Q4 2019 Earnings Call
[music] well comes to Devon Energy's fourth quarter and full year 2019 conference calls after.
Time, all participants are in listen only mode. This call is being recorded I would now like to turn the call over to Scott, who they vice President Investor Relations. Sir you may begin.
Good morning, and thank you to everyone for joining us on the call today last night, we issued an earnings release in operations report the cover results for the year and are forward looking outlook will make references to our operations report during the call today.
Conversation and these slides can be found on our website, Devon energy Dot com.
Also joining me on the call today.
Our president and CEO, Jeff written our Chief Financial Officer, David Heres, Our executive Vice President of exploration and production and a few other members of our senior management team.
Comments on the call today will contain plants forecasts and estimates that are forward looking statements on the U.S. Securities law. These comments are subject to assumptions risks and uncertainties that could cause actual results to differ from are forward looking statements. Please take note of the cautionary language and risk factors provided in our FCC filings and earnings materials.
With that I'll turn the call over today.
Thank God and good morning, everyone.
Devon 2019 can best be defined as a year of exceptional watch execution.
And differentiating performance across every aspect of our business.
As you can see on slide five of our operations report a critical accomplishment during the year was our timely and tax or patient transformation to a U.S. oil business.
Even with the challenging market conditions, we successfully completed or portfolio simplification objectives, and only 10 months and were able to exit non core assets at highly accretive valuations.
Furthermore, by sharpening our focus on Devins World class U.S. oil assets, we delivered a step change improvement and corporate level rates of return.
Achieved enhanced capital efficiencies expanded our margins reduced leverage and returned industry, leading amounts of capital to shareholders.
Oh no. It was a great year, but let me be clear. We're just getting started any investment case for Devon has never been stronger.
Looking ahead to 2020, our strategic frameworks for success and disciplined capital priorities remain unchanged.
These priorities are outlined on slide 10 of our operations report.
As always devins top priorities will be to fund the maintenance capital requirements of our business and a quarterly dividend.
Once these objectives are Mad next step in our capital allocation process is to selectively deploy capital to high return projects that were officially expand the cash flow of our business.
Importantly, our 2020 plan meets all of these capital allocation priorities at low breakeven funding levels.
Even after accounting for the recent weaknesses in gas and NGL strip pricing.
Sure just volatility drive prices higher we will remain discipline and the benefits of any pricing windfall above our conservative based planning scenario will manifest itself in a higher levels of free cash flow for shareholders not higher capital spending.
Conversely should we see price volatility to the downside.
We've designed or operating plan to have the flexibility and agility to reassess the capital program and react to any structural changes in a macro environment.
No it's run through some of the specifics of our 2020 operating plan would you can see on slide 11.
The key takeaway from this hard is that due to capital efficiencies. We are lowering the top end of our upstream capital gardens in 2020 by $50 million.
To a range of 1.7 billion 1.85 billion.
Furthermore, the impact of this investment program and 20 Twond. He is expected to be enhanced by reallocation of capital from the stack. They look woodrich combo play to the Delaware the top oil play and all of North America.
This shift in capital allocation will increase spending in the Delaware basin by approximately 15% year over year.
And the Delaware, Delaware will now account for approximately 60% of total capital investment for the year.
Another important distinction of EUR 2020 program is that the reallocation of capital to the Delaware Basin will be deployed exclusively towards accelerating wolfcamp development activity.
This is significant because our wolfcamp activity exhibited the most substantial capital efficiency improvement of any opportunity our portfolio and the Bangkok into back half of 29 team.
With this increase capital allocation Wolfcamp, well now account for two thirds of our Delaware activity.
Providing a visible capital efficiency tailwind to accrue to our benefit throughout 2020 and carry forward into 2021 as well.
Well the 2020 capital program is concentrated in the Delaware Basin I would be remiss not to mention exciting catalyst, which program. We have planned for the powder River basin.
With the appraisal success, we achieved in the Niobrara in 2019, we point to double our activity levels in this emerging resource play over the upcoming year.
A key objective <unk> broke probe Niobrara program and 2020 is to de risk and to prepare a portion of our 200000 net acres for full development by early next year.
And lastly, with our Eagle Ford and stack assets will be business as usual.
The operating team laser focused on executing on their capital programs efficiently managing based production and maximizing free cash flow for the company.
Turning your attention to slide 12 based on the strong operational momentum of our business, we're raising devins per share growth outlook for 2020.
Not surprisingly this improved outlook is underpinned body up standing well performance, we are experiencing into Delaware basin.
As a result, we're now increasing the lower end of our oil growth outlook by 50 basis points to a range of 7.5% to 9% compared to 2019.
And to reiterate there's higher growth rate is matched with lower capital spending expectations as well.
To maximize the value of this production we've aggressively acted over the past year to materially improve our corporate cost structure.
The success of this ongoing initiatives as evidenced by devins junaid cost projected to be reduced by 25% year over year.
And lastly law, Jeff will speak to this later in the call the per share impact of this improved 2020 outlook will be further magnified by our new 1 billion dollar share repurchase program and yesterday's announcement to increase the quarterly dividend by 22%.
Moving to slide 13, while 2020 decided not to be a great year for Devon. Another critical message I want to convey is at the differentiated operating performance achieved in 2019 is sustainable longer term.
Devon, we absolutely have the right person now financial strength in inventory depth to deliver both attractive growth rates and increased amounts of free cash flow and 2021 and beyond.
While it is too early to provide official guidance for 2021, our thoughtful and pragmatic approach to the business will remain the same.
Our Delaware centric capital program, we'll remain focused on steady activity levels deliver the right balance between returns capital efficiencies growth rates and free cash flow.
With this disciplined financial framework, we believe investors can directionally expect a mid to high single digit oil growth rate in 2021 for a relatively stable amount of capital investment.
Noteworthy driver of this preliminary outlook is a positive rate of change we expect realized from our transition to higher Wolfcamp development activity.
Looking beyond the next few years, given the quality of our inventory I believe a sustainable long term oil growth rate in the mid single digit range pills and appropriate rate to expand our business.
While generating increasing amounts of free cash flow kicking that can effectively compete with any sector in the market.
Slide 14 showcases the free cash flow our business can deliver through 2021.
As you can see in the grey box at the top of the slide Devins improved operating outlook lowers the breakeven funding level of our operating plan and 2020 and 2021 from our previous disclosure last November.
The combination of higher oil growth rate and improved cost structure and a stronger hedge book now allow us to fully fund our capital program at 40 650 WT.
And to dollar Henry hub pricing and Mont Belvieu realizations of less than 30% WT online.
While we are pleased with these improvements in breakeven funding, which meaningfully improves our position on the U.S. cost curve, we are not stopping here.
To be successful in this unforgiving environment, you must roll up your sleeves get your hands Dirty and on a daily basis look for ways to reduce costs by controlling the controllables.
And Devon that is exactly what we're focused on.
So in summary, devins multi basin oil business is built to last and our disciplined capital plan answered are designed to deliver compelling amounts of free cash flow and an attractive growth in or per share metrics for the foreseeable future.
And with that I'll turn the call over to Jeff to review, our financial strategy and detail, how we plan to allocate the excess cash flow from our business. Thanks, Dave Devon, We believe our financial strategy and underlying balance sheet strength or significant competitive advantages the extreme commodity price volatility we've experienced over the last year is a key.
Constant reminder, that a strong balance sheet and effective risk management programs are critical to the long term success of an SMB company.
Core to our financial strategy is the emphasis on building a high margin asset base Devins advantage asset base is very well position on North America is marginal cost curve.
The high grading of our asset portfolio over the last several years and the disciplined allocation of capital to our highest return opportunities is working to lower the breakeven pricing for the company.
As Dave mentioned in his opening remarks, and as outlined on slide 14, our improved operating outlook has lowered the breakeven funding level of our operating plan in 2020 and 2021 from our previous disclosure last November.
This allows us to provide shareholders with free cash flow, even in challenging commodity price environment to further expand our margin of safety. We are actively deploying proven and progressive risk management and supply chain practices to optimize our financial results.
The key example of this includes our disciplined hedging program, which uses a combination of systematic and discretionary hedges to effectively mitigate pricing volatility.
We have over 40% of our 2020 projected oil production hedged at an average floor of $53 per barrel well over our funding breakeven pricing of 40 650 per barrel.
In addition, our supply chain team has shifted the majority of our contracted services to shorter term over the last year, allowing us to take advantage of the deflationary environment and providing flexibility should market conditions change.
Demand changes in activity to preserve free cash flow.
In combination with our high liquidity and low leverage these prudent risk management and supply chain practices allow us to optimize planning efforts and enhance our capital allocation decisions in periods of uncertainty.
Now turning your attention to slide eight of our operations report I plan to briefly cover the details of our financial position, where we have built a tremendous amount of flexibility.
An important strategic priority over the last year has been the repayment of debt to further strengthen our investment grade financial position.
We made significant progress towards this initiative in 2019, and we retired 1.7 billion of senior notes, which reduced our debt ratio to around one times net debt to EBITDA on a trailing 12 month basis.
Importantly, this deleveraging activity completely cleared devins outstanding debt maturity runway until late 2025.
Extending the weighted average maturity of our debt portfolio to more than 18 years.
While our balance sheet is in great shape than we have tremendous flexibility, we're not done making improvements in the fourth quarter, Devon generated 171 million of free cash flow and we exited the year with 1.8 billion of cash on hand. Furthermore, devins cash balances will increase upon close in mid April.
With our $770 million Barnett shale divestiture.
We are keeping a close watch on interest rates and credit spreads as we evaluate that the next potential steps in our debt repurchase plan.
Current market dynamics of driven redemption premium substantially higher but we are prepared to be patient and opportunistic to repurchase additional debt should the market move to our benefit.
Pivoting your attention to the left hand of slide nine another top financial priority for Devon is returning capital to shareholders in the form of an increasing dividends.
Overall from a dividend policy perspective, we are targeting a payout ratio of 5% to 10% of operating cash flow at our base planning scenario, a $50 Debbie T.I. pricing.
Additionally, we believe consistent and sustainable growth in our dividend provides for a very attractive and competitive result, when compared to our E and M. P peers and other large cap companies across the broader S&P 500.
Our 46 dollar 50 cent per barrel breakeven under underpins this policy and supports growth in the dividend over time, given the strength of our projected 2020 financial outlook and reduce breakeven. We were pleased to announced last night that our board has approved a 22% increase in devins quarterly dividend this year shareholder friendly.
Action is consistent with our target payout ratios and is aligned with our commitment to steadily grow the dividend over time to a level that is highly competitive with other sectors in the market.
As you can see on the right hand side of slide nine in addition to our dividend. We're also returning cash to shareholders through devins industry, leading share repurchase program. Since our program began in 2018, we repurchased 147 million shares at a total cost of $4.8 billion, our board of directors authorize a new.
$2 billion program last December paving the way for additional repurchases in 2020 and total in a total reduction in devins outstanding share count of approximately 35% by year end.
This is not only the most active program in the MP space, but it also outpaces the activity of any company regardless of the sector in the S&P 500.
We have been aggressively buying our shares over the over the last year at levels ranging from 20 to $25 per share given our view of the attractive valuation of our shares compared to the intrinsic value of the company you can expect more the same from us in 2020.
In summary, the disciplined financial model, we are using to operate the company is working and checks all the boxes necessary for long term success, we have a strong financial position with a low breakeven funding funding level and our business can generate excess excess cash flow in any commodity price environment, we have excellent liquidity and strong balance sheet with very low led.
Bridge ratios and we rewarded our shareholders with the return of cash through our dividend and share repurchase program with that I'll turn the call over to David Harris to cover our operating performance and outlook.
Thanks, Jeff the fourth quarter was another strong when operationally for Devon that can best be described by oil production once again exceeding guidance and capital spending coming and 6% below forecast.
This trend of operational excellence has now been established over multiple quarters and is a testament to the high level of performance each of our asset teams and effectively fulfilling their respective roles in our business.
For my prepared comments today I plan to cover the asset specific highlights that are driving this positive business momentum and provide some insights and observations regarding our outlook for 2020.
As you can see on slide 16 of the operations report our World Class, Delaware Basin asset is the capital efficient growth engine driving devins operational outperformance.
In the fourth quarter net production from the Delaware continue to increase rapidly growing 82% on a year over year basis. This strong growth was driven by 36 high impact wells brought online in the quarter that we're diversified across all five core areas and the Wolfcamp bone spring and Leonard formations.
These strong wells achieved average 30 day rates of 2800 Beuys per day of which 70% was oil.
At an average cost of around 75 million $7.5 million per well. The overall returns from our fourth quarter program and the Delaware Basin were simply outstanding.
Looking specifically at the project level detail for the quarter are much anticipated catch scratched 2.0 project did not disappoint.
10, well project, which developed a second bone spring sweet spot exceeded our pre drill expectations by reaching average 30 day rates of 3000 view east per well or 420 by beuys per thousand feet a lateral.
Well the cat scratch results were certainly impressive I believe the top thematic take away for the fourth quarter activity is the operational momentum we are establishing with our Wolfcamp program.
As you can see on the map at the right side of Slide 16, we brought on line three impactful wolfcamp projects during the quarter that help further validate the commercial reality of multiple wolfcamp landing zones across the basin of southeast New Mexico.
Of particular note was our highly successful seven wells Spud Muffin project in the potato basin area and Eddy County in which we co developed the third bone spring and upper Wolfcamp intervals.
While industry has been active for some time in the potato basin area. The spud Muffin project was our initial operated test in this area and given the well productivity. We experienced this will be an area that definitely works its way into the Delaware basin capital allocation mix going forward.
Which further deepens, our resource rich opportunity set in this franchise asset.
As Dave touched on in his opening remarks, the set up for the Delaware Basin. In 2020 is exciting our diversified development programs across our five core areas position us for another year of exceptionally strong oil growth.
In total we expect to invest around $1 billion of capital in the Delaware that will result in approximately 130 operated spuds.
This activity, we're allocating nearly 65% to the Wolfcamp formation, which essentially represents a doubling of wolfcamp wolfcamp activity.
Year over year.
Turning to reiterate comments from earlier in the call. This shift in Delaware capital allocation to the Wolfcamp is impactful given the substantial capital efficiency improvements we've achieved in the second half of 2019.
In fact in the most recent quarter, our drilled and completed fee per day metrics in the Wolfcamp improved 48, and 62% year over year, respectively.
Steadily improving cycle times and costs provided capital efficiency tailwind heading into 2020.
The next asset I would like to discusses the powder River basin, an important emerging oil growth opportunity in our portfolio.
In the fourth quarter, our development focus program commenced production on 19, new wells that drove net production more than 50% higher year over year.
Importantly, this oil weighted production growth was accompanied by a step change improvement in capital efficiency.
Specifically looking at the turn formation formation, which was our top development target in 2019. The team did a fantastic job of substantially reducing cycle times, and recognizing savings of more than $1 million per well as well cost push towards $6 million per well by year end.
As I look ahead to the upcoming year, our highest priority in the powder River Basin Basin is the delineation of our Niobrara potential.
Our Niobrara position consisting of 200000 net acres in the core of the place chalk window has repeatable resource play characteristics and the potential to be an important growth driver for Devon longer term.
Over the past two years results from our Niobrara appraisal work have confirmed this potential.
With 11 operated wells now online and the average 30 day rates from these oil prone wells, reaching its highest 1500 Boe per day.
Further progressing the team's confidence our our initial spacing test brought online in the second half of 2019, which suggests the commercial potential for at least three to four wells per section.
These tests have also confirmed our ability to develop the Niobrara independent of the deeper Turner interval.
Based on positive operating results obtained to date, we're doubling our niobrara activity in 2022, approximately 15 wells.
With this increased capital allocation, we're methodically focusing our delineation efforts in the southwest quadrant of our acreage, which we call Atlas West and has delivered some of the highest oil rates in the basin.
With additional success, we believe it's possible to ready a portion of our Atlas Wes acreage for full field development in 2021.
And finally, our Eagle Ford and stack assets are successfully fulfilling their strategically important roles in our portfolio, providing nearly $600 million or free cash flow over the past year.
Specifically in the Eagle Ford key message I want to convey is that we have reestablish operational momentum in the play with our new partner exiting the year producing around 53000 Boe per day.
Our fourth quarter operations were impacted by a well control event related to surface equipment.
The situation has been resolved, but it did result in estimated downtime of 9000 beuys per day in the quarter and remediation costs in the quarter of approximately $7 million.
Looking ahead to 2020, we expect to maintain strong operational continuity in the Eagle Ford running an average of three to four rig lines through most of the year.
This disciplined and capital efficient plan is expected to deliver a modest increase in our production volumes on a year over year basis ostrich staying true to the role of generating significant amounts of free cash flow.
Lastly in the stack, we are excited about our recently announced Dow joint venture.
With the Dow deal, we have monetized half of our working interest in a 133 undrilled locations in exchange for one for 100 million dollar drilling carry over the next four years.
This innovative agreement will help us bring forward value in the stack, while delivering carry enhanced returns that compete effectively for capital within our portfolio.
In addition to the benefits of a drilling carry our returns are also expected to be enhanced by lower well costs from focused infill drilling and for midstream incentive rates that substantially improved per unit operating costs for each new wells brought online.
Initial activity from the Dow joint venture will begin in the second quarter of 2020 with the two rig program developing the 18, well Jacobs ROE in Northern Canadian County.
First production from the Jacobs ROE is forecast to occur in early 2021.
While we will continue to look for smart ways to enhance the value of our stock position. We're quite pleased with the initial steps we've taken with Dow.
That concludes my prepared remarks, and I would like to turn the call back over to Scott.
Thanks, David will now open the call to Kuni. Please limit yourself to one question and a follow up this allows us to get to more of your questions on the call today with that operator, we'll take our first question.
Your last question. Please press star one on your telephone keypad. The first question from our own Jairam JP Morgan. Please go ahead. Your line is open.
Yes, good morning, Dave the 2020 capital allocation.
Obviously, 60% going to the Delaware, 20% to powder.
17% to the Eagle Ford and 3% than the stack.
And the stack Capex is down from coal to 16% mix.
Last year.
How comfortable are you with a couple of rent complimentary assets in the portfolio to the Delaware.
And how are you thinking about inorganic opportunities as we did see a favorable reaction to the W.P. Axa Felix transaction, which was announced a few weeks ago.
Sure Yeah first off we're very comfortable with the capital allocation, we haven't and frankly the shift of capital from the stack to the Delaware is the primary reason you're going to see the growth that we have described in 2021 in general terms.
Why that is sustainable over a longer period of time, because you think about a conceptually it takes nine to 12 months for first production to come from capital and so really the for the most part the capital that we're spending in 2020, where we've shifted some of that capital to the Delaware is being reflected in 2021.
On production results, which is driving that oil growth rate and that is sustainable for many many years with the deep inventory of opportunities that we have in the Delaware basin. So thats fundamentally why we're going to see to kind of growth rates.
We're describing here for a long time.
Now given that.
That we are comfortable and we are.
Driving higher capital efficiencies internally, we're driving higher levels of cash flow and focused on returning that value to shareholders through increased capital efficiencies into higher cash flow that we're generating we have no need to do an acquisition now are we looking at.
The opportunities absolutely were that we are into deal flow, we're always going to be entity deal flow, we think thats part of our job, but do we are going to be incredibly disciplined around any decision.
Regarding that because of the strength of our internal.
Portfolio that we have and and the confidence. So we have that we're going to be able to continue to drive higher cash flow.
Through the oil growth and increased capital efficiencies.
Great then I had one operating question I know, there's been a lot of but excitement around the cat scratch area Todd.
We didn't want to.
If you could maybe elaborate on the initial delineation success in the potato basin I think your pet as just south of Oxys height and length of 14, well programs I was wondering if you could talk about some of the applications.
These delineation results and perhaps capital allocation on a go forward basis in this.
Part of your Delaware Basin portfolio.
Earlier this is David Harris. Thanks for the question Yeah, We're really excited about the potato basin area as I mentioned in my prepared remarks.
This is an area where.
So some other companies, including Oxy as you mentioned had been active.
For a little while spud muffin as our first operated test we brought seven wells online there.
And they far exceeded our expectations.
For that area and so.
As we think we're going to see increasing activity out there not just from an industry perspective, but you will increasingly see a compete for capital within our portfolio.
I think if you look in the operations reported at a kind of how we've allocated capital throughout the year.
It's going to be roughly about 20% of our capital or so.
Going forward and so.
It's one of the things that we like about the Delaware position that we have in the five core areas we're diversified.
Across the basin of southeast New Mexico.
And think that that will continue to be.
Exciting area for us going forward.
Great. Thanks for those comments.
Your next question comes from Doug Leggate of Bank of America. Please go ahead. Your line is open.
Thanks, Good morning, everybody.
Actually I wonder if I could just follow up on ruins question on the Delaware inventory. If we haven't really hurt you talk about inventory depth and quite a while at least not in terms of numbers and your slide deck. So I just wonder if you could give us an update as to how about risk development inventory looks particularly in the Delaware and if I made as both on a part.
Beat to that we haven't really helped a lot of people talk much about interference or.
Child issues since I guess about a year ago. So im just want to make sure that where you guys are comfortable with the spacing that you're.
You are developing the Delaware at this point.
Yeah, Thanks, Doug well.
Frankly, we had the.
The inventory slide in our corporate deck, I think everything up and up until this presentation. There is no. There's no big news, we just had a lot of other information we wanted to cover on.
And this operation to report so we didn't have it in there but there's.
And David Harris can give you a little bit more detail on this but we have a very deep inventory in the Delaware basin.
That is going to compete for capital for for many many years.
And that's going to be the underpinning of the growth in the company now when we say we have that kind of inventory. We're obviously thinking about issues such as why is the right spacing.
Parent child relationships et cetera, that's all incorporated in that.
No I think you may in the future and we're constantly refreshing this.
Our feelings on as you may see it at some point that the actual number of locations may change, but that's because we're driving total oh longer and longer laterals. All the time and so it may take less well to deliver the same resource, but which is again part of the capital efficiency drive to work.
And as a company, but the resource is really not I don't think is going to be.
Changing significantly so David you want to Eddie beyond that Yeah, you bet I guess, one thing I would add.
Specifically in addition to some of the things that Dave noted.
From a capital efficiency perspective, as we laid out the roughly 2000.
Wells of risk Delaware inventory.
Last year.
We're going to bring on about 130 spuds or so this year. So thats about 15 years of inventories they've said, we've got a long long runway of high quality things to do one of the things that that we really haven't reflected go forward that we think we'll continue to improve the quality that inventory is the capital efficiency in the step change that we're seeing theres.
When you're when you're able to to reduce your costs and cycle times us materials, we have been and think we'll be able to continue to do.
And as you're able to enhance the productivity are well certainly that's going to have a have a positive impact as you roll forward and think about the development of that resource base going forward.
Appreciate the answer Fellows I want to maybe jumped a question for Jeff. If I may is this going a bit of a Delaware question embedded in it but.
Jeff you talked about the 5% to 10% payout ratio for dividends can you talk about what the right mix I actually just want to think about how you think about the right mix of cash returns.
Then long term mid cycle or mid.
Single digit growth I should say.
Some is kind of a new non anew number is on.
The filing process is on target how do you make sold those things together and I guess I'll leave it at thank you.
Yes, Doug I would say, it's more of an output it's a balance we try to balance.
For all that all the different targets and metrics that we've been talking about from a gross standpoint from the payout ratio and the dividend actually I went back up and say what underpins all of that is that that lowering that breakeven funding level for us. So you you heard us talk about the 40 650 for 2021, we're working obviously to lower that every day.
And that's really going to underpin our financial strategy going forward as we add a high margin assets to the portfolio through the capital allocation that we've talked about more so to the Delaware on a go forward basis. So.
We think about how that competes relative not only to our sector, but I would point you to the broader S&P 500 sector. We've looked at what is that what is the kind of free cash flow yield that looks competitive we think it's probably something in the 5% to 10% range.
You marry that with with what you what our dividend should look like and how competitive that is not only again to the SMB excuse me to the MP sector, but the broader S&P 500.
And we try to marry all that together and and spit out what we think is a pretty competitive game plan not just from growth, but on all those free cash flow metrics as well.
So Jeff to be clear you capping the spending or are you targeting a growth rate.
Yeah, It's really returns based focus so we we start from the ground up in building our building our game plan, our portfolio and we allocated as much capital as we can to the highest return products and everything else just falls out of that.
Alright, thanks, so much measure that against that we measure that against the broader.
No competitive landscape to make sure that were in line and competitive with our peers and then the broader S&P 500, Doug I guess that we're trying to say here as we look at a combination of that returns.
Growth and free cash flow generation and try to optimize at a level.
That is the best for all three of those metrics and so it's not an absolute one or the other its and its an interactive.
Look at at those variables and see what we think makes most sense overall.
Okay. So makes I get it. Thanks, so much guys appreciate the they attempt to answer the question.
Your next question comes from Kimi in light of Barclays. Please go ahead, Sir your line is helpful.
Hi, good morning, everyone.
Morning.
My first question is on the updated corporate breakeven so year to year now is averaging 40 650 VTI NT dollar Henry hub can you just talk about how the breakeven and 21 compares to 20 and any changes you have to be assumptions embedded into that I guess kind of what we're getting at is that the training.
Breakeven benefits from an engine, the 19 and hedges and that's true for a lot of the M. P's right now, but there's also some assets as well for you guys too, but the average 40 650 over two years seems to imply an improvement in 21. So just any color that you would have on that would be great beyond just the timing of the wolfcamp activity.
Yes, Janine you're spot on that's exactly right. It does it does imply improved breakeven and 21 versus 20, you're right. We do get a we have taken the benefit of the hedges that we have in place as it relates to 2020, but I'll point you back to some comments, Dave made earlier, which is a function of our capital program the capital that we're spending and allocate.
And to the Delaware and specifically the Wolfcamp in 2020 is what's really driving that improved capital efficiency in 2021, and so it's just increasing.
Our ability to lower that breakeven in future years.
Okay and then my second question is on dividend coverage, we've seen a lot of increases so far have this earning season and when Devin thinks about dividend growth and the risk reward associate it with that.
VTI price are you comfortable with in terms of dividend coverage on an unhedged basis.
Yeah, we Janine as we said in our prepared remarks, I think we've talked about in the past we've tried to build the business around a $50 oil and kind of $2 gas price. So thats, where we start with our with our base business plan and then evaluate obviously the different market dynamics as we go through each year with our board to determine where the where the dividend ultimately.
Hands, but as we as we as I discussed in my prepared remarks.
What underlies our policy our dividend policy is that 5% to 7% kind of payout ratio, which we think is very competitive with the peer group in the broader S&P 500.
Okay, great. Thank you for taking my questions.
Your next question comes from Paul Cheng of Scotiabank. Please go ahead. Your line is open.
Hi, Hi, good morning.
Foreign to question Hi, Dave.
Dave can can you maybe that shit, if there's any information about the analysts Wes if you said you move into the food development Whats coal we source put 10, so number Paul spec inventory Destocking information that may be we you can share with us.
Paul This is David Harris, if I understood. The question correctly, you're you're asking about.
Resource potential in potential inventory in our Atlas West area is that correct.
That's correct that you were talking about yet or the 2020 it didn't the nation to be successful as expected and you'll be moving into development.
In 2021, so I mean, how big is this development plan for what that this.
If we had that we're talking about.
Yes, so so when we talk about Atlas Wesson Atlas East, it's our our entire 200000 acre position in the northern part a converse county, So as a reminder that doesn't include any of our acreage.
Up in Campbell, where other other operators have been active in the Niobrara as we think about.
That that position.
Probably early before we move into development to really give you specific.
Resource sort of numbers, but if you just did some some pretty simple math.
At kind of the three well spacing, which we think it's kind of the bottom end of where weve be that likely point you to something in the neighborhood of about 500 locations.
Okay great.
And.
Yes, I'm sorry.
Hi, I'm, just going to maybe the I'm just kind of clarify that that's a that does it be two mile locations.
Right and that's a including both MX west and east. So it just had an x. Wes.
Both.
Okay.
The second question is that.
In the event when you guys is looking at any inorganic opportunity. What's fun then so in operating matrix.
That you would be used in the evaluation and what tough minimum matrix that you'd need before you even consider.
Well, we trying to understand the pull assess that.
In the most important thing to think about on this is what I said earlier in response to.
I think is doug's question is it.
We have a great game plan internally to start with so we feel no need to do any any or inorganic type activity at all.
Now as I said, we are in a deal flow, but we're going to be extremely disciplined frankly, we're in a deal flow for couple of the public's have transacted recently, including the wrote a couple of deals included in a few weeks deal that transacted recently, so we were there and where are your understand what's going on overall, but to give you some.
Idea for their criteria that we look at for any sort of M&A activity. We we wanted to first off to be accretive to our financial metrics on a per share basis.
Second it also has to fit strategically within the framework of our.
Asset portfolio.
So the is it an area frankly, where we can realize some sort of synergies beyond what our.
The way that that is being executed right now whether that be gionee synergies eloise synergies or capital efficiency synergies do we feel that we have a better way to develop these assets than that are currently being developed and it'd have to compete for capital allocation within our portfolio as well.
So those are some of the.
Hi, So I'd say, probably also want to you might add would be margin expansion. Obviously, we're looking for.
Ways that we can expand our margins overall as a company and.
And again or are there ways, we can reduce the cost overall for the combined entities.
So that's overall that type criteria that we look at again at so.
We're going to be remain extremely disciplined around these because we think we absolutely have a strong strategy. As it is are we have a strong asset base and we are the right people internally to execute on that these opportunities and so.
We'll see if anything comes along the piss those criteria or not but if it's if it doesn't that's fine because we feel very confident in our strategy.
Thank you.
Your next question comes from Matt Portillo of Pp, Inc. Please go ahead. Your line is open.
Good morning.
Format.
My first question relates to stack capital allocation, just given the depressed natural gas and NGL environment at the moment.
Could you provide some color on how you're thinking about rates of return in the stack JV at strip and is there a price at which you might consider delaying development until you see an improvement in the forward curve of pulling forward more free cash flow generation in 2020.
Matt This is David Harris.
Yeah in terms of in terms of stack activity with Dow as we've highlighted the first phase of the work that we're going to do with them as in the Jacobs ROE, which isn't a Woodford road development similar to some of the ones that we've done before.
These are very predictable projects.
And we're going to be looking at starting that project.
In the second quarter likely in the May timeframe.
With just given the size of the project likely means that the production isn't coming on.
Until the first part of 2021 years, we've modeled that even at the strip today, where we currently set.
That initial project in the Jacobs Euro represents a fully burden rate of return of about 20%. So given the predictability that project.
We feel good about that project internally.
With respect to competing for capital, obviously will we have a partner we want to stay aligned with them and so we'll continue to be mindful.
The commodity price environment as we go forward and and have the right kind of dialogue that you'd expect as we as we think about four decisions around the program.
Great and then just a follow up question on capital allocation, the PRB still receiving a large portion development capital and looking back over the last two years on a capital efficiency basis definitely appears that is lagging the Delaware to some degree but you are progressing a couple of different initiatives, especially on the.
So just curious as you guys think about the 2020 program for the PRB are there some indicators on the horizon that might show a step change in capital efficiency metrics. This year.
As it relates to that asset and then over time, if you don't see a material change in capital efficiency is there the potential to reallocate more capital to the Delaware Basin.
Yeah. This is David again.
Yes, I think that the the punch line answer to your question from a capital efficiency perspective, you've already kind of hit on just in terms of the the little earlier stage nature of the assets some of the appraisal work for doing so.
Clearly, we've got some some science and data acquisition capital there.
As we are seeking the best I understand the resource and how to move it into full field development and so I think throughout 2020 and into 2021, particularly with the Niobrara.
As we move into more of a development mode. We think we think you will see a step by step change.
In that capital efficiency as we as we start to to mature that asset you've seen the changes in the wolfcamp as a has an idea of how much we've been able to drive down.
Drilling costs and completion costs. Once we go into full development mode, and and we haven't done any of that yet in the Niobrara and so at this point, it's just really appraisal mode. So I don't know if the numbers are going to be identical to that or not but there's definitely than the teams have internal goals I can tell you that are pretty aggressive.
We have around cost reduction of they feel that they can achieve.
Once we get into a full development mode and great confidence, we're going to be able to do that but right now to the focus has been as as David said more on the appraisal and understanding the resource and once we get into the development mode and things can change pretty quickly.
Thank you.
Your next question is from Brian Downey Citigroup. Please go ahead your line is helping.
Hi, good morning, and thanks for taking my questions, maybe a follow up on that one also if you do move Atlas less than the PRB towards development 28, 2021, I'm curious broad strokes at a your flattish total 2021, capex level, if and how that May shift basin capital level allocation from off from elsewhere and 21.
Probably not as significant shift.
We just be able to do more activity.
Much more efficiently, but not as significant overall shift in the and the capital allocation.
Okay, and then I had a question on your your outlook to 2021 I was curious what the service cost environment is currently contemplated in your updated 2020 capex guidance versus perhaps what pricing you saw in Fourq you 19, and then what if any deltas, you're assuming on pricing or further efficiency.
Fees in the 2021 Capex commentary.
Yeah I know this is Jeff we we have built in some of the efficiencies that we saw in the second half of 2019 in the fourth quarter of 2019 into the program as it relates to service cost inflation or deflation, we really left that flat.
So we have seen some continue to see some deflationary environment on some of the services so could be a potential.
Tailwind for us in 2020.
But generally speaking we've just assume that that would be flat for the year.
And is that flat from.
Second.
Oh, and Brian just let me add a.
Few other tidbits, you're asking about other nuances that may impact the modeling of that and one thing yet to be mindful of is with the differentials. We just carried forward kind of the current state that we're seeing right now into 2021, where there could be upside on that is obviously is the Permian highway or Whistler comes online you could potentially see some substantially improved.
Positions, but we did not build that in.
And then also we saw the or Ela, we cost continue to go down as well in 2021, especially after a some MVC payments roll off and the stack that'll be a nice tailwind for us and one other item you want to notice we expect our unit cost to continue to gravitate towards that $350 million target. So that would be a another improvement you should.
Account for when you're trying to.
Calibrate to our estimates starting to catch up there, but what you asked for now.
No problem, just just to clarify on the flat service price comment is that flat from Fourq you flat from from 2019 level, just just want to make sure I'm clear on what the baseline is that.
Flat from full year.
Okay perfect I appreciate it thanks.
Your next question is from Neil Dingmann Suntrust. Please go ahead. Your line is open.
Yes, Dave My first question is for you or Jeff around your financing specifically the recent drilling in partnership with Dow is this something that we could see it additional areas and the stack or potentially other place.
Well, we have a great relationship with Dow and we we started a relationship.
And the Barnett actually with them with a.
With a similar type deal this is a little bit larger deal.
And so.
And we think this is going to work very well and so there may be potential for dal somewhere else or Theres also we're looking at some opportunities around.
He will be okay capital that are not going to fit our return criteria.
Whether there is opportunities to bring in a partner for some of those opportunities.
Rather than just go non consent on those wells, but that actually have someone else come in and.
Execute.
A program associated to that so that's that is another type deal that were out there working on right now there's a possibility in the future and I'm not talking about with Dow at this point, but could be with other partners.
Interesting, Okay and then.
Skewed in my follow up My second question is on your shareholder return you all been aggressive in the last several months with stock repurchases. It I'm just wondering.
I'll share some details on how you will think about cap allocation between these repurchase up repurchases and the growth of dividends and more specifically.
Just wondered about if you would continue to aggressively repurchase this much stock.
Base. It on what your yields are growth levels are just wonder how you sort of balance those things. Thank you well I just start off so you know we want to have a dividend and chefs outlined the 5% to 10% of cash from operations. We don't want to have a dividend that is sustainable and can grow through time and so we are take a measured a.
Approach that we have about a 2% yield right now I think.
Where we're currently trading, but but as something that should be.
Sustainable and grow through time.
Jeff can go through the numbers the cash we have in the cash we're going to be bringing in and why we feel we can continue to be aggressive on that side. We've set out our capital program again, we optimize that capital program already on the basis of.
Okay.
Howard I would think about our returns on the program the capital efficiency. This generated the growth rate do we feel as appropriate in the free cash flow that that will generate so that's essentially established. So then you go back to the free cash flow that we are the cash that we have as a company and bottom line, we have the cash Jeff can go.
Through that and we think were significantly undervalued. So it's a great investment opportunities. So Jeff Davis, you summed it up well the only thing I would add as some specifics around the cash balances we talked about this little bit in the opening remarks, but we have about a $1.8 billion of cash at year end.
We will add to that with the Barnett divestiture.
The 770 million roughly and so as Dave articulated we you know we feel like we can accomplish our financial objectives, both on the debt repurchase and with a billion dollar share repurchase program that our board has approved for this year. So we feel really good about our ability to continue returning cash to shareholders via the dividend.
And the share repurchase this year.
No. It makes sense that thank you both.
Your next question comes from Kevin Mccarthy of Heikkinen Energy Advisors. Please go ahead. Your line is open.
Hey, good morning, just looking at Slide 16, do you have the oil mix breakdown between the Wolfcamp and the bone Springs and was the spud muffin mix different than other pets.
In you're asking about the oil mix with regards to could you give us a little bit more detail specific are you looking for the quarter or just the projects that we brought on for the quarter.
Yeah. The projects that you brought on for the quarter and slightly next year that gave you the overall oil rate.
Yeah, it's going to be about for the 30 day rates that we achieved during the quarter, it's going to be about 70% oil for those projects somewhere a little bit above that some are little bit above, but that's a good way to think about it.
And do you have the mix between the Wolfcamp in the bone Springs, just thinking about as the program goes more towards the Wolfcamp next year.
You know just scanning the numbers here.
You know directionally they look about the same so.
Hi, there around that 70% Mark so there's really not a big differentiation there on a 30 day rate or and you are basis for that matter between the wolfcamp and the bone spring.
Great Thanks, and as a follow up the Eagle Ford capital was a pleasant surprise do you have with the current well costs are there.
This is David Harris, there about $6 million.
Plus or minus.
Great. Thank you guys.
And just as point of clarification, that's for about US given the configuration of that development that that's for about a 6000 foot lateral.
Your next question comes from Charles Meade Johnson Rice. Please go ahead, Sir your line is open.
Good morning dates you your whole team there.
Just a couple of questions on on the Delaware the first.
One of the big things last quarter, which is.
Seems like its dissipate here was the concern around a real federal lands. So it seems like that has a it's at least receipts as part of the conversation, but can you give us your view whether its a.
Whether it's whether it's going to proceed as an operational for answer for you guys and if something that that we should continue to focus on.
Well I'd say is something that we're certainly aware of and when we fall, but we feel that we have a good plan and can adjust as appropriate.
And I don't want to get into all the.
No various legal arguments so.
On what could or could not take place Weve I can tell you. We've studied a pretty extensively and we take from a practical standpoint, the most likely thing it could happen would be a slowdown in the permitting process with the BLM.
And in preparation for that we are building an inventory of permits.
Those are the permits just so you know on federal land or actually two year permits and then you can apply for a two year extension on those permits that's the maxit any body good and so we're building up our permit inventory.
If that.
Vince you Audi would take place under the Obama administration.
It took about 18 months or so to get a permit on of Trump administration is more like six months to get a permit.
And so we're preparing for that but again, that's one of the advantages of also having a multi basin portfolio to is that we can reallocate capital away from federal lands, but in the meantime, we're growing up to the inventory.
If the permitting process does slow down and again I know there's talk of other things are more dramatic to that and we don't have time to get into all that from a legal discussion are here on the call, but I'd say, we've looked a lot of those issues and this is what we think is by far the most likely scenario that we should prepare for.
Got it thanks for that Dave and then and then just wanted to touch on one other one of the base with which party to the shift to the Wolfcamp in the better capital efficiency. So I think you've said that that youve.
You May note earlier in the call about how you really worked hard to get your drilling times and your GNC cost down on.
The wolfcamp in the Delaware basin, but but the other piece of that puzzle, but the well productivity can you just recap for us what if anything has changed your what you what you've learned of less.
Year or last six months that that is the other part of the puzzle that that is going to power. This.
This step hiring capital efficiency as you shifted wolfcamp in the Delaware.
Yeah and.
First off Charles if you look at Slide 18, you will show that we show the.
Drilling and completion costs.
For the Wolfcamp wells that we had.
At $880 per foot I think that compares extremely well against cost from other people are talking about probably even today.
And that's again, just a wolfcamp and.
If we looked at our entire well mix.
It would have the Delaware basin would be even a much lower dollar per foot and so just keep that in mind. When you hear some other numbers out there that.
The on the efficiency side.
On the productivity side, I think we're finding and we've learned a lot about the.
Wolfcamp I'll tell you, who can probably get a little bit more detailed David what are you running weather here I've got a few ideas I think you probably a better ones and I do so take that off yeah, you bet I think at the core of it.
Over the over the last several years as we've increased our technical focus.
We are really doing integrated reservoir modeling.
From a multi disciplinary approach.
And what that's led to is a high grade of landing zones.
And targets and so I think thats probably.
As much as anything that's that's the biggest driver that you're seeing from a productivity standpoint is the higher end technical work, we're doing we're targeting the best parts of these landing zones.
Our geo steering capabilities.
It's something we've invested in over the.
Several years ago, starting several years ago.
Keep in those wells in zone.
Substantially through that entire lateral all those things add up on a cumulative basis to kind of to drive the step change performance that you've seen from a productivity perspective.
Thank you for the color David.
Let's see where at the top there. So I appreciate everyone's interest in Devon today, and if you have any further questions. Please don't hesitate to reach out to the Investor Relations team and anytime which consists of myself and Chris car have a good day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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