Q1 2020 Earnings Call
Good morning, and thank you everyone for joining us on the call today.
Last night, we issued an earnings release and presentation to covers our results for the quarter and updated outlook for the year throughout the holiday will make references to our first quarter earnings presentation to support our prepared remarks and these slides can be found on our website Devon energy Dot Com also joining me on the call today or Dave Hager, our president and CEO, David Harris our rigs.
That could have vice president of exploration and production, Jeff written out our Chief Financial Officer Officer, and a few other members of our senior management team.
Comments on the call today will include plan forecasts and estimates that are forward looking statements under U.S. Securities Law. These comments are subject to assumptions risks and uncertainties that could cause our actual results to differ from our forward looking statements. Please take note of the cautionary language and the risk factors provided in our FCC filings and are.
With that I'll turn the call over to Dave.
Thank you Scott and good morning is my sincere hope that everyone listening today, a strange say you put in good health.
As you all know since our last earnings call. It's been an extraordinary tar many energy markets with an unprecedented demand chalk related to cobot 19, resulting in a rapid and historic decline in oil pricing.
Well no one could have accurately predicted timing or wide range. The impact does pandemic to the global economy or our industry I am confident that Devon has entered this period of volatility with an extremely firm Foundation.
Combination of strong liquidity low financial leverage high graded portfolio and top tier operating capabilities leave us well positioned to a practically NAND navigate through these challenging times.
I Didnt think it's competitive advantages is our talented team here at Daven had I want to take a moment to recognize all of our employees for their hard work and dedication during this period of dislocation due to covert 19.
Their focus on safely executing our business plan are protecting shareholder value during its unprecedented time led to another quarter of outstanding operational results.
The results for the first quarter were highlighted by capital expenditures coming in 12% blow midpoint expectations.
Higher oil production and previous guidance and our previous guidance.
Our cost savings initiatives continue to trend ahead of plan.
And we generated free cash flow in the quarter. All went all we are executing at a very high level and I want to thank our employees for their commitment to excellence.
The rest of my prepared remarks today will cover a handful key messages or provide insight into our approach to managing the business through these turbulent times.
Yeah, I'll turn the call over to Q and a horrible answer as many of your questions as possible.
The first key message I want to convey today as it we have the financial strength to withstand and extended downturn.
As you can see on slide three of our earnings presentation, Devon had poor point $7 billion up liquidity, consisting of $1.7 billion, a patient $3 billion of Undrawn capacity on our credit facility at the end of the core.
In addition to our substantial cash balances devins liquidity as further enhanced by our senior unsecured credit facility.
Which is not mature until the end of 2024.
This facility contains only one material financial covenant.
Hey debt to capitalization ratio below 65% and at quarter end this ratio was less than 20%.
The facility is fully committed to us and we are not subject to semiannual redetermination.
And lastly, a key event that will be additive to our liquidity over the remainder of 2020 is our recently amended agreement to sell the Barnett shale.
Under the revised terms, we agreed to sell our Barnett shale assets for up to $830 million of total proceeds.
Consisting of 570 million in cash at closing and contingent payments of up to $260 million.
Disagreement includes a $170 million deposit, which we received in April and we're on track to close the transaction by year end.
Also add into Devon financial margin of safety is our low leverage with no outstanding debt obligations into the end of 2025.
On the right hand side of slide three you can see that our near term debt maturity runway is best in class within our peer group.
With nearly six years of time [noise].
Until our first tranche of debt comes due.
This is a critical competitive advantage in this period of extreme commodity price volatility.
The second key message I want to everyone to understand is it Devon is committed to living within cash flow.
Our top priority in this environment is to protect our financial strength.
And to do that we've taken decisive actions to protect our revenue and align our business with industry conditions by aggressively reducing capital and operating costs.
Looking specifically at revenue Dampens disciplined hedging program has protected approximately 90% of our expected oil production for the remainder of 2020 at an average W. Two yard for price up $42 per barrel.
We've also taken steps to protect about half of our expected oil volumes for the first half from 2020 water prices that are nearly $40 per barrel.
Additionally to further protect against a risk of widening in basin differentials, we've utilized regional basis swaps to lock in pricing for the vast majority of our Eagle Ford and Delaware Basin oil volumes for the remainder of the year.
In aggregate he estimated market value of our go forward derivative position is roughly $750 million a substantial contributor to our cash flow and 2020.
On the cost front. The most significant changes we have made to date are related to reduction of our capital activity levels.
With our Rebars capital plan, we have limited our spending outlook to $1 billion in 2020.
On a 45% compare to our original budget.
As outlined on slide seven we've elected to continue to invest and preserve operational continuity in the Delaware basin to generate the necessary cash flow to effect of the operator business.
Cost of spending all capital activity in the Anadarko Eagle Ford and powder River plays until market conditions improve.
Well, we believe this is a prudent program for the current environment given the uncertainty regarding the depth and duration of this pricing downturn I do want to highlight do we have tremendous flexibility with our go forward capital plans.
We have minimal long term contract commitments.
Our opportunity set consists of only short cycle onshore projects and we have no significant lease expiration issues.
With these characteristics were fully capable unwilling to swiftly adjust activity levels as market conditions evolve.
In addition to the capital reductions were also improving our cash flow by targeting approximately $250 million in cash reduction cash cost reduction by year end.
This cost reduction plan includes a range of actions to lower field level operating expenses and to continue to optimize the organizations overhead.
This includes an expected 40% reduction in cash compensation for our executive management team year over year.
I want to reinforce our while we have a clear line of sight on these $250 million a cost savings we are not done.
There are several initiatives underway that will further trim our cost structure.
And I expect to provide updates on these initiatives in future calls.
To summarize on slide 12, you can see the cash flow impact as swept into Cyvek CIT decisive changes we have made year to date.
Our hedging program, an intense focus on costs have positioned us to fully fund or capital requirements and dividend, while generating net cash inflows at a price deck of 20 dollar WT are for the remainder of the year.
The next topic I want to touch on is our plan to dynamically manage production is storage levels become constrained and regional pricing weaken.
With today's challenging combos challenge commodity price backdrop.
We are being mindful not to accelerate valuable production into these weak markets.
To combat these conditions.
Our first course of action is to reduce our current completion activity levels by approximately 65% to the first quarter.
This decision to limit the wells, we bring online will position us with a DUC backlog of nearly 100 wells company wide at year end.
And for those wells are we brought online recently.
We were restricted to fall race to ensure that we do not deliver flush production entities tough markets.
Yep.
Next.
With regards to our base production profile.
Operating teams have performed a detailed analysis to identify uneconomic wells at various price levels across our portfolio.
The decision to shut in or curtail production from existing wells is generally made when a variable cost to operate the well exceeds as expected revenue.
While this is the primary decision point other factors may influence this decision as well such as leasehold considerations mechanical RIS and involuntary third party constraints.
We plan to a proceeds curtailment decisions on a month to month basis, but for the second quarter, we expected a for roughly 10000 barrels per day of oil across our portfolio of.
There's some out only 20% is driven by the shut in or production. The vast majority of curtailments are related to the restricted flow back of higher rate wells and the deferral of bringing a few new wells online in the second quarter.
The minimal shutdown activity reflects the quality of our assets and the good work. Our team has done to place volumes first we have no pricing exposure to West Texas light.
Clearbrook, the north slope Canadian bitumen or many other well known pricing hubs that have recently experienced exceptionally weak prices.
Furthermore, in key plays like the Eagle Ford and Powder River Basin.
We correctly anticipated that there would be week regional pricing on our marketing team took early and decisive action to lock in our revenue our pricing above variable costs in may and June.
Taking all these factors together our production operations are well positioned to be resilient in the face of these challenging conditions.
Looking ahead. The next key message I want to emphasize is our ability to capitalize on the recovery when industry conditions normalize.
The decision to exit our heavy oil position in Canada sell the Barnett shale I'm monetize our controlling stake in Enlink midstream have helped set the foundation for the advantage position. We operate from today. These bold moves have dramatically improved our financial strength asset quality and competitive.
Position on the marginal cost curve.
Devins go for portfolio now consists of owner a large contiguous stack pay acreage positions and the best parts of the best plays in the U.S.
Importantly, within this portfolio Devon has established a track record of operational excellence is supported by consistent capital efficiency gains.
A great example of this efficiency is on slide 17, which highlights our Wolfcamp program, where the majority of our capital has invested in 2020.
Our drilling and completion costs in the first quarter improved by 42% to $705 per foot.
To better appreciate the success I encourage everyone to compare this top tier result to our peers in the Delaware Basin.
These wolfcamp improvements are underpinned by steadily improving cycle times and optimized completion designs.
We have expectations for these efficiencies to continue throughout the remainder of 2020 and into 2021.
These efficiency gains have allowed us to preserve operational continuity, even as we limit capital investment.
As you can see on slide eight assuming no curtailment beyond the middle part of the year, we expect our oil production profile to be nearly flat compared to the average of 2019.
And we are in a good position to stabilize production in 2021.
This production resiliency as a testament to the quality of our go forward asset base and showcases the efficiencies that are driving our capital requirements lower.
Currently we are estimating that maintenance capital, which is the amount of investment required to keep our production flat will be around $1.25 billion, a 10% improvement from a year ago.
With additional savings, we expect from ongoing improvement and operations as well a shallower base declines we are projecting our maintenance capital to improved around $1.1 billion by 2021.
Importantly, this improvement in maintenance capital does not assume a drawdown of our DUC inventory, which we expect to be around 100 wells by year end.
With this low maintenance capital, we're able to quickly and efficiently stem declines.
And we are positioned to maintain our 2020 extra right all production into 2021 should market conditions incentivize asked to invest at maintenance capital levels.
[laughter].
And my final key message for today.
'cause it Devon has a REIT business model to maximize value for our shareholders over the long term.
Admittedly it is challenging not to get caught up into present with today's extreme bear market conditions, but we know from experienced at today's oversupply will ultimately be absorbed.
An industry conditions normalize it is our strong belief that the industry's historic approach of creating value by prior by prioritizing production oriented maybe growth well not be acceptable to investors.
As not a viable strategy to reinvest all cash flow have high leverage and count on OPEC curtailments to be successful.
To win in the next phase the energy cycle, we're convinced that a more balanced operating model that prioritizes additional upfront cash returns for shareholders as required.
With this financially driven model you must moderate capital investment to deliver free cash flow yields a compete for investment with other sectors in the broader markets.
Have the ability to deliver margin expansion through operational scale and a leaner corporate structure.
Prioritize returning more cash directly to shareholders in the form of dividends or supplemental distributions and time of windfall pricing.
And a successful GMP company going forward must six maintained extremely low levels of leverage and not be dependent on capital markets for liquidity or funding.
This critical shift in philosophy will result in a much greater margin of safety, which we all believe as needed.
This balanced operating model is not new to Devon, and we have been an industry leader in this movement.
Since 2018, we have deployed nearly 70% of our cash inflows towards shareholder friendly actions, such as debt reduction dividends and buybacks.
And when industry conditions normalize debit is one of the very few NP comedy is still have the capabilities to deliver on his progressive cash return business model.
And with that I'll turn the call back over to Scott for Q in a.
Thanks, Dave 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, well take our first question.
First question, Colin Erin Darien with Jpmorgan.
Yes, good morning, Dave.
Good morning earn.
I Hope you had a good cinco de Mayo.
Quick question for you.
One I was wondering if you could provide a little bit more details on your leading edge, Delaware basin, well costs, which you cited cited it being in the low seven hundreds.
This looks to be a couple of hundred dollars per foot lower than some of the guides we've seen from some of your Permian peers can you talk about what is driving this lower cost figure relative to peers is this well design or other factors and I wanted to.
If you could provide some details on if you included facilities spend what would that translate to on a dollar per foot basis in the Delaware.
Perhaps earlier or what I'm going to turn the call over to David Harris, Our executive Vice President of S&P I'd take has a lot of details around that question, but I can tell you. It's real answer resolve of outstanding worked is being done by our team here and we're not done so with that I'll turn it over to David.
Good morning around and thanks for the question, Yes, we we appreciate that this is this is it really outstanding result, it's the culmination.
Have a lot of hard work over the last several years.
Across our teams across disciplines, but as Dave said, we're not done and so that $705 a foot.
As the average cost performance that we saw in Q1.
Think you're probably right to characterize it as leading edge.
But.
One of the things that we've really focused on internally.
Theres really a relentless drive for continuous improvement and so we continue to try to turn our leading edge performance into our P. 50 performance and so one of things I think encourage you to look at not just from a cost perspective, we also disclose.
Drilling and completion per foot per day.
Metrics to try to give you a sense.
On a on a normalized for cost basis, what the performance looks like and so that's really the way that we try to measure ourselves that's what we control.
We don't think.
Just presenting cost numbers that may have some deflation Adam.
Is the right way to really hold yourself accountable.
And measure step change in performance certainly there is a little bit of that and ours, but our objective is to is to turn all those into structural change and drive those into the plan going forward, which I think is a big part of what you're seeing.
In terms of the step change in.
Maintenance capital levels, and things like that and so.
Not just is that that wolfcamp only performance.
You know really competitive.
Exceeding as you said by a couple hundred million dollars other peers in the Delaware.
If you look at the performance if you pull in our performance in all zones not just the wolfcamp in the Delaware in the first quarter that number is actually about $600 a foot. So this isn't.
This isn't a function of just picking a couple of data points and trying to make it look good.
This is the continued quarter over quarter improvement that you're seeing the teams really do a great job and driving.
To your question about the facility side, if you fully burden knees.
These pads with with facilities expense, it probably pushes that average up to about $100 a foot perhaps $100.
Foot on top of.
What we've disclosed there, but even with that still well south of where we believe our peers are even without facilities.
In their numbers.
Great. Thanks, and just my follow up is on the 1.1 billion of sustaining capital.
You guys disclosed for 2021 I was wondering if you could help us on what type of mix.
That would contemplate perhaps relative to 2020.
What price signal would you need to restart completion activity for Ducs were to add incremental rig lines throughout your asset base.
It's going to.
I mean, that's going to be roughly 70%, Delaware type activity, we're not given from guidance on everything on 2021, but directionally you can think of.
The activity.
And that level you can see from our our guide that we have there that we're we're really proud of how we've we've driven down the maintenance capital significantly.
That would imply that.
We could have a cash flow breakeven in 2021.
We're somewhere around 40 dollar WT I, which as you just do the math is probably 20% improvement of where we have been just in the past year or so.
We are going to continue to complete wells, but at a much slower pace here for the.
For the remainder of second quarter in the third quarter, we plan to start ramping backup with completions in the fourth quarter.
Then maintain more of a steady pace through 2021, if something around the strip prices were too where to play out David I don't know if you have any more details on that you'd like to hit.
No I think Thats I think I think you've said it well in terms of what the what the Fort profile.
I would look like around those kinds of assumptions, obviously, a lot of lot of volatility in the market, but thats I think thats indicative of what we believe the business can deliver.
Great. Thanks, a lot.
Your next question line of Doug Leggate with Bank of America.
Thank you good morning, everybody in.
Hello, everybody is doing well there Dave.
You've you've pretty set the bar pretty high we think this morning I want to ask you a couple of things one about your comment some business model.
It's a follow up on maintenance Council issue.
So if I may able to them, but by the first one of the business model you made a number of comments there about what you need to do to compete coming out of the other side of this so I just wanted to talk a little bit on that.
Explore things like how do you said, how do you design is a reinvestment rate model.
Variable distribution model.
How do you think about the goals, we there's a lot of things go into that.
I'm just wondering when we come out assuming we come out the other side of this there is the potential to build a very competitive investing to the goes a moderate pace and really builds and not maintenance capital you talked about with a lot of free cash flow Thats, one well how do you think about not my follow up is on the maintenance capital I really get.
So the issue evaluation, because I think what you've disclosed recently and then again last night should love the market. So we stood a free cash flow new analysis of on your business. My question is how sustainable is out 1.1 billion on what is the underlying decline rate goes along with us in the first one of the business model in the second one this is Sam.
If you have to maintenance capital I appreciate you taking my questions.
Yeah. Thanks, Doug first on the business model or we feel that.
The industry has been too focused on.
Growth and not enough on returning value to shareholders and we think it takes a combination of.
Higher free cash flow yield returning cash to shareholders and a consistent manner.
As well as a more moderate growth rate there would be did it would.
Go along with that and then third low financial leverage and want to talk about low financial leverage I'm talking about net debt to EBITDA of one or less and I think if.
This has taught us anything that we've had three downturns in the past 11 years and you can say, they're all unrelated.
Going back to 2008 or the.
14, 15, 16 timeframe and now they use but you may call my unrelated, but there has been three regardless of how you look at it and so I think that it is absolutely important to have.
Financial strength coming into the so they can emerge as a as a strong company NFC attitude that we had coming into this and as and is paying off extremely well.
I think that the investors just so important that the investors need to be paid along the way.
And there has to be a cash return element to the to the strategy that competes with other industries now the form of which that cash return takes place.
More flexible on it could be.
A combination of a fixed and variable dividend a it.
Could be one time.
Dividends it could be share repurchases, there's there's different ways to do that and we're open minded on how that might take place, but we think that a cash return is just so much more important.
Given the volatility in our industry, we can't expect investors to be active in this industry. If they arent getting returned all.
Cash along the way so that's kind of the fundamental thinking of how.
We are doing it and to make that model successful you have to continuously drive down the breakeven costs associated with the.
With your company and Nash, what we're doing and Thats really will use your second question, which is a driving down of the maintenance capital from $1.4 billion to $1.1 billion.
Yes, not only sustainable, but it's going to continue to go lower.
We're going to through time be shallowing out to decline curve. We also.
Can you relentless focus on cost reduction where the cost reduction comes on the capital side or the.
Expense side of the equation, so we're going to be driving those costs down and as we drive those down that obviously is going to help out with the with the maintenance capital investment that those returns are required.
So.
Jeff per day, but I don't know if you have any additional comments that.
Don't have but David.
Good morning, Doug.
To your specific question around the decline rate probably premature to give you a real specific number just given the number of potential moving parts here.
As we go throughout the year, but the level such if as we headed into 2020, we were looking that up.
First your oil decline rate probably in the high Thirtys and so certainly would be my expectation as we move to this more moderate.
Spend and activity level that you absolutely ought to see that that decline rate trend into the low thirtys here over the next year. So.
This is very thorough answer guys. So Dave just one quick follow up what do you think.
Organic mid cycle recovery scenario ghouls looks like.
Although production will be talking to 3%, 910%, we do you see that mid cycle.
There is somewhere in probably mid single digits around 5% plus or minus.
You give us a lot to play with your thanks, a lot guys appreciate taking my questions.
Your next question line of Neal Dingmann.
Interest Oh.
Good morning ill, let first question just really centers on your shut ins curtailments suspension. Just wondering is the decision when when you decide to bring these back is that just simply based on prices versus cash cost and if so I'm. Just wondering are the thresholds. When you sort of look at each of these three you mean looking at I know you've just.
To shut in a very minimal amount and with more curtailments in a bit of.
Spending DNC I'm just wondering when you bring these back.
Are these the thresholds for each of these about the same.
Good morning, Neal This David Harris.
You know from up from the standpoint of our curtailments I'd I'd remind you that have that that the approximately 10000 barrels of oil today we.
We expect to have curtailed.
About 2000 about 20% of that.
Would be actual shut ins and about 80% would be.
Restricting flow rates and and pushing pushing ideas back and so as you know, particularly from a shut in perspective.
We're we're we're trying to ascertain whether we believe the revenues are going to going to exceed the variable costs and so that analysis would hold you know as you look just to potentially bring those wells back on so kind of the same analysis.
You know that we do going in.
We will do coming back out and in order to determine.
When.
When the right time to to bring those shut in wells back on I would say in terms of.
The curtailment bucket in terms of restricted flow backs and things like that.
We're probably going to err on the side you know, even even though we've seen a bit of improvement here week over week in prices still doesn't feel like the right thing to do to to push a bunch of flush production even into this kind of market. So I would expect you'll see us be be fairly conservative on that front.
One thing I'm I might add you didnt ask but all I'll put it in there for context it.
What's the I suspect that we are using a very very similar methodology for determining whether to shut in as other people in the industry.
When the revenue does not.
Exceed the.
Variable expense of producing those barrels what this really shows is the high quality of our asset base the high quality of those barrels.
In addition, the very low operating expense. So we have in our key producing areas and so it's not a methodology methodology difference I don't believe at all but as a reflection of the quality of our asset position, which I think as.
Important not only to consider for shot as but to show I think about the.
The quality of the assets that underpinned the success of the future success of the company.
No I like that clarification, David maybe that leads to my second just just looking at that slide eight real talk a bit about which I think is very good slide by the way and types, but the maintenance cap given it looks like the quality is definitely sell in there as well as your maintenance cap continues to come down I guess my question is.
Actually this year I think you ought to San little less than $1 billion. So you can keep threats relatively flattish and with maintenance, obviously coming down given.
The strong portfolio.
You don't have 21 production guide out there, but it would look to me that given this is still both the maintenance cap coming down you could probably still keep production rather flattish next year.
Finally with around the same spend this year is that is that fair to say that.
Yes, that's roughly correct.
Okay very good thank you all.
Your next question Paul Cheng.
Thanks.
Thank you.
Good morning, gentlemen.
Born Paul too.
Two questions if I may.
First on the 250 million on the cost reduction.
Can you guys.
Definitely on the opinions himself what how much is that just going to be recurring into next year and how much as some of my one time, because you're deferring expands that have some temporary.
Reduction on the compensation.
Sure I worked out Jeff written our Chief Financial Officer answer that if all this is Jeff yes, so absolutely a component of that 250 million is certainly variable and so as you see production increase into the future you'll see some of that those costs come back as we get more active into the future, but theres also some very.
You are significant pieces related to our DNA cost structure and.
And otherwise that we expect to be permanent going forward. So.
You also had a severance tax credit in there, which is cash in the door, which were happy to.
Include that in our 2020 results as well so going forward, we think it's going to be impactful for the long term cost structure.
Jeff do you have a number that you can share to quantify what the recurring among.
Yes, Paul so, yes, so roughly about $100 million of that 250 million as what we would suggest is not going to move up with additional activity into the future.
And if that all into June and they build ahead on on the opinion opic sign.
No it's across all different categories, a big component of that as they are out is your LLC your operating costs.
I think on the second question is that thought maybe both Jeff and they you have a phenomenon abundancy component to our love PS and I'm not struck though.
And so what you're looking at that.
Do you want to use your bonds as say offensive move and looking at the industry for consolidation this consolidator or that you thing.
On pizza theme to balance sheet is more important.
And you will not it's fun to do too much on the consolidation site thats not worthy.
In the funnel money.
That's not on the front of our mind right now we are absolutely focused on our financial strength and liquidity.
Intel we understand better the.
Depth and duration of what we're dealing with here with the demand losses, leading to lower prices. We are absolutely have focused on that.
We recognized so we have the capability operational capability, the organizational capability to be a consolidator, but that's not at all where we're focused right. Now. We we are focused on coming out of this downturn as a very strong comedy and we're confident we're going to be able to do it and no no focus on a acquisition side right now.
Thank you and Jeff just a quick sign a question.
What is the minimum cash bonds you guys need.
Two one bumble operation. Thank you.
Yeah Paul.
Historically, we've thought about that being around 500 million dollar. So obviously, we're well north of that today, but if we get to more of a normalized environment that would be our expectation is something in that $500 million range.
Thank you.
Your next question line of Jeanine way.
Lee.
Hi, good morning, everyone. Thanks for taking the call good.
Good morning, I guess good morning. My first question is following up on a couple the other question about balance sheet any difference and operational that's been there.
Oil price does the 2020 plan breakeven at excluding the asset sale I think I heard you say earlier in the call. It was about a 20% improvement versus a few years ago. So just wanted to clarify or get the baseline for that.
And if there is an outspend on strip today can you talk about how you settled on the activity level and the second half its plenty in the duck. We can like certainly appreciate that you're not just solving for one year. So that could require leaning on the balance sheet, a little bit to maintain momentum and so we're just curious to see how you see the limit on that lean in various price.
Can I ask because you've got a really strong balance sheet got good hedges and.
But you have to factor in kind of trade off between your one and then your Q3 plus.
Anthony This is Jeff so on 2020 as it relates to our you know the new capital program that we rolled out for us at $1 billion.
Well, obviously, having the benefit of the hedges that we have in 2020, but our breakeven price now as we built the program around kind of a $20 oil price for the rest of the year. So you've got the actuals for the first quarter and then roughly $20 oil for the remainder of the year and that gets you kind of due to a free cash flow neutral standpoint, before you get your asset sale.
Proceeds.
And then going forward to answer your second part of your question we really.
Our primary director for 2020 was all about maintaining our liquidity to the ended the year, obviously as Dave described earlier, we don't have a good sense yet of the depth and duration of the downturn. So we wanted to make sure we maximized our liquidity through the remainder of 2020, so that we can walk into 2021 and hopefully.
Built upon our operational momentum and potentially in the future we might to your point have to lean on the balance sheet, a little bit more but our intention for 2020 is not to do that so we want to maintain or frankly improve upon our cash balance and liquidity position as we work through 2020.
Great. That's very helpful. Thank you.
Second question is following up on Neil's question about protection production curtailments. So for their curtailment, you talked about one right.
Costs are going to produce and so there are kind of other considerations that you already ran through that leases another thing, but in terms of the curtailments why why not curtail more.
Additional curtailment as the.
Given eating or macro view at hospice implementing them.
Yeah, we heard varying commentary on what that is earning season and we've heard some commentary from other operators that they're setting in cash flow positive.
And because it just simply don't like the Netbacks are seeing and they believe in a contango in the curve and they've got the balance sheet, the kind of within that period, and Devon has a very sound balance sheets. So we just wanted to kind of dig into that a little bit more and how you're thinking about it.
Hi, Jane it's David.
Yeah, I think from our standpoint look were first of all you you you start with flow assurance right you got to make sure you can move the molecules. We feel really good about that then you turn to that economic analysis that you described.
And from our perspective, our objective is to maximize cash flow.
And so to the extent that we we believe that.
That the revenues are going to exceed those costs and generate positive cash flow. We believe that's the right answer.
We've heard some of that commentary as well.
Jeff can can chime in here and give you more color, but I think what we would suggest to you is based on the analysis. We've done a you probably need a lot more contango than you see in the market today to really make that math go around and so whether or not that's really what's motivating other people's decisions or not it's hard for us to say, but.
But we feel comfortable with the approach we've taken we absolutely believe it's the right answer.
From a from a multiyear perspective.
Yes, Janine this is Jeff I would just echo Davids comments from our standpoint to the extent, we can get revenues above that variable costs thats incremental cash margin that offsets our fixed cost, which again supports our primary directive of maintaining and growing our liquidity position. So as Dave as Dan said, you've got to happy.
If we can contango in the market to really shutting with wells rainy any sort of duration. So we feel it and again it goes to the did comment the Dave made earlier in the call. It goes to the quality of our asset base in the low fixed cost or excuse me variable costs that we have in each of our operating basins.
Yeah, we've done all we had a lot of work on this Janine and I and I don't know how others are thinking about it but we'd be glad to walk you through the math that we've done a with it but I think that a new after keep yourself in mind, the only you're losing their cash flow the entire barrel up you shut it in any are only gaining.
The cash flow between what that well would have produced hip.
Hadn't shut it in and water will produce given the pack you had shut shutter Dan has not the entire barrel you get back as just the incremental difference between those two those two numbers and so when you got it. So given that you got to have a lot of contango and much more than in a market right now to.
To make that make economic sense from a cash flow standpoint.
Great. Thank you.
Your next question, Josh Silverstein with Wolfe research.
Thanks, Good morning, guys just a question on the maintenance oil levels.
Does that assume that there's going to be rose in the Delaware basin and declines elsewhere and then if we're to think about the maintenance scenarios well how does it looked like a view even since I imagine that's probably declines in gas and NGL. So just wanted to just over that.
Josh This is David Yeah, I think Directionally, you're right I think you would expect to see.
The decline on the NGL and gas side to to hold that oil flat.
Year over year, it's it's probably a little bit of growth in Delaware.
With the sort of the other three key assets offsetting that just a little bit.
Thank you and with that factor into the overall corporate decline rate you were talking about in the mid Thirtys range.
Yes.
And then.
Jeff you made some comments before about the cash on hand, the $500 million.
On cash.
What's what's your thoughts on how you would look to deploy against the rest of it you know theres, no leverage or or maturity concerns right now the your credit pricing has certainly come on down over the course of the last three months is there an opportunity here for you guys are retiring some of that or would you just want to keep this cash on hand from for the eventual recovery kind of restart the.
The engineered.
Yes, no absolutely.
I appreciate the appreciate the question obviously at this point, we think it's too soon to jump out there and repurchase debt I'm, even though we do have some.
Some issues trading at a discount our intention at the moment is to maintain and build upon our liquidity through the end of the year as we get a better better clarity around the you kind of the depth and duration of the downturn that it absolutely something that'll be on the top of our priority list as Dave mentioned earlier, which has to further reduce leverage so we'll look at opportunities to jump out there and.
Purchased at and then beyond that it's going to be returning cash to shareholders as we talked about in the past. So as Dave mentioned, we'll look at a different dividend strategies and and potentially share repurchases at some point in the future.
And maybe just following on that I know you with your remarks, the Barnett proceeds for.
For buybacks and with that now pushed back into December is there any thought about opportunistic buybacks this price or does that kind of get pushed into 2021.
No absolutely not now we've suspended the stock program stock repurchase program, obviously, given the current environment to again protect our liquidity and so we won't have any we don't want me, we don't expect to have any share repurchase the remainder of this year.
Great. Thanks, guys.
Your next question in light of median Kumar with Wells Fargo.
Good morning, and thank you for taking my question.
My first question is just around the.
Capital efficiency, the operational efficiencies talked about in the Wolfcamp as you slowed on activity is there risk that you could see some of those operating efficiencies come down or have you already accounted for those.
No. We don't think Thats, a we don't think that's a big risk I think thats part of how you know we've looked at the different variables and thinking about why the current activity levels. The right level for us. So no. We we felt like we can continue to not just maintain.
The level of efficiency, you've seen but but continue to drive it forward.
And the one thing I would I would remind you I mean, we've talked a lot about the the cost side of the equation. This morning, and certainly that's important but remember that the capital efficiency piece is also.
Got a productivity component in there and so you've seen our productivity.
Results from our wells not just in the wolfcamp, but across the Delaware and the rest of the portfolio.
Clearly those are competitive with with what we think anything you know what we think anybody is doing in the in the industry and so.
We're not just trying to trying to cut costs at the sake of a you know, but at the risk of jeopardizing productivity, we're going to continue.
To focus on both aspects of that equation to to to maximize that result going forward.
Got it thank you and David I certainly appreciate I think investors. Appreciate your comments early on about the change in the business model.
What rolled into 100 Ducs plea in your 2021 program.
You talked about a very moderate single digit growth.
I'm kind of curious because 100 Bucks is probably not the right level for the amount of.
Capital you're spending so just curious how do you plan to deploy do stuff 2021 is it for growth or something else.
No I wouldn't know how we feel that the hundred docs are essentially just a good working level of docs, given our activity levels and so the point, we're trying to make is that we have not included a drawdown of those docs.
To show, what our maintenance capital I was I think some other companies have talked about that fact, frankly that they say par when they calculate maintenance capital that they are including the drawdown of docs and out which we think there's not really matches what the actual definition of maintenance capital.
As it is is it should just include I am more static level or that is consistent with the ongoing business now. The 100 Ducs is gonna give allow us absolutely the ability to restart the business very quickly says we're not drawing those down.
So that is a another reason, though we feel good about moving into 2021.
Great. Thank you for me.
Your next question line of Jeffrey Campbell.
Brothers.
Good morning.
First question I was wondering if you could rank order the plays after the Delaware basin attract capital and the times right I thought.
The results were quite impressive, particularly the CBOB wells.
Zone, that's not gotten a lot of discussion versus.
The Turner Department of the Niobrara industry wide.
This is David Thanks for the question I'd say, it's a bit difficult to give you a rank order today lots going to depend on gas and NGL prices. We've obviously got a lot of optionality in the stack out there you're exactly right the powder results in the teapot.
Have been oppressive continue to have a really low breakeven costs one of the things we highlighted that that that basins, our highest margin asset.
In the portfolio for the quarter.
It's a high oil cod, it's a it's a light high quality oil.
We think is really desirable so it's got a lot of toward the higher prices.
And don't forget the Eagle Ford, we've got a lot of exciting stuff going there.
From a redevelopment and an infill perspective.
We think is going to is going to.
Meaningfully extend the life of of really highly competitive.
Economic work to do there and so you know across those three they all have a little bit of a mix from a from an oil gas and NGL perspective. So we like all three of them. We think all three of them have an important placed in the portfolio going forward.
But rank order really going to depend on.
What kind of assumptions you want to make a across the three streams.
Okay. That's fair I appreciate that.
The follow up on a prior question.
When you say that you can accelerate the 2021 activity with the.
Duck portfolio that you're going to have in hand.
In 2000.
Is that still consistent with the I'm talking about acceleration is that still consistent with the long term approximately 5% growth targets, you've laid out as part of the.
The business case going forward. Thank you.
Yeah, certainly I think I don't I don't think we intend that to be to diverge from that from Dave's comments really around what we believe the the the more appropriate growth rate for the industry and for Devon likely is I do think got it does give us and in a in a in a pretty vague.
Volatile environment, some good flexibility and Optionality as we think about Oh, you know how how we want to.
Restart those and at what pace.
Okay, great. Thank you.
Your next question line of Bryan singer with Goldman Sachs.
Thank you good morning.
Sorry, mindfully develop on a couple of the earlier questions what would be to key price points, you would need to see before moving from maintenance capital back to growth mode and do you need to see leverage go sub one times before moving to that mid single digit growth or a sub one times leverage a function of mid single digit growth.
Hey, Brian Yeah. This is Jeff as we said before our absolute priority would be to reduce leverage going forward and get to that one times net debt to or frankly lower on on that net debt to EBITDA ratio. So that's going to be on the front of our mine as well as we move forward and again the growth rate.
For US is is it is an output of the inputs right as we think I'm not our business number one make ensuring that we have the financial flexibility and strength that we want we highlighted that with that that net debt to EBITDA target as as one measure that we look at you know we're committed to driving the business to be at worst neutral on for on for.
Free cash flow on a go forward basis, and then that growth rate will ultimately fall out of the capital that we would that we spend obviously in each of our different areas constrained by those bigger picture financial objectives.
Got it should we think of maintenance mode as continuing until we see a sub one times CET one times leverage show up.
I wouldn't know I don't think I would pin it down to we have to have you know that sort of metric before we would accelerate in activity again, it's going to be a function of of all the different price.
Dynamics that were seen in the market the shape of the curve how comfortable we feel that that's sustainable longer term our ability to hedge though as you know there's a there's a bunch of different variables that that will go into that calculus before we determine what what a increased activity looks like Brian Directionally I would say you probably need to think in terms of.
Hey, sustainable 40 to $45 GW T.I. before we would go out of maintenance cap promoting and start looking at growth again.
Great. Thank you and then my follow up is when you talk and highlight the success, you're having a in lowering your your costs in the Permian in the Wolfcamp as well as the maintenance capital how much of that do you attribute to either the process that's unique to Devin the assets or is it just indicative that theres more widespread potential.
Turning to push supply cost down across the Permian basin in particular.
Brian This is David I think I think from our perspective, I think we have a lot of confidence that it's it's a it's our assets and it's the high level that our teams are are performing at I just it it can't be noted enough I think the the execution you're seeing is the real.
All of a lot of really seamless integration across multiple disciplines.
That are driving that cost result in so I think from our perspective. If you. If you look at the the sort of costs that were putting up relative.
To what you're seeing from other certainly we feel like that is highly unique to us.
When you couple that with what we believe are best in class assets and that gets you to what we think is it really differentiated result, you know I think theres some potential for the whole industry to get better, but that's okay, we'll be even better than that and so that's all right.
Great. Thank you.
Your next question in light of Charles Meade with Johnson Rice.
Good morning gave you in your own team there.
Morning, Charles.
So I have you guys have talked a lot about your concerns and I appreciate the real detailed explanation you'd given on on.
On your process, but I'm wondering if you could add some detail about.
Decomposing Oh, along the along a timeline in other words, how much of that are of that to future curtailment have you already is already in the books in April and what are you. What are you expecting for me what stuff, but the plan for June because look different from for me.
Charles This is David.
A number that we've given you reflects decisions we've made for April and May. So those are things that that we've already done and and and we have forecasted out for the quarter.
For the production month at June those decisions will be.
You know be made here over the next couple of weeks and so it's hard to feels better than it did last week, but it's hard to predict just given the amount of volatility we've seen in the market you know what exactly.
You know Juno look like in terms of the decisions we make.
Hi, Charles This is Jeff I would just add though that need to David's comments that as it relates to GE and obviously, we've seen prices from up on both the role in the calendar month average and arm marketing teams along with the business unit teams have worked really closely together in done a great job kind of getting out in front of of what we're seeing in the market and so we had there.
Point in time as David said things have things can have changed quickly over the last several months on a day to day basis, but at this important time, we don't see a a significant incremental amount of of shut ins or the damage at this point.
Got it yeah, let's hope it keeps getting better and then my follow up on the the Barnett.
Closed the sale of that of that.
The sale at the close of that that deal you mentioned you're on track what are some of the signposts that we should look you know look for longer that track as we go through the rest of the year.
Hi, Charles This is Jeff I would say the first piece, which is important was the incremental deposit that we got in the door. So you know we've already collected $170 million of default of deposit from our counterparty there and then going forward or frankly, there's not a lot I mean as we as we work for till the end of the year. The teams have done a great job of.
You know ticking off all the all the responsibilities that we have related to the contract a move us towards close so we feel really good about that and.
I look forward to getting the close by year end.
Thanks, Jeff.
Well it looks like we've made it through all of our questions in the queue. Today I appreciate everyone's interest in Devon, and if you have any further questions feel free to reach out to the Investor Relations team anytime. Thank you for your interest.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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