PR - NYSE

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 800-9259-354 and entering the reply 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 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 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.

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 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 D&C efficiencies and that 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 oil per day of our guidance increase this year is a direct result of outperformance of our base business. Given the strong D&C efficiencies, which drove a 13% cost improvement in Q2, when compared to 2023, we are also increasing our 2024 TIL 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 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 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 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 are 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 PR and third-party volumes. These assets provide optionality to enhance margins or to go-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 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 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 RBO 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 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 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 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 saving up to be a very strong year for PR, 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 question-and-answer session.

[Operator Instructions] Our first question from Neal Dingmann with Truist Securities.

First question is on your operating efficiency. Specifically, given your continued improved cycle times, I'm just wondering, you all anticipate lowering D&C activity this year? And maybe could you speak to how you're thinking about the D&C 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?

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 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 as once we close Barilla Draw, I think the current point today is we are going to drill a pad on Barilla Draw back half of this year, but I think it will be more kind of substituting Barilla Draw drop or 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 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 the 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 2. So we'll see how all those play out over the coming kind of 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, in the deck, it shows around 85,000. Can we assume much of the upcoming targeted activity will be on those acres or on those minerals acre. I guess, maybe asked another thing there. Is there any reason to consider monetizing some of these minerals given how high prices are for middle these days?

I appreciate your point on that. 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, 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 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.

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 loading in Barilla Jaw in to 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 in lumping in Barilla Draw? I mean -- is that -- are we at a maintenance pace at least right now with current activity even adding those assets?

Yes. I think kind of just given the -- 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 under the current rig count, we can -- 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 percent growth, something like that, very close to a maintenance case. 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 frac fleet count in 2025 that 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 current rig count, and 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.

And then just sticking on just general M&A kind of landscape and look, you guys have been successfully able to integrate assets quickly, cut cost. So, obviously, have been very, very good at that. And I couldn't help but notice you talked a couple of times in your prepared comments about having amongst the most liquidity since the combination of your Colgate in Centennial. So look, 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 kind of strength and consistency of our business in up cycles and down cycles than probably 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 that 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 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. I think we said it a lot, but 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. I think we've got a great track record of demonstrating our ability to do accretive M&A really at every scale. 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 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 a dry 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 PR, but there was still a gap there on the LOE side between kind of legacy Earthstone and PR stuff like 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.

I think the gaps closed on the LOE side would be the short answer. A little color behind it. We -- Q2 was an extremely strong quarter from an LOE side on both legacy Earthstone assets put also on legacy PR, just kind of we had a really good quarter from a I mentioned in some of the prepared remarks from just an 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 having to work over less wells and when we do, it's been cheaper. And then also Q2 is a really good weather quarter, just like typically, if you think about Q2, it's hot and your chemical usage goes up, your rate goes up, et cetera. And this was more of a mild summer. And 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 $518 million 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 to $6 guidance range.

And then just my follow-up question. And just 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-D&C and obviously, you'll remain really active on the M&A side. So this is probably a little bit of a moving target. But just 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 kind of percentage as it was this year?

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-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 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 that's a little bit. So kind of -- I'm not going to give a specific answer, but it will be less than 25% and closer to where we were historically.

We'll take our next question from

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 same half of the year and maybe address the potential to drive down well cost further?

Yes. So look, I think the way we got to $830 is almost 100% efficiency driven. So, mostly on the rig side, just drilling more feet per day. We averaged 1,500 feet per day during Q2, which 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 hard to predict when you're going to get a step change like we had from Q1 to Q2. And then I think the rest of the opportunity lies is as we're seeing across the industry as 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 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 likely 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.

And just a follow-up, I wanted to ask on kind of 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 wheat 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?

Yes. I mean, I think kind of the biggest change, as you've seen for PR and really across the basin is an increase in ethane recovery this quarter given poor in-basin gas prices. I think a future market 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 this could be kind of a reversion to more normal trends on kind of gas NGLs and percent oil.

We'll take our next question from Kevin MacCurdy with Pickering Eng 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 bit 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 in the New Mexico and Texas side of the basin. Our team is actually constantly out there knocking on doors, running titles on earth opportunity sets that kind of aren't available to the public realm at this point. And I'd say as part of that, we'd identified several thousand acres, which you see here, are a part of it here that OXY owned that we thought made a ton of sense for what 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 Draw, 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 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 the bolt-on acquisition. I believe was supposed to close in 2Q. This quarter, you reiterated your original guidance. I think that reads to me is 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 internal lines?

Yes. So the answer is yes to a lot of what you asked. 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 TILs. 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 going to 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 billion to $2.1 billion CapEx range. I think the math is right. We were at $2 billion. We went to $2.05 billion and now we are slowly chipping away back closer to $2 billion. And 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 $2 $2 billion, but kind of close enough 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 guys might look to monetize in the near future? And then just 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 guys attribute to kind of getting the good price on the asset here?

Yes. Sure. I will 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 how 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 yes, just to be blunt, the Texas part was part of a broadly marketed, I think very well-run process. The New Mexico piece was not. The New Mexico piece is 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 our counterparty here. But I think more than anything else, we attribute our success on deals like this to our peer-leading cost structure. Our or lower in-basin LOE are, I think, peer-leading D&C and the offsetting footprint and the synergies that came with this deal, I think is what allows us to win these deals, not anything else.

And then just with respect to production, obviously, you guys 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 kind of said that expected oil production maybe slide a little bit in the second half. And then with the acquisition was going to be a little bit more flattish in the second half. 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 in 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?

Yes. I think kind of production profile for the rest of the year is pretty flat from here, flat to the first half. I'd say that's on a standalone basis. If you were to factor in OXY in Q4, you'd obviously see some growth in Q4, but I think that kind of 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?

Yes. I mean I think the Midland Basin was a different one for us. I think as we've said time and again, our focus in 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 we're continuing to understand that asset better. I'd say our performance on the asset, both cost structure and productivity continues to improve this year. And we're trying to get our hands fully around that basin and kind of what it means in the portfolio. I think we like having it today. We like the cash flow profile that it brings. I think at some point, it may make sense to do something strategic with the Midland, but I think 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. So given the ongoing volatility in Waha pricing, kind of an expectation in the market that, that's going to decongest to some degree in the '25 and beyond. I just wanted to get your understanding like how you all see that playing out and also how that would impact your hedging strategy, especially around basis?

Yes, sure. I mean I think we expect like, I think, everybody does that the market to get better from the lows of Q2. I think additional pipeline capacity coming online kind of back half of this year should and will help that. I do think continued volatility is probably the case 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 intend 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 market. And I think important strategic initiative for us and our midstream team is going to be how can we sell more gas at other markets and kind of diversify beyond Waha over time. And that's a long game. 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 only is to sell more than 30% of our gas is 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 kind of a flurry of activity as of late across the space, our bid-ask spreads have been pretty volatile. Just wanted to get your take on kind of where they sit now and you see them going through the rest of the year?

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 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.

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

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

Look, on the inventory side, I think 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 because that's not how we think about inventory to start with.

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. And I think -- I do think it's important that as you think about secondary zones, which we're not really actively targeting today that, that will have a bigger impact on some of the secondary zones versus the more primary zones we're developing today.

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, what we're talking about and our cost structure.

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 either on proppant loading or spacing or anything like that?

Honestly, I don't think it's that materially different on how they develop the Third Bone Spring Sand, Wolfcamp A, Wolfcamp B historically or really Third Bone, Spring Sand, Wolfcamp A historically. Like the rest of being the Southern Delaware kind of 2,500 pounds per foot of proppant, call it, 10 wells between those benches is about solved at this point. We may add or subtract a well here or there and 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 in 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 developing the shales. So just what is kind of the optimized resource recovery and kind of PV per the issue as we think about looping in some of those other zones. But it won't be a material step change. I think the biggest step change will be -- it will be done under our cost structure from an LOE perspective from a CapEx perspective, et cetera.

[Operator Instructions] We'll take our next question from Geoff Jay with Daniel Energy Partners.

Well, 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 a bit about like single-digit percentage points. What kind of changed in Q2? Because you just help us understand exactly the significance of the gains you're seeing in Q2? And kind of would you do differently?

If we think about just efficiencies is 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 going to be on the drilling side. And we're now call it 15% faster than we were in '23. And that is, 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 add-up of a bunch of little things. I'd say the majority of the time were savings 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 also make sure we're in the rock to drill the fastest. And then second, we're always kind of tweaking and optimizing [BHAs], whether that be motors, bits, et cetera. And 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 happened from Q1 to Q2.

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

Just a couple of quick ones for me. So you did add your 2025 hedges, it looks like you started at to 2026 on the oil side. Do you do more? Or do you add more from here? How are you thinking about hedging at this point just given the backwardated strip?

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 spot price was in the '80s, and it was a more favorable hedging environment. Now I think of our hedging strategy is continuing to be, number one, to protect the balance sheet and do everything we can to ensure we can kind of thrive and 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 those kind of out years, it's probably just going to be opportunistically if we see a meaningful change in the commodities market to the positive. I think you'd see us probably layer on largely more hedges in 2026, but it's kind of nothing immediate at current pricing.

And there's also been also 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, 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?

Yes. I mean, I think 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. I think that volatility in pricing always is going to drive bid-ask spreads higher and kind of push buyers and sellers apart. But I think, look, we feel good about the timing of our last deal, getting that to the finish line. We aren't actually 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 now there's a lot of sleep over it today. I think with ascertain of the Midland Basin, that's just a larger percentage of the revenue and free cash from that asset come from gas and NGLs and NGL pricing has remained okay. The 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 environment. So I'd say that's what we're looking for or referencing there is really just the kind of improvement in interbasin gas pricing.

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. Well, having gotten off to a great start for 2024, our primary goal remains the same, to maximize 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 to everyone for joining the call today and for following the Permian Resources story.