Q1 2021 Devon Energy Corp Earnings Call
Welcome to Devon Energy first quarter 2021 earnings conference call. At this time all participants are in listen only mode. This call is being recorded I would now like to turn the call over to Mr. Scott Coody, Vice President of Investor Relations, Sir you may begin.
Good morning, and thank you for everyone for joining us on the call today last night, we issued an earnings release and presentation. The cover our results for the quarter and our forward looking outlook.
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.
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 a few of the members of our senior management team.
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.
Here. This morning, we certainly appreciate everyone, taking the time to join us today.
It has now been nearly four months since the closing of the merger between Devon and the AWP ex creating the Premier U S Energy company. The possesses a powerful suite of assets and a disciplined strategy to maximize value for our shareholders with this advantage platform and our merger integration efforts are complete and our go forward team is highly energized.
And delivering on exactly what we promised and we're executing on our maintenance capital program.
Capturing cost synergies generating free cash flow and returning significant value to shareholders through higher dividends and the aggressive reduction of debt.
The progress we've made with each of these strategic objectives as evidenced in our quarterly results and this is the only just the beginning it is going to be and an excellent year for Devon as we continued to advance our strategic plan.
Turning your attention to slide three.
With many investors, possibly new to our story I would like to review, what Devon has the right business model and maximize value for our shareholders to ensure that we are excellent stewards of your capital any successful strategy and a commodity business must be grounded and supply and demand fundamentals with fundamental signaling mature.
And demand dynamics for our industry, we fully recognize the traditional E&P model of prioritizing only production growth is not the correct strategy going forward the.
The optimize value creation and the next leg of the energy cycle.
The company must deploy of financially driven model the prioritizes free cash flow generation over production growth.
And at Devon. This is exactly what we're doing.
We're limiting top line production growth from zero to 5% and times of favorable conditions.
We're pursuing margin expansion and earnings through scale, and a leader leaner corporate cost structure.
We're moderating reinvestment rates the level substantially below that of cash flow.
We're maintaining low levels of leverage to establish a greater margin of safety and we're returning more cash to shareholders via our innovative fixed plus variable dividend policy.
Our talented team of Devon takes great pride that we are leading the industry with this discipline operating framework I personally feels time for industry and stopped contemplating and talking about the possibilities of the cash return model and more quickly embraced this necessary change high returns on capital employed reduced reinvestment rates.
And free cash flow generation will determine the winners in the cycle not the historic behavior of delivering outsized production growth.
Jumping ahead to slide four and as I touched on briefly in my opening remarks, we delivered on exactly what we promised we would do and the first quarter, our disciplined plan and limited reinvestment rates to just over 60% of cash flow, we substantially expanded margins and we continued to take steps to reduce our corporate costs.
And as you can see on the bar chart graph to the right with the excess cash our business is generating more than 65% of our capital allocation has been deployed towards dividends and debt reduction.
And this return of capital the shareholders is a clear differentiator for Devon.
Looking specifically at the dividend, we were able to accelerate cash returns and the quarter through our innovative fixed plus variable dividend framework, which we implemented earlier this year.
The initial benefits of this generous payout policy, where evidenced in March when the owners of our company received their first variable dividend in conjunction with our regular fixed dividend base.
Based on the first quarter results. Our board has approved another fixed plus variable dividend of <unk> 34 per share.
This payout represents a 13% increase versus last quarter and is more than three times that of the same period a year ago. This thoughtful and uniquely designed dividend framework is foundational to our capital allocation process, providing us the flexibility to return cash to shareholders across a variety of of market conditions.
Through the cycle.
In addition to the dividend another way, we return value to shareholders and was through our recent efforts to reduce debt and enhance our investment grade financial strength.
Since the closing of our merger we have already retired $743 million of debt.
With our actions year to date, we have executed on nearly half of our $1 $5 billion authorized debt repurchase program and we expect to reach our target of one times net debt to EBITDA by year end.
Jumping ahead of slide 10.
While first quarter production was limited due to severe winter weather I want to be clear that our operations are scale to generate substantial amounts of free cash flow specifically.
Specifically in 2021, we are on track to deliver a highly attractive free cash flow yield at today's spot price the free.
Free cash flow yield story gets even better if you look at us on an unhedged basis, and assuming year end run rates of for cost synergies.
This upside case as represented by the Red line showcasing a free cash flow yield in excess of 20% at today's pricing with this powerful cash flow stream I feel it is important to reiterate that we have no intention of allocating capital and growth projects until the demand side fundamentals recover and it becomes evident.
That OPEC plus spare oil capacity is effectively absorbed by the world markets.
On slide 12, with our cash return business model building momentum.
I want to highlight the unique value proposition that Devon offers from both of the dividend and a growth perspective the.
And to demonstrate this point we've included a simple comparison of our estimated dividend yield and 2021 at $60 <unk> pricing, assuming a 50% variable dividend payout as you can see on the slide Devon is implied dividend yield is not only highly differentiated compared to peers, but is vastly suite.
And <unk> to virtually any other sector and asset class and the market today.
Importantly, Devon is more than just the yield play we have the quality and depth of resource within our portfolio to deliver sustainable per share growth that will reward shareholders for many years to come.
The final topic I want to briefly touch on is ESG with the integration of our operations are progressing ahead of plan and the very near future. We plan to issue more specific guidance on Devon and go forward environmental priorities. This disclosure will include formal targets to reduce greenhouse gas emissions methane intensity rates and our.
<unk> to approve upon other key performance measures.
And with that I'll turn the call over to clay <unk>, our chief operating officer to cover of recent operating highlights.
And you Rick and good morning, everyone I first want to acknowledge the hard work and our organization is poured into this merger. Our team has made substantial progress integrating our organization assets and processes.
We knew it was not the easy way to combine two strong companies taking time to evaluate the best practices has proven to be a very valuable exercise.
From here and the corporate office to each of our field offices and I've seen some great. Examples of setting aside historical bias listening the new ideas and then coming together to find the right solution for the go forward enterprise.
External forces certainly of compounded the complexity.
While under the challenges of the pandemic February of the Winter Storm was a major event that again test of the resolve of our team as it turned out once again and saw incredible leadership innovation and personal sacrifice and the name of the greater good and saw many displays of our employees not only helping it and expanded capacity for Devon, but also and there <unk>.
Communities.
This exemplifies the culture of the organization that we have and continue to refine them.
And I'm pleased with the progress that we're making and the exceptionally excited about the future of Devon as we benefit from each other as legacy company best practices with an incredible portfolio and a rock solid balance sheet, let's flip the slide 14, and we can discuss our world class Delaware Basin asset.
Once again, the Delaware Basin was the driving force behind our operational performance for the quarter with our capital activity focused on low risk development projects high margin production grew 19% year over year on the pro forma basis.
This strong production result was driven by the Wolfcamp oriented production program.
Which accounted for roughly two thirds of the fifth.
The two wells that commenced production in the quarter.
And the second quarter, we will have several big pads come on and the state line area, which would be a blend of bone spring and Wolfcamp completions.
While the overall execution of our capital program was excellent in the quarter.
New well activity was headlined by our danger and danger noodle project and the southwest and counting this two mile lateral development targeting the upper Wolfcamp achieved average 30 day rates of 5100 Boe per day with the 67% of oil cut and importantly, the capital cost came in 20% below our pre jewel expert.
Patients driving returns on invested capital significantly higher and plan.
Another key project for US this quarter was the 11, well Thoroughbred development and Eddy County that.
And that co developed three upper Wolfcamp intervals due to timing, we only have commenced first production on two wells.
But these but thus far these wells have been outstanding with peak rates exceeding 4000 Boe per day. The remaining remaining nine Thoroughbred wells are being brought online and coupled with our current completion activity and the state line area I think it's fair to state that we have a strong line of sight to our Delaware production profile and cash flow growth and the other.
Coming quarter.
The final item I would like to cover on this slide is the positive regulatory update regarding our federal acreage.
Which accounts for about a third of our total Delaware leasehold as many of you are aware and earlier this year. The department of interior issued a directive that restricted permitting on federal land for a 60 day period.
This order lapsed on March 20, <unk> and with the teams for thawed and proactive planning, we navigated through the 60 day period without any impact of our day to day operations or full year GAAP capital plan.
What is even more encouraging is that since the order has labs, we've received approval and more than 50, new drilling permits and aggregate and netting for the wells and we drilled we have about 500 federal drilling permits representing and inventory of about four years at the current drilling pace.
Even though this positive regulatory news is right in line with our expectations. We will continue to be highly engaged and collaborative with policymakers to ensure that we retain the ability to effectively develop of our federal leases and maximize value for all stakeholders involved.
Moving to slide 15, we.
We continue to build upon our trend of operational excellence and the Delaware during the quarter as you can see on the left and chart.
And our drilled and completed cost declined once again, the $534 per lateral foot and the first quarter.
These results rank among the very best and the industry and represent a 43% improvement from just a few years ago.
This differentiated performance is underpinned by steadily improving cycle times refine completion designs.
And the deployment of leading edge technology across all facets of the D&C value chain.
Shifting to the Middle chart and we also continue to act with the sense of urgency to materially improve our cash cost structure in order to get the most value out of every barrel we produce.
This focus is evidenced by our first quarter results were field level costs improved 11% year over year to.
To achieve this positive rate of change we have many meaningfully reduced our recurring LOE expense across several categories, including chemicals water disposal compression and contract labor.
Looking ahead I expect further improvements the team is hard at work identifying and capture capturing additional savings that will generate margin expansion throughout the remaining remainder of the year.
Turning to slide 16, and other asset I'd like to put and the spotlight today is Anadarko basin, where we are officially back to work in this space and with two operated rigs and funded by our joint venture with Dow chemical.
The rig and I have long histories with this base and literally it's just that right down the road from our corporate headquarters.
I'm very impressed with the great improvements that our team has made and the last couple of years by way of background and late 2019, we formed this partnership with Dow and.
And of promoted deal where dollar and half of our interest on a 133 and drilled locations and exchange for $100 million drilling carry and.
In addition to the benefits of the drilling carry returns will also improve with targeted up spacing and for midstream incentive rates that will reduce our per unit costs for wells associated with this drilling JV.
And when you combine these factors and the continuing operational improvement these returns will be exceptional.
Year to date, we've spud eight wells and the liquids rich core of the play and.
And we are on track to drill up to 30 wells for the full year 2021 targeting and the mix of Meramec and Woodford opportunities and full confidence that the commencement of the Dow JV is the first of many positive steps Devon will take to extract value from the scalable and repeatable resource play.
And lastly on slide 17 the.
Key message here is that even with the severe winter weather, we encountered and the first quarter, we are well on our way to achieving all of our capital objectives for 2021.
Looking specifically at the second quarter, we expect the midpoint of oil production to be 288000 barrels per day coupled.
Coupled with the capital spend and are slightly elevated due to the timing of Delaware completions and some of the midstream projects of.
And though the portfolio effect with typically smoothed out of stack of events like this sometimes capital from larger number of pads and projects can fall in one quarter.
Following the second quarter capital will fall back to a more nominal rate. We will continue to work of our synergy gains and of the capital projections as we work our best path forward.
This should continue to offset much of the inflationary pressure and the industry that we will see and the $60 plus environment and were.
With that I'll now turn the color Jeff for additional commentary on our financial results.
Thanks Clay for today I will cover the progress we've made on our financial priorities and highlight the next steps and the execution of our financial strategy.
Beginning on slide five of key and differentiating part of our financial strategy and our ability and willingness to accelerate the return of cash to shareholders at Devon. We are of a long history of returning cash to shareholders paying a quarterly dividend for 28 consecutive years and has increased at an average rate of more than 10% per year.
The step up our game and build upon this tradition earlier this year, we implemented our fixed plus variable dividend framework. This cash return strategy is designed to pay of sustainable fixed dividend and evaluate of variable dividend on a quarterly basis the.
And 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 of up to 50% of excess free cash flow beyond the fixed dividend.
As Rick touched on earlier this isn't just an interesting theoretical concept. We are executing on this framework and we paid our initial fixed plus variable dividend in March of this year based on our fourth quarter results and with our strong financial performance and the first quarter of this year. The board approved the 13% increase and our fixed plus variable.
The dividend to <unk> 34 per share both the fixed quarterly dividend of <unk> 11 per share and the variable dividend of <unk> 23 per share are payable on June 30 at the shareholders.
Turning to slide six and addition to higher dividend payouts and other strategic priority for Devon has been the repayment of debt to further strengthen our investment grade financial position. So far this year, we've made significant progress towards this initiative by retiring $743 million of outstanding notes, while our balance sheet is in great shape.
<unk>, we're not done making improvements today, we acted on the next step and our planned by notifying bondholders of our intent to redeem $500 million of callable 2026 notes in June.
And combination these debt reduction efforts will reduce our annual run rate interest expense by nearly $70 million further lowering our overall breakeven per barrel with the execution of our plan. We are on pace to reach one times net debt to EBITDA target by year end and these debt retirement actions extend the average of mature.
Any of our debt portfolio to approximately 13 years with over 60% of our debt maturing after 2030.
Turning to slide seven another area of focus that will enhance devon cash flow generating capabilities going forward as the capturing of merger related synergies. The integration team has done a great job advancing this initiative year to date and as a result, we're now raising our cost savings target of $600 million by year end 2021. This.
Updated target represents of 4% increase and cost savings compared to our previously issued guidance, while we're making strong progress across all categories. This improved outlook is driven by capital efficiency gains and the benefits of enhanced purchasing power and the Delaware Basin.
Overall about 60% of the $600 million of cost savings targets has been incorporated into our full year 2021 outlook and we have clear line of sight to capture the remaining synergies by year end the.
And the capturing of the synergies is very material and impactful the Devon resulted in a PV 10 uplift over the next five years of $2 5 billion of roughly 15% of our market cap.
And with that I'll now turn the call back to Rick for some closing comments.
Thank you, Jeff Great job I would like to close by reiterating his key message and that is the integration of the two companies is complete and the team is delivering on exactly what we promised to do we have prioritized free cash flow over growth, we have identified and captured cost synergies above and beyond.
The plan, we have a free cash flow yield of compares favorably to virtually any other asset class and the entire market.
For reward for rewarding shareholders with higher dividends and we've taken some steps to aggressively reduce the debt. Our team is focused and energized and 2021 is shaping up to be an excellent year for Devon. This is just the beginning Devon future is very bright and with that I will now turn the call back over to Scott.
Got for Q&A. Thanks, Eric We will now open the call for Q&A. Please limit yourself to one question and the follow up this allows us to get to more and more of your questions on the call today with that operator will take your first question.
And you're asking the question. Please press Star then the number one on your telephone keypad to withdraw your question press the pad.
Your first question comes from Arun and Jerry Yang with Jpmorgan Securities.
Yes, good morning.
Alright, let me start with you.
One of the thoughts are incoming questions. We've been getting is call it beyond 2021 and how.
How do you think about balancing the development capex portfolio of renewal and returning cash to shareholders from the capital allocation standpoint in particular.
And then getting some questions around and Devin and the interest and a couple of of the larger.
And the Permian A&D opportunities, but just seeing where your heads of that as you look at the balance some of.
The Europe organic opportunities and.
The plus other opportunities and the marketplace.
Yes, Arun that's something we will always be contemplate, but right now we're really focused on 2021 and the SEC.
And second half of this year is really shaping up to be the quite quite strong second half of around some of great momentum going into 2022.
As far as of the capital capital plans, we have not.
Started working at yet that will better will take place later and later throughout the year. So I think it's a little bit of little bit early and I know that investors are really.
And are really interested there, but I think suffice to say for US right now, we're really focused on having great momentum and enter 2022 and.
And with a keen focus still to be on generating the free cash flow and and getting that back to shareholders.
I think the second part of your of your question is around.
And maybe some consolidation going on and you have seen quite of few transactions.
Transactions that have taken place over the last few months.
And I think we've been on record of sand.
We support the editing some of the industry needs to do but.
And as far as the Devon, specifically, we've had a high bar that bar just continues to go up when you start looking at the organic opportunities, we have and Lea and Eddy County, New Mexico, and Loving County, and Reeves County, Texas and you can just see that just and our inner Delaware. We have just just a phenomena.
The amount of running room, and so we just have to be thoughtful about that and then and on top of that we have or are.
And our other assets that.
All of our planning a very key role for us.
And the company and the go forward plan so.
That's kind of where we are today.
Great and my follow up.
You've noted more than 50 permit approval since the moratorium lapsed clay would you.
And our view this is kind of business as usual at the BLM or how would you characterize.
And what Youre seeing in terms of the ongoing permit approvals.
Yes, I would say it's the.
It's a little tough to say business as usual right. I mean, we worked very closely with with lots of counterparties, including the BLM and they are there and a little bit of the tough spot I mean, they are still trying to figure out directives from the administration from the.
And from the Department of interior, So I would say, we're still and a bit of of transitional phase, but that doesn't deter from our ability our focus on continuing to be a good partner working very aggressively and very supportively with them, making sure that we are proactive and our business. So that we don't find ourselves.
And the short term pinch and I think that's proven to be very advantageous as <unk> had as we've seen in the prior.
Disruption that we've experienced so I think we're still a little bit away from business as usual, but we look forward to that for everybody, saying great.
Great. Thanks, a lot of clay.
Your next question is from Doug Leggate with Bank of America.
Hi, sorry, guys I hate that.
Okay.
And I wanted to Jeff I Wonder if I could start with you.
And the free cash flow yield slight the hub.
From the deck and I'll.
I wanted to kind of walk you through.
We're basically in the slides.
Slide 10, and you're showing as of 20% free cash flow.
And the other WP line.
And you're showing the 285000 barrels a day.
Production on the.
The 40% the WTO assumption for Ngls.
Hybrid and Ralph on that day.
It basically says the senior market cap last night of about $17 million and Charles together.
It's about $3 $4 billion of the implied free cash flow.
And if I divide by the oil sensitivity.
And just the those about $30 or something and.
Which means your breakeven.
The 30 Bucks.
Can you confirm or deny that that losses and.
In other words, what do you think the sustaining capital, making the home prices today.
Yeah, No Doug Youre exactly right. The one caveat I'll make and we noted on the slide is obviously, we've assumed that we've captured all of the synergies and this analysis and we've also eliminated.
And the hedges that were burdened by and the current year, but when you put that all together and think about what the what the power of this business model can do going forward.
At these higher prices that we're currently experiencing that's it's incredibly powerful and Thats, what we tried to demonstrate here on the slide as all.
Though you can see from the bars.
Which are burdened by the current construct when you eliminate some of that and capture the synergies you eliminate the AG the commodity hedges on a go forward basis. Those are the kind of free cash flow yields that we think we can generate.
And I'm trying to get to the underlying number but to be clear I think both David and the night before I'd said Youre breakeven was and the 30 just wanted to make sure the what understanding of the subsequent clinical there's more of them.
Yes, that's right.
Push into the mid low mid and low thirties, and thats going to go lower as NGL prices improve.
Got it. Thank you my follow up then is an application of this way I'm trying to keep valuation very simple.
And the question and then becomes is how long can you do it for as the screen.
The question and I realized the can move capital around the different basins, but when you look at your business today.
When we think about a very simple ex fuel.
Sustainable business as the starting point for the valuation discussion how long can you sustain that type of mix of two and $517 billion of capital.
Yeah, Doug I'll, let I'll, let clay way and on the inventory yet Doug we're still working on pulling together the the quantifiable numbers of.
And what we would call inventory and make sure. We're talking the same language, but I would say the real high level. Both legacy companies had substantial inventory and I think as we continue to run and the zero and a 5% window.
And it's multiple.
Many years of forward inventory.
And you know how the the maturing of these opportunities evolve. So we look very closely at the say the next five years of inventory and make sure that we are ready to invest and any one of those projects, which we are and then kind of that five to 10 year span those may take additional downspacing tests the.
Landing and the right completion techniques and that maturing happens and those coming years. So I would say, it's probably closer to the 10 year range, but we will get we will continue and refine that and work towards a real tight number that we can talk about.
And of consistent method.
And that's really helpful. Hopefully see what I'm trying to get to and I. Appreciate the answers guys. Thank you.
Yes, the the summary, and Thats, great news, we've kind of exceptionally low breakeven or loss.
Sort of.
<unk>, good inventory and AR.
The exceptionally strong balance sheets and that makes for a pretty good environment, Yes, Doug gets rid of ultra way and real quickly I just think that.
Give this team of it but maybe another quarter and Youll get a little more clarity around.
Where that where the breakeven is but I think I think you are.
Our view is Directionally correct, and we will continue the.
Tighten that up a little bit for us.
Thanks for those.
Thanks.
Your next question is from that the Neil Mehta with Goldman Sachs.
Yes. Thank you I don't want to stick on slide 10 here and when you talk about the 20%.
Net.
Free cash flow yield when it breaks that back down to David.
And that's the kind of.
Same here, Rick that the 20% free cash flow yield correct.
Crude to a 10% variable dividend all else equal.
We're talking about a 2% fixed so low double digit sort of dividend yield and we look out into 2022 at $60 the Ti and.
Yes, the the one swing and that math to the extent that.
That's right.
Whether it is still will be running at a sustainable program at that point.
Or do you see of scenario and a $60 at epi, where youre starting to layer and growth capital.
Yes.
I think youre right on I mean, some of those numbers thats, what the numbers definitely imply we look at it the same way so I think we align.
Closely with you and I think as we think about 2022 and and beyond.
And the key word for US I think is optionality and there is no.
DAU, we could we could have a just almost a stunning yield.
Coming.
From the from the company.
And we will just have to balance that with <unk>.
Continuing to aggressively pay down some debt and the to strengthen the balance sheet is already in good shape, but I think the key word for me is optionality and I think that's kind of how I think we should look at it right now but.
And Directionally.
You are absolutely correct and the free cash flow yield of these kind of levels and gives you the ability to pay of.
Very very substantial variable dividend.
And Rick what are you looking for in terms of switching from sort of a maintenance type program running the business for free cash flow the thing that the world needs of your business to actually operate for growth if that makes sense or if the bar so high to do that and your framework has fundamentally changed.
See very real scenario, cherokee's scenarios, where it would be appropriate to take a more growth oriented approach does that makes sense and it.
It does I think for US we are absolutely spot on with the with the free cash flow generation would be the number.
And our number one priority as you think about the future.
And as far as growth.
And is concerned the for.
Framework, we laid out when we announced this transaction back last September I think is still intact and that is.
And we see.
Up to 5% growth is probably.
As we think about different sensitivities and that's that's still is where we land so for.
5% growth at a.
As you are approaching 300000 barrels of oil a day, that's not insignificant growth and so you think about the corresponding cash flow of that come from that.
And that will have to contemplate.
But the Optionality.
And as a great thing to have.
Alright, guys. Thank you so much.
Your next question is from Jeanine Wai with Barclays.
Hi, good morning, everyone. Thanks for taking our questions.
Good morning Jeanine.
Morning.
And my first question is just on return of capital the leverage is on track to reach one times by yearend.
Your line and.
And the past extend of the balance sheet is in good shape from leverage cash all of that the macro looks constructive and.
And you're generating good incremental free cash flow.
And consider visiting the 250 per tonne payout from the variable and the.
And potentially revisiting the 10% on the base dividend.
Do you think youll be in a position to maybe start more seriously contemplating that next year and and the situation would buybacks just look more attractive because of its generally a means to lessen the need for dividend burden.
Yes, the Jeanine this is Jeff.
Youre spot on as we've talked about in the past as we continue to execute on the plan and generate excess free cash flow into this year, we feel really good about one of the balance sheet is what the announced the additional $500 million debt reduction we announced today.
We're well down the path to reaching our targets.
We're forecasting to be at that kind of one times net debt to EBITDA target at the end of this year if not sooner.
So we feel really good about where the balance sheet is and then to your question.
We will absolutely be talking to the board of out should we reevaluate that 50% threshold and maybe start putting more cash to the variable dividend beyond that 50% and then even considering things like the fixed dividend as well.
And I will tell you the way we think about the fixed dividend as you mentioned is a payout ratio of cash flow kind of 5% to 10% on normalized pricing, which historically, we've thought about normalized pricing kind of being in that $50 to $55 oil range.
We believe there is as Rick mentioned earlier and some of <unk> comments, if we see a structural change and the and the pricing dynamic and the macro environment that would suggest to us that normalized pricing is higher than that kind of 50% 55 of the level. That's when we would reevaluate the fixed dividend.
So I think what youre, most likely to see from us and the near term is the incremental cash on the variable dividend and an increase in net threshold later this year or certainly in the next year.
Okay, Great and we're looking forward.
And to that and then maybe a second question is a follow up on a range.
And you've got a high bar.
Because you have very strong operations and of great portfolio right. Now you have of strict financial framework for evaluating inorganic opportunities and I guess, our question is maybe a little more philosophical.
And all accretion and Nash.
Of a reason to do a deal and.
Things are maturing and the industry.
As rate of change start to flow down a little bit with either while results for Pos with inflation on the horizon.
And is that enough of a reason for financial accretion and or do you think there is still sufficient operating room left with your given your existing capital efficiency. So that you think you'll still be able to remain competitive on the free cash flow accretion over time.
Janine.
And I see it David Harris is here with me may have David way and as well, but the way I see it is as the financial accretion.
Is absolutely critical so it's really the latter of of your too.
Your two directions.
And for US there is we do have.
Just a wonderful inventory, we're executing very well, we do see some opportunities and to improve not only cost structure, but.
Overall, the <unk> three.
And throughout our throughout our asset base and so.
We have we have a high bar I'll and helps to put it and we will be very very disciplined and thats not going to change and.
And I know that there is.
There's a lot of talk out there, but maybe you want to and you want to weigh in.
The way you see things differently, Yes, Jeanine. This is this is David certainly the financial.
The accretion is an important component of how we would we would think about opportunities, but as we've pretty consistently said.
For the last several years, it's one of a number of factors, we'd also be thinking about strategic fit within the portfolio and the possibility for operational synergies and margin expansion opportunities clearly inventory would would need to move.
Towards the front of the queue to effectively compete for capital. So it's a balancing act across all of those things and as Rick and clay and Jeff of have highlighted here.
We have a lot of confidence and the business both today and as it's going to continue to improve going forward and so that's what drives the high bar and the discipline, we're going to have as we think about balancing those factors.
Okay. Thank you very much.
Thank you.
Your next question is from David Heikkinen with Heikkinen Energy advisors.
Good morning, guys and thanks for taking the question.
As you think about your free cash flow and.
Yields I think the question that has come up as a 50% today going into the variable could easily.
And whenever you said studying racket and the type of the 50% cap works for now as you think about the balance sheet and.
And for sustainability, but.
How does the board and how do you guys think about increasing and that 50% payout of free cash flow over time.
Well I think Jeff David.
The touched on that briefly but I think the board will be will be thoughtful and we'll be disciplined but also open minded. If that's the that's the right thing to do and Thats.
We're seeing and hearing.
Feedback from our shareholders. That's the other thing to do we will we will certainly.
And look at that Jeff and you want to wait and yes, David I think I would add to my earlier comments as you know, we're not averse to continuing to build cash and driving our net debt lower.
Obviously focused on the one times net debt to debt to EBITDA target.
But we're not averse to taking that even lower.
But as we mentioned before I mean, we're in the enviable position of generating a significant amount of free cash flow. We're just fundamentally of the belief that <unk>.
Given our maintenance capital program and how we're executing we need to return that cash to shareholders and so I think it's likely that our board would debate and discuss the.
The opportunity to increase that threshold and and consider other options to continue to get cash returns back to shareholders.
And then as you've talked with your shareholders.
And you get some sustainability of the dividend payout and out of two variables and the.
And the bank or will soon and Jim have you talked at all about like what yield the price too I mean, do you get down into the six seven.
Type percent range getting priced and or have you had any of those discussions at all.
Yes, David honestly, we haven't we haven't got a lot of clarity on that from investors and our conversations at this point and time.
Looking forward to we've been real excited to get not only one but two of these kind of under our belt and hopefully start to gather.
Some of the attention that we think it deserves and I think it's likely we will have some of those conversations going forward, but frankly, just haven't got a lot of the line of sight of that at this point.
The stock clearly isn't there yet thanks guys.
David.
Your next question is from Kumar with Wells Fargo.
Hi, good morning, gentlemen, and thanks for taking my questions.
And.
And I'll start off on.
Hedges were a bit of a guy.
And it's all last night that you are paying almost all of $5 a barrel equivalent and.
For the fourth quarter.
Get closer to your one times debt target and.
And I'll just given the great on the fixed plus variable strategy, what is the future of hedging at day.
And and.
The strategic level.
I think it's.
Question, and I think is spot on and did very timely and I'm on a non won't kick it off and let Jeff close close of that but.
A little of.
If you look in the rearview mirror.
Obviously 12 14 months ago. It was of much more stark picture with the commodity.
When when Youre, considering the pandemic, so I think of lot of companies such as ourselves.
Both legacy companies actually wait and we had a place from defense and quite honestly and so we ended up with some hedges that if you look good and rearview mirror.
Sure.
You are leaving some money on the table so to speak but.
It was the right thing to do we think at the time and and kept confidence with the investment community and and protection of cash flow those sorts of things as we look forward obviously.
It's a new world, where you have much the scale that we now have and as.
As we talk about approaching 300000 barrels of oil a day of the balance sheet strength all of those things we are taking a different view than what we have in the past.
I think historically, both legacy companies typically like to be and I plus or minus 50%.
Hedge level and.
From the time at which it may be above that or below that.
And on the outlook, but.
And that's what we've been thus far but I think now it's.
With the cash flows the balance sheets.
It's a little a little bit of of different different stories of Jeff What would you what would you add the yes, no Rick I think you nailed it that the only thing I would add on is net into your question is we feel we feel really good again, one of the balance sheet is and the free cash flow generation capability sits today.
So we're roughly kind of on the back half of this year I think 40% hedged as it relates to oil and then as you move into 2022, I think we're more hunter and around maybe 20% hedged we feel really comfortable with those levels to just reiterate Rick's point and so I don't think youll see us add.
Add hedges and a meaningful way.
Based on where we sit today and how the balance sheet sales.
Okay. Thank you.
Thats helpful.
And there's a lot of topics on the minds.
Good day for Us, we've touched on consolidation and Devon zone in that but I can't help but notice.
Yes.
And right now the 8% of the capital going to the Delaware.
And I guess, maybe you can take a different tact and ask.
How do those five assets fit with the long term strategy and then there is the powder River basin of the Anadarko.
Long term future of Devon.
No.
And that's a good question and I think right now as we've said.
We're in the year one of the integration.
Every one of the assets that we have are playing a role.
With the free cash flow generation focus that we have and so.
And I think clay even talked about it there are some things that we're doing the anadarko.
The.
The tests that could really.
Change your mind on some of this.
<unk> and <unk>.
And making some great great returns right now with the with the.
With the JV the way of with Dow chemical so it's.
And something we'll always look at but we feel really good with our portfolio feel really good with the free cash flow generations and balance sheet and.
And we won't be really thoughtful if we need to do.
Additional.
Let's say portfolio optimization.
Great. Thanks for the answers guys. Thank you.
Your next question is from Paul Cheng with Scotia Bank.
Alright, Thank you good morning.
Morning.
Right.
One of them.
The largest component of that just a follow up on the day increasingly at the county drilled with the 15000 feet.
Total well.
I think up until recently that most people have thought the only 10 to 12000 get the optimum of things stay the ads of testing.
The company. So just wondering that do you guys have a view on that and whether thats much of that and opportunity for year to gain and that the length and improved efficiency and here.
Yes, I'm going to let the clay handle that one yes. Thanks for the question Paul I would say both legacy companies have and buy.
A history of three mile wells as well and the <unk>.
WPS side of it was more of the and.
And the Williston basin and I can tell you that that third model sometimes was.
Productive to the level and it should be and sometimes we looked at it and we really sequestered scratch. Our heads wondering if we were effectively draining that third Myles. So I would say it was it was the situational analysis that we didn't move towards that is the standard now flipping over to the Delaware Basin, Devon has really led.
The industry on some three mile development and what we're seeing and that side is the third model is very productive of.
Honestly very cost competitive and when you combine that.
It shows to be really nice.
The accretive.
Procedures is due now theres a backdrop of land once you organize the development for an area. It can be difficult to immediately switch from the two model of three mile but theres a situation. We talk about synergies. This is something that will never show up in the the cash flow statement, but and as an absolute synergy.
So we had some wells that were on the calendar from the WPS side that were three miles of three mile development, we were going to break it into $2 7500 mile developments for 7500 foot development sneezing.
And that was the plan because we didn't have the existing basis of experience and the basin.
That we felt confident items some of our best stuff that we really want the risk experimenting with three miles here once we merge the companies of the teams come together now immediately we have a couple of dozen and very high quality really good experience.
The operations that we were able to apply to the to the state line area and we flipped that to three mile development. So I would say where appropriate we feel very comfortable and the technology being able to drill that third model is not the biggest challenge in my mind, it's effectively stimulating and draining the third mile and I think from the experience from the legacy.
Devon side.
And we've proven that it's very effective so great question and I appreciate that and.
And that warm you up.
Portfolio of that.
What percentage of the well over the next step of the things you may be able to push into the three mile line.
I don't know the exact number but I would put it pretty low.
Like I said, we have a couple of dozen on the Devon side, we're fairly far along on the development scenario kind of the setup of some of our other areas, especially on the Texas side kind of working towards the two mile development and so I think it'll be looking for those opportunities maybe that we had had a three mile stack or when we can.
Trade into those.
But at this point I would say, it's going to remain a relatively small amount of our future development, but where appropriate it's great to have that tool and the toolbox.
Paula This is Rick I may I may add one of the things that.
And our exposure and Lea and Eddy County, those are federal units and sometimes of the federal units you don't have internal hard line. So it really sets you up nicely.
To drill the three mile laterals. So that's something that it's still too early for us to talk about 2022 and beyond plans, but.
I would say our land position is really conducive to and some areas to do just that.
Right and.
And you had touched on the on the consolidation trend and talk about from the position of.
And just curious that.
I mean, the 12 months and make a big difference.
Thanks, very much strong share performance and.
And commodity prices when you talk to your peers.
And you get a sense that the consolidation trend is still alive and kicking all of that everyone gets sort of happy and that the bill.
<unk> for or that the wear and the one that is now substantially.
Substantially come down and so from that standpoint, the consolidation and try and make the OLED in the meantime.
Well I think I think the consolidation the.
The trend has been a little it's really been a little hard to draw a straight line for it and we've seen.
I will just go back to.
The last September and we saw three really.
Attractive transactions happened back to back to back and then it was pretty quiet and and since that time.
Most of the transactions have been asset level deals and I'd say and at $2 million to $800 million range.
The few of those that have been done but.
It's hard to have a trend I think that.
As far as consolidation and Youll, probably see see of continue to some degree and the goods.
We've long said.
It's probably the healthy thing for our industry.
The.
It depends on which one of our peers we've talked to.
Alright, thank you.
Yeah.
Your next question is from Neal Dingmann with true and Securities.
Good morning, Rick I'd be remiss, if I didn't ask clay and more about this david or new of the project specifically.
Specifically I mean.
It wasn't just the well results, but even the cost.
And if you could just talk a little bit or is it just focused on the upper Wolfcamp and what did you guys do to continue to get those costs down there like that and can you continue that and others.
Neil it's pretty exciting just on the cost front and we show that.
For over quarter true.
Trend really from back in 2018 and of a 43% reduction and D&C is pretty remarkable but it's so much more there is so much more opportunity because you think about those that particular pad.
And that was really drilled and completed without much of the synergies that we're talking about from the combined companies.
And as I look forward and the next few quarters kind of what's happening right now things that are being tested and blended and combined.
The completion design is a huge opportunity facility design and big opportunity just getting the subsurface teams that have been working and relative isolation and the legacy companies in the same room comparing notes challenging each other challenging net we know this because we've studied this and we studied this and <unk>.
It is having somebody walk in and say I see it differently and just the ensuing the exciting conversation that happens is is amazing and very synergistic synergistic to itself. The three mile Wells and I mentioned supply chain bidding strategies, the economies of scale associated with something as simple as of the chemical program.
And be very valuable technology, what we're doing with cameras and AI watching wells $24 seven looking for those environmental opportunities for us to continue to move and the right direction.
Well monitoring.
The.
Thinking about how do we improve on for.
Preventative maintenance and thinking about machine learning associated with that and then certainly ESG I think.
Devon had a couple of years ahead of head start on WPS WPS side, I think we were really trying to ramp of our knowledge and I think blending that with the existing great work that the Devon and side of the house. The done is really supercharge that and we're seeing wins kind of across the board and I look forward to.
What Rick mentioned earlier and a couple of months being able to really more fully articulate our ESG strategy go forward.
Great Great details and then Rick I know, it's been asked but I'm just wondering.
Maybe you could talk a little on just the timing, particularly looking at the Williston and the pattern and there obviously has been a pretty.
It was a pretty strong Williston sale recently.
And the WPS you guys were pretty Frank about kind of what's your thought on existing locations there, but obviously the valuation seems that really has increased on that and then secondly, and you're looking at the powder theres not as much activity there of recent but there's certainly some potential big upside I am just wondering is this is this.
Based on sort of your free cash flow generation plan something that you think you would tackle this year to decide what you want to do I mean, maybe you could just talk a little more specifics on what it would take to.
Sort of drive decisions around that.
Well I think number one you see up and the Bakken it's of great based and operating and Thats why youre seeing the activity and you've actually seen some pretty competitive transactions recently so.
And just shows the value of the asset that we have up there and we've got a great team and.
And as we've always said the the.
The margins up there and the leverage you get per month from our improving crude oil price really drive home cash flows and we're seeing that day and the payout.
Payout. So it is the area we've been we've been very open on that Neil for your question that it does not have the inventory that the.
And that some of our other basins do.
But it is playing a very very important role right now and it's cranking out a lot of cash for us so.
I think we need to need to keep and I think the.
And the powder is almost the inverse of that.
We have the opportunity to be very thoughtful we are of great position. There is very high oil cut we don't have to rush, we can be very thoughtful very strategic about about that asset and.
And we're encouraged with some of the things we're seeing there and I think you're going to see more activity up there from from a few of the other operators and so we will learn from them as well and meantime, we will.
And keep keep pounding the very high return low risk of.
Opportunities and we have and our portfolio. So I'd say right now and that's the summary of those comments are full steam ahead of that and with the portfolio. We have we're excited about it and the <unk>.
You said, it's all about generating free cash right now.
No certainly makes sense for the near term congrats thanks guys.
And thank you.
Your next question is from Scott Hanold with RBC capital markets.
Yes, I think and I feel like it's being beat.
The pretty hard here, but on the divestiture of share comment just to clarify.
Something like the Bakken specifically at this point and time, if you can confirm if I'm hearing you correctly that it really is a strong free cash flow generation asset. So it probably doesn't make sense to sell right now since youre really transition Devon into a free cash flow generation story is that is that what I'm hearing.
It is.
Okay fair enough and is there a point of where that doesn't make any sense and if that point does come.
What would you all do with.
Theoretically of proceeds if it were to happen and what it looked like something similar to what you did with the Barnett where it would be more of a special type of scenario or is it just too early to kind of make the speculation.
I think Kevin of your questions are fine, but I think you just simply Scott just just too early.
Okay fair enough as a quick follow up if you all are running ahead of your development results and your performance has been outstanding if that continues.
Would you guys of rein in Capex towards the end of the year to sort of mitigate your production growth or would you spend your capital and just see a little bit of production outperformance. So the poor.
And I'm getting to is you don't seem to have 100% confidence and the current oil market to one of growth today, but with your asset outperformance allow you to grow or would you stunt that a little bit and the back half of the year and save a little bit on the capital front.
And I'd, just say, we'll probably just stick with our capital has been sort of track and it's looking good we're seeing great results and we don't see anything at this point and time to alter our plan.
Yes.
Said another way of.
Production is not going to be our limit if we can make more production for the same capital we're all for that and so.
I think the big thing the stick to our capital and as you've heard of that a number of times today for 'twenty, one and and make sure we're being as efficient with those investments as we possibly can.
That makes a lot of sense. Thank you.
Your final question is from Charles <unk> with <unk>.
Johnson and Brian.
Good morning, Rick to you and the <unk>.
Rest of your team there I actually just have one question and this is the gets back to the point of.
Maybe looking cash 21.
Rick how much time do you and.
And the board and the managing spend.
Thinking about the risk of maybe waiting too long for you.
To increase.
The growth Capex and the increased volumes is that even on your radar or is that just something that many of the conversation right now.
Well.
And I think that's something that you'll be talking about maybe down the road right now.
Our board has been the.
A lot of time, just focusing on what we've talked about today and that is positioning the company to be the leader that we are and and the dividend framework that we have and so.
Our board is very pleased we'll watch and we'll watch out of the equity performs we're very bullish on our equity and we think we're going to get rewarded for this we certainly hope so.
And so that's one of our board has been focused on.
And we'll have plenty of time to talk.
About the outer years.
And the next.
Few quarters, but.
And now we're in we're in a good spot.
That makes sense thanks, Eric.
Thanks.
Thank you.
Alright, well I appreciate everyone's interest and Devon today, and if you of any further questions. Please don't hesitate to reach out to the Investor Relations team and anytime you have a good day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
Okay.
And.
And then.
Yeah.