy with Pickering Energy Partners. Your line is open.

Kevin MacCurdy (Analyst)

Hey, good morning, team. I wanted to ask, maybe overlooked in the recent acquisition was the 2,000 acres that you added in Eddy County. I was hoping you could shine a little more light on how those acres became part of the Oxy deal and why that particular area was attractive to you.

James Walter (Co-CEO)

That's, that's a great question. Well, you know, I think this all really goes back to our robust grassroots activity and efforts that we've been pursuing in the, in the New Mexico and Texas sides of the basin. Our, our team is actually constantly out there knocking on doors, running title, trying to unearth opportunity sets that kind of aren't available to the public realm at this point. And, and I'd say as part of that, we'd identified several thousand acres, which you see here or a part of it here, that, that Oxy owned, that we thought made a ton of sense for what in, in the Eddy County part of the basin. Not a good long-term strategic fit or as good of a fit for Oxy.

So as we were having discussions around the Barilla, we were able to propose a potential win-win for both us and Oxy, which is including those acres in this deal. So that's how it came about. I think we've got a great relationship with the Oxy team. They've been really good to work with over the years. And, you know, as we can find win-wins for both us and Oxy, we tend to do them, and that's exactly what happened here.

Kevin MacCurdy (Analyst)

Great. Thank you for that answer. As a follow-up, last quarter, you mentioned that you expected your CapEx budget to increase by $50 million in conjunction with the bolt-on acquisition that I believe was supposed to close in 2Q. This quarter, you reiterated your original guidance. You know, I think that reads to me as lower CapEx than you know, what we were expecting last quarter. I just wanted to clarify, is that extra activity still included in your plan, and does that make up part of the 15 additional turn lines?

James Walter (Co-CEO)

Yes, it – the answer is yes to a lot of what you... The activity still is in the plan. We are actively drilling and completing on that Eddy County bolt-on asset, and that is included in the incremental 15 wells. What we've seen in the last quarter is that our kind of dollar per foot reduction real time is kind of chipping away at what was gonna be a $50 million add to the, call it $2 billion midpoint on our budget. So we're still well within our kind of 1.9-2.1 CapEx range. I think the math is right. We were at 2, we went to 2.05, and now we are slowly chipping away back closer to 2.

I, I think kind of what you see us saying here is that what we're seeing real time, the reductions on a dollar per foot basis are kind of making us feel very comfortable that we will kind of continue to drive that down. I don't think we'll get back sub $2 billion or even to $2 billion, but kind of close enough and well within the range to leave it where it is.

Kevin MacCurdy (Analyst)

Thank you, and, congratulations on a great quarter.

James Walter (Co-CEO)

Thank you.

Operator (participant)

Thank you. We'll take our next question from Leo Mariani with Roth. Your line is open.

Leo Mariani (Analyst)

Hey, just wanted to ask a little bit about the Barilla Draw acquisition. Obviously, you guys are picking up some infrastructure on that deal. Just kinda, you know, curious if that's something you guys might look to monetize in the near future. And then just secondarily on the acquisition, it seemed like a very attractive deal, you know, from an economic perspective, just kind of very low price versus other deals that we've seen, you know, in the Permian. Was this, you know, kind of a fully marketed, you know, sort of auction deal? And, you know, what do you guys attribute to kind of getting the good price on the asset here?

James Walter (Co-CEO)

Yeah, sure. To answer your first question, I do think we got to get this deal closed and get our hands around kind of more details on the actual midstream infrastructure, I think before we commit to doing anything there. But I think in acquisitions like this in the past, we have seen more value creation for shareholders to kind of divest midstream assets. That's not our core business. That's not where we're focused on spending capital. So I think probably a good chance at some point in the future, we divest at least a part of the midstream system. But again, that's not imminent by any means. And then back to Barilla Draw. So yeah, just to be blunt, the Texas part was part of a broadly marketed, I think, very well run, you know, process. The New Mexico piece was not.

The New Mexico piece was a proprietary deal that, like I mentioned on the prior answer, that we found that we thought could be a win-win for both us and, and our counterparty here. But, you know, I think more than anything else, we attribute our success on, on deals like this to our peer leading cost structure, our, our lower invasive LOE, our, you know, I think, peer leading DNC, and the offsetting footprint and the synergy that came with this deal, I think is what allows us to win these deals, not, not anything else.

Leo Mariani (Analyst)

Okay, appreciate that. And then just with respect to production, obviously, you guys ticked up the oil guide a little bit. I guess that doesn't include the Barilla Draw production, but I guess it includes some small volumes from the bolt-on you closed in the second quarter. With that being said, I know you guys had previously kind of said that you expected, you know, oil production to maybe slide a little bit in the second half, and then with the acquisition, it was gonna be, you know, a little bit more flattish in the second half. You know, looking at the guide, it looks like it actually might be up small in the second half on oil. Just kind of wanted to verify.

Obviously, there's somewhat of a range on the guidance, but is it fair to say it's probably up small from 2Q levels on the oil for the rest of the year?

James Walter (Co-CEO)

Yeah, I mean, I think kind of production profile for the rest of the year is pretty flat from here, flat to the first half. You know, I'd say that's on a standalone basis. If you were to factor in Oxy in Q4, you'd obviously see some, some growth in Q4, but I think that kind of flat profile from here is the right, right way to approach it.

Leo Mariani (Analyst)

Okay, thanks.

Operator (participant)

Thank you. We'll take our next question from Gabe Daoud with TD Cowen. Your line is open.

Gabe Daoud (Analyst)

Thank you. Hey, guys, Gabe Daoud here. Thanks for the time. Just a quick one for me. Curious if you have any updated thoughts on the Midland Basin position. Is that something that could also be a candidate for divestiture over time? Thanks, guys.

James Walter (Co-CEO)

Yeah, I mean, I think, you know, the Midland Basin is a different one for us. I think, as we've said time and again, our focus and the kind of core part of our business has always been and continues to be the Delaware Basin. That's where our development is focused. That's where our strategic M&A activity has been focused and will continue to be focused. But I do think, you know, our-- we're continuing to understand that, that asset better. I'd say our performance on the asset, both cost structure and productivity, continues to improve this year, and we're still trying to get our hands fully around that basin and kind of what it means in the portfolio. You know, I think we like having it today. We like the cash flow profile that it brings.

You know, I think at some point it may make sense to do something strategic with, with the Midland, but, but I think probably not anytime soon and probably not in this commodity price environment.

Gabe Daoud (Analyst)

Understood. Got it. Thanks, guys.

James Walter (Co-CEO)

Thank you.

Operator (participant)

Thank you. We'll take our next question from Paul Diamond with Citi. Your line is open.

Paul Diamond (Analyst)

Good morning, all. Thanks for taking the call. Just a quick one. So given the ongoing volatility in Waha pricing, kind of an expectation in the market that that's gonna decongest to some degree into 2025 and beyond, I just want to get your understanding of, like, how you all see that playing out, and also how that would impact your hedging strategies or hedging strategy, especially around basis.

James Walter (Co-CEO)

Yeah, sure. I mean, I think we expect, like I think everybody does, that the markets get better from the lows of Q2. I think additional pipeline capacity coming online kind of back half of this year should end will help that. You know, I do think continued volatility is probably the case, you know, for Waha going forward. I'd say as we look and think about our gas hedging strategy, I think basis is an absolutely critical part of that and tend to hedge basis alongside hub going forward.

I think another big part of that is, look, we sold about 30% of our gas this quarter in the Houston markets, and I think an important strategic initiative for us and our midstream team is gonna be how can we sell more gas at other markets and kind of diversify beyond Waha over time? And that's a long game. You know, I think it takes time for contracts to roll, new pipelines to get built, et cetera, to really play that out. But I think the goal ultimately is to sell more than 30% of our gas at Houston Ship Channel, and that's gonna continue to be a priority for us.

Paul Diamond (Analyst)

Got it. Understood. And then, just a quick follow-up, talking about the ground game. I know with the kind of a flurry of activity as of late across the space, you know, bid ask spreads have been pretty volatile. Just wanted to get your take on kind of where they sit now and how you see them going through the rest of the year.

James Walter (Co-CEO)

You know, I think I mentioned this earlier, but I think with our extremely low cost structure and cost advantage, we're still able to find small opportunities that make a lot of sense for us. I think that said, there is a really robust kind of market for non-op and kind of similar smaller deals out there. So we have found we're not always able to be competitive, but I think, you know, we remain really disciplined. We bid things to prices that we like, and because of our cost structure, I'd say we've been fortunate. We're still able to get things done, even in this market.

Paul Diamond (Analyst)

Understood. Appreciate the clarity. I'll leave it there.

Operator (participant)

Thank you. We'll take our next question from Noah Hungness with Bank of America. Your line is open.

Noah Hungness (Analyst)

Morning, all. I wanted to ask on your guys' cost structure, I mean, it's an inventory. It's your cost structure has continued to improve. I mean, DNC is down 13% from last year. What does this do to your inventory? Is there any inventory that's been high graded or de-risked or moved into the money? And then what impact does it have on your all's breakeven?

Will Hickey (Co-CEO)

Look, on the inventory side, I think it, our inventory is the way we classify and think about inventory, it already is kind of in the money, so to speak. I think what this really does as we continue to drive down LOE and drive down CapEx, is it just kind of maybe brings it from marginally in the money to deeper into the money. So it absolutely shifts the whole curve in our direction at a flat commodity price. Just reduce CapEx and reduce cash cost is always going to do that. But I don't think this is like a material change that we took three or four years that were out of the money and brought them into the money, just 'cause that's not how we think about inventory to start with.

James Walter (Co-CEO)

The economics are so strong today that it's not taking something from an uneconomic to economic. It's taking it from economic or very economic to more economic. It's a good problem to have. You know, I think. I do think it's important, though, that as you think about secondary zones, which we're not really actively targeting today, that will have a bigger impact on some of those secondary zones versus the more primary zones we're developing today.

Will Hickey (Co-CEO)

On breakeven, you know, we're at kind of mid- to high 40s through the Base Dividend for 2025 at a maintenance program. You know, we have really attractive capital efficiency and low breakevens. And given the productivity of the inventory, James, and what we're talking about and our cost structure.

Noah Hungness (Analyst)

Gotcha. Really, really appreciate that color. And then my next question is on Barilla Draw. You guys, when you take over the asset, how should we kind of think about your all's development philosophy versus maybe how Oxy was developing it, either on proppant loading or spacing or anything like that?

Will Hickey (Co-CEO)

Honestly, I don't think it's that materially different on how they developed the Third Bone Spring Sand Wolfcamp A, Wolfcamp B historically, or really Third Bone Spring Sand Wolfcamp A historically. Like-

James Walter (Co-CEO)

... The recipe in the Southern Delaware, kind of 2,500 pounds per foot of proppant, call it 10 wells between those, those benches is, is about solved at this point. We may add or just subtract a well here or there, or do a little bit on stage spacing, but nothing crazy. I think the bigger change you'll see is we'll start to loop in co-development of the Wolfcamp B and some of the shallow shales, Second Bone Shale, Third Bone Shale into that development. We've had success kind of on just to the east and just to the north of this asset in, in developing those shales. So, it just—we'll just kind of, I'd say, optimize resource recovery and, and kind of PV per DSU as we think about looping in some of those other zones.

It won't be a material step change. I think the biggest step change will be, it'll be done under our cost structure from a LOE perspective, from a CapEx perspective, et cetera.

Neil Dingmann (Analyst)

Sounds good, you guys. Thanks so much for the color.

Operator (participant)

Thank you. As a reminder, that is star and one if you would like to ask a question. We'll take our next question from Geoff Jay with Daniel Energy Partners. Your line is now open.

Geoff Jay (Analyst)

Hey, guys. Will, I just want to circle back to what I think I heard you say on efficiency gains, that there was a big step change between Q2 and Q1. Because I think if I remember right, you said in Q1 that on a legacy PR basis, an efficiency gain had been about, like, six single-digit percentage points. What kind of changed in Q2? Can you help us understand exactly the significance of the gains you've seen in Q2, and kind of what did you do differently?

James Walter (Co-CEO)

So, if we're thinking about just efficiency as time and cost, which is what we've seen from Q1 to Q2, I'd say the majority of the change on the CapEx side is gonna be on the drilling side. And we're now, you know, call it 15% faster than we were in 2023. And that is, you know, you got some of that from Q4 of last year into Q1, but the majority of that came from Q1 to Q2. How we got there, I mean, it's never an easy answer. It's always the, you know, add up of a bunch of little things. I'd say the majority of the time we're saving is in the curve and lateral, and it's a combination of two things.

One, we have a really, really good kind of working relationship between our geo team and our drilling team on making sure they are in constant communication, putting the laterals in the right place to enhance both productivity, but, but also make sure we're in the rock that drills the fastest. And then second, we're always kind of tweaking and optimizing BHAs, whether that be, you know, motors, bits, et cetera. And, you know, the combination of all those tweaks, kind of, you continue to see month-over-month and quarter-over-quarter improvement, but there are times when you hit breakthroughs and big step changes, and that's what, that's what happened from Q1 to Q2.

Geoff Jay (Analyst)

Excellent. That's good color. Thank you.

James Walter (Co-CEO)

You bet.

Operator (participant)

Thank you. We'll take our next question from John Abbott with Wolfe Research. Your line is open.

John Abbott (Analyst)

Hey, good morning, and thank you for taking our questions. Just a couple of quick ones from me. So you did add your 2025 hedges, and it looks like you've started to add to 2026 on the oil side. Do you do more, or do you, do you add more from here? How are you thinking about hedging at this point, just given a backwardated strip?

James Walter (Co-CEO)

Yeah, that's a good question. I mean, I think it's worth noting for the group that we placed these hedges, kind of all these new ones we referenced today, about a month ago, maybe a little over that, when, you know, spot price was in the eighties, and it was a more favorable hedging environment. You know, I think of our hedging strategy as continuing to be, number one, protect the balance sheet and do everything we can to ensure we can kind of thrive in a future commodity down cycle. I think we feel really good that the balance sheet is where it needs to be today. I think if you see additional hedging, especially in that, those kind of out years, it's probably just gonna be opportunistically.

If we see a meaningful change in the commodities market to the positive, I think you'd see us probably layer on marginally more hedges in 2026, but it's kind of nothing immediate at current pricing.

John Abbott (Analyst)

Appreciate it. And there's also been a lot of previous questions on M&A here. I mean, just given the volatility we've seen over the last couple of days here, does it, what's your impression about getting a deal, actually getting a deal done in this environment? Is it more difficult? Can you get deals done? I mean, you mentioned that this is not necessarily the optimal commodity environment to potentially do something with the Midland assets. How are you thinking about that at this period of time, just given the commodity environment?

James Walter (Co-CEO)

Yeah, I mean, I think kind of, kind of two different questions there, but I think, no, you're right. This kind of volatility, especially what we've seen kind of Friday to today, Wednesday, makes it a lot harder to get deals done. You know, I think, I think that volatility in pricing always is going to drive bid-ask spreads higher and kind of push buyers and sellers apart. But, you know, I think, look, we feel good about the timing of our last deal, getting that to the finish line. We, you know, aren't actively engaged in anything of material scale today and really focused on getting this Oxy deal closed and continuing to execute as our two biggest priorities. So not losing a lot of sleep over it today.

I think with us pertaining to the Midland Basin, that's just a, you know, a larger percentage of the revenue and free cash flow from that asset come from gas and NGLs, and NGL pricing's remained okay. But gas pricing in the basin has obviously been suppressed for quite a while now, and I think that really has potential for a step change in free cash flow generation and just modestly better gas price environments. So I'd say that's what we're looking for or referencing there, is really just a kind of improvement in interbasin gas pricing.

John Abbott (Analyst)

Appreciate it. Thank you very much for fitting us in.

James Walter (Co-CEO)

Yeah, thanks.

Operator (participant)

Thank you. We have no further questions on the line at this time. I'll turn the program back over to James Walter for any closing remarks.

James Walter (Co-CEO)

All right. Thank you. Well, having gotten off to a great start for 2024, our, our primary goal remains the same, to maximize its shareholder value over the long term. And to do that, we plan to continue to build on our track record of delivering consistent results with the lowest cost structure in the Delaware Basin. Thanks, everyone, for joining the call today and for following the Permian Resources story.

Operator (participant)

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.