Q2 2019 Earnings Call

Scott Coody, Vice President of Investor Relations, Sir you may begin.

Thank you and good morning.

On today's call.

A few preliminary.

And then turn the call over to our president.

Dave will provide his thoughts on the recent performance and strategic direction of New Devon.

Following Dave Tony Vaughn, our Chief operating Officer will cover a few operating highlights from the quarter.

And then we will wrap up our prepared remarks with Jeff written our our Chief Financial Officer.

<unk> comments on the call today will contain plans forecasts and estimates that are forward looking.

And many of which are beyond our control. These statements are not guarantees of future performance.

Following our prepared remarks, we will take your questions and with that I'll turn the call over to Dave.

On our.

So.

Hi, good start over because my microphones on on I apologize.

Thank you Scott and good morning, everyone. The second quarter of another outstanding one for the new Devon across the portfolio. Our teams are delivering results to continue to exceed production and capital efficiency targets.

We are successfully driving down per unit costs and maximizing margins.

Before we get into details of the quarter, let's begin with a brief overview of what defines new Devon.

For those of you, they're new to the story Devon is nearing the completion of this transformation to a U.S. oil growth company.

Allowing us to focus entirely on our world class oil assets in the Delaware Basin Powder River Eagleford and stack.

The simplification of our portfolio unleashes the potential of our U.S. oil assets, which reside in a very best parts of the best oil plays in all of North America.

Where we possess a multi decade inventory of high return growth opportunities.

With these advanced attributes new Devon is positioned to deliver sustainable growth and thrive in today's commodity price environment.

This is evidenced by several value enhancing accomplishments year to date.

First oil growth continues to exceed our plan and we are now raising our full year production outlook for the for the second time this year to a 19% growth rate.

This represents a 400 basis point improvement compared to our original budget expectations heading into the year.

Importantly, the strong low productivity driving oil growth higher is comp complemented with a step change in capital efficiency.

Resulting in a $50 million reduction and our 2019 capital outlook.

Keep in mind, our 2019 capital budget already had $200 million inefficiencies built in it too it compared to 2018.

So far this year, we have brought online 20% more wells for 10% less capital compared to 2018.

Any way you slice. It these are outstanding results.

We have also taken action to materially improve our corporate cost structure.

Our operated in June a cost savings initiatives are exceeding the plan by a wide margin and now we're on pace to achieve more than 70% of the $780 million annual savings target by year end.

The impact this savings plan is massive with that PV 10 benefit over the next decade of more than $4 billion.

This is equivalent to roughly 25% of our current enterprise valuation.

This capital and cost discipline translated into free cash flow in the quarter and coupled with our accretive sale of Canada. We have achieved nearly $3 billion of excess cash inflows. This years this year.

With these inflows we are delivering on our promise to reduce leverage and return capital to shareholders. In fact, our leverage has now declined by 80% from peak levels and we've returned more than $4 billion of cash to our shareholders through dividends and buybacks.

All in all it has been a fantastic start to the year as we have executed a very high level on every single strategic objective underpinning the new Devon.

And given the commodity price variability, we must navigate through in this space I firmly believe the investment of appeal of New Devon is further distinguished by our strategic approach to the business.

We all know there's been some messy and surprising results in the industry of late but I want to be clear about our unyielding commitment to excellence discipline and consistency of results.

New Devins financial driven model is designed to deliver peer leading returns on invested capital to generate sustainable cash flow growth.

In your growth rates and cash flow and to return increasing amounts of cash to shareholders.

And as you can see from our recent results. This model is working.

To get the key to this progressive and balanced operating model.

Is the quality and multi basin diversity of new devins asset portfolio.

Quite has some of the lowest breakeven points in MPS space.

This asset quality and low cost advantage allows us to build a margin of safety into our operating plans.

Which is demonstrated by our ability to fully fund our capital program at less than $50 Dwt I pricing.

Even after accounting for the recent weakness in gas and NGL strip pricing.

With our multi basin diversity, we have the capability to dynamically allocate capital between opportunities to optimize our rate of return.

This flexibility is evident with our recent redeployment of capital from the stack to higher return opportunities in the Delaware and powder River.

Lastly to provide an additional level of certainty to our operational execution, we are proactively managing commodity risk through an active hedging program and have taken steps to further fortify our balance sheet by aggressively reducing leverage ratios to less than one times net debt to EBITDA.

Put another way our operations are now backstopped by a fortress balance sheet.

I want to end my prepared remarks today with a few preliminary thoughts on our outlook for next year.

As I mentioned earlier, Devon is trending ahead of plan on all the operational objectives supporting our three year outlook and we have significant operating momentum heading into next year.

While it is still a bit too early to provide any detailed targets for 2020 I can tell you based on the trajectory of our business I expect efficiencies to continue to lower our breakeven capital funding levels.

And to further improve our corporate level returns.

Furthermore, given our low maintenance capital. We have is we have this substantial flexibility to deliver a desirable combination of ghosts of both free cash flow and highly competitive oil growth rates at today's strip pricing.

More specifically at the asset level, but we plan to allocate more capital to the Delaware to the Delaware to better leverage the well productivity and capital efficiencies. This franchise has had is delivering.

And we will continue to tailor stack activity to the current commodity price environment.

As our planning process firms up we'll provide more specific details on our 20 Tony outlook. This fall.

And with that I will turn the call over to Tony Vaughn, Our Chief operating officer.

Thank you and good morning, as Dave touched on new Devins operations are hitting on all cylinders and I'm quite pleased with the positive business momentum. We continued to demonstrate in second quarter each asset in our portfolio is executing at a very high level fulfilling its respective role in our portfolio I am quite proud of the results. The organization has generated and the strong performance as a result of the quality of our people.

And they are delivering results.

For today I will focus my comments on our Delaware Basin operations, which are the driving force behind Devon, New devins growth year to date.

Our high margin production in the Delaware continued to rapidly advance in the second quarter growing 58% on a year over year basis.

The key driver of this robust growth is the high impact wells, we have consistently brought online that rank among the very best in all of industry.

In the first half of the year, we commenced production on more than 50, new wells.

Diversified among the Leonard bone spring and Wolfcamp formations that achieved average 30 day rates of around 2500 Boe per day.

These high impact wells reflect the quality of our underlying asset base.

Our staffs top tier planning and operating capabilities and our willingness to deploy cutting edge technologies to improve well productivity and capital efficiency in the economic core of this world class play.

Looking ahead as we transition more activity to the Wolfcamp, which will account for as much as 65% of our program in coming years, I am confident in making that prediction that our wolfcamp well productivity and capital efficiency will improve from the impressive baseline we have established this past year.

Furthermore, with the substantial amount of acreage trades, we have completed in the state line area. Our future results will benefit from higher working interest in these high impact operated areas and for less exposure to certain lower returning non operated activity scattered across the basin.

With this world class leasehold position in the Delaware. Our team has successfully transitioned to full field development across a significant portion of our core areas. Our outstanding results year to date are benefiting from the learnings attain from the appraisal work we performed in prior years through this appraisal activity and our work in other plays across the company. We have a strong understanding of the subsurface that allows us to identify the best landing zones.

Understand parent child dynamics, along with the appropriate well density per section and deploy optimized completion designs to capitalize on that knowledge importantly through this process, we have learned how to better size and scale these projects to optimize capital efficiency and returns.

Our go forward development projects are striking a healthy balance between present value and return delivering an optimal outcome for shareholders overall as our results indicate we are well up on the learning curve and are very confident in our Delaware asset.

Specifically in the Wolfcamp formation, which will be our most active target going forward. We have a very good understanding of lateral and vertical connectivity. We have settled on a development spacing of the of about four to eight wells per landing zone, depending on the oil column pressure connectivity and the subsurface variability in southeast of Mexico. Our recent success with our fighting Okra and Flagler projects are examples of this pragmatic spacing approach and strong returns importantly, with our significant acreage position, we had the depth of inventory to deliver top tier results in the Delaware basin for many years to come.

At today's drilling pace to currently identified 2000 higher return risk locations. We have identified equate to 16 years of operated inventory. This inventory as a result of a detailed subsurface evaluation across our entire position rather than generalized acreage math.

With a depth of stack pay resource across the Delaware, We expect our high return inventory to continue to expand as we capture additional efficiencies and further delineate the rich geologic column across our entire acreage footprint.

Now I'd like to transition to a storyline that is often overlooked that critical to our recent success in the Delaware and that is the work we have performed in the field to improve the profile of our base production decline.

So far year to date, our gross operated based production has outperformed our budgeted expectations by approximately 10%.

This dramatic outperformance was the comp accomplished through the use of leading edge data analytics that has helped minimize downtime in the field. We have also successfully boosted existing well productivity through proactive gas lift and Rob rod pump optimization, while reducing maintenance costs. This thoughtful and innovative work is delivering some of the best returns and value uplift in the portfolio with minimal cost.

And lastly, I want to conclude my remarks in the Delaware by highlighting the good work that we have performed to maximize the value of our barrels produced.

Beginning with our oil realizations and major victory for US has been the avoidance of price decks associated with the new West, Texas Slide Index, we have leveraged our operating scale and acreage dedications in the area to attain multi year contractual guarantees that ensure we received Midland WT pricing with gravity project protection up to 60 degree a pie.

Coupled with a good work of our marketing teams have done in the hedging and firm transport front, our light oil realizations are near diabetes pricing levels and importantly, the regional gas price weakness experienced by the market has been mitigated by are attractive basis swap position.

On the cost side of the equation in the Delaware. We have also been able to lower expenses and enhance our margins through the scalable field level infrastructure. Our teams have built out over the past several years.

This foresight has helped us reduced per unit LOE costs by more than 60% from peak levels. One of the most meaningful sources of elderly savings as extensive water infrastructure. We have proactively built out we now have nearly all of our produced water connected to pipes. The infrastructure is fully integrated with eight recycling facilities 40 operated salt water disposal wells and several third party water systems with this infrastructure, we avoid the extremely high expense of trucking in the remote desert of southeast New Mexico that can easily exceed a couple of dollars per barrel and are able to source over 80% of our operational water needs from produced water at very low cost. The bottom line is that the hard work and thoughtful planning from our operations is paying off.

And our positions allow us to capture additional value per barrel that many of our competitors cannot.

And with that I will now turn the call over to Jeff written there.

Thanks, Tony I'd like to spend a few minutes today discussing the progress Weve made advancing our financial strategy and briefly provide context on several key metrics that are improving with the updated 2019 outlook, we issued last night.

A good place to start today is with our improving financial performance for the quarter, our operating cash flow increased 23% year over year to $623 million. This level of cash flow fully funded our capital requirements and generated nearly $60 million of free cash flow for the quarter.

With the free cash flow our business generated coupled with the proceeds from the sale of Canada Devins cash on hand increased to 3.8 billion at the end of June .

Subsequent to quarter end, we utilized a portion of this cash on hand to redeem $1.5 billion of low premium senior notes that were due in 2021 and 2022 with this redemption activity Devon is now completely cleared its debt maturity runway until late 2020 2025, given our strong liquidity, we expect to reduce additional debt in the second half of 2019, we will finalize the size and timing of our debt reduction activity in the near future, but we are well on our way to achieving our debt reduction goal.

In addition to debt reduction and other key financial priority as our ongoing share repurchase program, which is the largest program by a wide margin in the MP space.

Since the program began in 2018, we have repurchased a 125 million shares at a total cost of 4.4 billion and we are on pace to reduce our outstanding share count by nearly 30% by year end.

To advance our share repurchase activity in the second half of 2019, we expect to utilize cash on hand to reach our goal of 5 billion by year end any upside from higher commodity prices or asset sales would be earmarked for additional return of capital to shareholders.

I'll wrap up my comments today by covering a few key guidance items from our updated 2019 outlook. This updated outlook reflects the improvements of our retained business as it excuse me reflects the improvements our retained business has achieved year to date and incorporates the impact of Canada's restatement to discontinued operations.

On the production front as Dave touched on earlier, our light oil growth is running at least 400 basis points ahead of our original budgeted expectations.

For the second half of the year, we expect the strongest oil growth to occur in the fourth quarter driven by the timing of activity in the Delaware.

This production profile positions us with strong volume momentum heading into 2020.

Importantly, we are delivering this incremental oil growth with better than expected well productivity and capital efficiency because of this positive trend, we're lowering the midpoint of our capital spending outlook in 2019 by $50 million to a range of 1.8 to 1.9 billion.

We also continue to make substantial progress on the cost reduction front with a scalable growth we are achieving in the Delaware and the powder River, coupled with the benefits of Canada exiting the portfolio. We project total company per unit LNG cost to improved 15% versus our original budget.

Our DNA initiatives have also delivered a steady cadence of successful cost reductions year to date.

We estimate that we have captured approximately $190 million of overhead savings to date on a run rate basis, and this momentum is projected to reduce DNA by more than 15% versus our original budget.

With the progress we've made year to date, we are well on our way to attaining more than 70% of our 300 million three year savings goal by the end of 2019.

Shifting to interest expense with the $1.5 billion debt redemption, we completed at the end of July we are lowering our net financing cost forecast by approximately $50 million to a range of $250 million to $270 million. All in all we are executing at a very high level on the key financial objectives underpinning our three year plan, we have significant operational momentum heading into 2020, and we are positioned to deliver free cash flow and attractive growth with that I will turn the call back over to Scott for Q and a.

Thanks.

Thanks, Jeff We will now open the call to Kuni. Please limit yourself to one question and a follow up if you have further questions. You can re prompt as time permits with that operator, we'll take our first question.

Thank you at this time I would like to remind everyone that in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile it came in a roster.

And our first question comes from the line of ever in Tehran from JP Morgan Your line is open.

Yes, good morning.

You mentioned that you're now and call it pure development mode in the Delaware Basin. So just wondering if you could talk about some of the implications.

For capital efficiency wise.

I perceive that your capital efficiencies improve and then maybe give us some more details.

What's going on there and also maybe you could shed some light on the.

Thanks, Ted surprise that you could get.

Some acreage.

In that neck of the woods, and Todd, which has been really productive rock.

Good morning earn this is Dave I'm going to start off with just a summary comment here and then we'll turn it over to John rains, who is our.

Delaware Basin.

A vice president of that business unit to give some detailed comments about what you asked but I think that is you hit on the key one of the key elements about new DAP and that we have to continue to emphasize is that in the Delaware basin and in most of our plays we have moved out of.

An era, where we're doing quite a bit of the appraisal work and moving into more a much higher percentage than pure development work that leads to increased capital efficiency lowering of the well cost drilling the best wells in the best sound higher rates.

And also.

Obviously allows us to lower the well costs as we have consistent capital are consistent rigs in the same area and and so you see higher quality results and you see very consistent results. We've demonstrated that clearly with the first two quarters of results from 2019, and we will continue to deliver on that in the future. So with that I'll turn it over to John to answer more details about what that means.

Hi, This is John Thanks or answer the question. It's a good one it's one it's a story I am pretty excited to tell I think to properly tell the story.

Ill take you a little bit back to 2018. So if you go back to 2018, specifically with respect to our Wolfcamp.

We really leaned in.

On developing two mile laterals and when we did that we had a lot of learnings from these two mile laterals and I'll talk about some of those specifically.

So on drilling head as you noted in the Ops report, we've improved our performance by 20% on drilled feet per day.

These improvements are largely driven by.

Moving away from a pure slim hole design to a slightly larger hole and casing sizes.

The result has seen better tool reliability, better our over RFP or rate of penetration and significantly reduced NPT.

On completions as noted.

We've seen about a 40% improvement in feet per day.

The real driver here is much more consistent work with our dedicated Frac crews and we've also engineered.

Certain more prevalent problems out of the system.

To date, we've seen fewer horsepower wireline tow sleeve issues that again, we're much more prevalent in the past and this has significantly reduced our NPT.

I'd also note on completion completions that we've reduced our flat time, so our flat time as essentially the time it takes to swap wells on a zipper job or two rig up in rig down.

And to say that differently weve basically substantially improved our on site logistics.

And then finally for facilities.

We successfully deployed our first standardize train design on our Flagler project.

Versus our 2018 baseline this project delivered facilities at a per well cost of roughly 50% versus our baseline.

This new designs really brought some much needed standardization to our facilities.

And the simpler design has result in less equipment and associated cost much lower construction cost and other supply chain savings I think you had to look at our total cost. In addition to just the cycle times, we've mentioned in our.

Operations report.

By year end, we feel pretty good that we're going to be able to reduce our non wolfcamp wells tend to 15% total.

And that does include some larger completion designs on some of those wells and if we look at Wolfcamp, we're really striving towards a 15% to 20% type of reduction so very proud of the work that the team's done there.

Acreage trades, Yeah ran I think your second question was around acreage trades and I bet, you're more specifically, referring to the 5500 acres at Todd.

And so this is also a pretty fun story to tell and I think it shows.

How how much success and you can create by having a really intentional effort. So the 5500 acres again to go back in time.

Has to be considered as a multi year effort.

If you really go back to the Todd area. This was an area that the team identified early on as being a good Zip code.

I think I've referred to.

The parent boundary rate or well being drilled several years ago, even on a previous call.

So it was really at that point that the team got pretty creative about consolidating our position here and upping our working interest as for the 5500 acres itself.

This is really a product of the team being creative in the land team in particular being able to execute on our consolidation strategy.

This acreage it did not come to Devon via one or two large deals.

Rather this acreage came to Devin over the course of three years and over the course of more than a dozen trades.

These trades ranged in size from a smallest 40 acres to is as large as 2000 acre. So you can see that the teams really been effective in the hand to hand combat out here.

Great and just my follow up to that you guys have had put out previously called a 12% to 17% I believe.

The oil growth target from the new Devon properties.

This morning, or last night, you highlighted more capital going to the Delaware.

From the stack. So I was just wondering if you could maybe give us a little bit more thoughts on.

Initially how you're thinking about how much capital would shift from the Delaware is it a rig line or two or or just maybe some broad thoughts on that.

Well, we're still working through the details of that.

Rune and we're doing a lot of.

Modeling work on our 2020 capital program to determine what provides the optimum efficiencies.

But I, we did directionally in my comments I did directionally guided Delaware capital will continue to increase in 2020, and obviously rightfully. So when you see the outstanding results. So were delivering there and we're delivering good results by the way in other parts of our portfolio is not that others are failing to shifts of tennis is succeeding so well and thats why were able to increase our production guidance and lowered our capital guidance. So we don't I can't give you specifics at this point, we're continuing to look at various scenarios and obviously is a great place to be we are getting even more capital efficiencies than you. Originally estimated to think about what the options you have when it comes to our 2020 capital program.

Great. Thanks, a lot.

Our next question comes from the line of Doug Leggate from Bank of America. Your line is open.

Thank you good morning, everybody.

Dave I'm not sure who wants to take this one but just looking at the cash margin disclosure that you've given us which is obviously very very helpful.

The highest margins in the portfolio right now is in the powder River.

So I'm wondering if you can just give us an update there as to how that translates to returns at the well level because obviously if embryonic play if one assumes that well costs are still.

Being optimized I'll just discuss how you see the evolution of the play as it relates to the risks the inventory and.

Just the relative incremental capital allocation might evolve towards suppose it overtime, yes, you're right and Doug and good morning its a.

The powder has the highest oil percentage of any of the plays that we're involved in and so that play does have very high margins associated with it and.

Obviously as a very sensitive into oil prices. The returns that you generate on that play. So we're extremely pleased with the results are getting so far and the powder. We're we've now entered into the full development mode on a low risk.

Turner play.

That will constitute the bulk of the growth that we're going to realize over the next three years and in we're excited as well about the Niobrara.

We have not said too much about our first niobrara, well or just flowing that well back at this point, but so far so good I would say one thing to be cautious about by the way on the Niobrara is.

What you really can't compare our Niobrara too.

While other industry players Niobrara are out there we are at the peak.

And from a thermal maturity standpoint, we are in the heart of the oil window throughout the geologic call them, including the Niobrara on our acreage and that is not the case for some of the industry. Other industry players that have a much more gassy content to the Niobrara. So we're excited although again, that's the smaller part of our overall growth story over the next three years, but the returns are very competitive with those in a rest of portfolio and that's why we have four rigs working out there right now.

Just on the wrist inventory therefore some.

What would you say is the current.

Gross inventory if you like versus the.

I guess they are 900 locations that you've identified to date.

I'm going to turn it over to give you a two weighed hutchins to give you the inventory number.

Good morning, Doug.

As you see in our.

Main inventory disclosure slide the high quality risked inventory for the Rockies is sitting at about 650 gross.

Operated wells.

And again I'll, just remind you on all of that inventory, we've stripped out any non operated locations and we've also stripped out any risk locate our unrisked locations and we're just focused in on those locations that we think we can drive high quality returns on.

The the inventory is a balance between all of those targets that Dave noted a moment ago, including some very high return Parkman and teapot locations.

And so when you look at it from an unrisked basis, the numbers, obviously get a lot bigger.

Those are those are very.

Kind of preliminary.

When we look at it from a total unrisked basis, we see several thousand Rockies operated located.

And again, we're in the middle of trying to unlock that today with some of the appraisal work we're doing in the Niobrara. We would note also there are several other prospective targets that other companies are are testing, we're watching that very closely as well.

Appreciate the answers guys my follow up hopefully a quick one Dave just the the reallocation of capital from the stock and I guess the Eagle Ford is.

By seeing some activity it seems can you just.

Clarify are these should we think about these assets just as EPS growth or absolute declines, particularly in stock on a similar context, just what are the triggers it might cause you to change activity levels.

If if oil stays on the pressure.

Hi, Doug <unk> and for everyone. I think it's important to understand that we really have a dynamic capital allocation model and what that means is that we really look at water generating the highest returns throughout our portfolio and we obviously take into account.

Commodity price commodity prices, when we make that decision.

We have the ability with the inventory levels that we have to grow any of the assets. If we so choose but we don't think about it so much about whether or not we are growing and individual asset are not we allocate our capital to what we consider to be the highest return opportunities.

And then in a growth as an out as an output of that given where we think we're getting the highest returns. If we were less dynamic frankly with our capital we could just we get allocated more proportionate to all of our plays so that they all grow because we have the inventory to do that but we don't think that's the way to optimize the value of the company.

So with this obviously you've had some weakness and gas natural gas and NGL prices here and with that we have made the decision to reduce the activity somewhat in the stack and.

Reallocate that capital out to the Delaware and the Rockies given the higher returns and at this point.

Again I appreciate the answers there thanks, a lot for your time.

Thank you.

Our next question comes from the line of Gennine wave from Barclays. Your line is open.

Hi, good morning, everyone.

Good morning, James.

Good morning. My first question is on capital allocation I'm can you just discuss how you weighed whether to reallocate that 50 million and stack capex versus just taking it out of the schedule and reducing the 2018 budget by 100 million instead of $50 million and I know, it's a pretty small amount, but I mean, there's a lot of good things going on you're on track to meet or exceed your oil production targets you raised oil got already twice. This year, you've got the three year plan that already has a competitive growth rate and I guess you know one can argue that the market's not paying for growth but for disciplines. So I just wanted to understand how you're thinking about this because I know spreadsheet math is different from how things work operationally.

[laughter] on guard you appreciate that [laughter].

It's oh.

You know I think you could make the argument frankly, not just about that 50 million, but you can make the argument about capital in general but.

As far as what the right levels of capital or.

In the program, we did it to optimize the capital efficiencies that we have.

In both the Delaware and.

In the powder River basin to optimize returns.

Optimized.

The interplay between drilling rigs and completion crews and to maximize the efficiency, but between those and so we felt that that was going to maximize returns and the right decision to do I think it's a totally separate discussion that you could ask of us or everyone else every other CMP companies, what the right level of.

Capital allocation is and what's the right mix of competitive free cash flow yield and growth and certainly we think we're in a position to deliver on both of those and that's certainly what we're looking at.

Going forward into 2020.

Okay, Great and then that's very helpful. Thank you. My second question in terms of next year, I know, you're not giving any detailed guidance or anything right now, but can you talk about generally what your appetite is for activity in the stack if strip pricing Holden I'm pretty sure. This isn't a target, but you know how much activity is required just to hold that asset flat. These days and then.

Are there any overriding considerations in terms of having to maintain a specific a minimal amount of activity in the play him, it's pretty mature so I'm guessing there's no real HBP requirements or anything, but you might have some other.

Transport agreements or something.

No. There is no there was no firm transportation that drives that capital allocation. There's no held by production issues at all it is simply optimizing returns and again as optimizing returns across the entire portfolio.

We are currently having the bulk of our activity in the what we call the volatile oil portion of the of the play.

And those returns and we have on our revised type curve that we put out previously.

We're meeting or.

It was not an or driving down the cost of those wells extremely efficiently and those returns compete.

For capital with everything else in the portfolio.

Obviously, as we move outside of that in future years.

More into what would be considered the gas condensate window, and even perhaps the dry gas window.

The resources there the resource is very strong.

And the opportunities are there, but with the recent weakness in natural gas liquids.

And Nancy.

I cannot or gas prices, Oh, well, that's why we reallocated the $50 million out and we're looking very closely at any activity.

Outside of that and considering.

Whether we want to bring in a joint venture partners on a small or a larger scale to help us with any activity there to really dramatically increase our capital efficiency and make those opportunities compete for capital.

Okay, Great. That's very helpful. Thank you very much.

Thank you. Our next question comes from the line of Paul and Greg will from Macquarie. Your line is open.

Hi, good morning going back to the commentary on the base decline mitigation was interesting I was wondering if you could talk about further upside that might be seen through that if that's being applied to.

Other plays within the portfolio and then maybe the overall impact to the corporate decline rate that that could have either initially or over time.

Yes, Paul.

Well, that's a that's an area of focus that we've put in the company probably about a four or five years ago and I think over time, we've described our commit commitment to being a data driven.

During that process, we've installed automation and virtually all of our producing assets across the.

The portfolio.

We have what we call decision support centers in each of our producing areas. There man 24, seven generally there are the source of all this data driven a work we're actually now look having the ability to look at information on all of our artificial lift equipment and wake in spot.

Pending trouble on some of our of artificial lift.

Pumps and gas lift operations, we have the ability to predict.

Failure as opposed to just running towards failure.

We have the ability to bring.

The the replacement pumps to location have the crews available and ready to go before wells actually go offline.

So the guys have done a really good job the incorporating this stop process across the the organization we heard US talk a little better described what is going on in the good work that the Delaware Basin team is doing a lot of that same work is happening across the.

The area other areas as well so we think it's material to.

The business as John described having 10% uplift in our in our base operations with virtually.

Very little cost associated with that is a is an increment.

Not sure all companies.

Appreciate and focus on so.

Appreciate your interest in that as well as good quality work by our operating people.

Definitely definitely interesting topic, and then I guess, maybe maybe changing a little bit to the 2020, and just kind of the capital efficiency that Dave you mentioned earlier.

As you guys look going forward.

In one Q, you're very clear that you'd not outspend capital. This year, that's clear and the reduction as we move to 2020 with ongoing capital efficiencies. What are some of the sources that you guys see for additional upside that you can drive either on the capital side or on the operating cost side into into 2020.

Well, obviously as we move into a full development mode.

We are going to continue to drive down the costs on the capital side I think John range already outlined of how he sees additional.

Cost improvement in the Wolfcamp and I would anticipate that we're going to see.

Oh.

Drilling and completion cost improvement throughout the portfolio because when you're in full development mode is just by nature of that you get better and better as you do more repetitive type activities. So I would anticipate that you would see that.

Even more.

Tony I don't know if you want to answer a little bit on the L.O. each side, but I think the good news one of the good news things I can add steal your thunder a little bit as a lot of our infrastructure is in place and so we are able to add barrels with very little incremental cost.

Because of all the vast majority of the infrastructure is already in place for a for or once we increase our production.

It gets right and Dave and I think it even goes back prior to that is we have been.

Very committed to building contiguous acreage positions and all of our core areas that being in the heart of the play.

Well that is just kind of background work John described a little bit of that in the in the Delaware basin, but we've done a really good job of coring up our operations and all the areas that we work that was was purposeful. It allows us to build a more integrated infrastructure system there.

We're continuing to.

Optimize our drilling work and showing some great work there you see hints of that across our operating a report that we've published where that the the drillers are are reducing drill times are doing that through new design work that they're doing and less trouble time that we've had in the past. We're also in the process of seeing a lot of technology and innovation on the completion side of the business.

Work, we're tending to stretch out our stages reduced volumes increased the number of clusters and Weve, even got a technical guys that are working on very detailed work on the size and placement of perforations and that is the ability for our guys too.

Both manage cost and deliver a probably at some of the best returns and in the industry as shown in one of our exhibit. So there is continuing to be a lot of very thoughtful technical work across the business. We're also doing this on that facility design work, we're standardizing and Modularizing all of our equipment is there. So in almost every component of our operations. We're seeing some really thoughtful granular work is delivering the last couple of quarters outperformance that that I think you're seeing there coupled with that we have a supply chain group that is doing some really good quality work.

Well I'm not sure Jeff you may want to describe a little bit about Tony I was going to add some commentary and on top of all the great operational things that that Tony highlighted the teams are working in the efficiencies that we're gaining on top of that as you. As you look forward to 2020 and 2021 is supply chain group along with our operations teams have done a great job of driving down price on on the services that were procuring.

And flat in fact, we're working in kind of a deflationary environment at the moment and expect that to continue for the for the second half of this year. So that's going to be a nice tailwind for us potentially as we move into 2020 2021 relative to the expectations that we had for our three year plan initially.

No. That's helpful. Just one clarifying real one real real fast gives me on development mode is there any risk to lumpiness on production or is it sufficiently spread out.

Little bit.

You know that it looks like we're going to have a really strong Q4, and that's going to be based on a higher slightly higher capital spend that we have in in Q3 is going to drive really high production there.

You know <unk>, the only concern I've heard from what I've seen from a couple of reports as well does that drive down or 2020, and I guess I'd be willing to prepare a little spreadsheet for anybody why bring it on production or a month early is a good thing if that's what ends up happening and I don't get too worried about.

Oh weather comes on in December or January quite frankly of a like it's a big value driver, but anyway. They were there we do anticipate a very strong ended the year, that's going to give us a lot of operational momentum as we go into 2020.

Fair enough. Thank you very much.

Our next question comes from the line of Bob Brackett from Bernstein Research. Your line is open.

Okay and beginning of your prepared comments, you mentioned, a low maintenance capital could you talk about what the maintenance Capex is and what that base decline that had correlates to his.

Yes, the main as capitals, one by about 1.4 billion.

That's a maintenance capital essentially to keep.

EBITDA flat.

And.

The base decline on the assets overall is in.

About low thirtys, a little bit higher on the oil side of the business.

That factors into that.

Great Thanks for that.

Thank you.

Our next question comes from the line of Ryan Todd from Simmons Energy. Your line is open.

Good thanks, maybe.

One on cash return you've done.

We talked a lot of wood over the last.

A couple of years on debt reduction and buyback.

You reach.

And at the end of the near term targets, you've given on those two programs towards the end of this year.

Looking forward, how did the dividend growth compete going forward.

And how much how important of a factor do you.

View the dividend the potential for dividend growth in terms of kind of long term investability by the market.

Hey, Ryan This is Jeff I appreciate the question absolutely the dividends a critical.

Tool that we're utilizing to return cash to shareholders. We've done that for some time, we had nice growth in the dividend as you've heard us talk about our.

Dividend policy that we discuss with the board our thought process is really centers around a payout ratio and so we've we've kinda designed.

And to be kind of a 5% to 10% payout ratio relative to our cash flow from operations, we think that that's competitive with our peer group.

We want to make sure that we number one we can sustain the dividend.

On a go forward basis, and then of course grow it from there so as to the extent that we we execute a as we've as we've talked about on our share repurchase program. The remainder of this year and the debt reduction targets that that we've outlined as well you know, we'll certainly go back and discuss with the board at the end of this year, what the opportunity is to.

To do additional share repurchases and think about additional dividend growth and that can and that and those two concepts together.

Great. Thanks, and then.

Maybe just a quick one any I know the data rooms open any comments you can make on the initial level of interest you're seeing in the Barnett and.

Whether it's likely to go as a single package or potentially multiples.

Hey, Ryan This is Jeff again, I'm, just going to introduce David Harris, who leads our <unk> business development named the group and he can give you some color on the process there.

Thanks, Good morning, Ryan This is David Thanks for your question, Yes, we have.

The data room has process has been really active I think the one thing I would highlight to you is it is a it's a much deeper and broader mix of participants compared to what we saw recently on our Canadian process.

And as we've indicated we expect to get bids by the end of the third quarter.

These are all remind you these are attractive low decline assets with access to premium Gulf Gulf Coast pricing and we've really seen a lot of interest from the from the market participants given those attributes.

Okay. Thank you in terms of your second question on is it likely to go as a as a single package. Obviously, we're open to whatever maximizes value for our shareholders given the operating synergies across the asset base and how block. It is I think it's more likely to be attractive to a buyer as a single package.

That's helpful. Thanks.

Our next question comes from the line of Neal Dingmann from Suntrust. Your line is open.

Good morning, My question sort of takes on what they were just asking you. All certainly have done a lot for shareholder returns here and not only the near term with the last several quarters, but my question would be this market continue to stay irrational as it is I'm just wondering how do you balance you re up the shareholder buyback program or how do you balance that versus the growth program that you outlined it.

Well.

We are going to stick to our I think the overall message first and foremost is that we are executing from an operational perspective at a very high level. We are going to continue to stick to that plan and were very confident to that execution is going to continue it is going to continue.

We think that we have the asset base.

And there's a cost structure that we can deliver both we can deliver free cash flow yield Uh huh.

There's competitive not only within its space, but well within other industrial companies, while still delivering a significant growth. So we are planning and our on our plans are based on delivering both of those oh.

Wouldn't but that overall thought that's part of the work that we're doing in regards to 2020 and beyond as what is the optimum level to to ensure that we deliver on on those metrics and so but the good news is with our low breakevens to continued reduction increasing capital efficiency that continue reduction of the of the cost structure and the growth in revenue and is going to come as we grow our light oil production, we think were.

As well positioned as just about any company out there in the <unk> in this space to deliver on that.

No good answer and then I'm just one follow up around the reallocation of of your mid Con the Delaware in the in the PRB just one and other factors that you foresee in the mid con that would cause you to bring smell some capital back that play or is it just I mean, you mentioned about just you are certainly a return Dierdre then do you envision the Delaware in PRB, just continuing to have higher returns.

Well I think currently again to emphasize that as well.

The current activity, we have going on of the volatile oil window is competitive right now.

As we move out of the volatile oil window in the future or are those returns going to compete and certainly in though weaker natural gas and NGL market on a.

Ground floor basis, right now that they are going to struggle to compete for capital as well.

As.

No.

With the other place Uh huh, but as I also mentioned and were not being too specific here, we just cant that we see opportunities because of our strong acreage position that there are opportunities on both a small and perhaps even larger scale to bring in capital to that play to make those economics competitive that we would have activity outside the volatile oil window that would take advantage of these partner joint venture type opportunities.

That's great detail. Thanks, so much.

Yeah.

Our final question today comes from the line of David Heikkinen from Heikkinen Energy Advisors. Your line is open.

Good morning, guys and congratulations on the process and progress and thinking about kind of clear and simple communications for investors a lot.

And I was thinking through like why don't you all just say something simple like hasn't reduce our interest cost will transfer those savings to our shareholders through an increased dividend.

Just imagine like the immediate capitalization of $60 million of interest from the quarter and to your stock to that increase in dividends and as you move forward with your plans on cost reduction, but just be like a very simple method.

For people to understand where you're going.

And David This is Jeff I guess I would I guess my commentary would be is that we believe it is we are delivering a pretty simple message, which we've been pretty clear you know as weve <unk> as we're generating cost savings, whether it's on the interest side or on the operating cost side and the capital efficiencies that were that were delivering on the operational side. That's ultimately generating the free cash flow that we projected in our three year plan and then the mechanism that returning that to shareholders is through both the dividend and the share repurchase. So we think it's important to have a balance there. Obviously, our first priority has been to get the leverage down to a level that we felt comfortable with and we're going to get that accomplished obviously here over the next six to nine months <unk> beyond that then to the extent that we're generating the free cash flow that we expect a will deliver that in the form of share repurchases and the dividend.

And so again, we feel I guess I would just say we feel like we have a pretty clear message on that front, we've done over $4.4 billion of share repurchase to date and grown the dividend in the last year. So clearly that that that that cash flows going back to shareholders.

Yeah, I guess that Optionality and the group is one thing that we hear a lot and optionality leads to some uncertainty that's all I'll close with I appreciate the understanding and what you all are doing.

We have no further questions in queue I'll turn the call back to our presenters for closing remarks.

Okay, well. Thank you I appreciate everyone's interest in Devon today, and if there's any other questions.

Obviously, the IR team will be around.

This concludes today's conference call you may now disconnect.