Permian Resources Corp Q2 FY2024 Earnings Call

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 800-925-354 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 Hays Mabry, Permian Resources' Vice President of Investor Relations, for some opening remarks. Please go ahead.

Thank you, Britney, 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 Co-Chief Executive Officers; and Guy Oliphint, our Chief Financial Officer. Yesterday, August 6, 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 risks 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 statements sections of our filings with the SEC, including our Form 10-Q which is expected to be filed later 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.

Thanks, Hays. 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 Permian Resources 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 drilling and completion efficiencies and accelerated cycle times, strong run times 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 4,500 barrels of oil per day increase in total when compared to our initial guidance in February. Notably, 3.7 thousand barrels of oil per day of our guidance increase this year is a direct result of outperformance of our base business. Given the strong drilling and completion efficiencies, which drove a 13% cost improvement in Q2 when compared to 2023, we are also increasing our 2024 turn-in-line 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 we're 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 per BOE 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 Permian Resources. This program helped facilitate a reduction in private equity ownership from a high of over 50% to 15% today, with Permian Resources delivering peer-leading total shareholder returns during that period. Going forward, we expect the remaining three shareholders to be much more long-term oriented with significantly fewer and less frequent secondary sales. With that, I will now turn it over to James.

Thanks, Will. On July 29, we announced a highly accretive $817 million acquisition from OXY. This acquisition consists of the Barilla Draw assets in Reeves County and approximately 2,000 net acres offsetting 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 area 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 repairs 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 support 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 Permian Resources and third-party volumes. These assets provide optionality to enhance margins or to realize go-forward value via asset sales at some point in the future. Permian Resources' leading cost structure and the proximity of our existing operations provide confidence that we will be able to drive attractive incremental returns for 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 Permian Resources, 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 breakeven. 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 down our RBL and paid 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 that ensures we 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 and the most liquidity at any point since Permian Resources' 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 call 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 are proud of our team's continued execution, which is highlighted on Slide 9 and by our ability to increase both turn-in-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 up to be a very strong year for Permian Resources, and we're excited to continue to build on our track record of strong operational performance, financial discipline and leading shareholder returns. I will 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 year 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 the question-and-answer session.

Our first question is from Neal Dingmann with Truist Securities.

First question is on your operating efficiency. Specifically, given your continued improved cycle times, I'm just wondering, do you anticipate lowering drilling and completion activity this year? And maybe could you speak to how you're thinking about the drilling and completion activity once the Barilla Draw closes. I guess what I'm asking there is the goal once that closes to remain sort of stable production? Or would you think about maybe incremental production growth?

Neal, 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 a pretty material drop in well cost 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 point today is we are going to drill a pad on Barilla Draw in the back half of this year, but I think it will 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 is very clear is that the capital efficiency of our business with lower cash costs, flat well productivity and reduced CapEx is as good as it's ever been. But that's against the backdrop of commodity prices that have 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 months and quarters and then make a decision on what makes sense for the business in '25.

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

I appreciate your point on that. I think that's kind of an important part of our business. I'd say, 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 that royalty portfolio is a big part of that. I think we can't understate enough how important that is to overall driving economics and capital efficiency. I think an 80% NRI compared to a 75% is a real step change in returns and capital efficiency. I do think, though, given how impactful that could be to the business and the kinds 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.

We'll take our next question from Scott Hanold with RBC Capital Markets.

Just back to sort of activity pace in Barilla Draw. Look, it seems like obviously, you're having some good operational efficiency, good well performance. Do you think even lumping 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, are we at a maintenance pace at least right now with current activity even adding those assets?

Yes. I think given the increase in the number of wells per rig per year we can drill pretty meaningfully over the last two or three quarters, that increase definitely has under the current rig count made it more than a maintenance case pro forma for Barilla Draw. I don't think it's a lot more. It's probably a couple percent growth, something like that — very close to a maintenance case. But we are in a great position that as we look at what's the right rig count and frac fleet count in 2025, being able to do more with less gives us a lot of flexibility. If we want a small amount of growth we can maintain current rig count, and if we want to dial up the growth engine, we'd probably add a little bit more equipment. But the answer to your question is yes, it's more than a maintenance case today.

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

Yes, that's a great point. I do think I'll point out the reference to liquidity. I would say we're more focused on the strength and consistency of our business in up cycles and down cycles than anything related to M&A. I think the most important part of the balance sheet is not that it allows us to go to these strategic acquisitions, but 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, we'd say we have the same attitude towards M&A we have had since our founding. 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. We've got an Austin-based 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. I think we'll continue to evaluate anything and everything that's out there. We've got a great track record of demonstrating our ability to do accretive M&A really at every scale. For us, we're probably more focused today on the smaller opportunities. I think we've seen that the 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 nothing big coming down the pipeline as we see it. As opportunities come along, I think it's a safe bet to assume that we will be evaluating them and we'll make a disciplined decision for shareholders.

We'll take our next question from John Freeman with Raymond James.

Nice quarter. The first topic, I know that last quarter you all felt that you basically kind of closed the gap on a D&C basis on the legacy Earthstone relative to Permian Resources, but there was still a gap on the LOE side between legacy Earthstone and Permian Resources on items like SWD disposal agreements, recycling, et cetera. I'm just kind of curious, how long does that process take before 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.

I think the gap is closed on the LOE side — that would be the short answer. A little color behind it: Q2 was an extremely strong quarter from an LOE perspective on both legacy Earthstone assets and legacy Permian Resources; we had a really good quarter. I mentioned in some of the prepared remarks our workover cost perspective: our failure rates in Q2 were as good as we've ever seen, and our cost per failure is down. So we've been having to work over fewer wells and when we do, it's been cheaper. And Q2 is typically a good weather quarter for operations; this year was a milder summer, which helped. To answer a related question, my expectation is LOE going forward looks more like legacy Permian Resources than a combined premium, because integration is done. But I do think the $5.18 per BOE that we put out in Q2 is probably not the right run rate go forward. The run rate is probably closer to the bottom half of our $5.50 to $6 guidance range.

And then just my follow-up question. From a high-level basis, I'm not trying to get any necessary details on '25 plan. But if this year 25% of all budget was non-Drilling & Completion and obviously you'll remain really active on the M&A side, so this is probably a little bit of a moving target. But directionally, would we assume that percentage of non-D&C 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 kind of stay at the current percentage as it was this year?

It's all deal- and integration-dependent, as you mentioned. I do think that integrating Earthstone was a step change — it added quite a bit to the non-D&C piece relative to what we're used to. So it will come down from the 25% we saw in '24. I don't know exactly what Barilla Draw brings in; that's not a huge needle mover. So I don't expect that to fully offset it, but maybe a little bit. So I'm not going to give a specific number, but it will be less than 25% and closer to where we were historically.

We'll take our next question from Zach Parham with JPMorgan.

I wanted to ask on well costs. You were at $830 per foot this quarter versus the guide that underwrote your full year guidance of $860 per foot. Can you just talk about how you think well costs will trend in the second half of the year and maybe address the potential to drive down well cost further?

Yes. I think the way we got to $830 is almost 100% efficiency-driven, mostly on the rig side, just drilling more feet per day. We averaged 1,500 feet per day during Q2, and given the majority of the cost on the rig is priced per day, all that accretes straight to our bottom line. I think that's sticky; I think that is the new run rate — 1,500 feet per day and about $830 per foot is where we are outside of major inflation or deflation on the service cost side. There are still small amounts of efficiencies to capture. The Delaware Basin is still in relatively early innings versus other onshore U.S. basins, so we'll keep getting better, but it's hard to predict when you'll see another step change like Q1 to Q2. The rest of the opportunity lies in seeing some recession on the service cost side as the rest of the industry starts to drill more feet per day and more wells per year with fewer rigs. I don't know exactly how it plays out. 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 how we're thinking about it internally.

And just a follow-up, I wanted to ask on the volume guide from here, particularly on the NGL and gas side. 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.

I think the biggest change you've seen for Permian Resources and really across the basin is an increase in ethane recovery this quarter given poor in-basin gas prices. If the market plays out as many expect, gas prices should recover as you approach the end of the year. Our expectation internally is that gas prices should improve, and I do think this could be a reversion to more normal trends on gas, NGLs and percent oil.

We'll take our next question from Kevin MacCurdy with Pickering Energy Partners.

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?

I think this really goes back to our robust grassroots activity and efforts that we've been pursuing on the New Mexico side of the basin. Our team is constantly out there knocking on doors, running titles on opportunity sets that aren't always available in the public realm. As part of that, we'd identified several thousand acres that OXY owned which we thought made a ton of sense for the Eddy County part of the basin but were not as good a strategic fit for OXY. So as we were having discussions around Barilla Draw, we were able to propose a potential win-win for both us and OXY, which included those acres in this deal. That's how it came about. We've got a great relationship with the OXY team; they've been really good to work with over the years. As we can find win-wins for both us and OXY, we tend to do them, and that's exactly what happened here.

And as a follow-up, last quarter you mentioned that you expected your CapEx budget to increase by $50 million in conjunction with a bolt-on acquisition that was supposed to close in 2Q. This quarter, you reiterated your original guidance. I think that reads to me as lower CapEx than 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-in-lines?

Yes. The activity is still in the plan. We are actively drilling and completing on that Eddy County bolt-on asset, and that is included in the incremental 15 TILs. What we've seen in the last quarter is that our dollar-per-foot reduction in real time is chipping away at what was going to be a $50 million add to the $2 billion midpoint on our budget. So we're still well within our $1.9 billion to $2.1 billion CapEx range. We were at $2 billion, we went to $2.05 billion and now we are slowly chipping back closer to $2 billion. The reductions on a dollar-per-foot basis are making us feel very comfortable that we will continue to drive that down. I don't think we'll get well below $2 billion, but we will be close and well within the range to leave it where it is.

We'll take our next question from Leo Mariani with Roth.

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

Yes. I think first on the midstream, we need to get the deal closed and get our hands around more details on the actual midstream infrastructure before we commit to anything. But in acquisitions like this in the past, we have seen more value creation for shareholders by divesting midstream assets. That's not our core business and not where we want to deploy capital long term, so I think there's a good chance at some point in the future we divest at least part of the midstream system. Again, that's not imminent. Back to Barilla Draw: the Texas portion was part of a broadly marketed, very well-run process. The New Mexico piece was not — it was a proprietary deal that we identified through our grassroots work. More than anything else, we attribute our success on deals like this to our peer-leading cost structure, lower in-basin LOE, peer-leading drilling and completion performance and the offsetting footprint and synergies that came with this deal, which is what allowed us to win it.

And then just with respect to production, obviously you picked 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. That being said, I know you guys had previously said that expected oil production might slide a little bit in the second half and then with the acquisition was going to be a little bit more flattish. Looking at the guide, it looks like it might be up small in the second half on oil. Just wanted to verify — obviously there's a range in the guidance — but is it fair to say it's probably up small from 2Q levels on oil for the rest of the year?

I think the production profile for the rest of the year is pretty flat from here — flat to the first half — on a standalone basis. If you factor in OXY in Q4, you'd obviously see some growth in Q4, but that flat profile from here is the right way to approach it.

We'll take our next question from Gabe Daoud with TD Cowen.

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?

I think the Midland Basin is different for us. Our focus in the core part of our business has always been and continues to be the Delaware Basin. That's where our development is focused and where our strategic M&A activity has been focused and will continue to be focused. But we're continuing to understand that asset better. Our performance on the asset, both cost structure and productivity, continues to improve this year. We like having it today; we like the cash flow profile it brings. At some point, it may make sense to do something strategic with the Midland, but probably not anytime soon and probably not in this commodity price environment.

We'll take our next question from Paul Diamond with Citi.

Just a quick one. Given the ongoing volatility in Waha pricing and market expectations that that's going to decongest to some degree in '25 and beyond, I just wanted to get your understanding of how you see that playing out and also how that would impact your hedging strategy, especially around basis?

I think, like everyone, we expect the market to get better from the lows of Q2. Additional pipeline capacity coming online in the back half of this year should help. I do think continued volatility is probably the case for Waha going forward. As we think about our gas hedging strategy, basis is an absolutely critical part of that and we intend to hedge basis alongside hub pricing going forward. We sold about 30% of our gas this quarter in the Houston market, and an important strategic initiative for us and our midstream team is to sell more gas to other markets and diversify beyond Waha over time. That's a long game — it takes time for contracts to roll and new pipelines to be built — but ultimately the goal is to sell more than 30% of our gas in the Houston ship channel, and that's going to continue to be a priority for us.

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

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. That said, there is a robust market for non-op and smaller deals out there, so we haven't always been able to be competitive on everything. We remain disciplined and bid to prices that we like. Because of our cost structure, we've been fortunate to still get things done even in this market.

We'll take our next question from Noah Hungness with Bank of America.

I wanted to ask on your cost structure. Your cost structure has continued to improve — LOE 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 breakeven?

On the inventory side, the way we classify and think about inventory, it already is kind of in the money. What this does as we continue to drive down LOE and CapEx is it brings inventory from marginally in the money to deeper in the money. So it absolutely shifts the whole curve in our direction at a flat commodity price, just reducing CapEx and cash cost. But this isn't taking something uneconomic to economic — we think of our inventory as already economic. So it's taking economic inventory to more economic.

The economics are so strong today that it's not taking something uneconomic to economic, it's taking it from economic or very economic to more economic. It's a good problem to have. As you think about secondary zones, which we're not actively targeting today, that will have a bigger impact on some secondary zones versus the primary zones we're developing now.

And on breakeven, we're at kind of mid- to high-40s to the base dividend for '25 at a maintenance program. We have really attractive capital efficiency and low breakevens, and given the productivity of the inventory changes we're discussing and our cost structure, that positions us well.

And then my next question is on Barilla Draw. When you take over the asset, how should we think about your development philosophy versus how OXY was developing it, either on proppant loading or spacing or anything like that?

Honestly, I don't think it's materially different on how they developed the Third Bone Spring Sand, Wolfcamp A and Wolfcamp B historically. The Southern Delaware development approach of roughly 2,500 pounds per foot of proppant and around 10 wells between benches is largely solved at this point. We may add or subtract a well here or there and tweak stage spacing, but nothing dramatic. The bigger change you'll see is we'll start to loop in co-development of the Wolfcamp B and some of the shallower shales — Second Bone Shale, Third Bone Shale — into that development. We've had success just to the east and north of this asset in developing the shales, so we'll look at optimized resource recovery and PV per acre as we consider looping in those other zones. But it won't be a material step change; the biggest change will be realized under our cost structure from an LOE and CapEx perspective.

We'll take our next question from Geoff Jay with Daniel Energy Partners.

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. I think if I remember right, you said in Q1 that on a legacy Permian Resources basis, efficiency gains were single-digit percentage points. What changed in Q2? Help us understand the significance of the gains you're seeing in Q2 and what you would do differently?

If we think about efficiencies as time and cost, which is what we've seen from Q1 to Q2, the majority of the change on the CapEx side is going to be on the drilling side. We're now about 15% faster than we were in 2023. Some of that improvement began in Q4 and into Q1, but the majority came from Q1 to Q2. How we got there is a combination of many small things: a really good relationship between our geo team and our drilling team ensuring the laterals are placed to both enhance productivity and allow us to drill faster; continual tweaks and optimization of BHAs, motors, bits, etc.; and many incremental operational improvements. The combination of all those tweaks produces month-over-month and quarter-over-quarter improvement, and occasionally you hit breakthroughs that produce a big step change, which is what happened from Q1 to Q2.

We'll take our next question from John Abbott with Wolfe Research.

You did add 2025 hedges and it looks like you started to 2026 on the oil side. Do you plan to do more? Or do you add more from here? How are you thinking about hedging at this point, given the backwardated strip?

It's worth noting that we placed the hedges we referenced about a month ago when spot price was in the $80s and it was a more favorable hedging environment. Our hedging strategy continues to be to protect the balance sheet and ensure we can thrive in a future commodity down cycle. We feel really good that the balance sheet is where it needs to be today. If we add additional hedges, especially in those out years, it would likely be opportunistic if we see a meaningful positive change in the commodities market. You might see us layer on more hedges in 2026, but there's nothing immediate at current pricing.

And on M&A, given the volatility we've seen over the last couple of days, what's your impression about getting a deal done in this environment? Is it more difficult? Can you get deals done? You mentioned it's 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 given the commodity environment?

Volatility makes it a lot harder to get deals done. Volatility in pricing drives bid-ask spreads higher and pushes buyers and sellers apart. We feel good about the timing of our last deal and getting that to the finish line, but we aren't engaged in anything of material scale today; we're really focused on getting the OXY deal closed and continuing to execute. Regarding the Midland Basin, a larger percentage of revenue and free cash flow from that asset comes from gas and NGLs, and gas pricing in that basin has been suppressed for quite a while. A modestly better gas price environment would have a meaningful step-up in free cash flow generation, which is what we'd be looking for when evaluating strategic options for that asset.

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.

All right. Thank you. Having gotten off to a great start for 2024, our primary goal remains the same: to maximize shareholder value over the long term. 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 to everyone for joining the call today and for following the Permian Resources story.

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