Q3 2021 Devon Energy Corp Earnings Call
The Delaware Basin.
With this advantage portfolio, we possess a multi decade resource opportunity in the best position plays on the U S cost curve.
And with this sustainable resource base, we are positioned to win multiple ways with our balanced commodity exposure.
Our production is leveraged to oil nearly half our volumes come from natural gas and Ngls, providing us with meaningful revenue exposure to each of these valuable products. This balance and diversification are critically important to <unk> long term success.
As you can see on slide five the strength of our operations and the financial benefits of our strategy were on full display with our third quarter results.
This is evidenced by several noteworthy accomplishments, including.
We completed another batch of excellent wells in the Delaware basin that drove volumes, 5% above our guidance.
We maintained our capital allocation in a very disciplined way by limiting our reinvestment rates to only 30% of our cash flow.
We're continuing to capture synergies and drive per unit cost.
Lower.
We're also achieving a more than eightfold increase in our free cash flow.
We're increasing our fixed and variable dividend payout by 71%.
We're improving our financial strength by reducing net debt, 16% in the quarter.
Overall, it was another tremendous quarter for.
For Devon, and especially want to congratulate our employees and our investors for the special results.
Now moving to slide six while <unk> 2021 is wrapping up to be a great year for Devon. The investment thesis only get stronger as I look ahead to next year.
Although we are still working to find out finalize the details of our 2022 plan I want to emphasize that our strategic framework remains unchanged and we will continue to prioritize free cash flow generation over the pursuit of volume growth.
As we have stated many times in the past, we have no intention of adding incremental barrels into the market until demand side fundamental fundamentals sustainably recover and it becomes evident that OPEC plus spare oil capacity is effectively absorbed by the world markets.
With this disciplined approach and to sustain our production profile in 2022, we are Directionally planning on an upstream capital program in the range of one nine to $2 2 billion.
Importantly, with our operating efficiency gains and improved economies of scale. We can fund this program at AWS <unk> breakeven price of around $30. This low breakeven funding level is a testament to the great work. The team has done over the past few years to streamline our cost structure and optimize.
Our capital efficiency.
Being positioned as a low price low cost.
Producer provides us with a wide margin of safety to continue to execute on all facets of our cash return model.
With our 2022 outlook Devin will have one of the most advantaged cash flow growth outlooks in the industry.
At today's prices with a full benefit of the merger synergies and an improved hedge book we are.
Positioned for cash flow growth of more than 40% compared to 2021 as you can see on the graph the strong outlook translates into a free cash flow yield of 18%.
In an $80 <unk> price the.
The key takeaway here is that 2022 is shaping up to be an excellent year for Devon shareholders.
Now jumping ahead to slide eight.
Top priority of our free cash flow is the funding of our fixed plus variable dividend. This unique.
Dividend policy is specifically designed for our commodity driven business and provides us the flexibility to return more cash to shareholders than virtually any other opportunity in the markets today that.
To demonstrate this point we've included a simple comparison of our estimated dividend yield in 2022 based on our preliminary guidance as you can see <unk> implied dividend is not only more than double that of the energy sector, but this yield is vastly superior to every sector in the S&P 500 index.
In fact at today's pricing devins yield is more than seven times higher than the average company that is represented in the S&P 500 index.
Now that is truly something to think about in the yield Star World. We currently live in.
Moving on to slide nine with our improving free cash flow outlook and strong financial position I'm excited to announce the next step in our cash return strategy with the authorization of $1 billion share repurchase program. This.
This program is equivalent to approximately 4% of <unk> current market capitalization and has authorized through year end 2022.
Jeff will cover this topic in greater detail later in the call, but this opportunistic buyback is a great complement to our dividend strategy and provides us with another capital allocation tool to enhance per share results for shareholders.
Shipping ahead to slide 11 and to close out my prepared remarks, I want to summarize <unk> unique investment proposition through three simple chart.
Beginning on the far left chart, our business is positioned to generate.
Cash flow growth of more than 20, 40% in 2022, which is vastly superior to most other opportunities in the market as you can see in the Middle chart. This strong growth translates into 18% free cash flow yield that will be deployed to dividends buybacks and the continued improvement of our balance sheet.
And lastly on the far right chart, even with all these outstanding financial attributes, we would still trade at a very attractive valuation, especially compared to the broader market indices. We believe this to be another catalyst for our share price appreciation as more and more investors discover devins.
Unique investment proposition.
And with that I'll turn the call over to play to cover some of the great operational results. We delivered in the third quarter play. Thank you Rick Hey, good morning, everybody.
In summary, Devon third quarter impressive results were the result of tremendous execution across nearly every aspect of our business, we had wins in environmental and safety performance operational improvements continued cultural alignment.
<unk>, well productivity and cost control significant margin expansion and ultimately excellent returns on invested capital.
This recurring trend of operational excellence, while managing significant organizational change and macro stress has now been established over multiple quarters and is a testament to the Devon employees and strong leadership throughout the organization.
I look forward to 'twenty, two and beyond I believe we're positioned to continue delivering but also take out take our performance to an even higher level of cohesion and productivity.
<unk> the energy to fuel today's modern world is critically important work I am very proud of what we do and how we do it as I look forward to devins near and long term goals I'm confident in our ability to deliver on societies ever increasing expectations.
Let's turn to slide 13, and we can dig into the Delaware Basin.
Devins operational performance in the quarter was once again driven by our World Class, Delaware Basin assets were roughly 80% of our capital was deployed.
With this capital investment we continue to maintain steady activity levels by running 13 operated rigs and four frac crews, bringing.
Bringing on 52 wells during the quarter as you can see in the bottom left of this slide this focused development program translated into another quarter of robust volume growth.
And our continued cost performance allowed us to capture the full impact of the higher commodity prices.
Turning your attention to the map on the right side.
Our well productivity across the basin continues to be outstanding in the quarter with the results headlined by our boundary boundary Raider project. Some may recall that this is not the first time, we've delivered on impressive results from this well pad.
In 2018, our original boundary Raider project developed a package of bone spring wells that set a record for the highest rate wells ever brought online in the Delaware Basin.
Fast forward to today. This edition of the boundary Raider went further downhole to develop an over pressured section in the upper Wolfcamp. This project also delivered exceptionally high rates with our best well delivering an initial 30 day production rates of 7300 Boe per day of which more than that more than 60% of that was oil.
I called out pretty good for a secondary target.
Moving a bit east into Lea County, another result for this quarter was our Cobra project, where the team executed on a three mile Wolfcamp development. This pad outperformed our pre drill expectations by more than 10%.
With the top well achieving 30 day rates as high as 6300 Boe per day.
In addition to the strong flow rates. This activity helped us prove the economics of the Wolfcamp inventory in the area further deepening the resource rich opportunity we hold in the Delaware.
Turning to slide 14, with a strong operating results. We delivered this quarter high margin oil production in the Delaware Basin continue to expand and rapidly advance growing 39% year over year.
Importantly, the returns on invested capital to deliver this growth where some of the highest I've seen in my career bolstered by rising strip prices and the capital efficiency improvements we have delivered this year. These.
These efficiencies are evidenced on the right hand chart, where our average D&C cost improved to $554 per lateral foot in the third quarter, a decrease of 41% from just a few years ago, while we have likely found the bottom of this cycle earlier. This year. The team continues to make operational breakthroughs that have thus far.
Back most of the inflationary pressure.
We continue to win from a fresh perspective blending teams and also still relatively we're still working to know each other pretty early on these accomplishments are clearly demonstrated in the great work. Our team has done to drive improvements across the entire planning and execution of our resource.
To maintain this high level of performance into 2022, we are focused on staying out ahead of the inflationary pressures that are impacting not just our industry, but all aspects of the broader society, while our consistency and scale in the Delaware are huge advantage. The supply chain team is working hard to anticipate issues mitigate bottle.
Next and work with the asset teams to adjust plans to optimize our cost structure and future capital activity.
Turning to slide 15, another asset I'd like to put into the spotlight today as our position in the Anadarko Basin, where we have a concentrated 300000 net acre position in the liquids rich window of the play.
As you May know, Rick and I, both have a historical tied to this basin and were thrilled to get to see the great work that our teams are doing to unlock this value for investors a key objective for us this year in the Anadarko basin is to reestablish operational continuity by leveraging the drilling carry from our joint venture agreement with Dow by way of background in late.
2019, we formed a partnership with Delta and a promoted dear deal, where Dow earns half of our interest on 100 3300 locations in exchange for $100 million drilling carry.
With the benefits of this drilling carry we're drilling around 30 wells this year and our initial wells from this activity were brought on during the quarter.
The four well Miller Miller project is an up spaced Woodford development and Canadian counter County, and is off to a great start with both D&C cost and well productivity outperforming pre drill expectations initial 30 day rates averaged 2700 Boe per day and completed well costs came in under budget.
At around $8 million per well, while I'm proud of how well the team hit the ground running as we get our processes lined out and efficiencies dialed in I foresee material improvements in well costs ahead.
The leverage returns from this carried it carried activity will complete excuse me will compete effectively for capital with any asset in our portfolio in fact, the strength of natural gas and NGL pricing. The performance, we're seeing in the Anadarko Basin will likely command relatively more capital than it did in 'twenty one.
Moving to slide 16, while the Delaware Basin is clearly the growth engine of our company and we're excited about the upside for the Anadarko. We also have several high quality assets in the oil fairway of the U S that generate substantial free cash flow.
These assets don't typically grabbed the headlines there strong performance is essential to the continued success of our strategy. These teams are doing great work to improve our environmental footprint drive the capital program opt.
Optimize base production and keeping our cost structure loan as an example, williston will generate over $700 million.
2021 free cash flow collectively these assets are on pace to generate nearly a 1 billion and $5 of free cash flow this year.
Lastly, on slide 17, with our diversified portfolio concentrated in the very best U S. Resource plays we have a deep inventory of opportunities that underpin the long term sustainability of our business model.
As you May have heard me talk about in prior quarters, we have a brutal capital allocation process in regards to the competitiveness.
Of how we seek the best investment mix for the company.
The first step of this process is to make sure that all the teams are working from the same assumptions and inputs.
Since the close of our merger earlier this year, we have undertaken a very disciplined and rigorous approach to characterize risk force rank the opportunity set across our portfolio. This inventory disclosure as a result of the detailed subsurface work.
An evaluation across our portfolio that we converted into a single consolidated platform to ensure consistency.
Turning your attention to the middle bar on the chart at our pace of activity, we possess more than a decade of low risk and high return inventory of what we believe.
What we believe to be at a mid <unk>.
Cycle price deck as you would expect about 70% of our inventory resides in the Delaware Basin.
Providing the depth of inventory to sustain our strong capital efficiency for many many years to come.
Let me be clear.
In this exercise we are focused on AR on compiling a very important slice of our total inventory. This summary is not meant to convey the full extent of the possible with these incredible resources. These are only operated essentially all long lateral up spaced wells that deliver competitive.
Returns in a $55 oil environment.
Moving to the bar on the far right of the chart. We also expect inventory inventory depth to continue to expand as we capture additional efficiencies optimized spacing and further delineate the rich geologic column across our acreage footprint.
Expect we expect a significant portion of the upside opportunities to convert into our derisk inventory overtime.
Examples of this upside include the massive resource potential in the lower Wolfcamp intervals continue appraisal success in the powder River basin.
And the significant liquids rich opportunity, we possess in the Anadarko basin.
The bottom line here is that we have an abundance of high economic opportunity.
To not only sustain but grow our cash flow per share for many years to come.
With that I'll turn the call over to Jeff for the financial review.
Thanks, Clay I'd like to spend my time today discussing the substantial progress we've made advancing our financial strategy and highlight the next steps we plan to take to increase cash returns to shareholders.
A good place to start is with a review of <unk> financial performance in the third quarter were devins earnings and cash flow per share growth rapidly expanded and comfortably exceeded consensus estimates operating cash flow for the third quarter totaled $1 6 billion, an impressive increase of 46% compared to last quarter. This.
Level of cash flow generation comfortably funded our capital spending requirements and generated $1 1 billion of free cash flow in the quarter.
This result represents the highest amount of free cash flow generation Devin has ever delivered in a single quarter and is a powerful example of the financial results our cash return business model can deliver.
Turning your attention to slide seven with this significant stream of free cash flow a differentiating component of our financial strategy is our ability and willingness to accelerate the return of cash to shareholders through our fixed plus variable dividend framework.
This dividend strategy has been uniquely designed to provide us the flexibility to optimize the return of cash to shareholders across a variety of market conditions through the cycle.
Under our framework, we pay a fixed dividend every quarter and evaluate a variable distribution of up to 50% of the remaining free cash flow with a strong financial results. We delivered this quarter. The board approved a 71% increase in our dividend payout versus last quarter to <unk> 84 per share. This is.
The fourth quarter in a row, we've increased the dividend and is by far the highest quarterly dividend payout and Devin 50 year history.
As you can see on the bar chart to the left at current market prices, we expect our dividend growth story to only strengthened in 2022 and.
In fact at todays pricing, we are on pace to nearly double our dividend next year.
Moving to slide 10. In addition to higher dividends. We've also returned value to shareholders through our efforts to reduce debt and improve our balance sheet.
So far this year, we've made significant progress towards this initiative by retiring over $1 $2 billion of outstanding notes in conjunction with this absolute debt reduction. We have also added to our liquidity building at $2 $3 billion cash balance at quarter end.
With this substantial cash build and reduction in debt. We've reached our net debt to EBITDA leverage target of one turn or less even with this advantaged balance sheet, we're not done making improvements we've identified additional opportunities to improve our financial strength by retiring approximately 1.0 billion of premium lets say low <unk>.
Premium debt in 2022, and 2023 importantly, Devon has the flexibility to execute on this debt reduction with cash already accumulated on the balance sheet.
And to round out my prepared remarks. This morning, I would like to provide some thoughts on the $1 billion share repurchase program, we announced last night, while the top priority for free cash flow remains the funding of our market leading dividend yield. We believe this buyback authorization provides us another excellent capital allocation tool to enhance per.
Share results for shareholders given.
Given the cyclical nature of our business will be very disciplined with this authorization only transacting when our equity trades at a discounted valuation to historical multiples and the multiple levels of our highest quality peers. We believe the double digit free cash flow yield our equity delivers as outlined on slide six represents a unique.
<unk> buying opportunity.
The reduction in outstanding shares further improves our impressive cash flow per share growth and adds to the variable dividend per share for our shareholders with this with these disciplined criteria guiding our decision, making we will look to opportunistically repurchase our equity in the open market once our corporate blackout expires later this week.
So in summary, our financial strategy is working well, we have excellent liquidity and our business is generating substantial free cash flow, we're positioned to significantly grow our dividend payout over the next year. The go forward business will have an ultra low leverage ratio of a turnover less and we will look to boost per share results by opportunistically.
Repurchasing our shares and with that I'll now turn the call back to Rick for some closing comments.
Thank you Jeff great job in closing today I'd like to highlight a few things number one.
Devon is meeting the demands of investors with our capital discipline earnings and cash flow growth market, leading dividend payout.
Debt reduction and now a share buyback program.
Number two.
Kevin is also meeting the demands of the market with our strong oil production results great exposure in natural gas and Ngls, along with our consistent execution and.
And number three.
Lastly, Devon is also meeting.
The demands of society by providing a reliable energy.
Before the pandemic during the pandemic and as we emerge from the pandemic.
Our people throughout the five states, where we operate.
Continued to show up for work at work safely.
We didn't overreact with our capital program during the pandemic like many others did.
We actually strengthen the company with a merger.
And finally, we are laser focused on achieving our stated short term midterm and long term ESG targets. We're proud of the work we've done and look forward to continuing meeting the needs of investors the market and society for the foreseeable future Devin.
Kevin is a premier energy company and we're excited about the value will consistently provide to all of our important stakeholders and with that I'll now turn the call back over to Scott for Q&A. Thanks, Rick We'll now open the call to Q&A. Please limit yourself to one question and a follow up this allows us to get to more and more.
On your questions on the call today with that operator, we'll take our first question.
And you ask a question you will need to press star one on your telephone to withdraw your question question Keith.
Our first question comes from the line of Arun Jairam with J P. Morgan Securities.
Yeah, Good morning team Rick.
Rick I wanted to maybe start off talking about the inventory depths slide that you put out.
11, plus years of low risk development opportunities, 70% in the Delaware Basin.
We have seen a couple of large Permian basin trades with Conoco and pioneer earlier. This year. So I wanted to get your thoughts on how youre thinking about.
About portfolio renewal, just given that inventory depth and perhaps clay could also comment on the ability of <unk> to derisk some of the wells in that 2500 well.
Bucket, including that deeper Wolfcamp zone.
Yes, it's a great question Arun and.
And I'll have clay weigh in and provide some more details why we're looking at it is number one is place talked about we did a very comprehensive deep dive.
And once again these numbers are strictly operates so we have non operated projects out there that are in our order discount we wanted to make it really clear that these are operators, where we're going to control the drilling and completion activities.
We also contemplated.
Many many of the sections that had been set up as one mile laterals are now two mile laterals with some of the acreage consolidations that we've seen and in some cases, where you have got the federal units.
Especially on the new Mexico side, we've seen.
We see now the opportunities to drill more and more of the three mile laterals and you saw the results we just put up.
Not only this past quarter, but over the last year or so so really really attractive opportunities I think there is going to continue to be opportunities for us too.
Replenish our.
Our inventory there and a lot of this that you mentioned a couple of transactions that have taken place in the broader Permian, but specifically in the.
On the Delaware side, you laid out.
Conoco's purchase of of the shale acreage I can tell I can tell you Arun that we operate wells that are.
The shell ahead non operated interest in we have opportunities to do a lot more trading and I think optimizing our portfolio. That's the first thing I'll add too and I think thats going to optimize even further optimize the returns we get and then there are going to be other other small opportunities out there we're really focused on.
Bolt on type of things that really Michael industrial make a lot of sense from an industrial perspective.
And so I think youll continue to see see that I'll also just weigh in.
Over the last two days, we've had an internal tech conference and when I look at the unbelievable technology, that's being employed by Devon today, as we find more and more opportunities within the acreage. We are already operating I've got real excited and I think the entire organization is excited about what the future looks like.
So those are a couple of ideas that we have and I am confident that our team will continue to keep.
A long runway of inventory opportunities and problems with Glenn you might want to add to that yes. Thanks Rick.
Kind of reiterate a couple of your points number one Arun.
Arun as you well know, we're always trying to drill our best well next.
And it's amazing to me as long as we've all been in this business today, we're drilling the best wells, we've ever drilled and it's not because we saved them until today is because our teams have continued to innovate.
Get better how do we get on the efficiency.
Efficiency side, how do we figure out how to ring out the most optimal amount of resource from these incredible place how do we understand the plays what Rick was just talking about some of the technology. We are involving today's is absolutely outstanding second tip of the hat unlike to providers to the land team and Rick mentioned this the incredible work that's been done.
And trading around our core areas just makes us all better I mean, both parties typically in a trade where we are.
<unk> like for like exchanging at the same time, we're extending laterals, we're building efficiencies and a ground floor level and that just makes us better and so those things will continue.
Specific to your comment on moving some of the de risked or excuse me the upside inventory to the de risked inventory absolutely that'll happen. The luxury that we have today is because we have so much quality out in front of us we don't have to different <unk>.
We have to invest a significant amount into that Derisking program. So we could accelerate it faster, but we're going to be very measured about this by far most of our investment is just plowing the ground driving down costs get an exceptionally efficient and just wringing out that free cash flow machine that we talk about strategically so.
That will have a high degree of confidence that 2500 wells and by the way. It's a whole lot more than 2500 will eventually roll into the Derisked bucket.
It's not too much of a stretch to say when we drill those some of those will be the best wells that we've ever drill even five and 10 years from now.
Great. Thanks for that and my follow up is for Jeff.
Wondered if you could just maybe provide a little bit more color on how.
The board is thinking about the buyback Geoff you mentioned that maybe post the blackout and a couple of days.
The opportunity mystically look to be back, perhaps using the buyback authorization, but I wanted to get a sense of.
Maybe you could better define.
The sense of opportunistic nature of the buyback and thoughts on do you think you'd get to $1 billion done by year end 2022.
No absolutely Arun I mean, where we sit today and we look at again I'll point, you back to slide six which in our deck. If you look at pick your price deck, but 15% to 20% free cash flow yield, we think an investment and Devin stock is.
An absolute no brainer, where we sit today you compare that to the.
The multiples were trading at relative to our highest quality peers, probably again, a half turn to a turn below those folks.
And I think it was a pretty easy decision for our board to go ahead and approve the $1 billion share repurchase and so as I may as I made comments in our open once we get through the blackout here at the end of this week, we expect to jump into the market and really get after it. So we're excited about the investment opportunity that we have.
Married with the fixed and variable dividend framework.
Just to be candid there just isn't anybody else.
Sector, that's providing this kind of cash returns to our shareholders.
Great. Thanks, a lot.
Your next question comes from the line of Neil Mehta with Goldman Sachs.
Good morning team nice quarter here I want to.
Start off on.
On the NGL side of the equation because it doesn't get enough attention in your portfolio, but it's been a hidden driver for a lot of the cash flow generation can you just remind us how that business is set up here as you think about the fourth quarter into 2022, obviously Anadarko is a little bit more liquids rich and how that that changes where that asset.
Particular competes within the portfolio.
Okay.
Yes, Neal it's a great great. Great question. We appreciate you, making the point for us because again, it's been a real a real high point for us.
Throughout this year, obviously with the tailwind that we've seen on NGL prices.
Just to remind folks in 2021, we're producing over 130000 barrels a day of <unk>.
Ngls and I would expect you know moving into 2022, you'll see that grow a bit moving forward. So it's been a really nice tailwind for us and as you point out it's not an insignificant portion of the cash flow that we're delivering and the free cash flow that we're delivering this year and expect that to grow moving into 'twenty two.
Really expand on that a little bit and you have certainly you and your firm have your own view, but ours is that we're we're pretty constructive on NGL pricing as the worldwide economy, just continues to get stronger and stronger.
So.
I think the point's been made it's a realize.
Realize position to be in when you can see.
These kind of volumes, we put up and helps helps cash flow in a big way.
Marine grew at that point and then the follow up is just when do you think about moving outside of this maintenance slow type of program.
That business model that has been set up here is generate a lot of free cash and return that capital to shareholders.
But when do you think it makes us actually pursue a modest degree of growth.
And what are the signals that you are looking for whether it's demand signals OPEC spare capacity to make that call.
Yes, I think the way we were looking at Aneel is as well.
We're really focused as we said in our remarks on the cash flow per share growth and it's when you start looking at 40% cash flow growth.
And 'twenty two over 'twenty, one just keeping your volumes flat.
Absolute volume growth route doesn't have appeal, we just need to we need to make sure that.
As we said the OPEC plus barrels are are back in the market and we will watch things, we will be thoughtful, but if you think about our.
Retiring or re repurchasing actually.
4% of your of your shares you are going to get some per share production growth and I think most of the investors that we talk to that.
That's that's plenty good for them and Thats kind of how we're thinking about it.
Thanks, Rick.
Your next question comes from the line of Doug Leggate with Bank of America.
Okay.
Hey, good morning, everybody Hudson.
Hudson phone line issues. This morning, so I just want to check you can all hear me okay.
Sure Ken.
Excellent well, thanks, Rick for the presentation.
I've got a couple of questions I guess the first one is on the breakeven.
And I just want to make sure I'm reading this right.
So your $30 sustaining capital breakeven is using $2 50 gas.
Which is obviously quite a bit below where the strip is right now so given your comments about your gas exposure.
If you use current strip what do you think your sustainable breakeven is and if I may Tycho and maybe to that what is the embedded cash tax assumption.
And that breakeven.
Yeah, Doug just I frankly haven't done the math to give you an exact number but it's certainly lower than I would guess somewhere in the mid twenty's would be the breakeven using the current strip.
Call it three to $4 on gas prices, and then Ngls as well.
And then Jeff Yeah, Yeah on a cash tax basis Youll see we kind of did noted that on again on slides six and in our presentation.
Where things sit today, and where commodity prices said, we'll have to see how the rest of this year shakes out to give you an exact answer on where our NOL balance we will land, but generally speaking we think it's going to be around $3 billion that will carry forward into 2022 on top of that we will have some foreign tax credits, which will also help us shield some of our ink.
And next year, so again, depending on where commodity prices shake out will be in a pretty good position to shield a fair amount of that.
Of that taxable income however, we're guessing it's going to be somewhere in the mid single digits will kind of be our our current tax rate as we move into 2022 and that's what we've assumed in the forecast that we've outlined on that slide six that I referenced earlier.
Thanks Helane.
My follow up is first of all Rick I am delighted to see the buyback introduced and we'll see.
How that plays out, but I guess the.
Question I have is your variable dividend is a baked.
In the context of the <unk>.
Total cash return.
But I think my view on this which is.
Somewhat.
I don't think the market necessarily gives you a discounted.
All forward variable dividend something that theyre prepared to recognize so buybacks are more permanent <unk> growth per share.
Should we expect the split between the two to evolve over time.
Well I think the way we're looking at now the variable variable dividend concept.
This is I guess here in December will be the.
The fourth the fourth quarterly distributions, so it's I'd say.
It's still it's still relatively new.
Being very very well received we think is very prudent.
With your comments on the share repurchase those those are permanent and and meaningful.
But I think with the variable dividend we've had a lot of discussion. So some people have really ask us about are we are we wanted to bump that up to say, 75% threshold or something that I think for US. We think the 50% is a very very prudent level, let's see how this plays out.
We've talked the base dividend this variable dividend share repurchases and as Jeff talked about the debt reduction those all really I think.
Add up to a very very compelling story for shareholders something that we feel.
You don't feel really good about so I think that.
We'll see how the share repurchase program goes I think a question will be down. This question you are asking.
Give us a few months gives us a few quarters unless les CL, how things how things play out and what really makes sense, but that's really how we're looking at I think a balanced approach.
It is pretty hard to compete with Geoff you may have some additional I would just I would reiterate that last point, Doug which is we feel like we're delivering all of the above so.
Whatever your favorite mechanism for cash returns.
<unk> and Devin is delivering that as Rick mentioned as we move into next year, we settle out to the budget figure out.
Onto the line item, how we think the business is going to perform.
My guess is we're going to have opportunities to even build further on this framework with the potential to raise the fixed dividend on a go forward basis, and then we'll reevaluate.
Other other additions to the framework as we move through the year end and see cash build.
Hi, guys, let me spend a closeout of the comment because you have led the market on this you've been early to it and I think you are really changing the perception of what the E&P business model can look like so congratulations on that.
Okay. Thanks, Doug appreciate it I appreciate it.
Your next question comes from the line of Jeanine Wai with Barclays.
Hi, good morning, everyone. Thanks for taking our questions.
Absolutely good morning, Jeanine and thanks for sending in the picture Congratulations John.
The other one.
Thank you Darla.
Thanks.
Maybe just following up on everyone in doug's questions on the buyback can you just address how you specifically determine the size and the timeframe of the authorization.
Should we think about you revisiting either the buyback or the percent variable pay outlets.
Through a good portion of that $1 billion gross debt reduction or are those decisions independent I know you just mentioned that the 50% is prudent at this time you will have to see how the business performs and it sounds like maybe in a couple of quarters, you might revisit that but just maybe digging a little deeper on that on how it relates to the debt reduction.
Yes, that's right Jeanine I appreciate the question.
We as I mentioned just in the last question I think that.
The first thing we will probably look to.
To add onto our framework would be a potential raise in the fixed dividend.
But absolutely we are going to reconsider as we work our way through next year should we upsized the share repurchase program beyond the $1 billion, if we get to the end of the year and our cash build exceeds our expectations I think you could consider a special dividend.
And then certainly we would reevaluate the 50% threshold on the variable dividend. However.
I would just point out we think there is real value and consistency of maintaining that framework and so I think generally youll see us work around the edges on some of these other items that we've talked about but those are all things that will debate with the board as we work our way through the year to your question about how do we determine size really it was just a function of looking forward with our projections using what we think is.
Irrational price deck normalized price stack and $1 billion felt like a fair amount.
But again as I mentioned earlier, we will reevaluate that as we work our way through it and see how it performs and certainly well have the potential to upsize that with our board.
Great sounds great maybe.
Maybe my second question is on the 22 budget. So we know there's a few moving pieces in the midstream side and the other buckets as well.
Are there any opportunities that you can walk us through on the midstream and the other bucket side and how those should trend year over year now that the integration of WTS is complete.
I think on the upstream side that one nine to $2 2 billion forecast is there anything else there other than inflation that is driving the range for example, anything on efficiencies or anything macro related.
Hey, Jeanine and thanks for the question as clay.
I would say on the E&P part specifically.
We all we love that our team continues to be more efficient, there's always that hope and that opportunity ahead I can tell you. We've got some pretty good headwinds coming toward us as an industry inflationary wise. So will we be able to fully offset inflation. In this case, we have not assumed that we would.
We've baked in something north of 10% call it 10% to 15% inflation into our E&P operations and then the above.
The other items midstream the other spin some of the corporate capital in the ESG spin that's something that we're probably going to lean into a little harder this year.
In the range that you could probably say about $200 million.
Which would probably be.
Sort of a high watermark I don't expect this every year, but I think there is some opportunities for us to really take some significant steps to.
To build out a little bit ahead make sure that we are being a little bit more forward thinking on some of our infrastructure and that will allow us to run our operations smoother, including important factors like environmental. So I think this is kind of gives you an idea of what we're thinking about and of course, we will continue to refine this as we seek board approval.
<unk> next visit with you guys will give more details.
Okay. Thank you very much.
Thanks.
Your next question comes from the line of John Freeman with Raymond James.
Good morning, guys.
John.
Just kind of a follow up on <unk> questions.
You have mentioned that.
The drilling efficiencies that you all have done a remarkable job on it of compress the cycle times has been pulling forward activity I'm curious on the 2022 preliminary plan does that assume that you all have a static rig and frac crews relative to the 16 rigs five crews you have currently or does that assume.
Potentially doing more with less next year.
I would say John it's Directionally the same we consider it flat activity.
You know how it works we will depending on.
Working interest other factors rigs will come and go we're always upgrading fleets.
Contract rolls off contract rolls on but Directionally, we are flat and consistent in our operations and I can tell you. It's part of our our inflationary hedge is is that consistency as we look to our suppliers and try and get goal alignment with these important partners I can tell you what they want to know is that we're going to be.
Very consistent in our operations through the fourth quarter of this year, we're not abnormally dropping rigs and trying to monkey with the system and then as we roll into next year, and so I think that level of consistency helps tremendously internally and externally as well.
Great and then just my follow up question. The terrific result on the boundary Raider.
Project.
I guess any additional color there in terms of repeatability and kind of running room in that area any sort of read through is there anything you did on the completion design or anything else that you might be able to take to some of the other areas.
Yes, John I think it's we're at the point of evolution, where it's 1 million small things and so I think every new pad that we drill we're continuing to improve and it's <unk>.
Saving minutes and we're shaving just the sole small single.
Single percentage increases on all of these efficiency gains really continue to add up I think in this particular case, we were sitting on top some amazing geology that certainly helps in this business.
But I think I look across the board and you're right I see the efficiency gains.
The capital that we saw in the third quarter and as we roll into the fourth quarter that is there is some efficiency being baked in from the drilling and from the completion side as you know start stacking capital up a little bit we've considered that as we looked at 'twenty two we haven't built additional.
Efficiency gains into 'twenty, two and as I mentioned on the previous question, we've actually acknowledged some pretty pretty significant exposure for.
Inflation and I think that's a prudent step to take.
Thanks appreciate it congratulations on a nice quarter. Thanks.
Thank you John.
Your next question comes from the line of Neal Dingmann with <unk> Securities.
Good morning, guys.
I don't want to belabor the shareholder return, obviously, though does that <unk> and Rick a number maybe that produced several months ago early on <unk> com.
And at that time. This is I think maybe even just the one variable dividend.
Maybe you want being properly compensated I'm just wondering as you sit now with several under your belt.
You all been properly compensated for these and if not would you consider lowering the formula or doing something different on a go forward.
Neal I think I think we have been rewarded to a degree I think but if you'd ask Scott coody. The number of phone calls inbound phone calls that he is getting from more and more generalist investors and people quite honestly, he's never talk to or even heard of that's extremely encouraging. So I think we have.
<unk> to see the tip of the iceberg on our on our recognition of the appreciation of what.
What a strong tool is variable dividend is so.
Yes, I think if you go back to our conversation we had.
Several months ago, I think it was still just a little bit of a wait and see and we talked I think at that time about it.
Interestingly enough. If you are if you're just a yield investor youre.
Sure.
Out in mining for.
Yield comparing opportunities if you look at Bloomberg Factset places like that it just picks up that fixed fixed dividend it doesn't always contemplate the.
The variables are specials, those sorts of things. So I think there's a little bit of a wait and see mode. Now you fast forward to where we are today and I think we have seen some some recognition of that the feedback we get from <unk>.
From our shareholders, we've seen the shareholder base actually changed a fair amount. So I think I think the <unk>.
We're getting.
Would probably illustrate that yeah, we're starting to get some.
To give some recognition of the power that that.
But the variable dividend that certainly.
I think when people are open the open the envelope.
Below peer at the end of the year on this.
84 per share dividend.
IPhone I think is going to continue to be very.
Very much appreciated so tipped the iceberg, though.
No I agree it's good to hear because you guys have certainly been a leader in all of this and then my follow up is maybe for you or clay you can't help but notice when you guys start the presentation on the slides on slide four.
Having five distinct great areas and clay mentioned, how strictly they compete for capital so.
That said would you would you consider on some of those areas that maybe won't may.
In your vote to the top of the line would you fund those bring somebody else in there as a partner or somebody else to fund those that way or would you more likely to think about lighting some of those assets go.
Well as we stated on several occasions, all five of our assets play a very key role.
Our going forward strategy, you bring up something could you bring in a partner.
Absolutely that's always something you can do and the returns that they would get would be quite honestly phenomenal and of course, we would get would be phenomenal phenomenal I think so.
That's always an opportunity we just wanted to do the right thing.
For the long term success of the company and.
I can tell you that will continue in all of our basins to find.
More and more creative ideas on the on the resource and this is this is the subsurface and then.
So I think as we get into it.
A little next year or two we'll always have those opportunities and we'll evaluate them as they come along but.
Our phone does ring and so it is something that we would contemplate clay you may want to.
Comp comment on that yeah. Thanks, Regina Neil you know as well right. I mean, we are we are a business folks and we really look for value creation opportunities and sometimes that comes in.
In the name of buying assets or selling assets are doing creative structures. All of that's always on the table, we have to be very creative what I like I think something we've highlighted this quarter is our joint venture with Dow.
Perfect alignment, we had a resource that we knew was not going to compete on a heads up basis. We also had a little bit of a stagnant time. So we knew there could be a little bit of kind of startup friction we brought in a partner they love. It. It is a homerun for now it is a home run for us and as we cycle through this we're both winning and it's a great thing.
For the shareholders, because ultimately that asset is being converted into value. So we love those kind of deals.
Both legacy organizations have a very creative bent to them and so I think that carries through to us going forward. So look forward to more creative opportunities at.
Neil.
I'll add one more thing to that point that clay just made and I think that if you look at the legacy Devon, It's a kind of company that people want to work with.
So case in point is Dell Dell partnership that's the second one the first one was launched back in the Barnett days and so once you once you.
Prove that you are a viable partner and that you can you can make people some money.
They will come back so I'd like to add that.
Great details thanks, guys.
Your next question comes from the line of Scott Hanold with RBC capital markets.
Hey, Thanks, and congrats on the quarter.
I'm going to touch a little bit on 2022 quickly here, but.
When you look at maybe you can if you can give us some perspective about how big the non operated part of that budget is and obviously outside of the Eagle Ford, but in places like the Permian basin, and even Oklahoma, how much non op spend you do you have right now.
So Scott speaking of partnerships, we have a partnership in the Delaware, where we have a partner that we have prescribed agreement in place, where we can offload some of the non op, mainly because our non op is very hard to budget for and speaking from our own prior experience when you're bus bus the budget and it's on.
Somebody else's fourth quarter activity it can be a little bit frustrating. So again, we have a creative structure in place very beneficial to us very.
Beneficial to our partner that acts as a little bit of a shock absorber. So as we think about opportunities in other areas and as commodity price increases and we see some non op partners.
Lean into it a little bit we will consider those options, but I think it's.
Probably $50 million to $100 million.
Around the company is probably in the right ballpark.
Got it it makes a lot of sense and obviously you guys as operational performance has been outstanding and it's just not the last quarter or two it's been for quite some time and when you think about managing growth.
Based on the oil macro right now if you're in a position where you are outperforming next year would the plan be to taper activity to stay within sort of a flattish.
Growth outlook or would you.
Dropped capex, a little bit to stay.
More flat.
Yes, I hear you.
Thats always the challenge right as we do better become more efficient.
The acceleration causes us to push towards the high side of the capital range is what we're experiencing the third and fourth quarter of this year I hope we have that same problem. What I will tell you is we are going to really try hard to honor the high side of that that range and if necessary. Then we would trim back on activity to make sure we stay at <unk>.
That range its not something we take lightly like I said earlier this is very disruptive to internal and external.
Operations, and so we don't take that kind of operational.
Scaling up and down lightly I would tell you that it's something we plan to to honor and to be very consistent in and sometimes theres other creative ways to make sure that we still meet our capital guidance and continue the the incredible.
Consistency that we have rolling.
Got it no appreciate that and one really quick one for Jeff Jeff You mentioned the tax attributes of around $3 billion in that.
It seems to hold up through 2022 is it fair to assume that strip like sometimes say mid 2023.
A lot of that is utilized.
Yes, that's right and just to be clear in 2022 at the current strip prices, we would expect to pay some cash taxes and that's the assumptions, we kind of outlined on the slide deck, but certainly as you move into 2023, if we maintain this sort of price level through this next year, you're absolutely going to be.
And our cash tax position and Youll see that that current tax ratio move higher.
Okay High class problem. Thanks, guys.
Yes.
Yeah.
Your next question comes from the line of Matthew Portillo with T. P. H.
Good morning, all maybe a question for clay just on the PRP was curious if you could give us an update on your learnings from the delineation and the Niobrara and what you would need to see from either a well productivity perspective or from a cost perspective to feed that asset more capital over the medium term.
Yes, Matt. This is one of the areas it doesn't get a lot of spotlight. So one I appreciate the question and being able to talk about it. This is a massive oil in place resource. There is no question as we think about historical exploration exploring is figuring out if there is oil in place we're past exploration now it's figuring out how do we make.
Do we develop this in an economically competitive way in the portfolio that we have and therein lies the challenge the current.
The current delivery on economics doesn't compete in with the Delaware Basin, obviously that is a tough.
Portfolio to compete in so let's think about it we've drilled a couple of three mile laterals that we brought on earlier this year I can tell you. There. They are really strong we like the returns and they will compete there very strong economics, we've got a lot of repeat ability on that and so I look over to maybe how we did something with the <unk>.
Arco basin, if its not competing in our in our basin, how do we creatively.
Create value for shareholders for an asset that sits in our portfolio and theres a number of ways to do that clearly other industry peers are active in the basin. We look to learn from them, we look to partner with them all of that is on the table.
Certainly, bringing outside funding is certainly on the table.
Is it the homework that we need to do is continue to improve on the repeatability and the certainty of the outcome and that allows us to negotiate the best opportunity for us to really wring out the value.
Perfect and then just maybe a follow up question on <unk>.
Asset specific capital allocation, you've had some absolutely phenomenal results around the <unk>.
Acreage in Lea and Eddy County, and then some of the Stateline acreage from <unk>, just curious how Felix stacks up today, what you've kind of learned from your updated development program. There. How we should think about the return profile of that position in the southern Delaware basin versus your more northerly acreage.
Yes good.
<unk> as we as we draw the circles.
You have some Haley development that's in what we call. The monument draw, which is mostly Felix daily stuff was kind of in between Stateline and the eastern most side of the basin that pad recently came on during the third quarter Big development, I think 10 or 12 wells outstanding results. So we're excited about that clearly as you move further east things just.
Get more challenging the stick.
Steering gets a little more difficult the economics get a little bit more difficult and again and this is super competitive portfolio that we have it's just the eastern most stuff is not commanding the most capital today. So as we look at the depth of inventory in Lea and Eddy and really loving counties, that's where the lines.
Share of our capital activity will be.
Thank you.
Alright, well it looks like we're at the end of our time slot today, we really appreciate everyone's interest in Devon, and I know, we didn't get to everyone in the queue. Today. So if you have any further follow up questions. Please don't hesitate to reach out to the Investor Relations team at any time. Thank you have a good day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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