Q4 2020 Devon Energy Corp Earnings Call
Yes.
Hi.
[music].
Welcome to Devon energy fourth quarter and year and wont be 'twenty earnings conference call. At this time all participants are in a listen only mode. This call is being recorded I would now like to turn the call over to Ms.
Scott Coody, Vice President of Investor Relations, Sir you may begin.
Good morning, and thank you to everyone for joining us on the call last night, we issued an earnings release and presentation to cover our results for the year and our forward looking outlook for Devon in 2021.
Throughout the call today, we will make references to earnings presentation to support our prepared remarks, and these slides can be found on our website.
Also joining me on the call today are Rick <unk>, our president and CEO Clay Gaspar, our Chief operating Officer, Jeff Ritenour, Our Chief Financial Officer, and and few other members of our senior management team, including Dave Hager, Our executive Chairman.
Comments today will include plans and 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 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'll turn the call over to Rick.
Thank you Scott it's great to be here. This morning, we certainly appreciate everyone taking time to join us with.
With the merger of equals between Devon, and WPS energy now finalized we are and exciting story to share with you about the prospects of our new company. We are definitely timed this merger well catching the very bottom of the cycle and positioning ourselves to capture the full upside presented by the recent strengthening of macro fundamentals.
With these more favorable conditions the team at Devon is not taking anything for granted we are extremely focused on capturing synergies and executing our plans.
We remain disciplined with our capital program and we are delivering some very positive results well ahead of plan, even with all the disruptions driven by COVID-19.
Politics, and recently winter weather.
We will provide an update on the impact from this Arctic storm later on but our field personnel are doing a tremendous job fighting through these challenging conditions and meeting the energy needs of consumers.
And tough times like these.
Extreme weather like this is a good reminder of how the products. We produce are absolutely essential to protect and improve the quality of life for society.
Now for those of you who are new to our story, let's turn to slide three of the presentation to briefly review the advantaged attributes of the go forward Devon and.
In January we successfully closed the all stock merger of equals between Devon energy and WP ex energy and only three months. This is a remarkable pace to complete a transaction of this scale and I want to thank both organizations for their dedication and efforts to reach this milestone.
Progress on integrating and the merger is also off to a great start with our blended leadership team and staffs working remarkably well together by bringing together our respective companies' shareholders will benefit from enhanced scale immediate cost synergies higher free cash flow and our financial strength to accelerate the return of cash to shareholders through our <unk>.
<unk> fixed plus variable dividend strategy.
And also adding to Devon investment thesis is our attractive valuation, which I believe to be the best value available and the entire energy space as we execute on our strategy and more evidence continues to emerge that we will be able to efficiently develop our federal acres and the Delaware basin I truly expect Devon to reroute.
Higher and.
Jumping to slide five the power of the combined company was showcased by our outstanding fourth quarter results.
That outperformed street expectations across the portfolio. Our teams are delivering results and continued to exceed its production and capital efficiency targets, while successfully driving down per unit operating costs and maximizing margins. This was evidenced by several noteworthy accomplishments in the fourth quarter, including.
And our oil production exceeded guidance by 5% drill.
Driven by well performance not higher activity.
Our operating and corporate costs also exhibited sharper declines year over year and importantly, these efforts translated into $263 million and free cash flow and.
Coupled with the closing of our Barnett divestiture, we generated nearly $600 million of excess free cash flow during the fourth quarter, a truly fantastic result for our organization.
Now moving to slide six.
Devon has a long history of returning cash to shareholders paying and uninterrupted quarterly dividend for 28 consecutive years, the combination of Devon and WPS will allow us to step up our game by implementing our fixed plus variable dividend strategy and.
And with the free cash flow, we generated in the quarter I am proud to deliver on our commitment to reward shareholders with higher cash returned by the.
Declaring a industry first variable dividend of <unk> 19 per share.
Jeff will cover the details of the differentiating dividend policy later on but this fixed plus variable dividend framework will be a staple of our capital allocation process, allowing us to return meaningful and appropriate amounts of cash to shareholders across a variety of market conditions.
Now moving ahead to slide 11, the positive momentum of our business has established is also resulting in and improved operational and financial outlook for 2021.
And how do I define and improved outlook well, it's very simple.
Lower breakeven funding levels and higher free cash flow generation.
Beginning with production given the strong results we delivered over the second half of 2020, we now expect to maintain a higher level of oil volume throughout 2021. This enhanced outlook is underpinned by improved capital efficiency compared to what we estimated at the time of our merger announcement last year.
Even after raising production expectations in 2021, our upstream.
Dream Capital program is coming below our previous expectations of approximately $1 7 billion.
Presenting a reinvestment ratio of less than 70%.
Moving a $50 <unk> price deck.
Also of note most of the corporate capital, we expect to spend in 2021 will not be repeated in 2022 or beyond.
Combined with the merger related cost synergies that Jeff will cover later on we are effectively lowering our funding requirements and 2021 to Adobe and <unk> breakeven price of $32, which positions Devon with a free cash flow yield of 13% at today's pricing.
Furthermore, on an unhedged basis, and assuming year end run rates for cost synergies, our free cash flow yield.
Expands to greater than 20% this free cash flow yield screens at the very top of our industry makes Devon and a unique uniquely attractive investment proposition when compared to the record high valuations for most other sectors and asset classes and the market today.
And lastly on this slide while our recent uptick and commodity prices are certainly a welcome change and very beneficial to our free cash flow generation I want to be very clear with this message. We have no intentions of adding any growth projects until demand fundamentals recovery recover inventory overhangs clear up and OPEC plus per.
<unk> volumes are effectively absorbed by the world markets and.
Importantly, I encourage other producers to be very thoughtful and disciplined when it comes to capital plans and high returns on capital employed reduced reinvestment rates and free cash flow generation will determine the winners and losers and this upcoming cycle not just topline growth Devon will be a leader and this movement.
The final final topic I would like to cover today is Devon and commitment to top tier ESG performance.
Excellence and ESG as a core value here at Devon.
We believe that performance and ESG impacts every aspect of our business, both operationally and financially, including our social license to operate over the long term.
On the environmental front, Devon as top priorities will be the reduction of greenhouse gas emissions methane intensity rates and the advancement of water recycling.
Once we fully integrate our operations from the merger of topline Golar <unk>. This year is to establish quantitative targets for these environment environmental priorities in.
In addition to these objectives. We are also sharpening our governance practices, which include initiatives to refine and executive compensation to further enhance alignment with our shareholders and advanced and initiatives to foster inclusion and diversity within our organization.
The bottom line is this we are committed to responsible operations to advance the best interest of all stockholders.
And with that I'll turn the plague and I'll turn the call over to clay to cover our operating highlights for the quarter play.
Thank you Rick and good morning, everyone. This strategic combination of Devon, and <unk> creates a pause a powerful asset portfolio and strikes the right balance between sustainable growth opportunities and strong free cash flow generation.
Given the strength of our fourth quarter operating results and 2021 outlook, we're off to a great start executing on our strategy that will drive the next phase of financial growth and strong returns for the company.
Let's turn to slide 14, and I'll give you a brief overview of our incredible Delaware basin position.
Our World Class, Delaware Basin asset is a capital efficient growth engine driving devins operational performance as you can see we have amassed a dominant position and a 400000 net acres of stacked pay and the economic core of the basin that accounts for about 60% of our pro forma production.
The operating scale of our consolidated Delaware footprint provides a multi decade inventory of high return opportunities and our current activity level.
Another important point that this slide demonstrates is our positions geographic diversity between new Mexico and Texas.
And having a blend of federal state and fee lands and positions in both Texas, and new Mexico were able to leverage and significant economies of scale and at the same time benefit from market diversity and navigate the evolving regulatory climate.
While we fundamentally believe that we will be able to efficiently develop our federal acreage and new Mexico. We are proactively manage this risk by building up and inventory of around 500 approved drilling permits that cover our planned activity on federal lands for multiple years.
Our forethought and has allowed us to secure the necessary permits easements and rights of way required to execute on our near term capital program with minimal impacts our day to day operations.
Looking beyond the 60 day regulatory transition, we will be highly engaged and collaboratively with policymakers to ensure that we retain and ability to efficiently develop our federal leases and maximize value for all stakeholders involved.
Moving to slide 15, the fourth quarter operations results across the Devon legacy position highlight why we believe this space and to be the best resource and North America.
Our oil production from this operating region continued to increase rapidly growing 41% year over year. This growth was supported by 23 high impact wells that were brought online across the southeast new Mexico during the quarter.
While we had great results across our acreage our activity and the cotton draw region targeting the second bone spring top to highlight list. This package of eight wells delivered an average 30 day rates of more than 4000 Boe per day, which equates to an impressive 415 Boe per thousand feet of lateral link.
And.
With D&C costs, averaging less than 6 million per well the.
And the overall returns from this bone spring activity and ranks among the very best returns and Devin and ever delivered in the basin.
Turning your attention to the far right hand side of the slide another noteworthy trend as our improving capital efficiency with consistent improvements throughout the year, our drilled and completed costs exited 2020 at around $560 per lateral foot. We believe these results the best in class among our peers and the area. The key drivers are.
This performance are optimized completion design repetition gains and nonproductive time improvements across all phases of the value chain I.
I expect this positive trend of steadily improving cycle times and costs to carry into and benefit our 2021 program.
Congrats to David Harris, and the Devon legacy team for this outstanding set of results.
Moving to slide 16.
We also continue to build operational momentum across the legacy WPS acreage position beginning with our Stateline area. The key takeaway is our co development drilling program and the upper Wolfcamp and bone spring that is providing great results at a four to five well spacing per bench with.
With the 26 wells and brought online and the Stateline area. We continue to outpace type curve expectations with peak 30 day rates, averaging around 2300 Boe per day, and the D&C costs associated with this activity improving by 44% compared to just a few years ago.
We've also made significant progress and our monument draw area with encouraging results and our cathedral and Brian <unk> projects as you recall <unk> acquired this asset from Felix about a year ago with the 2020 slowdown in activity. We're just getting to see the results of the first WPS drilled and completed wells and we're very pleased with these results.
<unk> and continue to see significant upside to the asset a.
A critical subset of these projects, which co developed the upper Wolfcamp and the third bone Spring line was a trial of a more aggressive flow back methodology, along with improved spacing and also efficient and more efficient completion process.
The results were lower well cost and again improve productivity.
This approach, which is similar to the techniques and Stateline was applied to a subset of six wolfcamp wells across the two projects. The 30 day IP rates for these wells averaged 2300 Boe per day with 76% oil the wellbore clean out process has improved and we're not seeing any geo mechanical or geochemical and <unk>.
<unk> sides to the more aggressive flow backs.
With these positive tests, we will continue to evolve the completion design and monument draw and program and 2021.
As we extrapolate these results the monument draw will compete very effectively for capital with our Delaware Basin and portfolio.
Turning to slide 17, I'll cover our other positions and our border to border Premier oil fairway.
From the WP X portfolio of the Williston Basin continues to provide phenomenal returns we will continually continue our highly profitable program into 2021, and the powder, we will continue to deliver on appraisal and leasehold objectives with a focus on advancing our understanding of the emerging Niobrara oil play.
And at Arco Basin is back to work with two rigs funded by a joint venture partnership.
By the way I have a long history with the Anadarko basin, and our full I have full confidence and devins ability to extract significant value from this asset with the right well placement strategy and operational excellence and where the opportunity presents some leverage through partnerships.
Finally, and the Eagle Ford and with our partner with bps, we plan to run a two rig program and 2021 and jumpstart our activity by bringing online 22 high impact Ducks and the first half of the year.
Turning to slide 18.
The first key point is that our maintenance capital program is designed to optimize capital efficiency with approximately 80% of our capital allocated to the Delaware Basin.
Within the Delaware the capital will be relatively evenly split between new Mexico and Texas.
With an abundance of flexibility to reallocate capital, if we see a differential economic opportunity on either side of the border or even and unforeseen delay on federal lands as Rick stated earlier the capital efficiency associated with this plan is outstanding.
We expect to maintain our production at levels slightly elevated to 2020 for roughly 10% less capital on a year over year basis.
We expect to invest about 30% of our capital of our 'twenty and 'twenty one capital in Q1 due to the timing of D&C activity with some momentum rolling in from 2020.
After this heightened activity for the first quarter. The capital is expected to be more ratable for the balance of 2021.
While we expect the current weather conditions to negatively impact first quarter production. We also expect the balance of the year to be relatively flat.
As you can see on the right hand side of the slide. We also continue to act with a sense of urgency to materially improve our cash cost structure in order to get the most value and we can out of every barrel.
With this intense focus we are on track to reduce LOE and <unk> cost by 8%.
To achieve this step change and improvement in the field level costs, we have line of sight to meaningfully reduce our recurring LOE expense across several categories, including chemicals water disposal cost compression and contract labor.
The gains that we make in this area often act as ongoing annuities that we will benefit from for years to come.
I want to commend the production operations team that fight for these improvements every day.
I also wanted to add some additional color on the severe weather event, that's impacting a large part of the U S. Today first we are focused on ensuring the safety of our employees and the service company partners that work with us each day and these challenging conditions.
<unk> talked to several of our field leaders over the last few days and consistently the first thing. They mentioned is protecting the health and safety of people.
We also know the critical value of the commodities that we produce many of us as well as our family and friends and been personally impacted by the lack of electricity necessary to keep up with the demands associated with its intense winter storm.
And we're doing everything we can to safely keep production flowing to the communities and desperately needed.
As we try and quantify the impact of our FERC to our first quarter production numbers I would just say it's too early to tell we've included some downtime and the annual numbers, but we have elected not to give first quarter guidance at this time and the coming weeks, we will have a much better understanding and the impact and will provide additional information on the first quarter and expectations.
With that I'll turn it over to Jeff for the financial review.
Thanks, Craig and good morning, everyone. My prepared remarks today will focus on the progress we've made advancing our financial strategy as well as providing some context on a few key metrics that have improved and our 2021 outlet disclosed last night.
Beginning on slide seven with a review of our balance sheet over the past three months, we continued to make progress strengthening our investment grade financial position as Rick touched on earlier, the strong operational performance and the combined company allowed us to generate a substantial amount of free cash flow and the quarter and build an incremental $500 million of cash and the quarter.
With the benefit of this cash build Devon possessed five 6 billion of liquidity at year end, consisting of $2 6 billion of cash on hand, and 3 billion of Undrawn capacity on our unsecured credit facility.
As market conditions allow we will look to further reduce our absolute debt level with select repurchases under our $1 5 billion board authorized debt repurchase program subsequent to quarter and in February we took our initial step and this debt reduction plan by redeeming $43 million of senior notes that were due in 2022.
This action completely cleared Devon debt maturity runway until the second half of 2023.
We will have another opportunity to reduce absolute debt and the second quarter with a potential early redemption of our 500 million tranche of 2026 bonds, which become callable in June at a fixed price with the remainder of our debt reduction program will remain flexible and evaluate opportunities as we keep a close watch on interest rates and credit spreads longer.
Term it is our firm belief that a successful E&P company must maintain extremely low levels of debt given the volatility of our cash flows will continue to manage towards our stated leverage target of one times net debt to EBITDA or lower and we've charted a pathway to get there within the next year at today's spot pricing.
Our disciplined financial model grounded on a low capital investment ratio excuse me and reinvestment ratio and variable dividend payout of only 50% of excess free cash flow allows us to consistently build our cash balance reducing net debt over time and driving us to our one times net debt to EBITDA targets.
In addition to our debt reduction efforts, we expect to accelerate the return of cash to shareholders and 2021, given the stretched balance sheets across the sector. Many of our peers will have to reduce debt with free cash rather than returning cash to shareholders. We believe we are uniquely positioned given our financial strength to do both to opt.
<unk> is the outcome of our cash return strategy through the cycle, we've adopted a fixed plus variable dividend framework. This cash return strategy is designed to pay a sustainable fixed dividend and evaluate a variable dividend on a quarterly basis.
The fixed component of this policy is our legacy quarterly dividend that is paid at a rate of <unk> 11 per share and targeted at a sustainable payout level of approximately 10% of operating cash flow at mid cycle pricing.
The variable dividend is intended to be a supplemental distribution and periods of excess free cash flow beyond the fixed dividend.
More specifically after the fixed dividend is funded which is the first call on our free cash flow up to 50% of the remaining free cash flow and a quarter will be distributed to shareholders through a variable dividend.
As Rick touched on earlier, given the strength of our fourth quarter results. The board has approved <unk> inaugural variable dividend at a rate of <unk> 19 per share the remaining excess free cash flow builds upon our balance sheet and reduces our net debt as I mentioned earlier once again the variable dividend is in addition to Devon has previously declared fixed quarterly dividend.
And of <unk> 11 per share both the fixed and variable dividend will be distributed on March 31 for a total payout of <unk> 36 per share.
And lastly, I'd like to wrap up my comments today on slide eight by covering the progress we've made capturing the merger related synergies that are expected to drive $575 million and annual cash flow improvements by year end 2021.
I won't go through all the details on this slide but we have a detailed plan in place to meet this target, which includes a range of actions to achieve more efficient field level operations lower drilling and completion cost better alignment of personnel with go forward business and a reduction of financing cost to.
To be clear our efforts to reduce costs go beyond just dollars and cents and represent a meaningful shift and our culture to more streamlined leadership more reliance on technical expertise and intense focus on delivering top tier returns on our investments and the team is acting with a sense of urgency and we're running well ahead of plan with approximately 60%.
And at least cost reductions already reflected in our 2021 outlook and the remaining synergies to achieve our $575 million target had been identified and are expected to be captured on a run rate basis by the end of this year the.
And the value creation of these synergies are very material and impactful to our go forward value proposition, resulting in a PV 10 over the next five years of more than $2 billion a.
Roughly 15% of our market capitalization will provide further updates as we progress through the year and with that I'll now turn the call back to Rick for some closing comments before we open the call to Q&A.
Thanks, Jeff.
Yes.
Sure.
We've covered a lot of good information today and I'd like to reiterate a few key points.
Number one this transformative merger creates a leading U S energy company.
This is arguably the best value proposition and the entire E&P space number two the power of our portfolio is evident with our outstanding fourth quarter operating and financial results number three the momentum that our business has established is resulting in and improved operational and financial outlook for 2021.
And before our business with scale to generate substantial amounts of free cash flow and we're proud to reward shareholders with an industry first variable dividend and.
And lastly, number five we are committed to delivering top tier ESG performance and we expect to establish quantitative targets.
For our environmental priorities later, this year and with that I'll now turn the call back over to Scott for Q&A.
Thanks, Rick we'll now open the call to Q&A. Please limit yourself to one question and a follow up this allows us to get to more of your questions today with that operator, we'll take our first question.
Your first question comes from the line and by around <unk> with J P. Morgan.
Yes, good morning, Rick I wanted to get some insights regarding kind of the decision to start the variable dividend program.
Before the merger.
For the period before the merger was closed and just thoughts.
And that decision to kind of accelerate.
And the variable dividend.
Yes, that's a great question and I think at the end of the day, when we sit down and we looked at the pro forma results for the fourth quarter. Both legacy companies were so strong.
And it's so much cash to the balance sheet, we felt like it was a perfect opportunity to get out ahead and say exactly what we.
And do exactly what we said, we would do and Thats implement this this variable dividend and 2021 now.
We talked at the board level, we felt now is a great time.
To do it and we wanted to make a substantial enough that it did it showed our leadership and showed our focus on getting cash back to shareholders. As you will know which has been one of the.
One of the things that our industry has had pushback from them. So we thought was a great opportunity to show leadership and so are we.
We quickly and move that way.
Sure.
Great and my follow up is.
<unk> for Jeff, maybe a two parter for adjusted and Clay.
Maybe Jeff could you help us maybe reconcile.
And the Capex guidance between upstream midstream and total relative to Devon.
Previous common carrier around a call it a $1 $7 billion sustaining kind of program and clay and my follow up there is maybe if you could talk through the trajectory of 2021 oil volumes I know you clipped 305.
For the fourth quarter, but just maybe help us think about the trajectory.
The balance of the year.
And this is Jeff yes. Thanks for the question, yes. It simply put if you look back at the capital program that we rolled out with the merger that was on a run rate basis. So we were we made the assumption that we captured all of the synergies day, one and obviously accounted for our hedging program at that point and time.
And really just roll that forward for the full year today, what <unk> excuse me last night, what we rolled out is what we actually expect the cash expenses to be obviously in 2021 and as you would expect as we're working through our integration and timing of some of those synergies works their way throughout the year, so, whereas we had $100 million synergy assumption at the time of the rollout.
As it related to capital of course again, that's captured here as we work our way through 'twenty, one and we've tried as best we can and disclosure. We provided last night to provide unit level of detail to see what the cash flows and Capex will actually look like here in this current year.
That's helpful.
Yes.
To answer your AR.
And to be to be questions.
And Walton's on one question one follow up I'll give you that.
So let me, let me address all up and on our part and see as well because I think there's a question around the cadence of capital and the cadence of production. So a capital first we.
Some activity rolling in from 2020 that will we just have more activity going on and the first quarter of 2021, and so when we articulate is about 30% of the capital for 'twenty, one will be spent and the first quarter, we cautioned that even though we're not giving first quarter guidance and earnest. We wanted to make sure. That's in your model. So that we don't surprise anybody.
We just have more activity and that first quarter now I would say beyond that second through fourth it's it's pretty consistent we get to a run rate of steady state activity and it's pretty consistent from there interestingly production is almost like an inverse first quarter. We've got a couple of things happening remember, we only have a partial quarter from.
The WPS production don't forget that and then secondly, this weather impact will hit us and the first quarter. We don't have a good number on that yet, but both of those things will weigh on the first quarter total production numbers now beyond the first quarter and when you think about the full year guidance second through fourth are pretty steady state once again so.
We're going to have some disruption and the first quarter, we will tell you a little bit more about that and the coming weeks, but I would say the second through fourth beyond that we're pretty much and a steady state environment Super helpful. Thanks, guys.
<unk>.
Your next question comes from the line of Brian singer with Goldman Sachs and company.
Thank you and good morning.
Morning, Brian.
My first question is with regards to the capital plan and I think Rick you were very clear and saying that the.
Our capital plan Youre going to look very closely before.
And considering based on demand fundamentals inventories and.
And OPEC, plus curtailed volumes and making sure that those are absorbed and the market and I wanted to follow up.
To ask if that means that the capital budget that you've announced today, it's firm and tell the above and so those three boxes are checked or if there is flexibility within the 70%, 80% reinvestment rate framework to move activity at to move activity around.
No I think I think those boxes are checked I think you have it captured.
And Brian we are going to be very disciplined.
And those were all excited about the strength of the commodity price, but we're not back on on.
Demand, where we need to be and and.
I think you see that and the and the strip.
We're never upper Fifty's on WTS today, but you lose about $10 a barrel over the next two to three years. So I think we just need to keep that and perspective, and and we will keep that and perspective and where.
We'll stay disciplined.
Great. Thank you and then my follow up is with regards to how Youre allocating capital between the Mexico and Texas within the Delaware Basin highlighted the 500 permits and on federal land and can last for years and.
And I wondered.
If you could add more color on the ability and risks to execute on the 500 500 permits.
And particularly if theres other permits needed and weather.
You are getting.
And more midstream or or other credits beyond the drilling permits and then.
How you could see.
The capital allocation relative to an even split between new Mexico, and Texas changing depending on what the what comes out from the federal government you.
You bet, Brian ill start and ill then I'll pass it off to clay for a little more color but.
At the highest levels, we feel very optimistic that you're going to see.
The resumption of permits suddenly notices all these things get back into play.
Month, or so maybe two months, but for sure in the next month and as you you mentioned, we do have a backlog of permits we do have a number of.
<unk> pads and already been constructed pipelines.
The infrastructure has been and late to that so we feel we feel.
Confident and that we will be able to.
And our planned capital activity now should we be surprised thats why we wanted to illustrate the really really strong results our state line.
Activity.
We had the fourth quarter with some of the bone Springs, and the upper Wolfcamp results.
Same same with monument draw we saw some great great performance and access.
That drove our outperformance on the WPS side, and if you look at it from that.
And that perspective, so we feel we feel very very good about.
Where we're at we keep lines of communication.
And certainly the leadership and the state of New Mexico.
As you know the new Mexico as a state that we know pretty well Devon has operated.
And therefore, nearly 50 years and.
And personally is up share with many of you on the call and ill loved about half mile I've stated and Mexico was educated there.
My family was a range there, but <unk> school teacher, there we have a lot of a lot of relationships. There. So I think that we have a pretty clear picture of the reality that will happen and so.
We remain confident Brian so.
Clearly you have some more color you want to well and I think that was Wilson and the only thing I would add Rick is I think it's our job to be nimble and proactive when it comes to whatever storms are ahead of us that's weather related political related however, it is and.
And so I think the work specifically on the Devon legacy side to get ahead of this storm and.
As a perfect example of that we can only speak to what we know today, we have a 60 day pause and leasing.
We have responded very well and tell you from that perspective and really good shape.
And I can tell you. We are we are ready to roll with the punches on whatever comes our way and we have I.
I think back to.
Phillips Brooks and 17th century scholar.
We don't pray for lighter low and we paid paid excuse me pray for a stronger back.
And that's kind of the job and we are in so keep rolling.
Great. Thank you very much.
Hey, Brian.
Your next question comes from the line of Doug Leggate with Bank of America.
Thank you and good morning, everyone.
Your lines and volume and safe out there and.
And I appreciate all your amongst the day from Greg.
And your team.
Rick I've got two questions I wanted to pick up on a comment you made some day.
We're very deeply about it which is.
You expect Devon, so right.
Wanted to put it to you that.
The multiple is the bulk to switch and capital efficiency and portfolio debt.
Questions are basically.
And those two things over the two things I guess you can control.
So when I look at slide eight.
And you've given an update on progress on synergies and I'm just wondering how you see the risk so those numbers going forward as you've got chance to really pure black oil.
Layers of the combined company and that's my first question and my second question is maybe for Clay you talked about.
Decades of drilling inventory at current pace I Wonder if you could break that down and for us by basin.
And specifically speak to the future of the Bakken and the portfolio EBITDA.
Thank you.
Doug Great questions as you know as far as the synergies we feel very very good we felt confident on the merger rollout and we feel even more confident today than we did them and.
And so I hope that everyone is hearing that we already have and Jeff I think talked about it and some of his prepared remarks, and maybe ask him to weigh in as well if I missed something but at the end of the day, we've we've captured.
Quite a few of the synergies already and have that built into our two.
2021, and forecast and so although we feel very good about it and.
I don't want investors to.
Underestimate our focus on that and our diligence on that something this management team is highly focused on so flow.
<unk> you want to talk about the the capital.
Sure allocate inventory.
Doug I think as we think about the inventory and how we are investing today I feel very confident and our ability to run and perpetuity and the Delaware basin.
And we talk about a certain amount of high quality inventory and I think rightfully so the investors only have.
A certain view how far they can go out what I want to articulate is that we feel very confident and that solid next decade of opportunity and also know that we're continuing to refine those opportunities for years 11, and 12 and beyond this.
And this is the base and that keeps on giving.
Past quarter some of the splashy as most exciting news was around the second bone.
On the Stateline side and I can tell you that's just that has been.
Something that we've been evolving over the last couple of years, it's not fully baked into our.
Our forward look, but I can tell you it's the upside with associated with that is tremendous and fully confident on the north zone.
And the same opportunity holds as we move a little bit down structure and to the wolfcamp opportunities.
As we talk about other basins, Doug I know.
And Theres a lot of people new to the WPS side of the story again, but.
We have never shied away from the fact that we have a quantity quantifiable amount of inventory and the Williston basin. It has been a tremendous asset for WPS huge amount of our growth high high quality operations and results, but and of the day, we're going to run one rig because for a reason we have only so much inventory remaining.
Now what happens with that asset and what happens with the other assets.
It is way too early for us to tell I'm really excited about some of the real exciting things basins and I'm kind of.
I'm looking at from the first time and a few years and kind of some of the opportunities there. So.
And we will see how we can roll it out.
Over the coming quarters on more information there.
Doug One thing I will say also as the.
And is just the diversity, we have throughout our portfolio not only are we just over 50% crude oil but.
We have a strong.
Strong leverage to natural gas and natural gas liquids and so when we talk about diversified not only is it just a multi basin.
And it's also a multi commodity issue and I want to make sure that we cover.
Get that get to.
Albert.
Maybe just to kind of get to the punch line the $32 breakeven.
And a little lower rig and I'm just wondering are those additional downside potential to about breakeven.
And that's really the summary question I was trying to get.
Okay, I think there's always going to be things and where we try to lower that breakeven dug in and so we have I want you to know we got a very focused team here and creative team and I do think there is some upside to deliver and net.
And that breakeven down into the upper Twenty's.
Great. Thanks, very much guys. Thank you.
Your next question comes from the line.
Jeanine Wai with Barclays.
Hi, Good morning, everyone. Thanks for taking my question, and then and hope everybody's managing okay with feed out there.
And my Dream.
And my first question is for Rick on the reimbursement framework.
We know that equal up to 50% payout of the excess free cash flow, that's got certain criteria attached to it related to the balance sheet and the macro and one of the criteria is strong leverage and I know a lot of things can happen and we don't want to get ahead of ourselves, but I guess, we are hearing but at strip pricing Devon gets down to.
With onetime leverage call within a few years and even if you do around the net payout you're still left with sufficient cash after all of that.
And that so if this scenario ends up playing out is there and next evolution of your corporate strategy, such as revisiting the Max 50% payout from moving to additional buybacks or would you rather reduce leverage further beyond the one time just to be conservative.
Yes, Jeanine and those are those are good questions and that is the beauty of Devon today as we're sitting on will generate a lot of free cash we're sitting on a lot of cash we have no near term debt maturities as Jeff said in his prepared remarks, we have a good plan.
And of retiring debt over the next couple of years. So we will be focused on net to the extent that we.
And we.
We pay out up to 50% on the variable dividend and we reduce our debt.
And we keep moderate growth would recall we laid out.
Cap of 5% growth.
On the oil production I think if all those line up and we still see that we're.
Generating incremental free cash will certainly revisit all of those things, but first things first I think we're excited about implementing the variable dividend. We're excited about being proactive and are paying down debt. We're excited about the free cash flow that we're generating with this amazing team on these amazing asset so Jeff, Yes, Ginnie and the only other thing I would add is Rick.
All the right points.
And in that situation not only will we reevaluate the upper limit of the variable dividend target, but I think youll also be thinking about growing your fixed dividend.
We want to make sure we maintain that at a sustainable level, you kind of and a normalized price environment, but that would be another another lever we could pull was to start thinking about the growth of the fixed dividend component and then and thinking about the upper and on the variable as well. So and then again I would marry that with we would certainly talk to the board about buybacks if that if the opportunity presented itself.
Okay, great. Thank you.
Second question, maybe for clay and it's following up on Doug's question. Just now on deal synergies I know not much time has passed since the deals closed, but where do you see the most potential upside on additional synergy capture.
It's more on the D&C side of things because we noticed that the legacy EW checks while costs were down meaningfully.
Or do you think it's more and that net back improvement. Thank you.
Yes. Thanks for the question Janine as I think about the synergies some of the things I'm. Most excited about is just we are just now blending teams I mean this week.
<unk> and a lot of the organizational structure and these teams really have yet to kind of sit around even the virtual table together look each other and the virtual eyes and say, okay. How do we share. These best practices. Some of the observations from the folks that have been working and on really on task I would say.
Some of the application of the WPS completion techniques and efficiencies are very applicable to the Devon side of the house and I think some of the casing design drilling efficiencies on the Devon side of the house are very applicable to the south side of the border and so there are some immediate things you have to try and you have to.
Walk through these but there's things we're experimenting with and real time I think on the supply chain side of the organization I would characterize Devon as exceptionally good at understanding contracting strategy and have done some really innovative things around.
The contracts and the <unk>.
The business side of supply chain I would say on the WPS side.
The engineering side of the house has done a good job of understanding those contracts and wringing out the most appropriate value and as you can see those two things coming together will really materialize and the and additional value. So I'm excited about the D&C the capital synergies.
We have ahead of US I'm also excited as I mentioned in prepared remarks about some of the things that are kind of more and <unk> payments like LP and GP and T. We're starting to see some early wins there were long way down the road on some of the G&A.
Savings and of course, we've talked about those being fully baked in and really starting early 'twenty two but you will see a lot of that manifest during the course of 'twenty. One so really excited about where we're going and we're just getting started.
Great. Thank you very much.
Your next question comes from the line of Brian Downey with Citigroup.
Good morning, Thanks for taking the questions Clay I was curious if you could dig and more on your comments around the aggressive flow back methodology, you mentioned and the legacy Felix portion of the Delaware Basin I'm curious thought process. There given I believe youre actually testing a slow back strategy, there a year or so ago.
And then the the findings to date and is that something you're apply and other areas and I guess last.
Is that a strategy that will be at all dependent on your view of absolute commodity price or shape of the forward curve as we think about initial production rates versus the production curve that.
Thanks for the question Brian Yes.
And certainly all of these things are dependent on the macro environment, well cost services service cost environment commodity price certainly plays into the.
And the overall economic decision and Thats, how we make these final decisions and how do we generate the most dollar to the bottom line.
Think it's broader and was I think about what we call monument draw and the Felix assets, it's broader than just a more aggressive flow back I think we tend to use a little bit of a terminology that is kind of easy to convey and these and these calls but it's bigger than that we are a little different completion strategy.
Spacing is incredibly important and then also how do we how do we manage the facilities and the ability to flow back more aggressively if you might recall from the Felix acquisition a year ago, we were very open to understanding their slower back our strategy and how that creates incremental value, but we were also very clear.
And we're going to explore different options on all of these techniques to really kind of get to what is the desktop.
Slowed down during 2020 as you can imagine with the slowdown in activity and so we've had a delayed response to the first of some of these trials and what I'm, saying is that we are seeing incremental gains both on the cost side of the equation and the productivity side of the equation that are yielding much better returns and this is still very early so if I think about absolute.
Returns today monument draw versus Stateline state lines ahead, but the trajectory from monument draw is very very favorable and what I said in my prepared remarks, and I fully expect it to compete head to head with the best of and our Delaware Basin portfolio. So I'm really excited about the direction, we're headed there and the work that the team's done boots on the ground.
And your point about the facilities that impacted all of the capital spend is there any benefit of the flow back strategy beyond the initial production rate.
Yes, again all of that comes into play how you design your facilities may before efficiency.
Maybe you need to scale them up maybe you can combine with multiple wells on a pad those are all things I mean, even direct flow back straight bypassing tanks into into the markets into the oil lines and the gas lines and water disposal and those are all things that we're exploring right now to bring out those dollars both from the <unk>.
Capital side and of course, you don't want to give up on the productivity side and so we're very cognizant of that at the same time.
I appreciate it and.
Sure.
Your next question comes from the line of Nathan Kumar with Wells Fargo.
Good morning, gentlemen, and first of all I wanted to congratulate you and delivering on the promise that you made on what we call shale people I know.
Thank you.
Greg talked a little bit about and you've addressed the federal acreage.
Issue.
And that use case words your job is to look at it as strong as it had the regulatory environment is changing that or other things.
Can you maybe talk a little bit about what else you see out there and how youre changing the operations of the combined company to address things like the dapple issue or flaring or taxes and things like that.
Sure.
I would say that as clay mentioned, we are just now getting our teams together and having some some real meaty discussions about fees.
Future opportunities over and above what we've laid out.
From the synergies.
And the merger.
And we'll say go down the list there with dapple, we feel that.
As you recall, we had made sure that we would not be impeded in any way, we did take a one year rail.
Agreement to handle some of the.
The smaller percentage of the total volumes that we have open and Williston and that's.
That's that's gives US added protection I do think that there is.
Probably more upside I think I think the market has priced in mostly downside and I think that that's somewhat over baked I think that when you really think about.
The efficiency of the Apple from getting the crude oil to the market's very efficient way by Safeway very environmentally friendly way.
And I tend to believe that the new administration, we'll see it the same way so we'll share that all plays out.
Some of the other the other thing that I can tell you that.
Flaring is something that we'll touch on that for just a moment, we've continued to try to drive down <unk>.
Sharing even more I think that the legacy Devon.
Done a good job with WPS, we were a little bit more challenged quite honestly up and the Bakken and but we've made some great progress there.
Youll see that some of the incremental midstream dollars. We plan to spend this year are a direct result.
Some of the phenomenal results, we saw the state law and area and what we saw the reality was we started bumping up against.
Some of our systems and capabilities and if you didn't want to do that our flaring more and we don't want to do that and so we're getting out ahead.
Go ahead of that so but net net I think what you will you will see.
Certainly clay and his team and we're going to be very very focused on what you are bringing up you'll hear more of that as we go gopro.
Throughout the future, but it's something that's very very important to us.
Great and Greg you've always looked.
And look forward I remember when you were at WP accurate and look forward to the midstream issues the base and had and kind of plan ahead for it.
The other topic is ESG and I appreciate your comments earlier on the different pillars, there, but is there an opportunity for the new Devon and given your balance sheet, given your footprint and to create and their opportunity out of that and I'm thinking about any lines of business.
And our revenue streams down the road that you could participate in.
And that's something that we.
We actually our senior leadership team had our first combined strategy session, where we thought about.
Those are those opportunities and.
<unk> be more and more to come on that but it's something that we're spending quite a bit of time.
Evaluating the true opportunities of truth threats around the energy transition that we hear a lot about so we won't be thoughtful we will be very good stewards of our capital that we have cash flows that we have and.
But I think it's something you'll hear us more dialogue from from our team as we go forward, we are going to be very very thoughtful and.
And our approach.
Thank you congratulations again.
Thank you.
Your next question comes from the line of Paul Cheng with Scotiabank.
Alright, Thank you and good morning.
Two question pace I think the first one you asked about Jack and Greg and the second one net book today.
Historical date that day.
E&P sector, the balance sheet and this week and they spent too much money so everyone gets involving with a lot of hedging.
At that and today with a much stronger bonds at much larger scale and I'm very low breakeven requirement.
And we need to have the hedging program and long term day, it doesn't really create that day, saying, there's no one can predict the future.
And if you want to maintain.
From.
Long only accounts.
And <unk>.
Could it be possible that by not having the hedging, whereas sympathize and make it easier for that only accounts to understand and analyzing the company and make it more easy for them to invest.
And as questions.
The second question day to the powder with a basin.
That for this year.
Looking at.
Our peso and de risking so take and you maybe.
Share with us that what is the.
And I and more tough program, where you could see for the powder River basin.
And.
Narrow power over the next day.
And three to four years. Thank you.
Hey, Paul This is Jeff I think I will take your first question on the hedging philosophically, we haven't changed our view, which is for some time now we believe it's incredibly important to us both the balance sheet and and and our hedging program to maintain our financial strength.
We think it's important for all of our investors to try and minimize the volatility that we see and our cash flows on a quarter to quarter and year to year basis, and allows us to frankly plan and manage our operational activity and maintain and sustain a pretty consistent level of activity, which I think clay would tell you is it is really important and the data.
Operations.
Our business and so.
Philosophically, we like to think about having roughly 50% of our cash flow is hedged in any one given year, that's where we sit right now just to give a recap on where and where we sit on both oil and gas today, we're just below 50% for 2021 and just over 50% on natural gas for 2021 as you look ahead into 2000.
'twenty two.
Do have some hedges in place, but that's less than roughly around 15% of our of our position is hedged at this point on both commodities.
As you know and then.
Paul we typically use our systematic program to be and the market on a month to month basis and layer in hedges at market and then we layer on top of that hedges within our discretionary program as we see different opportunities arise and the market. So I don't think Youll see has changed from that tax here and the near future. We certainly recognize that.
And with commodity prices moving higher it's a real benefit, but we think it's important to try to.
Limit the amount of net volatility that we see in our cash flows on a go forward basis.
And <unk>.
Yes, Paul I'll take your second question regards to powder River.
I can tell you is I've personally worked the powder and worth the Eagle Ford and our work.
And the Anadarko basin.
Over the years.
And what I'm very strongly trying to do and a lot of discipline does not let my view from 10 or 15 or 20 years ago kind of overshadowed what's the current state of what's going on what we have right now is such an incredible opportunity we're going to have fresh eyes on all of these assets and so to really take a fresh look at what's the opportunity.
Entity and how do we fund that how do we maximize the value to shareholders with this incredible footprint and know that we were zero to 5% growth company. We are cash flow generators and that is kind of the overall structure and drive of the organization. So I would say, it's a little early.
And my views are a little bit David and that team I think has a lot of opportunity ahead and the doors are wide open to whatever.
Whatever we see as the most viable economics for our disciplined capital allocation program.
Thank you.
Yes.
Your next question comes from the line of Neal Dingmann with tourists securities.
Good morning, guys and the next steps and Rick.
It's and claim because you're looking at.
Slide 14, obviously, the massive acreage could you talk a bit about.
You've now got set that massive footprint could you talk about cadence as you approach not only this year, but how you sort of see that maybe even two or three year plan.
Yes.
And a reference back to my comments on to Paul and the last question and it's hard to predict two to three years from now I don't want to let my my bias coming in and I understand that the south side of the acreage a lot better than I do the north side of the acreage we have fresh sets of eyes on the north side on the south side, we have teams.
And that are working together to share those best practices and the big message for the investors as we have lots of flexibility I fully expect as we've articulated.
The initial guidance would be 80% of our capital relatively equally split north side of the border South side of the border I would wager that by the end of the year, we will see differential economic opportunities either drawing money to the north or to the south that will influence that and I just can't tell you today, which one of those economic.
<unk> youre going to prevail and I think it would be presumptive on my part to do so so I look forward to the team's diving in.
We've got a lot of flexibility and a lot of Optionality and we will make the most of that.
Without prior prejudice. So thanks for the question.
Yes, and and.
One last follow up I could just you guys I know I'm trying to think the WPS how long ago. This was maybe get it to you is that great right away deal.
And we added some.
Just P right away and I believe that can continue to be potential with the new administration and issue could you talk about are you awake.
Not only just theoretical stops per day.
Thoughts about just in light of weighted accessibility and call it.
Yes, Neil what Youre talking about is our surface acreage acquisition and it was $100 million deal a couple of years ago, when we basically bought.
A significant chunk of land and under our most viable subsurface acreage and the logic. There was we wanted to make sure to preserve our optionality to fully develop this asset we could see a.
And third party coming in and just kind of squeezing. This from a surface side. This is such a beautiful contiguous operation from roads from pipes from electrical infrastructure and then whatever however, we decided to leverage that go forward I can tell you that $100 million investment has paid out and Spain, and we have really been.
And pleased with that I can't say that too many more of those opportunities exist Stateline is a pretty unique $50 to 60000 acre big continuous block and so that was a pretty unique situation, but where those one off opportunities. We will continue to present, we will evaluate and remain good stewards of shareholder.
<unk> investment.
And Neil and this rig as you recall, we did have some questions about Hawaii and when capital was tied and we want to lead and on that 100 million dollar investment and yes.
And just played into our.
The strategy of getting out ahead of potential challenges you may have and the future. So that's something youll continue to see us do where were we.
We expect to be question, sometimes on a little more clarity on zone.
And similar capital, but we think we've established a pretty good track record of being very very prudent with our capital spending.
Alright, well I'd say that we're at the top of the hour I appreciate everyone's interest and Devon today, and if you have any further questions. Please don't hesitate to reach out to a member of the Investor Relations team and anytime you have a good.
Thank you very much.
Ladies and gentlemen that does conclude today's conference call you may now disconnect.
Okay.
And.
Okay.
And.
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Great.
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