Q3 2020 Devon Energy Corp Earnings Call
Good night.
Your next question.
[music].
Welcome to Devon Energy's third quarter 2020 earnings conference call at.
At this time all participants are in a listen only mode. This call is being recorded.
I'd now like to turn the call over to Mr., Scott Goodwin Vice President of 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 and presentation that cover results for the third quarter and updated outlook for the remainder of the year through.
Throughout the call today, we will make references to our earnings presentation to support our prepared remarks and these slides can be found on our website at Devon energy Dot Com also.
Also joining me on the call today are Dave Hager, our president and CEO, David Harris, Our executive Vice President of exploration and production, Jeff written our Chief Financial Officer, and a few other members of our senior management team.
Comments on the call today will include plans forecasts and estimates that are forward looking statements under US Securities law. These comments are subject to assumptions risks and uncertainties that could cause actual results to differ from our forward looking statements.
Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials with that I will turn the call over to Dave.
Thank you Scott and good morning, we appreciate everyone, taking the time to join US on the call today and for your interest in Devon.
For the purpose of today's call my comments will be centered on three key points, our outstanding third quarter results, our improved outlook for the remainder of the year and the benefits of our recently announced merger with WPS.
On slide seven of our earnings presentation I'll begin my prepared remarks by covering a few key highlights from our outstanding third quarter results.
Across the portfolio. Our teams are responding to a challenging operating environment by delivering results that continue to exceed production and capital efficiency targets, while successfully driving down per unit operating costs and maximizing margins.
This is evidenced by several noteworthy accomplishments in the quarter, including.
Oil production has exceeded midpoint guidance by 6000 barrels per day complemented with capital spending that was once again below forecasts.
Furthermore, we continue to expand margins through improvements in our cost structure headlined by operating expenses or 8% below guidance and gionee costs are reduced 30% year over year.
With this strong operational performance, we generated $223 million of free cash flow in the quarter.
And just after quarter end with the closing of the Barnett transaction, we paid out a $100 million special dividend.
All in all the third quarter was an actual one both operationally and financially as we executed a very high level on every single strategic objective that underpins our business model.
This strong performance is a testament to the hard work and dedication of our team and I want to thank our employees for their continued commitment to excellence.
Moving to slide 11, with the strong results our business has delivered to date, we're now raising our outlook for the remainder of 2020.
Not surprisingly this improved outlook is underpinned by the outstanding well performance, we are experiencing in the Delaware basin.
And as a result, we are now increasing our full year oil guidance for the second consecutive quarter.
Looking specifically at the upcoming quarter, we now expect our oil production to average 148000 to 153000 barrels per day.
7000 barrels per day improvement versus prior guidance expectations.
Importantly, we are delivering this incremental production with $30 million or less capital compared to the revised budget, we issued earlier this year.
We also continue act with a sense of urgency to materially improve our cash cost structure in order to get the most out of every barrel we produce.
With this intense focus we are on track to reduce our OE and GP and Ti costs by approximately 50 cents per unit or 6% compared to our previous expectations.
To achieve this step level improvement in field level costs, we have meaningfully reduced our recurring LLC expansion across several categories, including chemical and disposal cost compression and contract labor.
We have also taken steps to streamline our organization corporate cost structure.
This was clearly demonstrated by our Jna expense trajectory improving by around $35 billion compared to the revised budget.
And we expect to achieve a $250 million DNA run rate target by year end.
Turning briefly to slide 13, the positive impact from higher volumes better capital efficiency and strong cost discipline as resulted in increasing amounts of free cash flow in 2020.
Including the proceeds from the Barnett shale divestiture that closed on October Onest, we are on pace to generate around $900 million of free cash flow this year.
This is a tremendous accomplishment given the incredibly challenging conditions, we face this year.
And importantly, with this excess cash flow, we have rewarded shareholders with higher dividend payments.
Turning your attention turning your attention back to slide three of our presentation I'd like to cover the strategic rationale underpinning our recently announced merger with WP X.
This groundbreaking transaction announced on September 28 represents the first true merger of equals within the MP space in nearly two decades.
This strategic combination of Davita of Delta of Devon in WPS is transformational as we unite our compound complimentary assets to create a leading unconventional oil producer in the U.S.
With an asset base underpinned by a premium position in the economic core the Delaware Basin.
By bringing together our respective companies shareholders will benefit from enhanced scale.
Immediate cost synergies.
Higher free cash flow and the financial strength to accelerate the return of cash to shareholders through an industry first fix.
Fixed plus variable dividend strategy.
Additionally, the low premium stock for stock combination underscores our confidence that this transaction will allow shareholders of both companies to benefit from synergy realization and the powerful upside potential associated with our financially driven business model.
The path to completing this merger is progressing well.
We received a chase HSR clearance last week.
The S. Four proxy will be filed within the next few days.
And both companies plan to hold shareholder votes around year end to finalize the merger.
Integration plans are also underway led by a transition team comprised of senior leaders from each company.
In addition to ensuring a seamless transition the team has households passed with capitalize on the synergies and operational efficient efficiencies and contribute to significant upside of the combined company.
Moving to slide four.
The value of our merger with WPS lies not only in the power of our enhanced scale and strong financial position.
But also in how we will manage our company in the future.
As I have mentioned many times in the past with a commodity business such as ours any successful strategy must be grounded and supply and demand fundamentals.
We understand the maturing demand dynamics for our industry and recognize the traditional MP growth model in the past as not a viable strategy going forward.
To win in the next phase of the energy cycle, a successful company must deploy a financially driven business model that prioritizes cash returns directly to shareholders.
Devon as an industry leader in as cash return movement and was with this highly disciplined strategy. We are absolutely committed to limiting topline growth aspirations to 5% or less in times of favorable conditions.
Pursuing margin expansion through operational scale and leaner corporate structure.
Moderating investment race to 70% to 80% of operating cash flow.
Maintaining extremely low levels of leverage to establish a greater margin of safety.
And returning more cash directly to shareholders through quarterly and variable dividends.
I believe these shareholder friendly initiatives initiatives that underpin our cash return business model will transform Devon from a highly efficient oil and gas operator to a prominent and consistent builder of economic value through the cycle.
With the extreme price volatility or we have recently experienced.
I do want to provide approved for few preliminary thoughts on 2021.
While it is a bit too early to provide any formal guidance I want to be clear that our top priorities are to protect our financial strength.
Aggressively reduced costs and protect our productive capacity.
We believe we can accomplish all of these objectives in the current operating environment.
In fact, with our strong hedging position and pro forma cost structure, we can fund our maintenance capital program and an ultra low breakeven level of $33 dwt pricing, if not lower with the leading edge results, we are achieving in the Delaware.
We will provide more formalized guidance for 2021 upon completion of the merger with WPS, but.
But we will remain mindful of commodity prices nimble with our capital plans and we will invest responsibly to protect shareholder value. During this time of uncertainty.
And finally on slide five another critically important component of Devins business model is our commitment to delivering top tier SG performance.
Doing business or I was walking the right way has always been a focal point for Devon and pre dates the growing focus on MSG that we that has taken off in recent years.
We believe the strong SG performance our strong performance in the first few space is essential.
And impacts every aspect of our business operationally and financially.
As with all other aspects of our business. Our focus is to control what we can control, while providing energy the world needs and we take pride in fulfilling this need in a reliable and responsible manner.
As such our top environmental priorities include eliminating routine flaring reads.
Reducing emissions and advancing water recycling.
In addition to these environmental objectives, we strive to cultivate and inclusive and diverse workplace, where broad experiences and fresh perspectives can sharpen our competitive edge.
From a governance perspective, we're proud of the combined company will have a strong diverse and independent board committed.
Committed to responsible operations to advance the best interest of all stakeholders.
The bottom line is we are committed to these principles.
Which is underscored by the inclusion of MSG performance as a key measure in our compensation structure.
So in summary, I want to emphasize that the go forward Devon has all the necessary attributes to successfully navigate and flourish in today's environment.
And to create value for many years to come.
Our shareholder friendly strategy is designed to result in attractive returns and free cash flow yields that will compete with any sector in the market.
The combination of our top tier asset portfolio proven leadership team and disciplined business model offers a unique investment proposition in the S&P space.
And with that I'm going to turn the call over to David Harris to cover a few of our operational highlights from the quarter.
Good morning, everyone as Dave touched on Devins operations are hitting on all cylinders as we have repeatedly delivered best in class results over the past several quarters.
Turning your attention to slide eight of our earnings presentation, Our World Class, Delaware Basin asset is the capital efficient growth engine driving devins operational outperformance in the third quarter.
With our capital activity almost exclusively focused in the Delaware Our high margin production continued to rapidly advance growing 22% on a year over year basis.
During the third quarter. Our operated activity consisted of nine drilling rigs and three dedicated frac crews, resulting in 32, new wells commencing first production.
With most of these completions weighted towards the back half of the quarter only 14 of these new wells meaningfully impacted production totals in the third quarter by attaining peak production rates.
Overall initial 30 day production rates from these 14 wells averaged an impressive 3900 Boe per day of which greater than 65% was oil and those wells collectively rank among the very best results. We have delivered to date in this world class Basin.
While we had great results across our Delaware basin acreage position in the quarter, new well activity was highlighted at highlighted by the record setting well productivity from our Cobra project in Lee County.
This too well three mile lateral development targeting the X Y sands in the upper Wolfcamp achieved average 30 day rates of approximately 7300 Boe per day, or 475 Boe per thousand feet of lateral.
These wells drilled in the deepest part of the basin are the longest wells drilled in the history of the Delaware by measured depth and are the highest rate Wolfcamp wells, we have brought online to date at Devon.
Importantly, the capital cost for the Cobra project came in nearly 20% below our pre drill expectations.
Our result that Cobra is another example of the industry leading performance we have consistently achieved in the Delaware over the past few years.
This performance reflects the quality of our acreage and our technical understanding of the subsurface that allows us to identify the best landing zones.
Furthermore, with the experience of drilling hundreds of horizontal wells in the basin. Our results are aided by understanding parent child dynamics appropriate well spacing per development and customized completion designs to optimize results.
I am confident we can continue to deliver this differentiated well productivity in the Delaware going forward.
Our large contiguous stacked pay position in the economic core of the play provides us a multi decade inventory opportunity and we have a deep inventory of approved federal drilling permits in hand that essentially cover all of our desired activity over the next presidential term.
Turning your attention to the left hand of slide nine in addition to strong well productivity. Another key highlight for the quarter is the substantially improved drilling and completion cost results. We've achieved in the Delaware basin.
This is evidenced by our drilled uncompleted costs, reaching $560 per lateral foot in the third quarter, a 40% improvement compared to 2018. These.
These results are absolutely best in class among our peers.
The key drivers of this performance or the continual optimization of drilling and completion designs, along with repetition gains from drilling two mile Wolfcamp wells and nonproductive time improvements across all phases of the value chain.
These are truly special results and I would like to congratulate our operating team for this outstanding accomplishment.
However, we're never done improving and based on leading edge results, we expect our steadily improving cycle times and cost to provide a capital efficiency tailwind into 2021.
Shifting your attention to the right hand portion of the slide we have also done a lot of good work to expand our margins by lowering per unit operating costs by 26% since 2018.
One of the most meaningful sources of cost improvement is the scalable infrastructure, we have proactively built out.
We have nearly all of our oil and produced water connected the pipes to avoid the higher expense of trucking and is also a major positive from a safety and environmental perspective.
Looking specifically at our water infrastructure, we are fully integrated with nine water recycling facilities 40 operated salt water disposal wells and connections to several third party water systems.
This operating scale and flexibility allows us to source more than 90% of our operational water needs from either recycled or brackish water at costs that are well below market rates.
This strategic infrastructure provides the advantage of avoiding the extremely high extensive trucking in the remote desert or southeast, New Mexico, which can easily exceed a couple of $1 per barrel.
A few important other important contributing factors to our cost improvement in the Delaware are the use of leading edge data analytics that have reduced controllable downtime in the field by 12% year over year.
As well as supply chain initiatives that leverage our pursuit purchasing power to secure services at advantage rates.
The bottom line is that the hard work and thoughtful planning from our operations team and supply chain personnel positions us to capture additional savings that many of our competitors cannot.
And with that I will turn the call over to Jeff written hour for a brief financial overview.
Thanks, David My comments today will be focused on a brief review of our financial results for the quarter and the next steps in the execution of our financial strategy.
A good place to start today by reviewing our financial performance in the quarter were devins earnings and cash flow per share comfortably exceeded consensus estimates.
Operating cash flow for the third third quarter totaled $427 million, a rebound of nearly 200% compared to last quarter.
This level of cash flow fully funded our capital spending requirements and generated 223 million cash flow in the quarter.
At the end of September Devon had 4.9 billion of liquidity consisting of $1.9 billion of cash on hand, and 3 billion of Undrawn capacity on our unsecured credit facility.
Subsequent to quarter end on October Onest, our liquidity was further bolstered by the closing of our bar not Barnett shale divestiture for those of you not familiar with the transaction, we agreed to sell our Barnett shale assets for up to 830 million of total proceeds consisting of 570 million in cash and contingent payment.
We have up to $260 million.
After adjusting for purchase price adjustments, which includes a $170 million deposit we received in April and accrued cash flow from the effective date, we received a net cash payment at closing of $320 million.
In conjunction with the closing of this transaction. We returned a portion of the proceeds to shareholders by way of the $100 million special dividend. This special dividend was paid on October onest in the amount of 26 cents per share.
With the excess cash inflows our business is on track to generate in 2020, we expect our cash balances to exceed $2 billion by year end.
The top priority for the large amount of cash we have accumulated is the repayment of up to $1.5 billion of outstanding debt between Devin and Dan ex this.
This debt reduction plan will provide a nice uplift to the go forward company's cash flow, resulting an interest savings of approximately $75 million on an annual run rate basis.
We expect to execute our debt reduction plan throughout 2021 with completion by year end.
We'll be mindful of macroeconomic conditions and remain flexible with how we execute the repurchases which may include both open market transactions and tender offers.
Should commodity prices deteriorate from current levels, we will prioritize liquidity and deferred debt repurchases to a more appropriate time.
Longer term it is our fundamental belief this successful GNP company must maintain extremely low levels of leverage in accordance with this belief we will continue to manage towards our stated leverage target of around one times net debt to EBITDA.
Turning your attention to slide 14.
With our business scaled to consistently generate free cash flow another key financial priority for Devon is to further accelerate the return of cash to shareholders through higher dividends.
However, we believe the traditional dividend growth model deployed by most US based companies is flawed when applied to a commodities business. The historical practice in the industry of raising the fixed quarterly dividend in times of Frost parity and cutting the dividend or under investing in the core business during down cycles is not an optimal solution.
With these specific challenges in mind, we're implementing an industry first fixed plus variable dividend framework to optimize the return of cash to shareholders through the cycle.
This progressive dividend strategy is uniquely designed for our are inherently volatile business whereby AG a sustainable fixed dividend is paid every quarter and a supplemental variable dividend is also calculated then review each quarter.
More specifically upon closing of our merger with WPS Devins fixed quarterly dividend will remain unchanged and paid quarterly at a rate of 11 cents per share with a target payout of approximately 10% of operating cash flow assuming mid cycle pricing.
In addition to the fixed quarterly dividend up to 50% of the excess free cash flow in a given quarter will be distributed to shareholders through the supplemental variable dividend, if certain liquidity leverage and forward looking price price criteria are met in conjunction with this more flexible dividend payout strategy. We will also utilize a poor.
One of the combined company's excess free cash flow to further improve our balance sheet and evaluate opportunistic share repurchases.
With that I will turn the call back over to Scott for queuing. Thanks, Jeff We will now open the call to Q Onec. Please limit yourself to one question and a follow up.
With that operator, we'll take our first question.
As a reminder, please press star one on your telephone keypad. If you would like to ask a question. Our first question comes from Douglas with Bank of America.
Yes line is now open.
Hey, Good morning, guys. This is actually to lay on for Doug.
Morning.
I've got two questions. If I may both are related to our public policy on oil and gas.
So under a potential Biden administration, obviously, if there is risk to the industry.
Firstly, what's your understanding of the potential subsidies to the industry that could be targeted and specifically I'm thinking about items like itcs or even a mid above book tax that that race cast costs on the business how with this change items like your breakeven and how you pursue your activity levels.
Hi, This is Jeff.
To be to be honest I don't have a lot of specific details around.
In each any changes that the Biden administration is planning or have as talked about certainly to the extent that I'd see were to be limited or changed in some way that would be impactful.
Certainly to our financial results in the taxable income that we would generate as a company. So thats something we'll certainly have to be on watch for and be mindful of but we don't have any specific details at this point in time.
All right. Thanks for my second question I'd, just like to ask for an update on your federal acreage plans how.
How many permits have been secured.
Two what date does that bring new tier and if.
With that window, if you anticipate that window closing under a new administration.
Tim permits what you think that would close.
Well I'll start off here in the David provide details like we said in our prepared remarks. So we anticipate having about 650 federal permits by the end of the year.
80% of those are going to be in the Delaware basin are about 525.
Federal permits Dell and the Delaware basin by the end of the year as our is our anticipation the key point of that is that that covers four years of activity.
We would anticipate in the Delaware basin, and Nash keeping in mind, when I say that even under the maintenance capital scenario or production overall for the company would remain flat.
That means though in the Delaware basin, we would be growing our production. So thats a level of permits that would allow production to actually grow in the Delaware basin, while keeping the overall production for the company as flat and.
The other thing I'd mention too is keep in mind, we are very well aligned with the state.
Here at 40% of the revenue and new Mexico comes from oil and gas activities and.
The state understands extremely well the governor Gresham who's on the Biden transition team understands and support very much oil and gas activity in the state. So I know theres a lot of discussion around this and.
I understand why but the alignment with the state and what we do as an industry for the state to help out with other social needs at the state has is extremely important and everyone in the state of new Mexico understands that and so it's a great hypothetical question, but frankly, we think mostly.
Weekly is that things will slow down, but theres not going to be a stopping of activity on federal acreage. Even if there is we have four years' worth of activity covered with the permits we anticipate by the end of the year. So David did I Miss anything there no you Didnt I Couldnt said it better myself I think you covered all the covered all the relevant points and.
I agree with everything you said.
Guys I appreciate that answer maybe if I could say that the follow up for clarification.
Just wondering if any of the 650 permits that have been secured its dave require any extensions by the federal government.
Because for year. It is obviously a long period of time.
Yet federal permits are issued with a two year term and then you have the ability to extend them for an additional two years. So so certainly permits that are out would be out past that two year term.
Would require us to go through the extension process, but a couple of things I'd point out to you. There we've never had an extension denied before.
And it's important to note that the permits our underlined by an environmental assessment Thats.
Thats done as part of that part of the permitting process and those environmental assessments are good for a period of five years or so.
To answer your question is yes, but we don't foresee any material impact from that.
Perfect I appreciate it guys. Thank you.
Our next question comes from the line of frame cleaner with Goldman Sachs.
Your line is now open.
Thank you good morning.
Good morning, Brian.
The topic, that's come up here and there and with some of the M&A. That's happened in the Permian Basin. After the Devon WPS announcement is the topic of decline rates and you highlighted the very strong well performance that you're seeing and have been seeing in the Delaware basin and I Wonder if you could give us an update on where you see your Permian and corporate decline rate and how.
Do you expect that to evolve in 2021 in a maintenance program.
Good morning, Brian This is David Harris, yet as as we've talked about in the past if youd just starting with our year end Reserve report that we filed last year. If you look at those decline rates on a on a company wide basis.
You then put us in kind of the high thirtys percent on an oil basis and in the low thirtys.
On a BOE basis, as we move forward into this year and as we've been moderating capital then combined with some of the fantastic work that the teams are doing.
From a base production perspective, which we continue to see outperform.
Quarter over quarter, our expectation is that on a company wide basis that that oil rate would move from the high thirtys to low thirtys and on a Boe basis down into the mid Twentys.
Great. Thank you and then my follow up is also with regards to the Permian on Slide 10, you talk about and and can detail. The various projects that you have and where in the order of completion drilling and production they lie and I wanted as you contemplate the WPS acquisition when.
Do you think about where a maintenance drilling program between the two the two companies where you would prioritize how would you see.
The Devon legacy drilling activity.
Evolving how would this.
The main areas that you highlighted on the top left of slide 10 would would you be drilling more or fewer fewer wells. There. How would you think about the prioritization and in the context of having this WPS said 70 tax assets.
Well, we're still in the process of developing a obviously a combined 2021 capital program, we don't have anything specific to.
The way out there, but obviously and the Delaware Basin, where we're growing the legacy Devon Wells, we're delivering best in class cost for these wells productivity that's as good as.
Just about anybody out there and obviously, even get a little bit advantage of a lower royalty rate on federal acreage as well and so the economics on the Devon legacy activity are incredibly strong probably.
Probably on average as a even a little bit stronger than the WPS, but WPS is extremely strong also and thats why we like it but but it's hard to top what you can do right here.
Really in Eddy County, and so I'd say, we haven't again, we haven't developed any sort of combined budget, but it's.
They are both higher highly economic areas, probably the overall edge.
On an average basis would probably go to the activity in Lea and Eddy County on to better on the legacy Devon acreage.
Got a great and the last the last one if I could just add one more out of the 560.
Dollars per per per foot the cost that you achieved in the third quarter of 2020 do you care to hazard a guess.
Forecast for where that could be in 2021.
And maintenance that type scenario.
Well, we have been highlighting improve.
Improved performance on a cost per foot basis every quarter for the last couple of years I mean, we just continue to find ways to step that down.
And to your to your comment about Hazarding, a guess frankly to points.
To levels that I'm not sure I would have thought.
We could get to.
And so I think a lot of what we're doing here there is a bit of service cost deflation in there but.
But I would tell you in my mind, probably three fourths of the improvement that we're making.
Here over the last quarter in the last several quarters.
His efficiency driven and so we believe that's going to be be more structural. So we absolutely believe we can carry forward. These levels and continue with rate of change as we move forward into into 2021, and we think thats going to be.
Nice capital efficiency tailwind and another leg to.
To the capital efficiency story.
Brian One thing that people say why are you doing this how can you do this while I'd say one of the big things that we have going for US is that we went.
We are the first ones to go to 10000 foot laterals in the Wolfcamp out here and we admittedly we had a few wells in the beginning where I'd say, we stubbed, our toes a little bit annuity were challenging at first for US most of the industry have grown 7500 foot laterals. We went to 10000, but because we went early and we figured out we win.
While we call a modified slim hole design.
That design has turned out to be very robust and b.
B the appropriate design that we have now stayed with for a long time. So we have many many reputations of drilling the same type well over and over and over many more than I think than many of our peer companies out there.
With this particular design and that just allows us to be further down on the efficiency curve. Now are we done we absolutely are never done no way, but that I think if there is a question.
And just almost seems too good to be true why are you able to do this I'd say those are a couple of.
The big things as well as allowing us to optimize our costs from our vendor when you go to that fixed design like that.
Thank you.
Our next question comes from Goldman with truly Securities. Your line is now open.
Well I guess Dave.
First question for you Jeff.
I have talked about a little bit it's really on slide 14, but and you've talked a lot about your thoughts about the variable dividend, but I just want to make some clear on that slide you talked about the need to.
50% of excess free cash flow I'm, just wondering when when deriving that are thinking about that how should we think about prior to that where you would want the debt level is that once you get the debt level to a certain point and once you have growth at a certain point I'm just wondering how I should think about that win sort of factored in leverage and.
And the growth.
Well I'll start off here and then Jeff can chime in so what we've said and I'll talk about the combined Devon WPS here.
Pro forma that we our breakevens for maintenance capital would be $33 Dwt, and frankly with what we're talking about this morning. It look targets, we're tending to drive that lower we don't have a new number for you today, but obviously the results. So we talked about today would tend to drive that breakeven even lower than if you.
Add.
The fixed dividend now would take the breakeven up to 37, and we've said that we will invested maintenance capital levels up to around $45 per share. So we would be building free cash flow.
In that range and once we get the full.
45, we'd mix in a combination of little bit of growth select growth along with adding to the free cash flow at the same time by the time to get to $50 ourselves for $50 WTMJ said per share $50 Wi Fi.
[music].
We can accomplish all of our strategic objectives of 5% growth in really strong cash flow yield so back when we start generating free cash flow and we think we're at a healthy enough financial position that we can do a combination.
Of debt pay down and.
The variable dividend now obviously, we want to maintain some flexibility around how how much we do to each but we think we're in a good position on both and so we'll we'll make judgment calls on how we think the appropriate mixture is been Scott like we have to get one done before we start the other we have to have a certain level of gross before we start the fixed.
The variable dividend policy, we anticipate once we start generating free cash flow, if we see an appropriate commodity price outlook that we will start the variable dividend policy. So Jeff, Yes, that's well said, Dave that Neil about the short answer I would give you is we're already there. So we've got the cash balance we feel like we have a strong balance sheet.
And we've got a constructive view of the commodity price outlook that we highlighted that step two on slide 14. So obviously, we've seen some weakness here in in prices. This weekend and that could certainly continue into into next year. So we'll be mindful of that but as Dave said and our minds with the combined company, we're already in a position to where we can deliver.
Cash returns to shareholders via the fixed and variable dividend along with accomplishing our debt reduction target over time, So we feel like we're there and in good shape.
Great Great details and then just one follow up maybe he will also talked a lot about when they make some color on this as well around what you.
Term maintenance capital you had a lot of efficiency is just a lot of improvement that continued to.
Improved what that sort of level as you know on a on a go forward how should we I guess, how do you define that these days I guess given all the improvements you have and how should we think about when we think about potentially maintenance capital into 21, how should how would you like us to think about it.
Well first off we're trying to use what I would consider more of a.
Websters.
Dictionary book definition of maintenance capital if you say, it's the it's not an optimized 2021 maintenance capital in other words, we're not counting on any sort of drawdown of DUC inventory.
In this at all this is more of a pure how much.
Capital to do that we think we need to spend or what what or what price WT I do we need given the capital we need to spend in order to keep production flat.
Without any drawdown of Ducs, if we would draw down ducs it could be even better and so certainly as we have.
Accomplished.
Better capital efficiency, along with the cost synergies that we're anticipating out of the merger.
Thats watch, allowing us to lower that.
Maintenance capital significantly.
I would anticipate to ask going to continue to lower through time.
As we continue to accrue achieve even greater capital efficiency more.
More more cost efficiencies.
And frankly as our as Bryan singer brought up earlier as our overall corporate decline rate.
Becomes lower and outer years than the amount of capital required to.
Maintain the production should should trend tend lower also so while we're giving you is just kind of a definition of where it is just slamming together the two companies what we both defined as maintenance capital I think it was 950 on the on the Devon side and the remainder on the WPS side, but again the results were seeing today or.
Tended to indicate to you.
Even now it's going to be.
The lower in 2021, but we're not giving an exact number.
Very good thanks for the details.
Our next question comes from Derrick Whitfield with Stifel. Your line is now open.
Thanks, and good morning all.
Good morning.
I appreciate your earlier comments on federal and state alignment collection rates are certainly top of mind with investors.
Regarding the 650 permits you're expecting have on hand at year end.
Permit comprehend any change in development approach from your current practices, including spacing lateral length et cetera.
And it is a slight build on that question a negative election into a regulatory outcome were to occur the permits in ended at a later time for longer laterals.
Hillary resource conversion.
Yes.
Derek This is David Harris. Thanks for your question, Yes. The 650 permits that we have in hand contemplate our our current development strategy around the the zones that were the most focused on.
And that spacing.
As well as giving us some flexibility for some down spacing to your question about the transition to a three mile laterals.
Just for your background kind of that quick rule of thumb is.
If you've got a drilling permit in hand, and you make a change if it if it doesnt result in a different level of surface disturbance.
You don't need to get a new permit you go through what's called a sundry process, which is.
A really quick and routine process that we have.
We do these from time to time, when we tweak tweak landing zones are bottom hole locations and so thats the process that we would go through.
As we look for opportunities to.
To incorporate more extra long lateral development into into the programs and and certainly with the not just the results we've seen and Cobra, but the results we've seen over the last couple of years with across the portfolio. That's something we're actively looking at.
We've drilled about 30 wells across the company that are two and a half mile laterals are longer about half of those in the Delaware, but importantly, we have drilled them in all three of our other assets as well so we're getting increasing reps there as Dave alluded to an increasing confidence in our ability to make that a meaningful part of the program go forward.
And I think you'd expect to see probably a half dozen or so three mile wells in the Delaware next year.
Upwards of 20% to 25% that's that are two and a half mile laterals are longer. So so we think this is going to be an important part of.
Our development approach going forward, we think Theres a.
Obviously as you saw from Cobra Big capital efficiency pickup.
As we successfully execute this.
That's fantastic detail and then as my follow up really more broadly on integration efforts to date as your teams have begun to work together or you guys since in any areas of potential synergies beyond whats been disclosed.
Hi, Thank the short answer is yes.
When you get good.
People together and they start talking about that and I think particularly on the capital side, we're seeing that there are going to be.
Uh huh.
Permits even just from pure scale.
On the supply chain and what the incremental scale will provide as well as just optimizing programs as well. So yes, it's still early days, but I can tell you. There is a lot of excitement enthusiasm that the synergies are not only achievable, we're going to see more of them and so Geoff and David here, even closer to it to me.
No Dave I think you hit that hit the high points, that's exactly right as the teams have gotten together again, it's early days still for sure but.
Already started to think about specific areas across the organizations and I think there is no doubt in our mind that we've got a lot of momentum there and should see.
In increase to those synergies overtime in most areas.
And I'll just say philosophically.
I think one of the reasons at this we're going to make this work so well as it's our whole approach to this is a more of a merger of equals and so we're we're both sides are taking the attitude. Okay. We both done well on our own but are there some things that we can do to create a better company that are even better than either one is ending.
Digitally and is that open minded attitude about.
We're really not focusing on what I do great or my company does great. It's more about okay weve.
How can we really create something is better than either one of us and and not worried about where it comes from whether it's from the W. PX side or the Devon side is how can we do better and and I think there is a lot to be said for just that mental attitude of really trying to take the best from both sides is going to allow each.
And more synergies in a situation where you just have something is just much more of a takeover and you don't learn as much from the other side as you do in this type situation.
Very helpful. All great update.
Our next question comes from Jeffrey Campbell with Tuohy Brothers. Your line is now open.
Hi, Dave.
Alright, I wanted to ask a.
Wanted to ask more specific debbie's question and then one broader question.
With regard to WPS.
Tended to invest elsewhere, then and its Eddy County assets, whereas Devon has outstanding results are as illustrated on slide eight.
I was wondering if you see the tangible to bring some capital to W.P. acnes.
Acreage when the merger is complete.
Yes, we don't have a specific plan, but I mean, there they have some outstanding acreage just across this.
The state line and in an area actually called for the state line area.
As well as ER.
So I think there is a pickup from Felix and which Felix we think honestly and they feel very much so too did not optimize the development plan on that so yes, it's going to compete for capital very well I.
I didn't say I think maybe on average that Evans, a little bit better but.
Legacy results, we have a pretty high bar to meet and I don't know that anybody that we would look at would quite match up to that but that doesn't mean, a WPS in really really good and thats what.
And frankly, we we do quite a bit of study on those.
Before before WPS acquired both those positions. So we understand those positions pretty darn well. So maybe you want to add anything.
I think I think thats exactly right, Jeff you may have been referencing.
Some of the acreage that further.
Further further north in Eddy County that would be.
Kind of northwest are arc, our potato basin area.
There's.
So some of that acreage is operated our understanding is some of its non operated but.
But that would certainly be a place as we think about acreage trades and other things that we'd be looking at potential for bringing some of this this extra long lateral development.
Roche there.
Yes exactly.
So I'm, sorry, Jeff kind of misunderstood your question I'm sorry.
It was good color anyway, it was five.
Then my broader question is bearing in mind that go fall and focus on free cash flow and considering the merger is.
Is there any part of the portfolio that struggling to generate free cash now and would this be a yardstick for not only attracting capital in the future, but maybe some portfolio management longer term. Thanks.
Thanks, well we have.
Do you think about it we have.
Three areas are generating really strong free cash flow right now pro forma that we'll be generating really strong free cash flow into the Bakken Eagle Ford and the Anadarko basin.
Obviously, the biggest growth engine with.
The 400000 really high quality acreage in acres in the Delaware Basin.
That's going to be the biggest growth engine and then you have the Rockies that's more of a longer term growth play is not as much of a free cash flow play.
Right now.
As a smaller asset, but its a very oily basin.
We know there is very good potential into in the Niobrara, there across probably a couple hundred thousand acres or so and our approach right. Now we think is most appropriate to just take a.
Very measured approach we've drilled some wells there were learning a great deal from the wells, we did about what worked extremely well and where our challenge is still lie.
It's probably a an environment that is going to Taco is very oily up in the powder is going to take probably 45 $50 oil to really compete effectively for economics, but there is a lot of hydrocarbon. There. So is the one that's not a strong contributor currently but I don't feel.
Well, obviously look as a combined company weve neither side has been afraid to make the right decision at the appropriate time, but there is nothing obvious because both companies have really high graded our portfolio a lot historically and.
And we like the asset base, but thats, obviously at this stage of each of them and we understand that it was 10.
Well look at it.
Hey, great. Thanks, I appreciate that color.
Well it looks like we've gotten through our question queue. We appreciate everyone's interest in Devon today, and if you have any further questions. Please do not hesitate to reach out to the Investor Relations team.
Team and anytime you have a good day. Thank you.
This concludes today's conference call you may now disconnect.
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Okay.
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Oh.