Q2 2022 Devon Energy Corp Earnings Call
Coal.
However, I do want to emphasize that these portfolio additions are highly complementary to our existing acreage footprint. They tactically unlock quality inventory in the core of the play and the immediate financial accretion from these transactions allow us to further step up the return of cash to shareholders.
Now moving to slide five the key message here is very simple.
The combination of our strategy, our asset base and execution has resulted in an impressive track record of value creation for our shareholders. Since we unveiled the industry's very <unk> cash return framework upon the WPS merger in late 2020, we have consistently delivered on our strategy to return increasing amounts.
<unk> of cash to shareholders, while steadily improving our investment grade financial strength as.
As you can see on the chart since the closing of the merger we have cumulative.
Return $6 2 billion.
<unk> to shareholders and only 18 months.
For perspective, this value exceeds more than a 100% of the combined market capitalization of the two companies at the time of the merger announcement.
Unbelievable.
Jumping ahead to slide seven with a strong operational performance achieved year to date, we are raising guidance expectations for the full year of 2022.
As you can see on the top left a key contributor to this improved outlook is our 2022 production targets increased by 3% to a range of 600000 to 610000 Boe per day.
Higher volume expectations.
Or due to better than expected well performance year to date and the positive impact from our recent bolt on acquisition of the Williston Basin.
After accounting for the benefits of our share repurchase program. This outlook puts us on track to deliver a very healthy production per share growth rate of 8%. This year. We're also adjusting our upstream capital to a range of $2 two to $2 4 billion versus our prior guidance of approximately $2.
$1 billion.
This updated guidance incorporates $100 million of incremental capital from the Wilson acquisition and includes additional inflationary cost pressures associated with this higher commodity price environment.
Overall at current pricing.
This updated outlook is resulting in a 25% plus improvement.
And free cash flow generation compared to the assumptions that underpin our original budget expectations. The key takeaway here is that our low cost asset base is capturing the benefits of higher commodity prices and winning the battle against inflationary pressures.
Now on slide eight I want to briefly showcase how our improved 2022 outlook translates into a compelling free cash flow yield.
To demonstrate this point we've included a simple comparison of our estimated free cash flow yield in 2022 compared to other common equity benchmarks in the financial markets. As you can see from the two charts at today's pricing devins attractive free cash flow yield of 16% is up to four times higher.
In the broader market.
Expect this valuation gap, which is at historically wide levels to correct as investors rediscover highly profitable and value oriented names like Devon.
Now going to slide nine with its powerful stream of free cash flow our priorities remain unchanged, which means the first call on our free cash flow as the funding of our fixed plus variable dividend with this predictive and formulate framework. We are on track to pay out around $5 per share this year, which.
At a yield.
More than 8% places Devon is one of the highest yielding stocks in the entire.
U S market.
However, I want to be quick to add that we are not just a high yielding dividend story. We're also bolstering our per share growth by opportunities Opportunistically repurchasing our stock.
With this share repurchase program, we are on track to retire up to 6% of our outstanding shares at what we believe to be trading at a substantial discount.
Two our intrinsic value as you can see on the right even with the large cash payout, we still have excess cash flow leftover to further strengthen our investment grade balance sheet. This.
This balanced and transparent capital allocation framework provides us multiple avenues to create value for our shareholders through the cycle.
And finally on slide 14, I want to end my remarks with a few thoughts of what you can expect from Devon as we plan for the upcoming year.
While it is still a bit too premature to provide formal production and capital targets for 2023 I can tell you that there will be no shift to our strategy. We will continue to prioritize free cash flow and per share financial growth not the pursuit of topline volume growth.
We are designing a plan that pursue steady and consistent activity levels to optimize supply chain cost and certainty of execution and this exceptionally tight market.
And finally with our low breakeven funding levels, we remain well positioned to navigate the recent market volatility and build upon our track record of delivering outsized cash returns.
And with that I will turn the call over to clay to cover our operational highlights for this most recent quarter.
Thanks, Rick and good morning, everyone as I reflect back not just one quarter, but the last 18 months since we've closed our merger I'm very proud of what we've accomplished last year at this time, we will pass the hard work of organizational design.
Answering the who but still very deep into the systems process and culture building is incredibly important to answering the how of running the company.
In some ways, we were rebuilding the engine, while we ran the race.
This year, we're continuing with the never ending challenge of improving systems processes and culture, but we're also keenly focused on external factors like inflation and supply chain uncertainty.
While these challenges are real and something we dedicate a lot of attention to I'm also fully confident in our team's ability to once again differentiate devin from the pack and execute on an exceptionally high level.
The second quarter results are a perfect example of this product.
Related to this focus as a summary of the operating results displayed on slide 16, which showcases our solid production beat.
Better than forecasted capital efficiency.
And the expansion of our per unit margins to the highest level in more than a decade.
I know it can be a bit mind numbing when the team makes these results look as easy as they have but listen.
Every.
Well in the portfolio average 30 day IP for the entire company of 2900 Boe per day per well.
$60 plus field level margins and a reinvestment rate of 22% are incredibly impressive when you put them into historical context.
<unk> strong results, we've delivered since the merger between <unk> and Devin is simply an outflow of three key factors the high caliber assets our talented organization.
And a disciplined investment framework that is designed to optimize returns.
And per share financial growth throughout the cycle.
These key factors are held together bias steady strategic vision and a culture that exemplifies our corporate values I want to congratulate the entire team for this special results that we're creating together and.
And I am confident we will build upon these accomplishments as we progress through the balance of the year and beyond.
Now turning to slide 17, our Delaware Basin asset was exceptional was exceptional capital efficient growth engine that drove devins operational outperformance in the second quarter. The net production from the Delaware continued increase rapidly growing 22% on a year over year basis. This.
High margin growth was driven by 52 wells brought online that were diversified across our acreage footprint in the Mexico and the Texas State line area.
Looking at the project level detail the top thematic takeaways was the consistent execution and outstanding well production, while we achieved across the development programs.
This Great example, a great example of this theme was the prolific results we achieved in our Todd area in Eddy County, where we developed a highly charged fixed theme of upper wolfcamp.
The initial 30 day rates from this 12, well wolfcamp oriented development averaged 4500, boe's per well with a per well recoveries on track to exceed one 5 million barrels of oil equivalent.
With a strong upfront recoveries were experiencing coupled with a favorable commodity price environment. This package of wells is on track to pay out in less than six months.
Next I want to cover the multi zone development success that we had in the potato basin, where our recent activity successfully co developed three different landing zones. The third bone spring the XY sands and the upper Wolfcamp. The initial 30 day rates from Mr. Potato head project averaged 3100 Boe per day.
And given shallow the shallower drilling depths in this portion of the play our D&C costs came in as low as $6 7 million per well as.
As we look to allocate capital for 'twenty three and beyond this positive result will serve as another valuable data point to optimize future development activity and further deepen our conviction of the resource opportunity in the potato basin area.
And lastly on this slide we also brought on several high return pads online in the Stateline Stateline area.
Adding to our long term track record of success in this prolific tranche of acreage. Our recent capital activity was highlighted by the CBR eight and nine pads that outperformed our pre drill expectations by as much as 20% with the top well achieving 30 day rates as high as 4300 Boe per day.
In addition to these great wells another impactful event for US this quarter was a recent trade completed that added to our acreage position in the Stateline area.
Turning to slide 18, you can see a zoomed in map of this critical 3000 acre trade that we completed in the Delaware Basin Stateline field.
You've heard me on prior quarters brag about the incredible results and team creates with these land trades.
We typically execute dozens of trades every year.
In the company so far we have executed on several trades, bringing in around 7000 net acres to the Delaware.
The trade we are highlighting today significantly enhances our wolfcamp potential in the Stateline area and unlocks more than 200 extended reach drilling locations that were previously constrained to one mile developments.
This is the economic core of the play and is further enhanced with Devin significant surface ownership.
Company owned wet sand mine water recycling and disposal infrastructure and the midstream JV with Howard energy each of these levers create incremental margin to Devin that other operators would not benefit from.
Also importantly, this transaction allowed us to trade out of acreage that was either not scalable to Devon or had lower priority within our capital allocation framework.
With this high grading of acreage and the capital efficiencies that come with us.
We expect that the net present value uplift to devin of more than $200 million.
On a time zero evaluation and importantly, when we consider how these projects are getting pushed to the front of the development list. The uplift is over $350 million of.
The present value.
Moving to slide 19, another area, we enhanced the depth and quality of our drilling inventory within the Williston basin.
In June we announced a bolt on acquisition of <unk> assets in Dunn County.
At highly accretive valuation of around two times cash flow.
This acquisition adds contiguous positions 38000 net acres directly offsetting the overlapping devins existing leasehold.
<unk>.
This consolidates tier one acreage on the Fort Berthold Indian reservation, where we have an exceptional competency for not only the technical perspective, but also the strong relationships with the tribe and with the community.
With completion activity lined up for the second half of the year, we expect production from the acquired assets to exit the year around 20000 Boe per day, increasing our pro forma production in the Williston to around 65000 Boe per day.
This acquisition also adds more than 100, highly economic and drilled locations positioning our williston assets to maintain this level of high margin production and strong.
Free cash flow for years to come.
Our Williston team continues to perform at an exceptionally high level and I'm thrilled thrilled to reload their opportunity set for continued great results.
And finally on slide 20, I'd like to call out the important the importance of our free cash flow generating assets.
That are also continuing success and sustainability of our business model.
These assets may not capture as many headlines of the Delaware basin, but I'm proud of the strong execution and consistent operating results that these teams have delivered to fulfill his critical role within our corporate strategy as you can see by the slide by driving capital efficiencies optimizing base production and keeping operating costs low.
These high quality assets are on pace to grow cash flow by about 40% this year to greater than $3 billion.
At today's commodity price with our completion activity ramping up across each one of these plays in the second half of the year I will look forward to providing another very solid update on our November call and with that I'll turn the call over to Jeff for a financial view, Jeff. Thanks, Clay I'll spend my time today covering the key driver.
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 second quarter averaged 616000 Boe per day exceeding the midpoint of our guidance by 4%.
This production beat was across all products due to another strong quarter of well productivity in the Delaware Basin.
As Rick touched on earlier with our performance to date, we now expect our volumes for the full year 2022 to be around 300 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 completion activity.
Moving to expenses, our lease operating and <unk> costs were $7 71 per Boe.
This result was slightly elevated compared to our forecast due to higher workover activity and moderate pricing pressures across several service and supply cost categories overall, our exposure to higher value production, coupled with a low cost structure expanded devin field level cash margin to $60 12 per Boe.
22% increase from last quarter.
Cutting to the bottom line, our core earnings increased for the eighth quarter in a row to $2 59 per share. This level of earnings momentum translated into operating cash flow of $2 $7 billion in the second quarter. After funding our capital program, we generated $2 1 billion.
A free cash flow in the quarter. This result represents the highest free cash flow generation Devin has ever delivered in a quarter and is a powerful example of the financial results our cash returns business model can deliver.
A top priority for our free cash flow as the funding of our dividend and in conjunction with our earnings report, we announced a record high fixed plus variable dividend of $1 55 per share that is payable at the end of September .
This payout represents a 22% increase from last quarter and includes the benefit of a 13% raise to the fixed dividend that was announced with our recent Williston Basin acquisition.
In addition to the strong dividend payout, Devon also repurchased $324 million of stock in the second quarter. Since we initiated the program last November we've retired nearly 24 million shares lowering our outstanding share count by 4%. We continue to believe the double digit free cash flow yield.
Of our equity offers a unique buying opportunity for us.
We also took steps to further strengthen our financial position in the quarter with cash balances increasing $832 million to a total of $3 5 billion.
With this increased liquidity, Devin and exited the quarter with a low net debt to EBITDA ratio of four times.
And lastly, I want to briefly highlight that our disciplined strategy and execution are resulting in excellent returns on capital employed based on our performance year to date and our outlook for the remainder of the year I expect our return on capital employed to exceed 40% in 2022. This outstanding return profile.
Combined with our cash return framework further reinforces the unique investment opportunity Devin offers versus other opportunities in the market today.
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 four key messages from our call number one Devin is a premier energy company.
And the team is proving this quarter after quarter with our outstanding operational results and record setting financial performance number two the momentum of our business has established is resulting in an improved outlook manifesting in higher per share growth and cash payouts for the owners of our company.
Number three we've taken steps to Opportunistically capture resource.
<unk>, the quality and depth of our portfolio, while ensuring the long term sustainability of our model.
Number four lastly, as we begin our planning processes for 2023.
I can assure you there is no change to our strategy.
Driven by per share value accretion not the pursuit of volumes I will now turn the call back over to Scott for Q&A.
Thanks, Rick we'll now open the call to Q&A. Please limit yourself to one question and a follow up this allows us to get to more of your questions on the call today with that operator, we'll take our first question.
Thank you operator.
Yes.
Our first question comes from Jeanine Wai from Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking our questions.
Our questions and our first question is on.
Our first question is on discipline.
Mentioned that.
Mark to market between 2000 to your Capex budget for inflation, presumably based on recent conversations with providers and I guess, how have those conversations really shaped your updated view on 'twenty three and what we're getting at it.
Easily argue that returns being as high as they are that inflation would have to get pretty high to make returns on attractive and it's pretty clear how the market defines disciplined on the production growth side, but how do you define discipline on the cost side.
Hey, Jeanine as cloud I'll take this one.
The strategy remains the same we do have categories of the strategy related to growth of zero to 5% is kind of one of the metrics, but if you refer back to slide three we also focus a lot on free cash flow on slide 16, we talk about.
Some of the margins and so that know that the focus is not just how much capital, we spending or how much production, we're making it's the flow through resolved and so while we're really excited about the margins today and we're really excited about the 22% reinvestment rate.
We have a stated goal to be somewhere below 70% on that reinvestment rate. So there's a lot of flexibility on built in and allowing us to continue the strategy, even with the headwinds of the very real inflation, we're seeing today.
Okay, Great and then maybe moving to cash returns theres been a lot of talk on buybacks. This morning.
For the past two quarters, Devin has increased the buyback authorization by about the amount of share buybacks that you did during that quarter. This quarter. The board kept the authorization flat at $2 billion and so we're just wondering is there anything in particular, that's driving you to treat the authorization differently this quarter than prior quarters. Thank you.
Yeah Jeanine. This is Jeff. Thanks for the question, yes, the biggest the biggest thing that happened for us here at the quarter.
We are blacked out the bulk of the second quarter as it relates to our share repurchase program given the rimrock transaction that we've talked about so we didn't quite get as much done as we would've liked to that left us with just over $800 million of authorization still available to us and so we felt like we've got plenty to go execute on here over the next.
Quarter in the back half of this year and of course, if we if we make as much progress on that front as we hope to hear in the near term we will absolutely go back to our board and reload that authorization due to accomplish more share repurchase.
Critical component of our cash return strategy and as Clay mentioned, we are very much focused on per share growth on all line items.
Great. Thank you very much.
The next question comes from.
Jarrod from Jpmorgan Securities. Please go ahead.
Yes. Good morning. My first question is if we look at first half activity perhaps for clay.
You guys Ted.
<unk> sales of 131 wells of that 80% or little bit over 100 in Delaware Basin.
We are seeing a little bit more spud activity or drilling activity in some of your other basins. So I was wondering if you could give us a sense of.
For the <unk> of 100, maybe a little bit of help on the mix.
On a basin level just broad mix.
Yes, Brian Thanks for the question, we're still going to be obviously dominated by Delaware activity.
Some interesting work coming in the other basins as well, but it's I would say for the third quarter in particular considered at least 55% or so Delaware. Some other number of wells coming in and the other areas Youre also going to see.
Productivity of the Delaware Basin will.
Also lever that that turn in line number two higher productivity higher contribution.
We've got a lot of questions on the numbers on the kind of the flow of the capital throughout the year, we're definitely more back end weighted with the activity. The number of wells that we bring online, but we also have an ebb and flow related to working interest that that relates also to some of the capital.
Those as well.
Yes.
Great that's helpful.
And maybe one for Rick Rick you guys announced a couple of things on portfolio renewal over the last quarter rimrock, plus some of the acreage acreage.
Acreage trades in the Delaware.
Was wondering if you view kind of rimrock is kind of a one off just opportunistic or is this part of our broader strategy.
These niche acquisitions to address portfolio renewal.
Well Arun it's a good question, we get quite a bit and I think we have been very consistent with our answer.
The last couple of years, and we will always be looking for unique opportunities like like remark.
It is also like the acreage trade that clay talked about we'll continue to look for those opportunities.
And.
I will say this is there is there something pretty attractive about buying something at two times cash flow.
This day in time, and when you think that.
It really fits in with your story and you've got the industrial logic. So.
I don't expect us to ever be a serial purchaser per se I hear that term a lot, but that does but I will say that we'll always be looking for opportunities to strengthen strengthen our company's asset base and continue to build devin for the long haul.
We mentioned.
Earlier this year, we celebrate our 15th anniversary as a company and we really think about multi decade, when we when we talk.
About it it's just not an arm waving exercise where truly are committed to that.
Thanks, Rick.
The next question comes from Doug Leggate from Bank of America. Please go ahead Doug.
Thanks, Good morning, everyone.
No.
Rick.
I Wonder if I could ask you or maybe Jeff about second half Capex run rate.
Obviously, the <unk> parts of thought but.
There was also some midstream spending in there how should we think about 2023 implications of the second half of 2022 can we kind of annualize that and get a handle as to what we think capex might look like next year.
Yes.
Jay This is Doug as we said in our prepared comments its little early for us to give you granular detail, we're going to continue to stick with our strategy of.
Maintenance type spending level.
You talked about the midstream.
Asset spending.
We do have.
Some expansion we have a joint venture we're going to be building our third train.
The JV has gone very very well.
400, 400 million a day cryo plant is full and so we'll be working with our partners there to expand that to handle.
Our gas production there.
But still too early for us to be laying out.
In 2023 numbers.
And I don't know if player Jeff will weigh in on that but that's kind of where we're at right now Paul.
Okay. Thank you Rick.
Rick I guess my follow up would be on gas.
You guys are the economics of the portfolio, obviously has got a lot of variability in it.
Pending on what the gas deck is and obviously it looks to us at least.
The outlook for U S gas has been reset some here maybe.
Maybe to some kind of a new normal I'm just wondering if you could talk then about capital allocation across the portfolio.
Mostly what Ive got in mind as the mid Con in particular.
Yes, Doug Thats a.
Great question, we get quite a bit and I can tell you.
When youre looking at a eight.
Dollar commodity price for gas is I think youre really I think people listen to us more than they did back when it was a $3 50 gas price and we talked about the diversity.
We enjoy with this portfolio that we have and so for us I don't know that youre going to change.
You will expect to see us change our capital program allocations, because recall that in our <unk>.
In our Delaware Basin, we do have a great deal of gas production. There. So it really some wonderful wonderful returns we do have four rigs running here in the Anadarko basin to to your point, we're seeing some great returns there.
The one thing that we want to do is a little bit more assessment type work. There are some ideas that we have and so it will be very very measured with that but it's a wonderful asset we have a great.
The acreage position, we have a great joint venture partner was we've talked about with with Dell.
The JV is going very well, we're generating some phenomenal returns with it we're going to be very measured very thoughtful about it. So I wouldn't expect us to have <unk>.
Significant changes in our capital allocation mix.
Alright, I appreciate it thanks Rick.
Thank you.
The next question comes from Scott Hanold from RBC capital markets. Please go ahead Scott.
Yes. Thanks.
My first question is going to be around.
Your view of intrinsic value and could you give us a sense of how you get your arms around what the.
Intrinsic value is and.
How aggressive will you get on the stock buybacks.
And as part of that discussion would be interesting to hear your thoughts on your 50% variable dividend payout ratio.
If there is some flexibility to move higher than that or is really just keeping optionality for buybacks and maybe bolt on another kind of M&A activity. The continued plan.
Yes, Scott this is Jeff thanks for the question.
Maybe I'll hit the second part first which is.
We're big believers in all of the above so the framework that we've laid out provides.
An opportunity for a fixed plus variable dividend and then the share repurchases. As you mentioned, we think all of those are critical components to deliver on the on the business and operating and the financial model that we that we've laid out feel really good about that don't expect to see that change from us in the near term, we feel really good about the 50%.
Threshold level for the variable dividend as you point out it provides us flexibility to bring cash back to the balance sheet for obviously any any debt repurchases that we wanted to do which we've mapped some of that out here over the last couple of calls we've got $1 billion. We think we can do over the next two years, which is important to us.
To maintain our financial strength on the balance sheet and then on top of that we can we can execute on our share repurchase initiatives. So to your first question around intrinsic value and how we kind of think about the share repurchase where we're just like you guys. We've got 345 10 different models that that we look at when we evaluate our core business run.
<unk> operationally and financially different price decks different discount rates and how we how we think about that calculating that intrinsic value. We also do a lot of market comparisons right with from a multiple standpoint and otherwise.
Bottom line is when we put all that together any which way we cut it we think our shares are outstanding.
Outstanding value right now and have been for some time and when you look at the business model that we've rolled out and the outputs that were generating a case in point the second quarter result.
It's pretty clear to us that.
Folks ought to be buying our equity and that's exactly what we're going to be doing going forward. So as I mentioned earlier, we've got over $800 million to go execute remaining on the current authorization and expect to approach. The board later this year for additional upside.
That's great color, Thanks, and my follow up question is.
You talked about looking at opportunistic activity means with the bolt ons and.
And rimrock, but I think the term you used for that as portfolio renewal can you give us a sense of how you think about portfolio renewal versus <unk>.
Acquisition for scaled usage is devin.
The right scale for to be a very efficient company or do you think there is still some advantages of rather than just buying stuff for renewal just for scale to to have better cost efficiency on a per unit basis.
Well.
I will say this I think we're going to continue to see opportunities that.
Come our way that we have to contemplate a number of things number one is the renewal if you will of inventory. We've drilled 300 400 wells a year. So you just you think of that even though <unk> got a deep inventory.
We are a we are a industry that needs to continue to renew your inventory, whether it's through exploration or transactions and so I think that will always be part of our part of our game plan to consider those but theres also other.
Other things that come into play Clay mentioned, the acreage trades where suddenly.
We can drill another couple of hundred two mile laterals instead of one model and I can tell you just it just supercharged as your returns.
So theres a lot of ways, we'll do that we have we have a great team.
Both the land and a business development side, we look at.
All sorts of.
Opportunities, but we have a very very high bar.
We're going to keep that bar quite high and we can do that because of the inventory that we currently enjoy and so I just don't know that.
Well, we will ever say that it's just absolutely part of our.
Part of our game plan, but I do think we will have opportunities that come our way.
Could make sense for us.
Understood. Thanks.
Okay. Thank you.
The next question comes from Neal Dingmann from curious Securities. Please go ahead.
Good morning, guys.
Frank share returns that you guys are going to continue paying out Rick My question is rather more on overall strategies, specifically other macro drivers or maybe even change large investor sentiment that would have you all consider potentially more growth, let's say next year.
Hold with this large shareholder return.
The shareholders, we talk to and we frequently engage with.
The feedback we get continues to be.
Similar to ours and that is focus on a per share.
Approach and so when we talk about growth its a per share growth and so.
Fundamentally unless we have shareholders numerous shareholders to come in and say look we absolutely we do not like these big dividends, we do not lock your share repurchase programs. We want you to go back to a growth model until we see that.
I see no reason to change our strategy. This is a strategy that we didn't we have we've really not tweaked our strategy since we we laid out the merger.
Announcement in September of 2020, and nearly two years ago, and so I think we've been very consistent.
We did.
A few quarters back we did talk about bumping our fixed dividend and we also talked about the.
Adding the share repurchase option and those are the things that really just solidified our cash return model and I think as commodity prices strengthen we saw it just it really it <unk> to our shareholders. When you could go across with all of those options.
<unk>.
Deliver across the board so.
To go back and completely change your strategy I don't know it just seems like a real long putt for us right now too.
And we're certainly not getting that feedback from our investors.
Yes, no I would agree with that but long.
And then second question, maybe for clay on Delaware activity, specifically could you address the current and future federal permits.
Of course in the <unk>.
And I'm just wondering what these permits or potentially just in the entire play lease explorations.
Cause you to reallocate more activity.
Either southern loving Winkler County that you currently have.
Yes, thanks for the question Neil.
I relate the federal land, it's kind of like working international stuff you have certain rules to live by Theres really good things about it and there are some challenging things about it I think specifically with the federal lands is you need to have a long view on our program you need to be two years out ahead, you need to plan for your right of ways need to plan for.
Your tie ins needed.
<unk> for all the contingencies and Thats, how we treat it.
Happy to report, we still have 600, plus permits out ahead of us.
That gives us plenty of runway, we're working very diligently with the local BLM office I think they have a better understanding of what <unk> asking them to do.
Great hard working people that want to do their jobs, well and we work really hard to make them successful and helping us do what we need to do so I would say so far we feel good about the trajectory there.
There is always the concern of something changing we will react to that then but I think most importantly is having a long vision a roadmap that allows us to stay out in front.
As Rick mentioned earlier.
Having a diverse portfolio having assets on the Texas side of the basin, having assets in other areas around the country.
As only accretive to the story currently.
Allocating quite a bit of our total capital to to the northern Delaware.
Cause of the amazing returns that we have there.
The great work that the team does allowing us to execute on it.
Thanks, guys.
The next question comes from John Freeman from Raymond James. Please go ahead John .
Good morning.
The Delaware well results continue to look quite good.
It is interesting that.
The lateral lengths are a good bit short I think the first half of the year than what we've seen the prior couple of years and obviously you highlighted the stateline acreage trade that you all did which.
Cored up a good bit of the acres you highlighted today, some more extended reach laterals.
I guess I'm, just trying to get a sense of kind of I guess, a what is kind of driven kind of a first half activity to be.
On the shorter side on the laterals again good results the collateral is being a bit shorter than what we've been accustomed to and maybe how to think about that going forward and we'll kind of move back towards that 10000 type lateral length or better.
Yes, John I. Appreciate the question. We are we are always striving to drill long laterals and long today is sometimes two sometimes three mile laterals. We've built really good proficiency in multiple basins to drill three mile laterals.
North Dakota in the Anadarko Basin.
Quite a bit all over the Delaware basin, as well and so where the land position allows us to do that that's often our first option I can tell you in a little bit more of a mature development.
Kind of set the tone on development for example, two mile lateral development relatively early and once that is established it's hard to revert to three miles.
You just saw the great trade that we did in allowing us to go from one mile to two mile. That's that's.
A very high importance, we really try we've been holding back all of that development those <unk>.
Avoiding the one mile drew.
Drilling because we had hoped to be able to get this transaction completed so youll continue to see us push two and three miles and sometimes we will have 75 hundreds out of necessity and of course the occasion one model.
As I look at the results for the second quarter 9100 feet is what we delivered.
That's a little bit shorter than the 97% to 10000 that we'd seen in prior quarters I wouldn't take that as a statistical anomaly. It's just the stack of how many actual three miles versus how many 75 hundred's fell into that quarter, but we're always trying to push longer and keep that capital efficiency up high.
Thanks, Clay and then a follow up question for me in the past.
You've talked about one of the things that you all of you.
As to try and combat cost inflation is sort of yes, yes.
All size and kind of consistent activity levels in terms of being able to look out and maybe.
Layer in some longer term sort of contracts for both materials and services and I'm. Just curious if we can get some feel for kind of what the.
The environment is at the moment in terms of <unk>.
Service providers kind of willingness to.
To offer longer term contracts through 2023 illustrates or if it's just too cost prohibitive to kind of do that at this point.
Yes, John I appreciate you, bringing up the question because it's a if.
If it was important last year its <unk> important this year.
In fact, I would even point to a transaction like rimrock as maybe one of the contributing factors of us being able to get that deal done as you can imagine working in a tough environment like North Dakota, having to try and pick up drop various services. It is a really tall order even to get basic casing does.
And some of the basic equipment necessary to get work done and I think that allows us to come in with scale and have a higher degree of execution certainty and kind of break the logjam, we've been trying to buy this particular piece.
Piece of business for for several years.
And I think that was a contributing factor so like I said incredibly important.
Really proud of the business model the consistency helps a ton as we have lots of dialog with our service company partners. It's the first thing they bring up number one is scale number two is consistency so very much top of mind specific to your question on longer time contracting there's always.
A.
And appetite for us.
From our side from their side, it's just a matter of that kind of that bid ask spread and we have our own view on where service costs is going to go so kind of pairing that out and lining that up I would say, we tried to balance some of the longer term and mid and shorter term as well to keep ourselves active in the <unk>.
<unk>.
Yes.
Great. Thanks, Clay I appreciate the responses.
The next question comes from Neil Mehta from Goldman Sachs. Please go ahead.
Thank you.
Yes, Rick the first question is for you on the macro you have had.
Really good call them better better than most on the oil macro with the with the bullish view that you laid out earlier this year on the calls.
We're going into an OPEC meeting tomorrow I'd, just love to hear your perspective on the moving pieces then being <unk>.
Band outlook U S production decline rates non OPEC.
Obviously OPEC behavior, how do you think about the moving pieces as we look forward and the sustainability of this up cycle.
Yes, great Great question, I guess for US we think that.
Just fundamentally.
OPEC is we'll see what they what they come up with but you know they.
They probably.
May handicap, a little bit of the concerns around.
<unk>.
A possible recession that.
Could.
Impact demand somewhat some somewhat I don't I don't think its going to be.
Very very large if they were to bump there.
Let's say, Saudi specifically, if they were to two bump there.
Productivity I don't think it would be a large bump because I think in the back of their minds or they're looking at a lot of data like we are right and so they're going to be.
I think there can be very measured.
Rest of OPEC I, just think quite honestly.
It will be very very challenge to getting more closer quotas and thats been I think will well represented so for us.
When we think about.
Maybe a slight uptick in saudis production, maybe even the UAE, but I don't think its going to be.
That strong you see continued discipline you do see some growth here in the lower 48, but it's still a disciplined approach.
<unk> is the point in time, when you you will see that demand I.
I believe increases they start reopening in our mind demand is is going to be strong and I think demand is going to net net is youre going to start you will still see some demand growth.
Until we see prices I think <unk>.
North of $1 20, Thats kind of what we thought the first time in a pullback in what could have been just circumstantial, but so we'll see but I think for us we're very.
Very constructive on the commodity price environment, that's both on the <unk>.
On the crude side and then on the gas side too.
Ben.
Little surprised that the gas didnt pullback, a little a little harder and stay but.
I think we've talked about it with our team.
Just fundamentally you.
You do not want to be short gas in this world and I think thats.
At that point driven whether it's.
Whether it's a.
Yuri storm or type storm or or some of the geopolitical things you just do not want to be short gas, that's an uncomfortable place for for governments and utilities.
And the greater society. So we're very very constructive I think for US we're just.
We're very pleased with our execution, we're staying on top of the supply chain. The best we can and it's I think going well.
We've made some really strong moves on in the marketing front, both on the gas side and the crude side to ensure.
My mind very consistent reliable close of the market. So I think we've done what we.
Need to do and.
And I guess the takeaway for us.
Is that we still or constructive on on demand both on the oil and gas side.
Yes.
Very helpful perspective, if I could dive a little deeper into the U S production profile.
One of the great debates in the oil markets right now is where we are in terms of productivity have you.
The us shale and whether the U S.
Oil assets are maturing at which point now we're moving more to maintenance mode versus growth mode, and you have a unique perspective, because we operate in so many different basins I would love your perspective on.
Whether we should be thinking of the U S has more of a mature base and as opposed to a growth basin, which again would support a more constructive macro view.
Yes.
Let's start with crude I think for US we are.
Really there is ranges of estimates out there. So we think about the balance of growth throughout the back half of 'twenty two.
We're probably a little more conservative than what some of the some of the estimates are and so in other words, we were not as bullish on U S growth as some will be.
For the back half and there's a number of reasons there.
I think for the as far as the maturation.
We're at with with lower.
The lower 48 plays.
Fundamentally I think you've seen places like the Bakken the Eagle Ford.
In particular, where you've seen.
Volumes are hanging in there, but youre really not seeing a lot of growth I think we did see an uptick in the Eagle Ford, but it has come back some but.
I think both of those basins will be will be challenged to grow much I think you have plays like the DJ and the Anadarko, we're not in the DJ but.
That's a place we watch.
I think I think inflation like especially like the Anadarko gas is going to be.
See some growth there.
But it's going to be I think in the App.
Aggregates can be somewhat moderate.
So it all comes down to the Permian and I don't think the Permian will continue.
To be the only basin.
<unk> substantially, but even with the Permian I think youll start seeing.
Impacts of things like the supply chain pinch and others I think many of the privates.
Operators have been the ones that have driven the growth.
We're really sorry about the last 12 months and so I think that's going to moderate a little bit.
No.
So that all plays out.
You'll still you'll still see growth, obviously, but I think that will play out a little bit it may not be quite as much growth as some people have a forecast that we will see how plays out.
Thanks, Rick.
Thank you.
The next question is from Matthew Portillo from TP, Inc. Please go ahead.
Good morning, all.
Perhaps just a quick word about four.
Question for clay around delineation in the Permian.
Outstanding results both spring.
Just curious how youre thinking on that play has evolved as you've worked the asset both in new Mexico and at the state line and what that might mean for inventory expansion over time.
Yes, Matt. Thanks for the question Yeah, you might have noticed that in the slide we highlighted some of the results on the new Mexico side. It was really focused a lot on the wolfcamp, which is kind of been seen as the secondary bench secondary to some of the bone spring activity. That's been that's dominated the area for the last few years.
And then on the Texas side, we actually talked a lot about the bone spring, which again is a little bit secondary historically to wolfcamp as you can see from the results.
<unk>.
Results are exceptional and so it gives us great confidence that the productivity of Wolfcamp and Delaware is doesn't change at magically at the border it's pretty ubiquitous throughout this part of the Delaware Basin. The real trick is finding out the right recipe spacing staggering sequencing and the team is making.
Tremendous progress on that.
One of the hidden synergies of having two really strong teams that have worked this problem individually come together compared notes and really try and parse out what is the right solution on this so we will never have the final answer but I can tell you. We are much further along than we were even just a year or two.
<unk> ago, and understanding how to do this and that's certainly a significant contribution to our understanding of the portfolio and the incredible results that youre seeing today.
Great and then just as a quick follow up last quarter, you highlighted the potential savings for vertical integration on your sand mine expansion in the Permian I was just curious if you could give us updated thoughts on potentially expanding this operation beyond the Permian and additional mines that might be able to.
It would be developed going forward to continue to lower your costs on development.
Yes, we're certainly looking at it.
A slide like that makes makes the deck you can bet around the company everybody want some of that and so it's been a lot of fun to see the excitement in the kind of creativity around the organization. What I will tell you is we have a we have a really unique position in the Delaware when it starts with the geology in this case the surface geology, but also the ownership also though.
Logistics and so those those.
Holes have to line up for us to be able to execute on this I would say I am cautiously optimistic at this point of being able to expand not just in the Delaware, but to other basins and use some of the same techniques. We're learning a lot, but it's been a real homerun to our operations as I mentioned this trade.
The wet sand mine that we have up and running even further enhances the already incredible economics that we're producing so that leveraging of the margin is especially in places like Stateline is just is pretty phenomenal.
Happy to see more of it in due time.
Thank you.
Thanks, Matt.
The next question is from Kevin Mccarthy from Pickering Energy Partners. Please go ahead Kevin.
Hey, Good morning, guys. My question is now that you've closed on the Rimrock acquisition Im curious what youre seeing on costs compared to your legacy acreage and any opportunities for further efficiencies.
Thanks, Kevin I would say, it's really pretty early we are just taking over some of the operations now.
Best thing to do is a whole lot of consistency to make sure we don't.
Have any of the wheels fall off in the process, but theres certainly techniques I would say generally speaking completion designs are roughly similar.
We will see some tweaking.
I think certainly our supply chain efforts will help right away and kind of the next round of wells, but I want to be real clear. We are also taking this opportunity to learn.
We can learn from everybody rimrock is fighting the good fight just as everyone else in our industry is doing and so every time, we either look at one of these deals or when we're able to actually consummate a deal we take it as an opportunity to step up our own game as well and there's things mainly on the facility side. Some nuggets that we have already picked up and we're exporting to the rest of the basin.
From this transaction.
Great and as a follow up any color that you can give us on the comment of steady and consistent activity levels next year, and maybe how production could trend from your <unk> exit rate at a steady and consistent level.
Yeah, I would just say directionally.
Same strategy, so zero to 5% when we come off that.
That zero or low end growth know that it takes time to move that so I would say, where we stand today consider its on the low end of that zero to 5% range.
As you see in our quarters, we will have quarters that are a little higher and a little lower but when you zoom out a little bit you draw a line through it.
Well inside the strategy and we hope that that we.
We plan for that to continue.
Into the into 'twenty three.
Alright, well it looks like we're at the end of our.
<unk>.
It looks like we're at the end of our time slot today, we appreciate everyone's interest in Devon, and if Theres a few questions we didn't get to reach.
Reach out to the Investor relations team at any time.
Have a good day.
Thank you all for joining this now concludes today's call. Please disconnect your lines.
Okay.