Q1 2022 Devon Energy Corp Earnings Call
And I want to congratulate the entire Devon team for getting the job done the right way.
Mid some very challenging conditions at.
Now turning to slide five the first key message I want to convey is that the execution of our disciplined operating plan resulted in yet another quarter of impressive financial results.
This was highlighted by.
Devin as earnings and cash flow growing at healthy double digit rates versus last quarter our.
Our capital was in line with our plan and our free cash flow increased 18% over the prior period.
We grew our quarterly dividend to a new record high payout of $1 27 per share.
Our buyback program further amplified per share growth and our rock solid investment grade balance sheet only continued to strengthen.
These results continue to demonstrate the power of our disciplined business model, our focus on growing cash margins and the benefits of our differentiated cash return framework.
On slide six my second key message today is that we are staying true to the game plan. We laid out earlier this year and are well our way to achieving our capital objectives for 2022.
With our budgeted activity Devon is one of the most active operators in the U S. With 19 operated rigs running and our team is working hard to maximize our production.
Is that.
On earlier.
In the first quarter, we delivered more volumes to the market that projected in our plan and our strong execution positions us to produce 570 to 600000 Boe per day for the full year of 2022.
This level of output makes us one of the largest producers in the U S. And we are laser focused on reliably delivering these essential barrels to the market in a capital efficient manner.
Now looking beyond the current year I want to emphasize there is no real change to how we will manage our business to ensure we are excellent stewards of capital we believe that fairly consistent activity through the cycle is the best pathway to optimize efficiencies and returns to execute on its foundational principle, our disciplined strategy strategy.
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Moderates devins production growth from zero up to as much as 5% in any given year today's heightened pricing from recent geopolitical events does not impact our capital allocation strategy I can assure you that we will continue to be very thoughtful and closely evaluate how the geopolitical landscape influences market fundamentals.
Even with today's higher prices, we simply must consider the continued steep backwardation and strip pricing the ongoing supply chain challenges and the economic uncertainty, resulting from the crisis in Ukraine.
The third key point I want to make today is that are financially driven strategy is designed to reward shareholders with higher cash returns in this constructive price environment.
This is demonstrated on slide eight with the attractive yield that devins fixed plus variable dividend policy offers compared to other segments of the equity market. In fact at today's pricing era yield is six times higher than the average company. That's represented in the S&P 500 index with this market.
Leading dividend payout, we have seen a tremendous benefit to our shareholder base over the past several quarters by attracting dividend oriented funds value investors pensions family offices retail and we're even beginning to see evidence of growth investors.
Furthermore, we've also seen a significant change among the culture of our employees, who all own our stock and look forward to that quarterly dividend check just as much as you do.
Now another way, we're returning cash to shareholders by repurchasing our stock as you can see on slide nine since we commenced the program last November we have executed 890 million $91 million of share repurchases. This activity has reduced our outstanding share count by 3% at a cost basis.
It is about 25% below current trading levels.
With the board now expanding our share repurchase program by 25% up to $2 billion.
We can be active buyers of our stock throughout the rest of this year, we will be thoughtful disciplined and convicted with this buyback activity, but I can assure you that we will take full advantage of any pullbacks and look for opportunities, especially to buy dips.
At current levels, we feel that we are fundamentally undervalued and are at the start of a multiple expansion for our equity that should translate into true value creation for shareholders.
Turning to slide 11.
My final key message for you today is that we expect a strong financial and operational performance, we have been delivering to be sustainable for years to come.
My confidence comes from a quality of our asset portfolio the depth of our inventory the diversity of our product mix and the talented team we have assembled these.
These competitive advantages are further reinforced by our unwavering unwavering commitment to capital discipline through the cycle. The transparent cash return framework, we have instituted and the rock solid balance sheet, we possess.
Now importantly, the market agrees with this view has been rewarding us with an increasing share price for the advantaged trades over the past year.
With many investors that are possibly new to our story. We believe it is still very early in this structural bull market.
Devon strong stock performance over the past year is largely a bounce back from the generational lows, we experienced during the Covid crisis.
This is evidenced by energy's waiting in the S&P five.
500 index of only five 4% compared to the long term average of closer to 10%.
As you can see on the box to the right. We believe are attractive return profile and valuation compared to the broader market will be another catalyst for our share price appreciation as more and more investors discover Devon unique investment proposition.
Furthermore, with our geographic and commodity mix diversity, we have the ability to benefit on all fronts.
And with that I will now turn the call over to clay to cover our operational highlights for the past quarter clay.
Rick and thanks to those listening in on our call today as you can see from the results. We issued last night our team delivered another round of impressive operating results I want to stress to you that I don't take these regular accomplishments for granted nor should diminish the valiant work that the team does to make these consistent deliveries look easy.
This is a technically challenging business that continues to get harder every day.
I believe that our recipe for today's success, we will continue to deliver in the future. The foundation of that operational success is built on our high quality portfolio that foundation is brought to life by incredibly thoughtful and hard working people.
And that team is guided by our business model as articulated on slide three.
That provides a steady course for them to drive their efforts towards.
Once again this quarter strong well productivity across the portfolio.
<unk> production to exceed the midpoint of the <unk> guide.
Steady operational improvements allowed us to mitigate additional inflationary pressure and keep our cost structure in line with our full year plan.
This comprehensive execution across all phases of our operations allow the higher commodity prices to passed directly through our field level margins and generate the highest level of cash flow for Devon in nearly a decade.
Now, let's turn to slide 13, where we can discuss our franchise growth asset in the Delaware Basin.
In the first quarter net production from the Delaware increased 27% on a year over year basis. This volume growth was driven by 52 high impact wells brought online that were diversified across targets and the Avalon bone spring and Wolfcamp formations in aggregate. These wells achieved average 30 day.
Rates of 2800 Boe per day, with an average oil cut of over 60%.
At an average completed well cost of around $7 5 million per well the.
The overall returns from this program are outstanding with many of these wells on track to pay out in less than a year at today's strip pricing.
Turning to slide 14.
Another highlight associated with the Delaware activity was the improvement in operational efficiencies and margin expansion, we delivered in the quarter.
Beginning with the graph on the left we continue to achieve efficiency gains across each phase of our operations in fact in the most recent quarter, our drilled and completed feet per day metrics continued to improve to 85 and 135% respectively from just a few years ago.
A great example of this progress is the team drilling our fastest well ever in the basin during the quarter with a spud to rig release time of only nine days at this point as a point of comparison I can remember evaluating the 2015 acquisition that brought <unk> into the basin with spud to rig release time.
<unk> of greater than 40 days.
Completion efficiencies also steadily advance with our best results occurring in the upper Wolfcamp development that reached a record high pace of 2400 completed feet per day. These.
These accomplishments clearly demonstrate the great work our team along with our service company partners have done to drive improvements across the entire planning and execution of our resource.
Directing your attention to the right side of the slide we also effectively controlled lease operating expense in the quarter by keeping our per unit LOE costs.
Costs, essentially flat on a year over year basis.
Our consistent operating plan leverage of technology enhanced purchasing power and relentless focus on margin allows us to manage and offset rising costs and maximize the value of this production in this inflationary environment.
As you can see the strong cost performance resulted in significant margin expansion compared to both the previous quarter and on a year over year basis.
As I look ahead to maintain this high level performance a top priority for US is to continue to stay ahead of inflationary pressure in supply chain disruptions.
As the market has tightened we're experiencing substantial cost increases in raw materials continued labor shortages and uncommon scarcity across numerous products and services. We come back these challenges with thoughtful upfront front planning technology consistent activity levels and through bolt.
<unk> power we possess.
Due to our operating scale.
Our effectiveness, thus far as evidenced by our <unk> upstream capital spending coming in at only 24% of our full year.
As we look as our full year guide as I look forward to the rest of the year I have confidence in our team and processes to mitigate our exposure to supply chain disruptions and out of the out of control inflation. We will continue to watch this closely but if these trends continue our capital spend could gravitate gravitate towards the top half of.
Our guidance range for the year.
Turning to slide 16, our catalyst that will help us combat higher cost environment as the recent commencement of our company owned sand mine on the surface acreage we own in loving County. This mobile sand mine is the first of its kind in the Delaware basin and is expected to supply up to 25% of our proppant requirements in the.
A basin this year.
In addition to providing a certainty of supply this mine could save us up to 200000 per well relative to the rising spot prices, we're experiencing across the basin as activity picks up in San supplies tight equally important. This mine also has significant environmental and safety benefits due to the.
Need for fewer trucks on the road and eliminates the combustion related emissions associated with drawing the sand that occurs and normal mining processes.
Finally controlling this critical baseline of supply in this market is incredibly valuable to operational certainty is.
This creative solution to the current supply chain crunch as another benefit from an investment we made of.
Purchase of 15000 acres of surface land in the Stateline field in 2018 with the early success from this project. We are excited about the potential to expand this concept to other areas of our portfolio with operating opportunities already identified in both Anadarko and the powder River basins.
This innovative approach to sourcing sand for our completion operations serves as another Great example to our team's drive for continuous improvement.
Moving to slide 17, while the Delaware Basin is clearly the growth engine for Devon. We also have several high quality assets in the top U S resource plays.
The teams that support these assets are doing an incredible job of working to drive capital efficiencies optimize base production keep operating costs low and steadily improving our environmental footprint as you can see by the slide by executing at extremely high level on these critical objectives. These assets are on pace to.
Grow cash flow by about 20% this year to around $2 5 billion at today's pricing and proud of what these assets are delivering and I. Appreciate the team's hard work and efforts that go into fulfilling this important role within our portfolio and with that I'll turn the call over to Jeff for financial review.
Thanks, Craig I'll spend my time today, covering the key drivers of our strong financial results for the quarter and I'll also provide some insights into our outlook for the rest of the year.
Beginning with production our total volumes in the first quarter averaged 575000 Boe per day. This performance exceeded the midpoint of our guidance due to another strong quarter of well productivity in the Delaware Basin.
We expect first quarter production to be our lowest production quarter of the year due to winter weather downtime that reduce volumes by 15000 Boe per day with these curtailments back online and more than 80 development wells scheduled to initiate first production, we expect Devon volumes to increase by around 3% to nearly 600000 Boe per day.
<unk> in the upcoming quarter.
Moving to expenses, our largest field level cost category lease operating and transportation cost totaled $7 44 per Boe in the quarter.
This strong cost performance was 3% below guidance expectations and allowed us to hold our per unit cost essentially flat versus the year ago quarter.
Although we are experiencing experiencing moderate pricing pressure across several service and supply cost categories. Our team's proactive planning and thoughtful cost management has mitigated these inflation pressures year to date.
Overall, the strong cost performance, coupled with exposure to high higher value production expanded devins field level cash margin by 17% quarter over quarter to nearly $50 per Boe.
We also continued to control corporate cost in aggregate G&A and financing costs declined 13% year over year due to merger related synergies and the company's ongoing debt reduction program.
These structural improvements will help our margins remain resilient to inflationary pressures as we progress through the year.
Current tax adjusted for nonrecurring items was 6% during the first quarter given the higher commodity prices. We are experiencing we now expect this to approach 10% for the full year.
Cutting to the Bottomline Devins core earnings increase for the seventh quarter in a row to $1 88 per share.
A key contributor to this growth as lower depreciation rates driven by our capital efficiency improvements over the past several years.
This level of earnings momentum translated into operating cash flow of $1 $8 billion in the fourth quarter. After funding our disciplined maintenance capital program, we generated $1 $3 billion of free cash flow, which is the highest level of free cash flow Devon has ever delivered in a quarter.
With this increasing amount of free cash flow our top priority is to accelerate the return of capital to shareholders as we've communicated in the past the first call on our excess cash as the funding of our fixed plus variable dividend.
Our strong first quarter financial performance, we increased our dividend payout by 27% to $1 27 per share.
This distribution will be paid at the end of June and includes <unk> 11 per share benefit from the divestiture contingency payments received earlier in the quarter.
Another critical use for our free cash flow is the execution of our ongoing share repurchase program.
Year to date, we bought back another $302 million of stock.
As Rick touched on earlier since we initiated the program last November we've retired over 19 million shares driving growth on a per share basis by 3% with.
With the board expanding our share repurchase program to $2 billion. We now have just over $1 billion remaining on this authorization and expect to continue to opportunistically buyback stock as we progress through the year.
We also have returned value to shareholders through our efforts to improve the balance sheet in the first quarter, our cash balances increased by more than $350 million to a total of $2 6 billion.
With this substantial liquidity and our strong cash flow generating capabilities, we expect devins leverage profile to push towards a zero net debt balance by year end.
Even with this advantaged financial position, we are not done making improvements. The next step in our debt reduction plan is to fully retire the 300 $390 million of 2027 notes that become callable in October of this year.
We will have the opportunity to retire another $600 million of debt in 2023 with the call of our 2028 notes in June followed by the maturity of another note in August .
And lastly, I want to highlight the outstanding returns on capital employed that we're generating based on our outlook for the remainder of the year I expect our return on capital employed to exceed 40% in 2022. This return profile places us in the upper echelon of the broader market today, providing further evidence that our <unk>.
Disciplined cash return strategy is working and delivering differentiated results with that I'll now turn the call back to Rick for some closing comments.
Thank you, Jeff great job I'd like to close today by reiterating a few things number one the execution of our strategy is delivering impressive financial results, you've just heard that.
Number two there is no change to our disciplined game plan in 2022.
Number three we are rewarding shareholders with record high cash payouts and number four we are confident we can continually and sustainably deliver this kind of performance for years to come.
Lastly, I'd like to reiterate once again, how proud I am of this team the results they are delivering and the reliable energy we provide our great nation.
The energy crisis, we're experiencing in certain regions across the globe is a stark reminder of how critical it is for the U S to have a clear and consistent energy policy to ensure our nation security and global leadership.
Oil and natural gas will remain a core source of energy for decades to come and this these be acknowledged and accepted with any energy transition policy discussions.
This transition is not in an event in time, but rather a multi decade endeavor that will require enormous amounts of energy from all available sources to meet the world's growing demand.
Energy policy matters, and if we Miss step.
VIX and economics will defeat platitudes, and Untether ideologies overtime.
At Devon, we're committed to doing our part by showing up to work everyday to responsibly produce low cost clean and reliable energy. We're also dedicated to bettering the communities in which we live and work by supporting investments in public education health care infrastructure and by providing high paying jobs to American.
Families.
I will now turn the call back over to Scott for Q&A. Thank you.
Rick will now open the call to Q&A. Please limit yourself to one question and a follow up this allows us to get to more to more of your questions on the call today with that operator, we'll take our first question.
Thank you. Thank you would like to ask a question. Please press star followed by one I will now turn thank you Pat now when preparing to ask your question. Please ensure you're on mute locally.
Your line. Please press star followed by.
Our first question is from Aaron Jr.
Of J P. Morgan Your line is now open. Please go ahead.
Yes, good morning.
First question is just on cash return.
The updated.
Outlook is for dividends at $4 75 per share.
On slide seven.
And you highlighted two potential uses of cash.
B.
The balance sheet of $1 billion over the next couple of years and then.
Call It just over $1 billion left.
On the buyback authorization so.
Record Jeff.
Given how.
I may be up to around 400 million.
And cash return.
Debt reduction this year.
Is it fair to say that.
That there is enough cash to deliver on the full buyback this year.
Hey, Ryan This is Jeff yes, the short answer is absolutely yes.
As you know well.
We continue to kind of evaluate each quarter the financial framework that we've laid out to the street and obviously discussed it in great detail with our board. Our first priority is always to make sure we feel comfortable with the leverage and the balance sheet. We're in great shape. There as I mentioned in my prepared remarks, we've got $400 million, we'll take out.
This year and then another $600 million.
Into next year, and frankly, if you look beyond that and $24 25, while the option to take down another 1 billion and a half of debt. If we so choose as we work our way out into the future, but right now given the strength that we have with the balance sheet.
Really focused on delivering on that fixed and variable dividend commitment that we've made and then beyond that we're incredibly excited to buyback our shares given the current level that we see and kind of how we're trading.
Not not just versus our peers, but versus the broader market. We think there's a real opportunity to create some real value by buying back our shares and so youre going to see us continue to lean into that as we work our way through the year and hopefully our track record is a pretty good indicator of our behavior, which is each quarter, we've continually added to that and and.
And added to the capacity and our ability to go after that.
Great and just my follow up.
Have seen over the last week or so a couple of.
Permian gas takeaway projects being announced Tam has got an open season on our pipeline.
And wessler reached.
Yesterday I believe I was wondering if you could talk about.
What type of solutions.
Kevin have in mind in terms of mitigating the risk of.
Gas takeaway challenges.
Next year, just given the production growth in the basin.
Yes, you bet Arun I think you and I discussed this question on the last quarterly call as well just as a reminder, currently our setup.
With our production out of the Delaware about 50% of our of our current production in the Delaware, we have firm takeaway.
That we own and control and move those volumes out of the out of the Delaware basin to the Gulf Coast with the remaining 50% about half of that we actually sell.
Two counterparties on term sale deals that actually have firm takeaway capacity as well out of the basin and then the remaining 25% of our production a day actually sits there in basin and so that's the current construct for that we do share the concern that the broader market does around takeaway for for gas out of the basin.
As you move into 'twenty three 'twenty four so we are actively evaluating different opportunities to move more of our gas out of basin.
If the value proposition makes sense as we as we work our way through that.
From a from a price standpoint again, 50% of that production is getting Gulf coast pricing and then the other 50% the way we have been trying to manage that and mitigate any impact to differentials is through our hedging program. So youll youll see in our hedging disclosure that we that we outlined last night, we have a significant amount of our production Thats in basin gets in invasive.
Pricing, we've actually hedge that for this year and well into 2023.
Thanks, Jeff.
Our next question is from Neal Dingmann of true Securities. Your line is now open. Please go ahead.
Good morning, guys first question for you as an investor recognition specifically.
We're talking to you would seem to suggest now that.
You guys think youre being rewarded for the outsized dividends and I'm, just wondering given how well the stock's done, particularly well 18 months I know a number one the S&P last year.
What other areas do you think you and clay would talk about it other areas, where you still think that investors might not be fully appreciated or appropriately rewarded you all yet.
Well I still think I think we've been rewarded to degree with our dividend framework.
That strategy and the execution of that I believe that investors are.
Going to continue to reward us for the predictability the transparency of what we're doing but I still think fundamentally that when you look at it.
I mentioned this in our prepared remarks is that.
We're fundamentally undervalued when you started looking at the multiples.
<unk>.
Returns people are going to see from us over the next several years and I think that's that's something that it's.
It's not just us, but I think it is especially us, but it's not we're not the only company that I think there needs to be just a fundamental.
Change of thinking.
With all of us on water expectations are when we can.
Consider our multiples relative to virtually any other sector in the broader market and I.
I think it was a great setup.
You heard clay give you some ideas on.
Some of it not only ideas real examples of what we're doing from a creativity standpoint.
Addressing supply chain issues, you've heard Jeff talk about some things we've done on.
The gas takeaway. So many of these challenges we always we always.
Think that we're going to be step or two ahead of the competition and it's double than the competition, but issues that are that are coming our way that could be problematic for us. So I think that all we need to do to just keep being ourselves and keep delivering being transparent and I think it's going to work out just fine clay you want to add anything else.
Neil I would just add to that I think what is undervalued and the story is the repeatability.
This is not just a one quarter kind of splash.
The business model the depth of our portfolio the quality of our portfolio and how those the business model meshes with that portfolio to create a sustainable.
A return to the shareholder in a very tangible way I think still comes in time I remember a little over a year ago, we issued our first variable dividend. There was a very positive reaction, but I think the consensus was yes give us a few quarters of repeatability and then we will be able to draw a line through the <unk>.
<unk>.
I think now that line has been pretty established and of the remaining question is how far can we extrapolate that line and I think what we are continuing to show from our portfolio as.
As we talk more about our ability to deliver in various phases of the cycle I think that repeat ability and longevity will soon come to be valued as well.
Yes, Greg I don't think you have low cost of capital, even even being considered as well, but lastly, just on the second question could you talk about maybe asset allocation specifically.
You talked about the repeatability I'm just wondering given the entire move of the natural gas strip and a consideration of allocated more towards Anadarko or still is that just not completely mitigate I know how good the Permian returns are so again.
They sort of challenge to have I'm, just wondering how it.
Any outlook over there.
Yes, thanks for bringing it up I'm, a big fan of mid Con and with the team. There is doing I think we are really significantly moving the derisking of that that program I think we will.
To see dollars going to it to it in a very material way as they are this year I don't see wholesale changes moving away from the Delaware, we have incredible depth of inventory, there and Thats always shakes out at the high end, we stress test the portfolio a number of different ways, we move gas relative to oil and what have.
<unk> as you may reallocate inside the Delaware, but it continues to drive most of that investment a ballpark, 70% to the Delaware Basin remember, we have some deeper gas gas year options inside the Delaware that we barely have scratched the surface on so it's.
There's a lot of significant upside around the portfolio, but I don't see a wholesale change from us being a predominantly Delaware basin focused organization.
Well said thanks guys.
Thanks Neil.
Our next question is from Jeanine Wai of Barclays. Your line is now open. Please go ahead.
Hi, good morning, everyone. Thanks for taking our question.
Morning, Jeanine, Amy just following up on some of the good morning, maybe just following up on some of the other questions on natural gas.
We've heard a lot of talk recently about the role of U S natural gas in the global market.
560, a day coming out of the Permian, which is a good amount you mentioned already 50% of that going to cause an FTE theres additional FTE, that's getting announced.
How are you seeing devin potential participation in the global gas market. We know it's not a short term call kind of given LNG export capacity, but for me and it's got a long runway of inventory we heard from our peers. This morning that the economics don't really look so good for LNG right now so I'm just wondering how youre thinking about that for Devin.
Hey, Julien this is Jeff. Thanks for the question, Yeah, absolutely nailed it and highlighted that we've got a significant.
Portfolio of gas, obviously, just just under a Bcf a day. So it's something we think a lot about we do think theres going to be opportunities to capture.
A better realized price for our gas longer term given the LNG dynamic. So that's something that we are actively evaluating and thinking about don't have anything to announce today.
But certainly something Youll youll hear more from us about in the future as we get further into those opportunities and determine what makes the most sense.
Okay, Great and then maybe a follow up is on the balance sheet.
Jeff you mentioned getting to zero net debt by year end, if prices fall, but.
You are also not done paying off some debt early in 2002 and 'twenty three.
It's been pretty obvious over the past couple of years that a strong balance sheet as a strategic advantage. So is getting to net cash something that you're comfortable with maybe down the line.
Actually getting there.
Closer to the end of 'twenty 'twenty, four even with a healthy variable on buyback program. So it is net cash something you're comfortable with is that ultimately a goal or do you think it's really too inefficient use of the balance sheet. Thank you.
Yes, you bet Janine.
Fundamentally we want to get more and more cash back to shareholders. We've been I think we've been pretty clear on that with our framework and finding ways to do that creative ways to do that from quarter to quarter. So I think that will continue to be the mantra for us in the behavior that youll see us pursue from my seat I never I've never fast with building cash so I'm always happy about that and certainly it gives us.
A lot of Optionality and flexibility as we as we execute execute our game plan, but certainly were cautious given the inflationary environment. We're in.
Sitting on cash is probably not the most productive thing that we could do so we're always actively evaluating different opportunities in different ways and debating those ways with the board as to how to get more and more of that cash back to our shareholders. So that I think youll continue to see our framework evolve over time.
But certainly will be consistent with what we've outlined in the past.
Great. Thank you.
Our next question is from John Freeman.
Raymond James Your line is now open. Please go ahead.
Okay.
Good morning, everyone.
John .
Our first question, we've been hearing everyone sort of talk about this earnings season, the supply chain issues and everybody is dealing with and sort of the tightness.
And the service side of things and I'm, just curious if sort of going through this caused any sort of changes and maybe the way that you. All go about either securing raw materials, maybe how can our plan further in advance and where the service side of things. If there is any willingness to maybe look at adding longer term.
Contract everything you all would have in the past given cardiology steady state level of activity.
Maybe isn't as sensitive to commodity swings that where maybe we would have experienced in the past.
Hey, John it's Glenn Thanks for the question, Yes. The answer is we do need to think about things differently. I can think of a number of kind of slight modifications to our normal course in the first one that comes to mind is I Love innovation I Love change I Love, What's the next what's the $1 one.
Was the one point to 1.2 is working how do we get to one three what we've talked about internally here is the necessity out of being a little bit more sticky and our designs and as we think about facility designs. A perfect example, we may have that great next idea and we just put that into practice.
A brilliant mind from the fields that hey, if we just did it this way be even better.
In this environment, we need to be a little bit more sticky with our designs and what I mean by that is working with our supply chain telegraphing not just the normal three months or six months lead times, but nine and 12 months. So what you'll end up seeing is and you don't see this on the external but internally instead of a $1. One we may wait for it to point out.
Innovation to make that next change.
That's just the cost of the current situation. The other thing we're being very cognizant about our.
Our suppliers and very importantly, our suppliers' suppliers one of the great questions I love asking of our <unk>.
Partners is what's your potential supply constrained supply chain constrained and how are you mitigating those and so as we think about aligning with partners that have more service company partners, who I'm talking about as they have more sophisticated kind of vision into their own supply chain that gives us greater confidence in aligning with them.
Because if they fall short that means we fall short in the whole thing falls apart. So there are several examples that we think about.
As we talk rig contracts are always a great proxy as we think about interfacing with our rig contractors.
We ask what's a well to well contract look like with a six month 12 month 24 month looked like and by talking company. The company, you'll kind of get a feel for their essentially their supply demand middle of the supply demand curves internally and we will make decisions on who do we think can complement one versus another.
Trying to do is blend a miss.
Mix of short term midterm and long term contracts. So that we stay current in the market and also mitigate.
Significant run ups in a short period. So there's a lot of things that are probably more normal course, and this part of the supply chain. This kind of hyper concerned around supply chain I think everything is kind of just dialed up to 11 about how we think about these things and really try and protect outside downside.
That's great. Thanks, Clay, if I guess, if I just followed up on the operational side. It was nice to see the sand mine.
Come on wireless this quarter and you mentioned that there were some opportunities to deprecate that anadarko in the powder.
I'd be interested in sort of on the timing on those two fronts, and then as well or if there's sort of an appetite to expand.
The Delaware sand.
Above and beyond sort of what it's doing now supply and 25% of the al <unk>.
Yes. Thanks for the question. This is just an example project of a lot of things we have.
Kind of under the radar that we're working on to take a little bit more control.
And make sure that we have at least a base load of supply sand is one of those things that nobody worries about until it's an issue and then it's a major major issue and so owning the surface as we did kind of keeping an eye on the horizon, what everyone else is doing we saw an opportunity here and it's still we're still we've got startup issues, we are still running.
This thing just ramping up the activity and so I would say, it's a little too early to talk about significant expansion, but really really pleased about this as a project as I think about the ESG World I think about projects that are environmentally better that are safer.
Save money that just absolutely to do the right thing and then help us from a supply chain perspective. This was one that checks all the boxes. So really excited about it as we talk about other basins. It's different in each basin, it's a pretty unique situation for us to own so much surface right in the middle of the heart of one of our biggest fields.
We don't have that luxury in other areas. So you look at it a little bit differently partnering with landowners or even partnering with sand contractors to make sure that we have that kind of this ability very close to our the heart of our operations and still achieve at least most of the benefits associated with it.
Thanks, Cory I appreciate the responses.
You bet. Thanks, John .
Our next question is from Matthew Portillo of GP Hate. Your line is now open. Please go ahead.
Good morning, all thanks for taking my questions.
The first one might be for Rick Rick.
You have been able to pull together a very impressive portfolio.
Through M&A transactions at the right time through.
Through the cycles over the last couple of years and I was just curious how you feel about the current M&A market.
A bid ask spread perspective, and how that might compare to continuing to return capital via buybacks to shareholders here.
Yes. Good question, Matt We talk about this all the time and certainly.
Kevin will always be a company that.
Stays.
Kind of in the no so to speak and with whats in the market that doesn't mean, we'll participate will diagnose urea, we'll have some kind of a.
On idea of evaluations.
Bar standpoint, nothing really changes I mean, we have we've always had a real high bar of asset purchases or timing and even of sales.
And.
Nothing's really unchanged in our framework.
Our number one priority as you've heard of <unk>.
<unk> several times a day and is returning.
Cash back to shareholders and returning value back to shareholders.
And.
Really really excited about our outlook, that's why we're so constructive owner share repurchase.
The program to be honest with you. We just think were fundamentally undervalued and.
And so once again that that makes a potential acquisitions more challenging because it.
Fundamentally just has to be very accretive to us and we feel that it makes sense and so.
Nothing's really changed from what you've seen over the last several years really.
Perfect and then as a follow up just on natural gas again, you, obviously have the Dow JV, which has been a homerun it looks like for both parties.
It uses the return profile for the Anadarko development program, just curious more broadly speaking is there an opportunity to potentially form similar JV going forward to pull forward. Some of your gas your inventory and take advantage of the current improvement in the forward curve for both I guess natural gas is.
Well as Ngls and some of the lighter streams on the hydrocarbon side.
Yes.
It's a good question and its always something we could do Matt, but I can tell you that the Dow JV is really.
A nice setup for US you mentioned the NGL exposure that is tremendous here.
In the Anadarko.
And clay talks about how the team is getting more and more confident in those returns and certainly on a promoted basis, they're absolutely phenomenal. They are just really really strong.
When you start thinking about.
JV in other areas, we have exposure to gas I mean in the first place.
We have most exposure to gas will be the Permian really I don't know that we have a strong appetite to do a lot of.
Gas Jv's down there right now it just doesn't seem like that makes.
A lot of sense for us I think we're going to continue to focus on.
Developing the higher liquids, where you're 50%, 60% crude oil plus the Ngls, thats, where youre going to get some real rule.
Real margins.
Induced your return so I think for US right now we've got a great set up.
You'll see us really having a strong appetite with these kind of commodity prices to move into another gassy basin and set up some some type of a JV there I don't think it makes sense. So.
Sure.
I think we will just really stick with what we have right now makes probably the most.
Most sense for us.
Yes.
Thank you.
Our next question is from Doug Leggate.
Bank of America. Your line is now open. Please go ahead.
Thank you good morning, everybody.
So Doug if I may one on inventory and Jeff.
Hey, good morning.
One of the inventory and Jackie no I've got to talk about the variable so ill do that second if you don't mind.
So in your remarks, I think you talked about you've got deeper gas opportunities in the portfolio on slide 20, you show us.
Two and a half dozen sorry 4000 locations.
Current inventory and up to another two and a half dozen. So my question is presumably that includes the gas sensitivity and I guess the question I am really trying to get.
That's about a 15 year inventory at your current pace, including the two and a half dozen.
How does Devon avoid being a third smaller five years from now on is inventory debt.
Hey, Douglas Clay I'll I'll take that one so there's a couple of things happening in the inventory and remember we we try and show this slide to give confidence around the next running decade.
I had to update the slide today, I'd say I feel as confident as I did a year ago, and our one or excuse me one decade.
<unk> ability to deliver very high returns at very competitive cost structure.
If you recall that slide is all based on a 33 excuse me a $3 $55 world and so certainly as that commodity price runs up the whole.
<unk> of those opportunities come up as well and the quality of those opportunities come up now remember we're still looking at other deeper horizons as an example in the Wolfcamp in the Permian that adds to that inventory. The work that we're doing in the powder that adds to that inventory. Some of these things that some of our.
Presented in that upside piece and then there is additions that we didn't even consider in the upside what I would expect as we March through the years that this is kind of a rolling 10 years out in front of us.
We will certainly look to augment we've done a great some great things in the past with bolt on acquisitions right in the heart of what we're doing our land team continues to do a great job of trades that bolsters. These numbers as well and then of course, the kind of literally exploration kind of under positions that we already own also adds.
Are these positions. So there it's a moving target certainly commodity price helps where we're not we're not just relying on higher commodity price to add to the quantity and the quality of this portfolio look.
Yes.
Just a clarification in place so the two and a half dozen additional.
My read of it that was the impact of the higher commodity types. So you're suggesting there is upside for the six months.
Yes, there is additional upside.
Okay. Thank you my follow up Eric is probably for you or for Jeff.
Been a lot of comment around you think their stock is undervalued, but youre getting a lot of help from gas today obviously.
The other things going on with the whole sector, but your share price is pretty much flat since the oil price drop coming up at the beginning of March.
On the RIN.
Renewables are the variable dividend will be paid out on the 13th of June So thats coming off your balance sheet.
Which is net negative for your equity.
You increased your buyback by 25%, but your variable dividend has been more than that.
So my question is.
How does how does the commentary around how cheap the stock is.
With the continued commitment for a nice size variable distribution, which erodes your equity value.
Post a really stepping into the buyback program.
I think just fundamentally all of our questions.
I think some investors grapple with it and quite honestly, we've debated over the last.
12 to 15 months is.
Is it an either or we felt like the most of the most of the investors. We felt like were giving us very very candid feedback they prefer that return of cash today.
Today, rather than than share repurchases as we've gotten into it.
I can tell you that we become more and more convicted we continue to.
Debate this with internally here and with our board.
And we just feel fundamentally that.
The curve is heavily backward dated but it's been wrong and that's why you continue to see it come up and this was not just the Ukraine.
The horrible situation, Ukraine, driving it certainly is up.
As we all know that it's a factor but but.
We have become more and more convicted.
Share repurchases, Michael makes a lot of sense for us and but it's not just an either or.
So we're going to do both in a matter of fact, we're not just doing both we're doing the third thing.
Aggressively paying down debt. So all of this creates value to our shareholders. It makes the equity I think more and more more and more value viable and you start looking at the discipline we're employing.
When I look at.
The.
The equity performance Yeah, it's been been grateful we have done over the last 12 months.
I'm excited about that but I still think that at the end of the day. The story has just begun with energy and I think we continue to get.
That's what makes a market right you have people that pushback on thesis and people that pushback on perspective, but.
Ours was that if we.
It goes all the way back to the fundamentals of the merger that we announced 18 months ago, we felt like that it would make a lot of sense, we'd give us lot of a lot of runway to implement a variable dividend, which were both companies, we're very big fans of.
But we were able to accelerate that and as things that we saw the synergies we saw.
The opportunity to set up for the continued execution.
Managing through the supply chain. So that's why we just feel that fundamentally our equity is undervalued and that gives us the conviction to go out and buy.
Buyback and so we're.
We're going to have a multi pronged attack and I think that's the best thing we could do as a management team I belief.
I appreciate the answer Vic I guess, what I'm, saying is I think we prefer to see more of it.
The permanence in the transitory stuff, but but I will say one last thing I think we're all going to be closer view on closets, among tethered ideologies of what that expression.
That was all I was one is going to go down in the Annals of history I think thanks, so much.
Thank you take care and talk soon.
Our next question is from Charles Meade of Johnson Rice. Your line is now open. Please go ahead.
Yes.
Good morning, Rick Clay, and Jeff and the rest of the different folks on the call.
My first question I guess this would be.
For you perhaps for clay thank.
Thank you could you could you contrast for us the different ways, you may be experiencing inflation across the Rockies mid con Permian and dealt with the Gulf Coast and maybe offer a thought.
Your thought or two on what.
Sure.
What bottleneck bottleneck, maybe yet to emerge for you guys.
Oh do you want to add after that sure happy to yeah, I think of inflation and we use it kind of as a holistic term, but its supply chain and importantly, its people in any one of those can manifest in a headwind to our operations and so kind of break those apart a little bit thinking about supply chain or excuse me, let's start with inflation.
Just as a sense of rising prices thats, one component of inflation.
Actually one of the easier ones to manage its a little you can telegraph it a little bit more you can mitigate with contracting.
Alignment with suppliers.
That's pretty manageable in a sense the harder part of inflation and I'll stick to kind of that piece of it is maybe there is a time component.
You are having to go to your third or fourth or fifth favorite supplier, maybe there is a drag on.
Maybe when that well starts up that's an inflationary component that is really hard to mitigate.
Maybe there's some standby time or you are reaching for that your favorite supplier and they are always available. They are no longer available how do you bake that into your time component of inflation. There's one other component of inflation that can get you and you think about.
This is more people related.
The newness or the dilution of the talent when we're contracting we get a really run up in some of the best people in the industry. Most experience you might have a day company person in a night company person that are both 30 year people that are exceptionally good at what they do as that activity picks up that dilution of talent also can.
Cause a little bit of a drag we anticipate these things we work with this we always look for a safety potential and make sure that we mitigate around that turning to supply chain. This one is usually a little bit more of a contracting strategy. We think about the big exposure items of hydraulic horsepower rigs water sand steel.
That covers a huge portion of the cost structure and as a as a supply chain organization. They really focus on the long term view of that whats getting us and what's unique about this opportunity right now is it could be the transformer it could be the display on some.
Piece of equipment.
That is not it is absolutely inconsequential.
Cost standpoint, but is just as critical path to any one of those big ticket items. If we don't have them and so we're certainly very aware that there's things that have popped up that we try and stay ahead of we built a little more inventory.
Both on our own ticketing with our suppliers trying to make sure that we're staying ahead like I said in the question and answer earlier.
Asking our suppliers about their suppliers and kind of continuing to go down that line and hunt out where those potential constraints are and then finally, a little bit more on the people people could be truckers it could be the quality the quantity of the individuals we have out on location.
If you can't truck the equipment to location you can't do what you do so it's a complicated business I commend the team, especially our supply chain organization. That's thinking so deeply about this our operations team that are working and really.
The guidance for <unk>, but what was what was Devon has.
Like in that.
Is that storm blew through and is that.
<unk> average representative for what your guys' experience or Carlos.
Maybe what is the difference.
Yes, I'll rewind back just a little bit as we talk about weather I really didn't get to talk about it earlier, but in the first quarter we had.
For weather events blow through the teams getting better and better overall this was probably more mid con and Permian related debt.
That manifests during that during the course of the first quarter to respond to that to mitigate make sure were avoiding any safety events incidents environmental incidents.
Protecting the wells and then getting them back on and that was all baked into the first quarter results. We did have some downtime associated with that as you mentioned in the second quarter, namely in the month of April we had some fairly late spring massive snow events, mainly in Williston, but it also hit a little bit into Wyoming, our powder as well.
<unk>.
The range is I've heard from the field or 26% to 40 inches of snow over the course of just a couple of days, we had people completely snowed in to their house, not even able to get to the field to check on wells. The good news is with our modern operations, we're able to remotely monitor wells, but you can only do that to a certain degree.
<unk>, we can remote shut in wells, we have cameras on location. So you can visually see if anything's going on except if the whole field covered in.
Feet of Snow then it's hard to see even what's going on so we did have some downtime very significant we had a.
The weather event I mentioned and then the next weekend, we had a follow on another six inches of snow followed with some rain in Williston, a larger snow event in.
In the Wyoming and I can tell you the teams did a great job no safety incidents to speak of no.
Significant environmental events to dimension, we did have a production impact and as you mentioned it was it's all baked in the 80%.
I think thats way overstated for our operations I don't know with the source of that information was but we've baked our.
Our production forecast in accounting for all of this weather.
And just great work by the team our field.
Can't say enough about how great. These guys are.
Yes.
All right I see that we're at the top of the hour. We appreciate everyone's interest in Devon today, and if you have any further questions. Please don't hesitate to reach out to the Investor Relations team at any time, Thank you and have a good day.
Yes.
Okay.
This concludes today's call. Thank you for joining you may now disconnect your line.
Okay.
Yes.