Q2 2021 Devon Energy Corp Earnings Call
[music].
Welcome to Devon Energy's second quarter earnings Conference call. At this time, all participants are in a listen only mode. This call and 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 to 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 the slides can be found on our website also joining me on the call today are Rick Moncrieff, our president and CEO Clay Gaspar, our Chief operating Officer, Jeff Ritenour, Our Chief Financial Officer, and a few other members of our senior management team.
The comments today will contain plans forecasts and estimates and 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 filing and <unk>.
<unk> and earnings materials with that I'll turn the call over to Rick.
Thank you Scott we sincerely appreciate everyone, taking the time to join US This morning on the webcast.
Devon second quarter can best be defined as 1 of comprehensive execution across every element of our disciplined strategy that resulted in expanded margins growth and free cash flow and the the return of significant value to our shareholders through higher dividends and the reduction of debt.
Following our transformative merger that closed earlier this year.
Pleased with the progress of the team has made and our second quarter results demonstrate the impressive momentum our business has quickly established.
Even today as we celebrate Devon 50th anniversary as a company. This year, we're only getting started and our talented team is eager energized and extremely motivated to win.
As investors seek exposure to commodity oriented names. It is important to recognize the Devon is of Premier energy company and of must own name in this space.
We have the right mix of assets proven management financial strength and a shareholder friendly business model designed to lead the energy industry and capital discipline and dividends now.
Now turning to slide for the P.
Power of Devon portfolio was showcased by our second quarter results as we continued to deliver on exactly what we promised to do both operationally and financially.
Efficiencies drove capital spending 9% below guidance.
The strong well productivity resulted in production volumes above the midpoint.
The capture of merger related synergies drove sharp declines and corporate cost the.
These efforts translated into a 6 fold increase in free cash flow from a just a quarter ago.
And with its excess cash we increased our dividend payout of about 44%.
And we retired $710 million of low premium debt and the quarter.
But Jeff will cover the return of capital to shareholders and more detail later, but investors should take note. This systematic return of value to shareholders is a clear differentiator for Devon now.
Now moving to slide 5.
And while I'm very pleased with the results of our team have delivered year to date the setup for the second half the year is even better with our operations scale to generate increasing of mats amounts of free cash flow.
This improved outlook is summarized in the white box at the top left of the slide.
With the trifecta of and improving production profile lower capital and reduced corporate costs, Devon is positioned to deliver and annualized free cash flow yield and the second half of the year of approximately 20% at today's pricing.
And I believe it is of utmost importance to reiterate that even with this outstanding free cash flow outlook. There is no change to our capital plan this year.
Turning your attention to slide 7 now.
And with this powerful stream of free cash flow our dividend policy provides us the flexibility to return even more cash to shareholders than any company and the entire S&P 500 index. The demonstrate this point. We've included a simple comparison of our annualized dividend yield and the second half of 2021, assuming a.
50% variable dividend payout.
And as you can see Devon is implied dividend yield is not only the best in class of the E&P space, but we also possess the top ranked yield and the entire S&P 500 index by a wide margin and fact at today's pricing or yield is more than 7 times higher than the average company that is represented in the S&P 5.
500 index.
Furthermore.
Our dividend is comfortably funded within free cash flow and as the company by a strong balance sheet that is projected to have a leverage ratio of less than 1 turn by year end <unk>.
Investors need to take notice.
Devon offers a truly unique investment opportunity for the near zero interest rate world that we live and today.
Now looking beyond Devon for the broader E&P space I'm.
Im also encouraged this earning season by the announcement from pioneer on their variable dividend and implementation as well as a growing number of other peers, who have elected to prioritize higher dividend payouts.
Disciplined actions will further enhance the investment thesis for our industry paving the way for higher fund flows as investors rediscover the attractive value proposition of the E&ps, but base.
Now moving to slide 10, while the remainder of 2021 is going to be outstanding for Devon and simply put the investment thesis only gets stronger as I look ahead to next year.
We should have 1 of the most advantaged cash flow growth outlooks and the industry as we capture the full benefit of merger related cost synergies restructuring expenses roll off and our hedge book vastly improves at today's prices. The structural tailwind could result in more than $1 billion of incremental cash flow in 2000.
And 22 to put it in perspective, this incremental cash flow would represent cash flow per share growth of more than 20% year over year. If you held all other causes of <unk>.
All other factors constant.
Now, while it's still too early to provide formal production and capital targets for next year.
There will be no shift of our strategy, we will continue to execute on our financially driven model that prioritizes free cash flow generation.
Given the transparent framework that underpins our capital allocation.
The behavior will be very predictable as we continue to limit reinvestment rates and drive per share growth through margin expansion and cost reductions, we have no intention of adding incremental barrels into the market until the demand side fundamentals sustainably recover and it becomes evident that OPEC plus sparrow.
Oil capacity is effective book effectively absorbed by the world markets the.
The bottom line is we are unwavering and our commitment to lead the industry with disciplined capital allocation and higher dividends and with that I'll now turn the call over to clay to cover some of the great operational results, we delivered and the past quarter.
Thanks, Rick and good morning, everyone as Rick touched on from our operations perspective, Devon continues to deliver outstanding results. Our Q2 results demonstrate the impressive operational momentum we've established in our business and the power of Devon asset portfolio and the quality of our people delivering these results I want to pause and congratulate.
The entire Devon team for the impressive work overcoming the challenges of the pandemic and the merger while not only keeping the wheels on but requesting everything we do and ultimately building better processes, along the way we've come a long way on building. The go forward strategy execution plan and culture and I see many more significant wins.
And on the path of ahead.
Turning your attention to slide 12 and Mike.
Key message here is that we are well on our way of meeting all of our capital objectives for 2021 at the bottom left the slide you can see that my confidence and the 'twenty..1 program is underpinned by our strong operational accomplishments and the second quarter with activity focused on low risk development, we delivered capital spending results that were 9% below plan.
And well productivity and the Delaware drove oil volumes above guidance and field level synergies improved operating costs.
While the operating results year to date had been great for the remainder of the year looks equally strong of true test of asset quality execution, and corporate cost structure proves out and sustainably low reinvestment rates steady production and significant free cash flow. This is exactly what we're delivering and a devon.
We plan to continue to operate <unk> rigs for the balance of the year and deliver approximately of 150, new wells to production and the second half of 2021.
Now, let's turn to slide 13, where we can discuss our world class, Delaware Basin asset, which is the driving force behind devins operational performance.
During the quarter. Our capital program consisted of 13 operated rigs and for dedicated Frac crews, resulting in the 88, new wells that commenced production. This level of capital activity was concentrated around the border of new Mexico, and Texas and accounted for roughly 80% of our total company wide capital investment and the quarter.
As a result of this investment Delaware basins high margin oil production continued to rapidly advance growing 22% on a year over year basis, while we had great great.
Great results across our acreage position of.
Top contributor to the strong volume, where several large pads within our stateline and cotton draw areas that accounted for more than 30, new wells and the quarter. This.
And this activity was weighted towards development work and the upper Wolfcamp, but we also had success co developing multiple targets and the bone spring within our Stateline area. The initial 30 day rates from activity at Stateline and cotton draw and average north of 3300 Boe per day and recoveries are on track to exceed 1.5 million barrels of oil.
Equivalent.
And with drilling and completion costs coming in at nearly a $1 million below pre drill expectations, our rates of return and cotton draw and Stateline and projected to approach 200% of today's strip pricing.
While we've all grown weary of quoted well returns. This is the best way that I can provide insight for you on what we're seeing and real time, and what will be flowing through the cash flow statement in the coming quarters.
While we lacked precision and these early estimates I can tell you. These are of the nominal investments and will yield significant value to the bottom line of Devon and ultimately to the shareholders through our cash return model.
And lastly on the slide I want to cover the recent bone spring appraisal success, and we had and the potato basin with our 3 well Yukon Gold project historically, we focus our efforts and the Wolfcamp formations region and Uconn was our first operated test of the second bone spring interval and this area given the strong results from Yukon.
Additional well control from non operating activity. This will be of new landing zone and it works its way into the Delaware Basin capital allocation mix going forward.
This is another example of how the Delaware Basin continues to give.
This new landing zone required no additional land investment very little incremental infrastructure and as a result, the well returns of a direct path to the bottom line of Devon.
Moving to slide 14 and.
Another highlight associated with the Delaware basin activity with the improvement and operational efficiencies and the margin expansion, we delivered in the quarter.
Beginning on the left hand side.
The D&C cost of improved to $543 per lateral foot and the quarter of the.
Decline of more than 40% from just a few years ago to.
To deliver on this positive rate of change the team achieved record setting drill times and both bone spring and Wolfcamp formations with spud to release times, and our best wells and proving to less than 12 days.
Our completions work improved to an average of nearly 2000 feet per day and the quarter I want to congratulate the team and I fully expect that these improved cycle times will be of tailwind to our results for the second half of the year.
Shifting to the middle of the slide we continue to make progress capital capturing operational cost synergies and the field with solid results, we delivered and the second quarter, LOE and GP and <unk> costs improved 7% year over year to achieve this positive result, we adopted the best and most economic practices from both legacy companies.
And leveraged our enhanced purchasing power and the Delaware to meaningfully reduce costs associated with several categories, including chemicals.
Water disposal compression and contract labor and.
Importantly, these results were delivered by doing business and the right way with our strong safety performance and the quarter and combined with the company delivered some of the meaningful.
Environmental improvements over a year over year basis.
And my final comment on the slide on the chart to the far right the cumulative impact of debt and strong operational performance resulted in significant margin expansion compared to both last quarter and on a year over year basis and.
Importantly, our Delaware Basin operations are geared for this trend to continue over the remainder of the year and beyond.
Moving to slide 15.
While the Delaware Basin is clearly the growth engine of our company, we have several high quality assets and the oil fairway of the U S and generate substantial amounts of free cash flow.
And these assets may not capture many headlines, but they underpin the success of our sustainable free cash flow generating strategy.
And the Delaware basin cash flow of nearly doubled in the quarter on the strength of natural gas and Ngls are Dow joint venture active activity is progressing quite well and we're bringing on the first pad of new wells this quarter the <unk>.
Williston continues to provide phenomenal returns and at today's price and this asset is on track to generate nearly $700 million.
Of free cash flow for the year.
And the Eagle Ford and we have reestablished momentum with 21 wells brought online year to date, resulting in second quarter volumes advancing 20%.
And in the powder River, we're encourage with continued industry activity and how and.
And evaluating how we create the most value from this asset.
We have created we have of creative and commercially focused team working on this asset many of which bring fresh set of eyes on how we approach this very substantial oil range acreage position.
Overall, another strong quarter of execution and each of these asset teams did a great job delivering within our divorce the diversified portfolio.
And lastly on slide 16, I want to conclude my prepared remarks with a few thoughts on the environmental performance targets. We recently published.
The team here of debt and takes great personal pride and delivering affordable and reliable energy that powers every other industry out there as well as the incredible quantity and quality of life. We appreciate today.
We absolutely believe that and addition of meeting the world's growing energy demand, we must also deliver our products and in an environmentally and commercially sustainable way as you can see with the goals outlined on the slide we're committing to taking a leadership role by targeting to reduce greenhouse gas emissions by 50% by 2030 and achieving net <unk>.
CRO of emissions for scope, 1 and 2 by 2015 of.
A critically important component of this carbon reduction strategy is to improve our methane emissions intensity by 65% by 2030 from a baseline in 2019.
This emissions reduction target of involves a range of innovative innovations, including advanced remote leak detection technologies and breakthrough designs like our latest LOE and <unk> facilities and the Delaware Basin.
We also plan to constructively engage with upstream and downstream partners to improve our environmental performance across the value chain.
And while it's a journey not of destination environmental excellence.
Excellence is foundational for Devon.
With that I'll turn the call over to Jeff for the financial review.
Thanks Clay my comments today will be focused on our financial results for the quarter and the next steps and the execution of our financial strategy.
A great place to start today is with the review of Devon strong financial performance and the second quarter, where we achieved significant growth and both operating cash flow and free cash flow opt.
Operating cash flow reached $1.1 billion, and 85% increase compared to the first quarter of this year.
This level of cash flow generation and comfortably exceeded our capital spending requirements, resulting in free cash flow of $589 million for the quarter.
As described earlier by Rick and Clay are improving capital efficiency and cost control drove these outstanding results along with the improved commodity prices realized in the second quarter overall was a great quarter for Devon and these results showcase the power of our financially driven business model.
Turning your attention to slide 6 with the free cash flow generated in the quarter, we're proud to deliver on our commitment to higher cash returns to our fixed plus variable dividend framework. Our dividend framework is foundational to our capital allocation process, providing us the flexibility to return cash to shareholders across the variety of market conditions.
And with its.
<unk> framework, we've returned more than $400 million of cash to our shareholders and the first half of the year, which exceeds the entire payout from all of last year.
The second half of this year of shaping up to be even more impressive.
This is evidenced by the announcement last night that our dividend payable on September 30th was raised for the third consecutive quarter of 49 per share. This dividend represents a 44% increase versus last quarter and is more than a 4 fold increase compared to the period of year ago.
On slide 8 and addition to higher dividends and another way we've returned value to shareholders is through our recent efforts to reduce debt and enhance our investment grade financial strength.
And the second quarter, we retired $710 million of debt, bringing our total debt retired year to date to over $1.2 billion.
With this disciplined management of our balance sheet, we're well on our way of reaching our net debt to EBITDA leverage target of 1 churn of less by year end.
Our low leverage is also complemented by a liquidity position of $4.5 billion and of debt profile with no near term maturities.
This balance sheet strength is absolutely a competitive advantage for Devon that lowers our cost of capital and often the optimizes, our financial flexibility through the commodity cycle.
Looking ahead to the second half of the year with the increasing the amount of free cash flow. Our business is projected to generate we will continue to systematically return value to our shareholders through both higher dividend payouts and by further deleveraging of our investment grade balance sheet.
As always the first call and our free cash flow is to fully fund our fixed dividend of <unk> 11 per share after funding the fixed dividend up to 50% of the excess free cash flow and any given quarter will be allocated to our variable dividend. The other half of our excess free cash flow will be allocated to improving our balance sheet and reducing our.
Net debt once we achieve our leverage target later this year. This tranche of excess free cash flow that was previously reserved for balance sheet improvement has the potential to be reallocated, the higher dividend payouts or opportunistic share buybacks should our shares remain undervalued relative to peers and the broader market.
So in summary, our financial strategy is working well, we have excellent liquidity and our business is generating substantial free cash flow. The go forward business will have and ultra low leverage ratio of of Turner last by year end and we're positioned to substantially grow our dividend payout over the rest of the year with that I'll now turn the call back over to Rick for some.
Closing comments thank.
Thank you Jeff great job.
I'd like to close day by reiterating a few key thoughts.
Devin as the Premier Energy company and we are proving this with our consistent results. Our unique business model is designed to reward shareholders with higher dividend payouts.
This is resulting in a dividend yield that is the highest and the entire S&P 500 index.
And our generous payout is funded entirely from free cash flow and backstopped by an investment grade balance sheet.
And our financial outlook only improves as I look to the remainder of this year and into 2022 with the increasing amounts of free cash flow generated we're committed to do and exactly what we promised and that is to lead the industry and capital discipline and dividends.
And with that I will now turn the call back over to Scott for Q&A. Thanks for.
Eric We will now open the call. The Q&A. Please limit yourself to 1 question and a follow up this allows us to get to more of your questions on the call today with that operator, we'll take our first question.
Your first question is from David Magee with Bank of America.
Good morning. This is John Abbott on for Doug Leggate.
Thank you for taking our questions. The first question.
Is on M&A.
There has been from recent press speculation out there that you are the potential bidder and of process.
Now recognizing that you probably won't comment on any ongoing potential transaction.
Could you just sort of discussed and general what you would see is the benefit.
Devon of a large scale acquisition given the running them that you already have from legacy Devon and from WTS.
Yeah, John Thanks for the question.
Great question, Great perspective, and you know just fundamentally we continue to have a very very high bar and have a wonderful business post merger.
And so for us the way, we think about it as anything we.
We evaluate and Thats really the on the the buying or selling side has got to be immediately accretive.
It's got to have.
Compelling industrial logic.
And we have tried to be really clear it is but it absolutely has to fit within our investment framework and makes us even even better even stronger.
And I'll just go back to just the fundamental message today.
It's got on anything we have to consider is got too.
Help us get stronger on a on an outlook that says look if we just keep volumes flat, we're going to add an additional billions of dollars of cash flow next year and any of when you look at the add on a cash flow per share basis is 20% the.
Growth of 22 over 'twenty 1 so.
And that's really how we view it and that Hasnt really reached where agenda. We've got a tremendous inventory we've got a tremendous business and we continue to have a very high bar and we are going to be very very disciplined and anything we do.
I appreciate it and then for our follow up question here.
On your hedging strategy going forward here.
I mean, you've historically had a systematic component here of hedging strategy. How are you thinking about hedging going forward from here.
And then we'll have Jeff and.
And for that Voyager, Yes. This is Jeff yeah happy to provide some color on that as you probably saw and are prepared materials and what we disclosed last night, we've not added any material incremental hedges since our last call since last quarter.
Going forward, we don't expect that to change given given where we are in the in the cycle given where we are with our business the balance sheet. The great shape that we have the balance sheet in.
The low reinvestment ratios that we've talked about which we expect to continue going forward and frankly, just the low cost structure and breakeven is that we have it's created a margin of safety for us and our business that allows us to be.
Less less aggressive on the hedging front and so we really don't feel the need to add any incremental hedges at this point and time, we'll obviously monitor that and we certainly talk about it and debate it on a weekly basis here.
And then the walls of Devon and could certainly change our view at some point and the future, but where we sit today given the strength of our business and projected business and the balance sheet, we really don't feel like we need to add any incremental hedges and the near term.
Thank you for taking our question is on a great quarter.
Thanks.
Your next question is from Brian <unk> with Citigroup.
Hey, good morning, guys and thanks for taking the questions Jeff It sounds like from from your prepared comments raising the 50%.
Excess free cash flow of payout cap, maybe consider at some point given the the leverage and and maturity schedule outlook here you mentioned it but share repurchases are still left us at the <unk>.
And of your free cash flow of priority flag and the appendix.
That and the purchase appetite changed much at all on the margin given the recent equity performance versus the commodity price and and Devon and forward yield on offer and if you were to consider repurchases.
That being more systematic or opportunistic.
Yes, Brian appreciate the question I would I would say of the share repurchases is certainly moving up the list of the options for us potential options for us as we move through the back half of this year I talked about and my prepared remarks, and we've talked about it for a couple of quarters now our first focus is on debt on reaching our leverage target, which you all have heard me speak to you in the past we really.
About that on $55 oil price and.
And so if you do the math on $55 oil and our current oil production you get to somewhere around <unk>.
For for 8.4 and $5.4.8 billion EBITDA.
And we currently have $6.5 billion of gross debt cash balance of $1.5 billion, we need a couple of hundred million more dollars of cash to get us to that net debt of kind of of 1 times ratio I really expect thats going to happen and this quarter and as I mentioned in our prepared remarks that puts us in the position to think about other ways to return more of that excess free cash flow.
Go to shareholders and so things on the table are absolutely and increase and the variable dividend percentage, we're going to maintain the framework that we've outlined and don't expect that to change going into the future, but we could absolutely simple a minute with some incremental variable dividends and potentially some incremental share repurchases I think the other thing we will look at as we get further into the year and.
And probably into 2022 has the potential to.
The increase the fixed dividend as well so those are all of the things that we'll be considering with our board as we move into the back half of this year.
Great and then maybe 1 for clay clay and the Anadarko Basin, and you mentioned, bringing online a half dozen or so the meramec docs anything youre seeing from those production results completion costs. So the early days of the at the drilling JV and maybe changes in your view of the Anadarko returns or how it ultimately fits within the portfolio.
Yes, Brian just between you and I'm actually pretty pretty positive on the Anadarko basin.
I have been for quite a while I think it's underappreciated generally speaking.
But it is a pretty tough hill to climb to compete in our investment portfolio. So I think the team there is taking exactly the right approach. We've entered this joint venture we've got some promoted money and allows the investments to compete feel really good about the investments that we're making and and Meanwhile, we're doing exactly what youre, what youre asking about is.
We're getting a modern look at today's well cost today's completion designs and the well results that we're generating so still pretty early days on the on the well results, but I'm very encouraged the Miller Miller pattern is the 1 we're bringing on this quarter as the first ones that we drilled this year, bringing on that's really exciting.
Sitting and looking forward of those opportunities, both Woodford and Meramec opportunities, but I can tell you. This the well costs are phenomenal and really excited about that and as you know of dollar saved on well costs as a direct dollar to the present value. So.
It's a holistic look and we look forward to seeing more from that team.
Okay appreciate the comments.
Thanks.
Your next question is from.
And with Wells Fargo.
Okay.
Hey, good morning, gentlemen, and thanks for taking the question.
Rick I appreciate the I guess the early look into 2022, if I can.
And as you're planning deck, the commodity price deck for 2020.2 and.
And should we expect given the the issue.
Shifting and the Delaware for that facility the workhorse in terms of the capital program.
Yes, I'm going to have the.
Jeff weigh in and help me on the field and the question didn't appreciate the appreciate them, Yes, I think the Delaware is going to continue to be the workhorse and our portfolio I don't see that changing as.
As clay just talked about we've got some great investment opportunities and our other basins of.
The reality is the Delaware is really really hard to compete with internally and so you'll continue to see the lion's share of our capital program being allocated to the for the Delaware Basin, and you'll see that really changing anytime in the near future. So Jeff you may want to talk about commodity price assumptions that we have and.
I appreciate the question and as you might guess, we look at multiple sensitivities and evaluate different different scenarios and price decks that might come out come out as I would say foundational, though we really think about $55 oil as kind of a normalized price and then and then try and manage our business around that were and are positioned today with the low breakeven that we have and our <unk>.
And there's even at $55 of oil.
And we can accomplish all of our financial objectives and then some so we feel like we're in a really good spot, but we certainly do evaluate the strip and even higher and even lower price scenarios as we work through our budgeting process with our board.
Okay. Thanks, Thanks for that and.
The fall.
You were 9% below expectations and capital spending and in the second quarter Youre expecting an improvement for the rest of the year.
But you left capital budget for 2021 and chain.
Is that of function of any inflation that you're seeing and could you just help us understand debt.
And the math there.
Yes. Thanks. This is clay I'll respond to that net and I think the.
And the idea is that we have set a.
Of course for capital I think we are still very much inside the planned activity levels. In fact, we've accelerated a little bit just from drilling faster.
We're not going to drop rigs and bounce activity because of that and so what it does is it draws a little bit more natural activity into the fourth quarter, but that said I think as I think you can kind of continue to see a very line of sight runway I think there will be some some continued improvements I think we will also see.
And some headwind from inflation start to creep and I think on balance I still feel good really good about reiterating the 21 capital plan and and we'll see how the team continues to perform throughout the year.
Okay. Thanks.
Thank you debt.
Your next question is from Neil.
And then.
Thanks team and.
The first question.
It's more tactical and as we think about it.
Q3, and all the moving pieces with most of the quarter at this point, Dan and from our realized price perspective, how should we think about that David and the variable dividend recognizing it is a board decision.
Talk about the moving pieces around price realizations gas Ngls, and then and then capital and cost.
And.
Based on what we know now is it fair to assume that the variable dividend is likely to be higher next quarter and of west This quarter, yes, absolutely and that's exactly right and I mean, given the strength that we've seen and pricing thus far.
And as Clay mentioned earlier, the capital efficiencies that we've seen and continued cost reductions you marry that with the fact that we've got incremental hedges rolling off and.
For the third and fourth quarter and all of those are going to be tailwind to R. R.
And our free cash flow and the quarter and my absolute expectation is that the higher variable dividend and the third quarter on a relative basis.
And the only share yes.
And this is Rick I'll augment the a little bit.
I think we need to just remind everyone that we were about 50% hedged on crude this year, but the profile of that is about 60% of first half <unk> 40 per cent of the second half and and currently we're about 20% hedged as we look at the 22.
That's great Rick and it.
Just the follow up here it is.
As you guys think about the payout, which right now of 50% and thank you.
The the.
Bread crumbs of and indicate that you think there's a path way to move that higher can you just talk about what the milestones we should be watching for at <unk>.
When we should start to think about taking up that payout ratio from 50% to something higher than the and any sense of what the ultimate destination would be in that and.
Dreamworld.
Of what the right payout ratio could look like.
Now this is Jeff again.
Again, as I mentioned earlier, and that's something we're absolutely going to debate and talk about with the board as we move into the third and fourth quarter again, I want to reiterate we want to make sure we get to our debt target and that I mentioned earlier that 1 times turn which I fully expect given where prices are we will accomplish that here and the third quarter, but as we.
And we move into our discussions and of the fall with our board around the budget for 2022 and the potential outcome around.
Share repurchases, the fixed dividend and an incremental variable dividends on top of the 50% I think those are all things and we'll talk about here over the next call. It 3 months.
And would expect to give you all more color as we as we move through the year.
Okay.
Your next question is from Matthew Portillo with the Tpa.
Good morning, all and thanks for taking my question.
And this 1 might be sort of.
Just wondering if you could talk about some of the strong results youre seeing and the bone spring around the Stateline and how that May impact your future inventory and development plan of you going forward.
Yeah. Thanks for the question Matt.
The exciting so we.
The original acquisition was based on really the Wolfcamp a and.
And we knew there was additional upside, but really pinning the.
The acquisition economics, and the Port and the forward plan was really on kind of that greater or upper wolfcamp.
Landing zones, and Thats been amazing.
The the homerun is really where you get these additional landing zones essentially for free right and that's that's what was so intriguing about the the original entry into the Delaware and as I mentioned in the prepared remarks, just the continued dividends.
That are paid from it so we knew there was opportunity and the second bone.
We had drilled some early wells, but as we've refined the Petro physics, and really dialed into the proper landing zones. We've been very encouraged at least 3 maybe for landing zones and the bone spring and the real questions have been and what we've been working on is proper spacing kind of laterally, but also and a vertical sense how much of this.
As in hydraulic communication and we're starting to kind of nail that down and now youre starting to see us move into the development mode, which is just significant upside on that is that the incredibly rich <unk>.
The infrastructure out there and talk about infrastructure, it's everything from owning the electrical infrastructure water disposal system, our partnership with Howard energy to re lever all of those those benefits and then and then also recall that we purchased 15000 and surface acres over this whole area and so again.
As we continue to rediscover.
We find new opportunities kind of literally exploration under our own feet and this is some of the most accretive value creation for the organization without question.
That's great and then maybe and just another follow up on the operational side. The WPS team is working to widen and designs and parts of the delta over for the merger with Devon I guess with both of the teams now combined could you talk about what you've learned so far from the completion and spacing optimization perspective, and how that.
And might influence the results moving forward.
Yes. This is 1 of the kind of the hidden wins of oil we talk about synergies.
We can put a number on so many things and we've ascribed to this $600 million, which by the way I feel very confident and achieving by year end, but I think these of the kind of things that are synergistic and nature, you've got to really really smart teams and have been trying to solve this problem independently now have the opportunity to really learn together share.
Our data share resources share lessons learned wins losses, along the way and it really kind of supercharge of that so I don't know that we moved dramatically in any 1 area around spacing, but I think what's really interesting is to watch the continued improvement on the on the cost side of the equation, we're drilling wells and 12 days <unk>.
Mile laterals, and some and some pretty challenging areas and thats phenomenal that adds incredible efficiency on the front end of the economics the capital and.
And the and the design associated with the completion is really where these wells will start to separate and Thats well placement stimulation design and all of those attributes that go in.
And we're testing we're turning a lot of knobs in that space too early to call on kind of what is the go forward consistent plan across the whole Delaware Basin. My My intuition would tell me that it's multiple go forward plans and different areas.
Continue to learn we're looking a lot of new technologies and at the same time continuing to get better from an ESG front and I can tell you. That's another 1 of the hidden wins from synergies, we're making great strides on that and I think it's the.
A very much of a beneficial symbiotic relationship there as well.
Thank you.
Your next question is from and Neal Dingmann with true with Securities.
Good morning, all of that should get me on to.
2 questions that kind of both of that asphalt and asking different ways, maybe Rick for you. Just first question is maybe on free cash flow allocation I guess my question around that is obviously doing a great job of the variable dividend and the first out of the game and I'm. Just wondering 1 do you think youre being appropriate rewarded for that variable and just just the total debt and general and to me.
Combined with that what appears to be your stock trading at a discount NAV, maybe why not do some more buybacks near term given that discount.
Yes Neil.
That's a question that we all debate here internally.
I'm not convinced of it.
We've seen that yet I think there the question around the variable dividend about consistency and you get the quarter after quarter of.
Some really nice dividends and encouraged by the actions of <unk>.
Of our AR and in some of our other industry peers and I think I think what youre going to find has been now the Devon is not just being treated as 1 off its truly of movement within our sector of getting more cash back to shareholders and I think that's the that's a good thing so when.
And when you when you look at of net perspective.
I think we will start seeing better equity performance.
But if not certainly the discussion we had about share repurchases. The really comes it comes to light and it's great to have Optionality. So you heard Jeff while.
While I go talk about the ability to ratchet up the free.
The variable dividend with the stronger cash flows we also.
From an opportunistic standpoint of the ability to certainly.
Our repurchase of the equity and the third thing I think that when we think about capital allocation of this a little more longer term, but.
We don't have any near term debt maturities.
We do have a couple of hundred million do I think here in 2023, but we have an incremental $800 million of.
Of.
Callable debt and the next 24 months and so we have we have options and that's what I love about our portfolio of strategy. The optionality of strong balance sheet all of that is going on.
And you don't really make for an exciting story over the next few years and.
And something I'm very very pleased with.
And how it's come together with the with the merger so.
I think suffice to say if we don't if we don't see the equity performing.
To the level that we feel it should be.
It's going to be a really good discussion with our board and I think there'll be very supportive of us.
Pursuant of opportunistic share repurchases.
Youll have really been the pioneer of the variable dividend great to see the options and then secondly, just on my question on the capital allocation play, obviously, the Delaware sort of.
Speak for himself, but you deal with that state law and development cotton draw et cetera, and it just seems like every quarter the efficient chicken and better. So I'm just wondering when you think of it and you mentioned your excitement and powder River and obviously you've got that Eagle.
Eagle Ford et cetera could you talk about how you think about the capital allocation is it.
All of these sort of that you know as.
As you said the workhorse will probably continue to be the Delaware, but how.
How do you think about allocating the capital because you've got obviously a lot of other exciting areas.
Yeah. Thanks for the question Neal So the Delaware side, because it's just it's kind of the <unk>.
First in line and takes the lion's share of the growth engine Dot Dot dot the story, there I think thinking about the other assets in the Williston basin have more familiar already with more history with and you've seen the phenomenon of returns year. After year. After year. There we have been 100% of transparent that we're just short on inventory and.
So it just doesn't command.
A whole lot of capital today.
As we think about the other assets I mentioned, the the JV, we have and the mid continent area and that's.
Wonderful.
Wonderful investment, but it is of a certain scale right. It's in time, if its very successful week of scale up and time, if we want to do something different we could certainly scaled down theres, even a scenario where if the.
And the best success case, it really competes that well we continue to drive the invest and the asset on the heads up basis.
And as I move to places like South, Texas, we are of a partnership there with BP and so theres a dance we have to do together to measure our expectations on capital investment along with theirs I can tell you. It's a really phenomenal asset we're really pleased with the returns and we're real pleased with our partnership there we have with BP I think.
The teams of both Ford and very well together to make sure that they are working well in advance and so there's no surprises on either and and so that is something thats kind of the almost pre baked as we start thinking about some of the activity.
The powder River Basin, I think as I mentioned in the prepared remarks.
Encouraged by the continued industry activity some really.
Tier 1 players and the area.
And are excited there as of.
Lots of opportunity as we know when you really do a thorough post appraisal. It has just been challenged and so I think taking of real commercial opportunistic look and how we create value. There is of a multi step process, where just like I said, we've kind of refresh part of the team and I think that that helps kind of 1 brings.
The new questions and challenges to the.
The to the asset.
But it's also a new way to kind of.
Bring some more life and and think about how do we.
Energize that that asset to create value and ultimately keep compete for capital in the portfolio.
Thanks, guys. Thanks for the zone.
It's Neil.
Your next question is from.
David.
With the Pickering energy partners.
Good morning, guys.
Dave.
Hope you're doing well of.
Most of the questions of our assets I was trying to think through the combination of the new sustainability report for 2021, and your methane emissions targets.
How do you think through where the merged company will be and then what that's going to be a little bit of of an early look as you as you start thinking about the <unk>.
Outlook for the company.
Thanks I appreciate the question I think it was very important to us not to just set of a very long range target and say trust us we'll get there. So we said intermediate kind of ranges goals as well and so we have intermediate steps around 2025, and 2030 that are peppered throughout the document and I can tell you we're well on our <unk>.
I mean, just to point to some of the areas I think about 1 of the the most important is around.
Greenhouse gas emissions and I think of the southern Delaware, which the legacy WPS asset we were about 5% couple of years ago, We average about 2.5% last year.
The state of the art today last probably quarter.
And are somewhere between 1 and 1.5% and so that's that's very encouraging there is a lot of meat on that bone because when you compare to the legacy Devon assets just across the border they've been running about a half a percent and so we see line of sight to wear that southern Delaware it needs to go.
We just need to do a little bit more work on some of the infrastructure.
Some of the cultural mindset about how we flow back what we're gonna do flow.
Flowback and.
Building infrastructure and how we manage the wells themselves I think about the other areas, both south, Texas and mid continent are phenomenal and in that regard.
<unk> powder is a little bit more challenged the big Big challenge as the Williston and for all of the Williston and players you hear the same story it is a real challenging infrastructure asset.
That is that has continued to be the case I can tell you, we're pushing really really hard on that we've dropped the.
The emissions by about a third over the last year, but it's still nothing to brag about and it's still about a 10% number which we need to continually improve on and we're investing and that.
We're leveraging all of the relationships we have the continued continuing to drive that down and we will we will achieve our 25 and 30 targets as we've set out but theres a lot of work to do between now and then.
Okay.
That's helpful.
Thanks for the answer.
Sure.
Your next question is from Paul Cheng.
Good day.
Alright, Thank you and good morning.
2 question Pete.
And I think for US is maybe for Jeff.
And 17, Paula that's oil.
I think from a cost that you guys talking about the won't be a cash tax payer and came to us.
And that the hopper at decade, just wanted to see that and how that progression.
Or may not have changed and also can you talk about the our accounting team looked.
It looked like the today's pricing debt.
GAAP and non.
The money on debt.
So the.
In terms of the cash flow and the.
And the P&L account and maybe that you can help us understand I think that the all of that.
The second question.
It's the pain.
Can you talk about the pace and.
What the how.
How much of the patient that you are seeing.
And the Permian net.
<unk>.
And then finally and it just wanted to make a comment on the hedging I appreciate that you guys.
And maybe that's shifting and theyre typically lateral and quite frankly.
The sales team for the old business model.
On debt and not sure that wisely the attaching at all I think our shareholders will actually be at all of it.
Given the industry call of record.
The in terms of the hedging and the long run that's inside of the oil and last Monday, having single come from.
Thank you.
And Paul I appreciate the thoughts and the questions out of the Mouthful I think we got the second half of the question of if you wouldn't mind could you just refresh us on that first question just so we get to what you were asking.
For 2000 people across all types of GAAP.
Pat.
Wayne debt.
Terms of the cash tax paying.
And that project has been changed from.
What you have set and the Pos.
Okay.
Yes, really short answer is no material change from what we talked about on the previous call. If you'll recall what we current projection. We think we will enter into next year with probably over $3 billion of federal Nols, So that that puts us in a pretty good position to shield.
Our sales from taxes and the near term obviously price deck is is as you highlight and your question.
And can have a material impact of that our current expectation, though given the NOL position that we have and our current projections even at these higher prices, we really don't expect to be of material cash taxpayer for a number of years. So again, that's going to be consistent with what we talked about in the past and no material changes there obviously 1 of the things that we're evaluating.
Evaluating and thinking about and the broader macro specific to the tax are specific tax position and then just more broadly and any changes that the administration may may make as it relates to IDC or any of the other specifics around how we would calculate our tax position again, no new news on that front and we've not gotten any.
Better clarity as to the direction for of the administration, where they may have on that front, but we certainly been run the sensitivities and evaluating the potential outcomes again, given our tax attributes today, we really feel like we're in a good spot and don't expect taxes to be detrimental impact to our free cash flow story for a number of years.
Yes, Paul I'll pick up the play on the inflation question was there something else first.
And then how about the earn our accounting team.
And your.
Commodity price that you ship the April to get the Monday from the earn out.
And <unk>.
Paul I think you were asking about the contingent payments specific to our Barnett transaction.
Yeah, absolutely so the.
The 1 item and you probably saw and in the quarter as we adjusted our expectation there given the higher prices and so as we look at it again this is I'm going to use the forward strip and.
And as the baseline here, but as we look at <unk>.
2022, excuse me 2021, and the results and the prices that we've seen to date, we would expect to receive of contingent payment on our Barnett transaction. It could be in the ballpark of $40 million. So that would be incremental cash that would be coming in the door to us as a result of.
The result of that transaction.
And that you have in the P&L.
Okay.
P&L impact yeah, no we've adjusted debt adjusted that that contingent payment and our results for the second quarter. So you shouldnt see of big impact going forward.
Okay. Thank you.
And false cloud I'll pick up on your original question too.
Around inflation.
Look my belief is the inflation is real I appreciate the fed chairman and saying, there's some transitory things happening in the and the macro sense.
But I think you go anywhere talk to any business owner and there is.
The struggles to get employees and things working.
<unk> been trying to buy.
Relatively routine thing so I think theres, 1 level of inflation kind of in the macro sense and then specific to our industry.
Higher commodity price, obviously is driving some increase in activity. The question I have and I think he is still yet to prove out is the historical correlation between commodity price and rig rig activity is disconnected and thats a good thing from the sense of our industry discipline and.
So I think what we need to do is not not necessarily focus on the commodity price, but it's more of the resulting activity certainly some of the private folks have picked up more rigs differentially.
Relative to the for the larger publics I think as of the larger publics continue to hold the line on the.
Disciplined cash flow returning sustainability.
In that regard I think we will continue to see.
Moderate growth on activity, so what that means to us is.
Those 2 things up certainly we will see some inflation we're seeing it now we have we have certainly baked that into our 'twenty 1 expectations guidance of a.
A lot of confidence and again being able to meet our guidance for the balance of the year as we start to look forward and really trying to hone in on 'twenty..2 I think theres still some questions out there clearly we expect to see some inflation I'm not ready to prepare and put a number of onto it today and where.
We're just starting our really deep conversations and the long term sense.
With the board as we work through capital investment levels. Some of the things we've talked about on this call and certainly and incredibly important part of that that math is inflation. So we see it coming we're prepared for it and we're working to mitigate as best we can we believe our relationships.
And the partnership that we can offer from a very consistent and robust program, where the company that does what it says it's going to do I think offers a lot of value to our service company partners.
And of the day, we will see some higher costs, but not prepared to really point to the number just yet.
Alright, thank you.
Your next question is from Scott Hanold with RBC capital markets.
Thanks, guys.
And my question is.
When you step back and think about Devon strategy and how you return cash to shareholders do you all have a sense on how you view the best way to give value back to investors is meaning.
Do you think it's the higher the highest dividend yield is that the real way you think long term of going to create value or is it.
And in ways to use of free cash flow to over time generate incremental more free cash flows that you all have of certain.
The thesis of our strategy at this point.
Yes, Scott the only thing gets Rick 1 thing that we constantly try to keep a pulse on the net is.
The investor preferences, and that's that's not always easy the physical who you asked sometimes and so from our perspective, we think a balanced approach is a pretty good way to look at it and.
And you may be you, maybe a little cross threaded 1 quarter or 2 quarters, but over over.
Over time, we think that's the best way to do it and that's why you heard us talk about Optionality.
I think I think.
More near term I think the the higher dividends and show me. The money now has been I think the lion's share of the feedback that we've been hearing from.
The most shareholders and I think debt as we look at our shareholder group, but we think that it's continued to strengthen and we're getting.
Really some not shareholders across the across the line.
And really pleased with that now I think you'll you'll also here over time, maybe more comments and more perspectives on.
The longer term approach and I think that's that's an outcome of <unk>.
Maybe some of some more stability in commodity prices and when I think commodity price I'm think about not only crude oil which drives most of the revenues but.
And I can tell you Ngls are we have some really really nice exposure to the Ngls from.
Basically all 3 of our basins, the best place to be and so that.
If you get into a situation, where even with your best efforts of getting cash back to shareholders significant amount of cash to shareholders. If you still think youre being not rewarded properly.
With your equity performance and it really sets you up for some opportunistic share repurchases and.
And that's something that even though there were 20% growth next year on the cash flow per share of the.
The work on both the numerator and the denominator not a not a bad way to go and.
And that's how you can deliver some growth because I think the broader market continues to reward growth.
Our sector, we just can't we're not going to get rewarded for growth right now as we've all talked about for last year or so so how can you do things of all.
<unk>.
And both on the numerator and denominator and and the third the third option is just is on the balance sheet just continue to have a fortress.
The balance sheet, which we have a wonderful balance sheet is getting stronger every quarter.
But at the end of the day, we also have some.
Callable debt that we will have to think of that over the next couple of years and what do we pull the trigger on that or just.
Just treat it as a net debt type of.
The exercise so.
Really a good spot to be in and that's really how we.
We view it.
And so really the summary, we just try to do the best job, we can day and day out of trying to keep a good pulse on what the what investors are looking for and I do think and this is day and time as we said in our opening comments.
When you have a near zero.
The percent interest the world that we're in the right now.
East.
These are these yields are really really compelling and we're all shareholders and we.
We love those quarterly dividend checks and I can tell you of those those those.
Early in the not so.
That's really how we're looking at as of late but some color of the.
The healthier and so it's.
It's very appreciate it and just a quick last question here and.
Clay I think you kind of alluded to this already but.
Obviously with the greater efficiencies and you guys continue to outperform.
And even your expectation on your quarterly production guidance and book on pace to be there for the full year.
It doesn't sound at least like this youre going to probably taper activity.
Is that sort of the concept that we should think about it is if you think about 2022 of you guys are still running a little bit more efficient.
Youre going to kind of maintain net activity and maybe grow into that 5%.
I guess kind of cap rate that you have out there.
Yes, I think I think it is of great question and I appreciate the clarification, because obviously as we we run a constant rig program and those rigs become more efficient you just draw more capital into the calendar year. That's of a normal thing we have seen before we love that kind of win.
Those are always beneficial.
Ultimately investments that we're making right the challenge can be you're capital constrained during the calendar year, which is obviously, how we guide I feel very comfortable and being able to deliver our capital during the year, even with the efficiencies.
How that manifests into 'twenty, 2 yet to be determined, but here's kind of what it is.
It could look like in my mind, if we find that 12 rigs in the Delaware. It can do we are doing with <unk> and that achieves our goal. We can run 12, what I don't want to do is dropped to 12 or 11, or 10 and to try and scale back up and a couple of months.
Just to try and kind of game the the capital for the calendar year in terms of value destructive to the asset teams and its value destructive to our service companies and so I think that consistency of approach is very very important and what youll see us do is kind of run through now when we make a move to more of less rigs and hopefully we're very steady.
And in that regard as well and predictable and deliver on what we say we're going to do.
I appreciate it thank you.
It looks like we're at the end of our time slot today, we appreciate everyone's interest and Devon 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 and thank you for participating you may now disconnect.
[music].
Okay.
Okay.