Q3 2022 Devon Energy Corp Earnings Call
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Welcome to Devon Energy's third quarter earnings Conference call. At this time, all participants are in a listen only mode. This call is being recorded I would now like to turn the call over to Mr. Scott Coody Vice President.
Investor Relations, Sir you may begin.
Good morning, and thank you to everyone for joining us on the call today last night, we issued an earnings release and presentation to cover our results for the quarter and updated outlook throughout the call today, we will make references to the earnings presentation to support prepared remarks, and these slides can be found on our website.
Also joining me on the call today are Rick <unk>, our president and CEO Clay Gaspar, our Chief operating Officer, Jeff Ritenour, Our Chief Financial Officer, and a few other members of our senior management team comments. Today will include plans forecasts and estimates that are forward looking statements under U S. Securities Law. These comments are subject to assumptions risks and uncertainties.
That could cause actual results to differ from our forward looking statements. Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials with that I'll turn the call over to Rick.
Thank you Scott it's great to be here. This morning, we appreciate everyone, taking the time to join us today.
For Devon, the third quarter was another high quality performance demonstrated the flexibility of our strategy to create value in multiple ways.
The team's disciplined execution of our operating plan advanced earnings and cash flow by healthy double digit rates on a year over year basis free cash flow was bolstered by capital efficiencies and effective supply chain management that drove capital spending below forecast.
We rewarded shareholders with cash returns in the form of both dividends and buybacks that increased by nearly doubled over the past year.
And we strengthened our asset portfolio by closing on two highly accretive bolt on transactions that add to our ability to deliver sustainable long term results all in all another great quarter of executing our disciplined strategy.
For my remaining comments today I want to focus on those strategic moves we've taken recently to improve our business and the positive impact. These actions have on our fourth quarter and our 2023 outlook.
Turning to slide four.
We have worked hard through the years to assemble an asset portfolio that resides in the very best position plays on the U S cost curve being.
Being a low cost producer with quality inventory is critical to our long term success in over the past few months, we've taken steps to opportunities Opportunistically.
Improve our asset portfolio.
These bolt on acquisitions were underpinned by exceptionally strong industrial logic.
That advanced both a financial and operational tenants of our strategic plan.
First and foremost from a financial perspective, the transactions represent a value oriented consolidation of resource in the economic core of these respective basins, resulting in immediate financial accretion.
Acquired assets were funded entirely from cash on hand, and purchased at levels as low as two times cash flow and possess free cash flow yields ranging up to 30% at strip pricing.
Furthermore, the addition of this incremental wedge of free cash flow also allows us to accelerate the return of cash to our shareholders through higher dividends and positions us to further compound per share growth through our ongoing stock buyback program.
From an operation standpoint, these transactions fit like a glove within our existing asset portfolio and provide us improved economies of scale in the core of these respective plays the direct adjacency.
The acquired acreage also offer strong operational synergies and provides a meaningful runway of high quality inventory that immediately compete for capital within our portfolio.
Importantly, this resource capture allows us to sustain our high margin production from these assets for many years to come and does not require us to accelerate drilling activity across other parts of the portfolio to maintain our overall productive capacity.
Altogether I could not be more pleased with these tuck in acquisitions as they successfully demonstrate another pathway that our business can create immediate value for shareholders.
However, I do want to be clear the deals such as these that check every box are exceptionally rare we will always look for smart ways to strengthen our portfolio, but you should be confident in our disciplined approach that focuses on quality assets adjacency to our operations and immediate per share accretion.
On slide five in addition to enhancing our asset portfolio. We have also taken important steps to maximize realized pricing for our products with our marketing strategy. We are focused on securing multiple low cost transportation options in each basin we operate.
With balanced exposure to domestic and international markets by controlling firm capacity from the wellhead to the key demand centers, we've been able to steadily improve our price realization over the past few years. This progress is evidenced by the record oil realization. We were we achieved in the third quarter.
That reached 101% of the WTO benchmark.
A key contributor to this strong performance was the 20% equity interest in <unk> oil export terminal that we've accumulated over the past year. This investment in <unk> provides us 90000 barrels per day of export capacity in Corpus Christi offering valuable access to premium Brent linked pricing that led to an uplift.
More than $3 per barrel on these exports.
We've also taken steps to secure additional pricing diversification for our natural gas portfolio by recently entering an LNG export partnership with Delta Midstream once again this arrangement will provide us.
With 150000 Btu per day of direct exposure to international gas prices, such as the lucrative DTF or Jay Kent km markets.
However, I want to be clear. This is a capital light approach to attain LNG exposure and our investment in Delta, which is spread over this year and next is very minor and it will have a negligible impact to our capital outlook.
A final investment decision for <unk> <unk> floating LNG vessel is expected to be made in the coming months and we anticipate the facility will be operational within four years of this decision.
Now turning to slide seven with a positive tailwind to come from our accretive bolt on <unk>.
Acquisitions devins upcoming fourth quarter is set to be a strong one as you can see on the left we are planning on delivering a high single digit growth rate in production per share capital will be higher in the fourth quarter, but our disciplined reinvestment rates.
Remains at very low levels.
Approximately two thirds of the increased capital spending compared to the previous quarter is driven by our recent bolt on acquisitions.
The remaining third of the increase is a combination of higher service costs as contracts refresh a bit more operated activity than previously planned helps our operational flexibility as we head into 2023.
And we have seen a uptick in non operated activity.
Overall, it will be another great quarter for us as we expect to deliver free cash flow growth of more than 25% on a year over year basis.
In today's pricing this outlook translates into a compelling free cash flow yield of 11% or nearly three times, what the S&P 500 index offers investors with this excess cash flow. There is no change to our cash return playbook it will be more of the same.
As you can see on slides nine and 10, we will continue to accelerate the return of capital to shareholders through our market, leading dividend, which is one of the top yielding equities and the S&P 500, and we remain active buyers of our stock when the market presents us opportunities.
This operational and financial momentum will also carry into 2023.
I will hold off on detailed line item guidance today since we're still integrating the recent acquisitions of rimrock and validus into our capital allocation process.
However, I can confidently say that our Delaware asset we will continue to be the focal point of our capital program and we're focused on designing a plan with consistent activity levels that delivers the right balance between returns capital efficiencies and free cash flow.
With the benefit of acquisitions, we do expect to grow production in 2023.
However, compared to fourth quarter exit rates, our volumes in the upcoming year or likely to be in the bottom half of our targeted growth range of zero to 5%.
But capital activity levels required to sustain production at these levels.
We will be similar to the program were deployed in the fourth quarter of this year.
Although we could pull back on less efficient rigs when considering the incremental activity. We've recently added in the Delaware.
We still expect to experience some additional upward pressure on costs as contracts refresh, especially the second half year, but price discovery is still ongoing and very sensitive to industry activity levels and commodity pricing. We will provide official guidance in February but I'm confident that 2023 is going to be another great year.
For Devon, as we are well positioned to generate substantial free cash flow and execute on all facets of our cash return model.
With that I will now turn the call over to clay to cover our operational highlights.
Thank you Rick and good morning, everyone Devins consistent quarterly performance exemplifies the importance of balancing three things first the value of well communicated consistent and long term business strategy second a 24 plus months planning process, a detailed out the development schedule supply chain takeaway needs and any potential <unk>.
<unk> points, and third and critically important near term execution and getting it done.
Although the third quarter was another quarter, our team was working hard to deliver on all phases. All together, we're able to deliver on our business continues to strengthen and build momentum during the quarter. The team delivered results that exceeded expectations by focusing on capital efficiency and strong well productivity.
In addition to the important blocking and tackling associated with our day to day operations. We also invested substantial amounts of effort to ensure that we integrate the recent acquisitions into the business. The right way. So that we can maximize the value of these assets for shareholders. The integration is not just simply teaching the new people, how we do it a devon, but taking the time.
Learn challenge and improve our own processes.
On slide 14, let's begin with an overview of our Delaware Basin operations, which account for more than 60% of our total activity and drove the overall company performance in the quarter.
To optimize the returns of our capital program in this tight market, we've been very thoughtful in designing a plan with steady activity levels that has resulted in average of 14 rigs and three frac crews year to date.
On the top right chart, you can see that this disciplined capital allocation and the Delaware is working well, resulting in a healthy production growth rate of 11% year to date.
Importantly, the low risk development projects underpinning of this volume growth have delivered world class returns with IRR is consistent in the triple digits. Another win for us can be seen in the bottom left where the team has leveraged our substantial operating scale to maximize the value of our production.
With good upfront planning and economies of scale in the basin, we've been able to effectively control operating costs easing even as commodity prices have gravitated much higher over the last few years on the bottom right. This cost mitigation strategy has allowed us to materially benefit from the higher prices with margins expanding by 200.
Third 60% over the past few years.
Looking specifically at the quarter's results on slide 15, the Delaware team continued to a great job of achieving operating efficiencies.
On the chart to the right new well activity was highlighted by several high impact development pads, but the most prolific result was achieved by the CDU 604, H and southern Eddy County. This three mile lateral was our first test of the Wolfcamp b interval and the cotton draw area delivering a 30 day rate of just over 60.
500 Boe per day with estimated recoveries for this well trending towards 3 million Boe.
Not bad for a secondary target.
In addition to our outstanding well productivity, we've not seen any meaningful communication with the shallower zones in the wolfcamp such as the Wolfcamp, a XY sands, which deepens our quality of inventory and provides us flexibility to optimize future development plans in this portion of the field.
As I mentioned in my earlier comments, the strategic development of these target rich assets as some of the most complicated and important work. We do results like this give us confidence that we're getting things right.
We also made great progress advancing drilling and completion efficiencies across our operations in the basin and the Wolfcamp, we improved drilling productivity by 13% on a per foot basis versus last quarter with some of our best spud to rig release times for a two mile wells.
Pushing below 20 days completion efficiencies have also steadily progressed as were highlighted by a record setting performance on our cotton draw pad, where our completion pace reached an average of 3200 feet per day.
While we have made a lot of progress on efficiencies over the last few years. These D&C results showcase the incremental improvements the team is making everyday to reduce cycle times refined completion designs and deployed leading edge technology across all facets of the value chain moving.
Moving to slide 16, I am also excited about the positive results were seeing delivered and the other key assets across our portfolio.
In the Anadarko basin with our four rig program the team's approach of wider spacing and larger completion designs is delivering excellent results.
A great example of this resource progression was the auto development in the condensate window of Canadian County, This five oil project, which co develop the Meramec and Woodford formations attained an average 30 day rate of more than 2700 Boe per day, the strong well productivity, we are experiencing coupled with our.
100 million DAU drilling carry positions this liquid rich gas play to compete for capital with any asset in our portfolio.
Moving to the Williston. This asset continues its tradition of delivering some of the best returns and highest oil rates in our portfolio with another batch of great wells brought online during the quarter capital coupled with the Rimrock acquisition oil production advanced 30% versus last quarter. The team is also making substantial.
Progress integrating the <unk> acquisition, and Iraq operations and because of this transaction, we expect volumes to take another step up to around 65000 Boe per day by year end. This enhanced production profile now puts our williston asset on pace to generate around $1 billion of cash.
So for this year.
Turning to the powder River basin, we are encouraged by the results from our Niobrara appraisal activity in the quarter. The top highlight was a three mile lateral.
As you MLT project in Converse County that helped further validate the commerciality of this spacing test with improved completion design that pump 3000 pounds of sand per foot all ssu MLT wells performed above type curve expectations with 30 day rates, averaging 2500 Boe per day of which 86.
Percent was oil.
Importantly, we are still experiencing strong reservoir pressure and shallower declines than forecasted with per well recoveries on track to reach $1 2 million barrels of oil equivalent.
While we still have a lot of work ahead of US. This positive result, as to the conviction that the Niobrara will be repeatable resource play and an important growth driver for Devin in the future.
Lastly, in the Eagle Ford the results from the infill and redevelopment activity across our legacy position into Webb County continue to demonstrate that there is a lot more oil to be recovered from this prolific play overtime during the quarter. We brought on eight new infill wells bounded by existing producers that delivered 30.
Day rates, averaging 3200 Boe per day.
Slide 17 provides more detailed overview of our recent Validus acquisition.
This opportunistic acquisition doubles, the scale of our position in the Eagle Ford and captures a repeatable resource play in the best part of the Karnes trough oil window.
As you can see on the map the transaction secures an operated position of 42000 net acres with high working interest of 90% that's adjacent to our existing footprint in the play.
The oil weighted production mix of around 35000 BOE per day provides strong cash operating margins through access to the premium Gulf coast pricing low per unit operating and G&A cost of around $6 per Boe with.
With enhanced scale in the basin, we expect to realize $50 million in average annual cash flow savings from the capital efficiencies operating improvements and marketing synergies. Furthermore, the core of the Eagle Ford is providing is proving to be one of the best opportunities in the world for Downspacing redevelopment re <unk>.
And also EUR.
We have identified roughly 500 economic opportunities across the Validus acreage and this inventory allows us to sustain the high margin production from our Eagle Ford assets for years to come.
And lastly on slide 18, with our recent resource capture I wanted to end my comments today by covering the depth and quality of our inventory, which we believe is differentiating compared to the vast majority of the e&ps out there.
Turning your attention to the Middle bar on the chart at our current pace of activity. We've identified 12 years of high return development inventory delivering greater than a 30% return with $65 <unk> and $3 25, Henry hub pricing. This inventory discloses disclosure reflects the comp.
That we have and delivering repeatable capital efficient results for many years to come as you would expect the majority of our risked inventory resides in the target Rich Delaware basin, but we're also stocked with healthy amounts of high return inventory across all of our key assets to be clear this rigorous characterization.
As a result of existing well control and detailed subsurface work, but it is not meant to convey the full extent of our resource base.
This bar only represents the high confidence operated inventory that deliver competitive returns in a conservative mid cycle price scenario.
Moving to the bar on the right with a higher commodity price and further derisking of our portfolio over time, we estimate that our inventory extends more than 20 years at current activity base. This upside scenario assumes that we capture additional efficiencies fine tune spacing at higher prices and further delineate the geologic rich <unk>.
<unk> across our acreage footprint, however, I will be quick to add that the upside. We've identified is not an exercise, including every molecule of potential we fully expect a signal excuse me a significant portion of the upside opportunities to come into development over time tangible.
<unk> of these upside opportunities that the team are currently progressing include massive amounts of resource potential residing in the deeper wolfcamp intervals.
Redevelopment spacing in <unk> success in the Eagle Ford.
Ongoing appraisal work in the powder River basin to further de risk the Niobrara and improving capital efficiency that is unlocking resource potential in the Anadarko.
Bottom line here is that we have an abundance of highly economic opportunities that will continue to deliver top tier capital efficiency for the foreseeable future.
And with that I'll turn over the call to Jeff for financial review Jeff.
Thanks, Clay I'd like to spend my time today discussing the highlights of our financial performance for the quarter and the capital allocation priorities for our free cash flow.
A good place to start on slide six with a review of <unk> financial performance, where earnings and cash flow per share growth rapidly expanded year over year and exceeded consensus expectations.
Operating cash flow for the third quarter totaled $2 1 billion, an impressive increase of 32% compared to the third quarter of last year.
This level of cash flow generation comfortably funded our capital spending requirements and resulted in $1 5 billion of free cash flow in the quarter.
As you can see on the chart to the right. This strong result keeps us on track to generate a record setting amount of free cash flow. This year and is a powerful example of the financial results our disciplined cash return business model can deliver.
With the free cash flow Devin generated this quarter, our top priority is to reward shareholders with higher cash returns through our fixed plus variable dividend framework.
This dividend strategy is foundational to our capital allocation process, providing us the flexibility to return cash to shareholders across a variety of market conditions.
Under this framework, we pay a fixed dividend every quarter and evaluate a variable distribution of up to 50% of the remaining free cash flow.
Based on our strong third quarter financial results. The board approved a 61% increase in our dividend payout per year over year to $1 35 per share.
On slide nine you can see that our large dividend translates into a very compelling yield compared to other segments of the broader market and.
In fact at today's pricing or yield is substantially higher than the average company in the S&P 500 index.
Another priority for our free cash flow is the execution of our ongoing $2 billion share repurchase program on slide 10, you can see that over the past year, we bought back $1 3 billion of stock, which is a result, which has reduced our outstanding share count by 4%.
This equates to an average price of $50 per share, which is more than a 30% discount to our current trading levels.
Over the past several months our buyback activity has been somewhat limited due to our recent bolt on acquisitions in the Williston and Eagle Ford However, with those transactions now closed and with around $700 million remaining on our authorization, we can be more active by buyers of our stock when the market opportunities present themselves.
And to round out my prepared remarks. This morning, I'd like to give a brief update on our investment grade financial position. After funding $2 5 billion of acquisitions from cash on hand during the quarter, we exited September with a healthy cash balance of $1 $3 billion and low leverage with net debt to EBITDA ratio of around half a turn.
Even with this strong financial position, we're not done making improvements and we will continue to evaluate opportunities within our debt stack to create additional value for shareholders with that I will turn the call back to Rick for some closing comments.
Thank you Jeff Great job, we have covered a lot of good information today, but I would like to close with this key message and that is that the team here at Devon is delivering on exactly what we promised to do.
This is so foundational to our strategy. Our consistency has developed a strong trust for our brand with internal and external stakeholders.
We prioritize building a can do culture, and taking care of our people, including our contractors, who work for us we prioritize per share value creation over the pursuit of volumes and we have rewarded shareholders with market leading cash returns.
We've also demonstrated time and again, our technical capabilities and operational expertise against all across all five of our operated areas by consistently delivering top tier well productivity and capital efficiencies.
Furthermore, I believe we've continued to lead and differentiate from peers by establishing a logical accretive track record of consolidation the resource assessment successes that clay referred to with our lower Wolfcamp and the Delaware Basin and the Niobrara in the powder River basin.
Our establishing new sources of supply and inventory, we look forward to sharing additional resource assessment successes in the future.
Finally, we've continued to take important steps to enhance our business through our marketing and infrastructure strategies that have positioned us to achieve very attractive price realizations across the portfolio and stay ahead of any regional bottlenecks overall, it's been another great year for us, but the best is yet to come for Devon.
We are focused on closing out the year with strength and are preparing to build upon this positive momentum into into 2023.
I'll now turn the call back over to Scott for Q&A.
Scott Thanks, Eric We will now open the call to Q&A. Please limit yourself to one question a follow up this allows us to get to more of the questions on the call today with that operator, we'll take our first question.
Yes, Thank you and as a reminder, if you would like to submit for a question. Please press star followed by one on your telephone keypad. If you would like to remove that question. Please press star followed by Tim again to ask a question Thats Star. One also if you are using a speaker phone. Please remember to pick up your handset before asked.
And with your question.
Our first question comes from Ryan.
Jeremy with JP Morgan Your line is now open.
Yes, good morning, Rick I wanted to start you provided some call it soft guidance commentary for 2023 I respect the fact that you're still in your capital budgeting process.
Let's go back to your prepared comments, you mentioned that you expected.
<unk> growth to be at the low end of the zero to 5% range from the <unk> exit rate.
When we think about the <unk> exit rate is that basically the <unk> guide of 650000 Boe per day at the midpoint and $3 20 to five for oil.
Trying to get your definition of the exit rate.
You bet Arun that's spot on that's exactly what we're saying is correct.
That's that's the assumption I should make you bet.
Great Okay.
My second question for you Rick is to get your thoughts on.
What do you think is the appropriate development scheme.
First shale.
<unk> above mid cycle conditions that we get a lot of questions from this from the buy side, but.
One of your peers has decided the high grade there.
Their 2023 program.
To develop higher return locations starting next year.
In the broader context of the fact that shale inventories are finite in nature.
Do you think it makes sense for Devin today to tailor your development programs on maximizing irr's or NPV per section and love to get your thoughts on that idea.
Yes, that's a good question for us.
The plan that we've been implementing over the last 18 months is about what you ought to expect from us.
In the future we may have some minor minor tweaks rune, but we feel really good. When you are when you are a multi basin operator as we talked earlier, we're stood still doing in a couple of our basins quite a bit of a resource assessment testing new zones.
New intervals things like that will continue we'll continue to do that but as far as the operating scheme I don't know that youll see a lot of change from what we've been.
Over the last couple of years.
You want to you want to add anything to that Rick I think you nailed it with balancing IRR an MPV is an important consideration.
Of course, you have all the practical realities of we've got to make sure. We have takeaway we want to make sure. We're doing the right thing from an ESG perspective, we're thinking about assessing future potential those always don't necessarily command the highest risk rate of return today, but it's incredibly important as we think about not just this quarter's return or years return three year five year 10 year returns as well.
<unk>.
Great. Thanks, a lot.
Thank you Ron.
Thank you.
Our next question comes from.
Neil Mehta with Goldman Sachs. Neil Your line is now open.
Yes, good morning team.
Just get your perspective on this opportunistic bolt had valid center key interim rock and as you said you acquired them at very attractive multiples. What is the opportunity set that you see around similar type of acquisitions and 10. This become a core part of your go forward business model.
<unk> up.
Assets and arbitrage the multiple.
Neil.
Another good question from our perspective, I think you've heard us be very consistent with our messaging that we will always be opportunistic on transactions that could strengthen our company.
We want to make sure that we do deliver the accretion or wave in arms, but we actually it shows up in our income statement over time and to the point.
That you made if it could deepen some some inventory.
That really is very critical we're going to continue holding.
Holding.
Consolidation.
I think an important part of our overall strategy that being said as I mentioned in our prepared remarks.
You don't always find those deals at check every box and we're not going to overpay, we're going to be very disciplined.
And.
These two transactions worked quite well for us and there could be others in the future, but we'll wait and see.
But we're certainly proud of what we've done in half two.
Give a tip of the add to our team that brought these over over the over the fence and.
Great transactions and help us in a lot of ways.
Thanks for the follow up is just on capital spending.
And the focus of Investor conversations. This morning, you talked a little bit about in the prepared remarks, but can you once again for H between old and new guidance for 2000 to spend and just how we should think about.
How much of this play.
The way, we should think about 2003 as well.
Yes, I think I'm going to ask <unk> to go into maybe some of the details, but just as I said in our remarks, two thirds of the increase the capital spending are a direct impact of these acquisitions, where you had ongoing.
Rig activity, we had two rigs running down the Eagle Ford on the Validus deal on a rig running in the <unk>.
The Bakken on the rimrock, so that comes with that comes with capital spend and so that's a big part of it and and I think we broke it down into three other three other areas.
For that other than the third but clay you may want to just share your perspective as well on the increase.
Eric first of all there is inflation out there we've never been hiding from inflation, it's real as we renew contracts. We see that continue to tick up I think we're starting to see a crest and that as I look to see that necessarily significant rollover, but certainly kind of a cresting, maybe some green shoots and softening here.
There.
We will continue to monitor that I think it's too early to say how that manifests over the course of 2023.
But that's the first piece of it. The second is we actually took some opportunity too to step up a little bit of activity get a running start on 'twenty three you'll see that in really in the.
In November December .
New wells Spud spud.
Spud count will come up a little bit and then also as we start to look at kind of across the fence and our partners. The non op activity has stepped up as well. So when you when you break it down with the two thirds being from the acquisition activity.
The remaining piece kind of divided roughly in thirds that way.
I think we feel pretty good about where we're at.
Sure for the trajectory for 'twenty three as well.
Thanks, Tim.
Thanks Neil.
Thank you.
Our next question comes from the line of Doug Leggate with Bank of America, Doug. Your line is now open.
Thank you and good morning, everyone.
Guys I Wonder if I could go to clear first and then to.
Jeff Thanks.
<unk>.
Comments about testing wider spacing.
Guests in the Midcon.
I'm looking at slide 18.
To get from the 12 unit inventory to the 20 year inventory one of the comments under there as appraisal on tighter spacing.
So I wonder if you can reconcile what is up spacing means for your confidence and not increased longer term inventory.
Guidance.
Yes, Doug thanks for the opportunity to clarify that so the.
The up spacing is really relative to I think the dark years of the stack.
Where the industry really down spaced too much took for granted the amount of well to well interference or maybe isolation and frankly, just overdressed I think where we're at today, we're seeing phenomenal returns, but as you know everything changes on a real time basis commodity price yields well.
Costs.
<unk> and that constant mix is something we are evaluating is three or four or five the right spacing.
Specific to mid con, but I think in the broader sense as we look kind of across the basin and then you move from a midpoint of $65 price deck.
I believe we assumed 85 on the larger on the larger account.
You also have to reconsider how does that work in other areas powder River that has really yet to be defined on how what kind of spacing, we're doing and even some of the deeper potential in the Delaware Basin, certainly has significant upside depending on which commodity price you run and that's where that really that that spot to the.
<unk>.
On the bar on the right really comes in one additional note on the in the mid Con area. There is a lot of running room with gas and I think that of course is a very important consideration as we start thinking about what price deck you run what realizations do we have and ultimately what's the right economic approach to extract that.
Opportune value.
Sorry, just to be clear did you say $85 oil for the 10000 locations.
Yes.
A little higher than that Scott.
<unk>.
It's in that neighborhood, Doug. So we did for the unrest we did have a higher price point, that's more reflective of maybe current spot pricing just.
Have a regulator on the on the unrest as well, but and also we did take some of the risking off with regards to some of the appraisal that needs to be successful to make that call them convert into our risk category overtime.
Okay. Thank you for the clarification my follow up is hopefully a quick one for Jeff and it goes back to the comments Rick made about free cash flow in the fourth quarter over 2021.
Jeff you still have about it looks about 80% deferred.
Cash tax and not free cash flow number for the third quarter of $1 $5 billion.
When can we expect to see a more normalized.
Cash tax going forward and I'll leave it there thanks.
Yes, thanks for the question.
As you saw here in the third quarter, we adjusted our expectation for the full year.
Cash tax level.
<unk> been guiding most of the year around a 10% cash tax burden and we now think that's going to be closer to 8% a real big driver for us This year as we're having the benefit of some tax attributes.
The bulk of which are Nols as we move forward into next year.
We will carry forward of about $1 billion of Nols that will be able to utilize kind of over a multiyear period. So that will help keep.
Our tax liabilities in check as we move forward, but as we've talked about before our expectation for next year. If you assume kind of the current commodity price levels and cost structure, you're going to be hovering around that kind of 15% current tax level and that would be our expectation as we move throughout next year.
Thanks for taking my questions guys. Thank you.
Thanks, Doug.
Okay.
Thank you.
Our next question comes from Jeanine Wai with Barclays. Shannon. Your line is now open.
Hi, good morning, everyone. Thanks for taking our questions.
Your first question actually both of them maybe for clay here sticking with inventory.
Again officially I appreciate all the details on slide 18.
Delaware can you provide a little bit more color on that it looks like for the over 4500 risk locations about 55% of those are in the Delaware and so our question is kind of what's the mix of zones within that estimate and in particular, how much of those 55% of locations would you consider to be tier one kind of.
<unk> X y.
Okay.
Thanks Jeanine.
Youre, referring to slide 18, the bar kind of there in the middle of total of greater than 4500 locations. Yes, you got a keen eye a little more than half of that is in the Delaware as I think about that kind of light gray box and break that down by far most of that is wolfcamp and bone spring, which as you know.
The really good stuff that we've been going after.
Certainly a smaller portion is some avalon and some deeper other potential but it is by far mostly bone spring and Wolfcamp.
Okay, Great and then maybe sticking on us here on base decline. So in Q2, the Delaware total and oil production. It grew significantly I think it was like 22% year over year in Q2 and 16% on oil.
Q3.
Year over year growth it slowed and oil I think was down like 3000, a day versus <unk> of last year.
So just maybe smashing everything together, we've got flattish oil expected in four Q and the Delaware can you provide an update on what you think the oil based decline will be for the Delaware going forward and then maybe for the overall company.
As you put in the Bakken and Eagle Ford deals. Thank you.
Yeah. Thanks Jeanine.
Yes, you are right and as we compare quarter to quarter.
Obviously, there's two ends of that last year's quarter to this year's quarter and boy can really get a little bit lumpy. So I think you were thinking about it right scaling up maybe thinking about year over year trajectories.
So yes, we will continue to see.
Some nice growth, we said, 11% year to date.
And on the slide for the base decline.
I'd say its roughly 30 to 35, probably closer to 30% as we continue to moderate that growth. These numbers come down and that's a benefit of this of the business model that we that we have we will continue to see that mitigate over time and therefore, making this.
Keeping our production flat more capitally efficient.
Thanks.
Is that 30% to 35% in the Delaware or was that for the overall company.
Yes, coincidentally are really both.
But yes for both.
Great. Thank you.
Sure.
Yeah.
Our next question comes from Paul Cheng with Scotiabank. Your line is now open.
Thank you good.
Good morning, guys.
Two questions.
The first one yes.
Good morning, the first one is for Jack and the second one yes, okay.
Jeff in your presentation you have a.
Interest income and assumed debt.
Managements.
And.
And then the streamlining that plot has led to a high yield unit DD&A.
Can you elaborate what exactly you guys are doing in that.
That will lead to a higher unit DD&A and also.
But that you expect on those asphalt.
Are we talking about here.
And second corn, yes.
On the bolt on acquisition and legal costs.
Is that in any shape or form will impact how we're going to look at J.
<unk> EBIT BP in the area that.
The focus all the attention for their companies.
If any shape or form that yes, it's going to have any impact. Thank you.
Hey, Paul This is Jeff Yes happy to address your question on DD&A, it's a little bit of the nuance of successful efforts accounting and.
You are probably aware we have different common operating fields are cost centers. If you will kind of across the company as Ted aligned with how we kind of manage the operations post the merger that we did with WPS, we actually kept our Delaware, South and north asset separate so new Mexico and to the North obviously in Texas to the South here.
Over the last couple of quarters, we decided to consolidate that all into one cost center and so as a result, you have.
Spread that cost of those units.
Across the entirety of that new business unit or a cost center, if you will and so as a result.
Have a slight increase in the DD&A rate going forward to the overall company as a result of kind of streamlining that effort.
Driven by the consolidation of those two call centers.
And Paul as cloud pick up on the second question.
Yeah.
Sorry go ahead, yeah, sorry, Paul go ahead bought that cannot just off that Jeff yes.
<unk>.
The cash savings.
Going forward with this consolidation on the same line.
Oh absolutely.
Work that we've done around integration post merger continues so we're always looking for ways to continue to make the.
The asset base, better and how we manage those assets going forward. So certainly this was a component of our.
The execution of that integration and we certainly would expect to see.
Some synergies.
Minor in the Grand scheme of things today, but we'll certainly thats part of our thought process as we rolled out the synergies we talked about post merger.
Paul I'll take the second question, yes, Sir.
Our joint venture with BP.
<unk> is really a separate discussion now clearly as we scale up our activities, we will bring our learnings that economy of scale to BP as the drilling and completions operator and then.
Vice versa. We're also.
Bringing knowledge to the Validus assets.
Also remember as part of the JV Devon operates the.
Joint venture Wells. So there is definitely economies of scale in our operations. Some of the technologies that we use some of the efficiencies around the people being able to cover essentially more with less.
That's always very good as you scale up these.
These opportunities I think one of my favorite test to do as you look at one of these deals is just glance at the map and if it makes sense from an industrial logic standpoint, you know that there is some real efficiencies to be gained and we're certainly going after those right now.
Thank you.
Thank you.
Our next question comes from.
Scott Gruber with Citigroup Scott Your line is now open.
Yes, good morning.
The Validus acquisition in the Eagle Ford Yes.
Yes identified 500 remaining locations.
W or the total base.
Inventory stack.
The stacked bar chart or all of these new drill locations. These figures include re frac opportunities in.
Re frac is not included.
Could the re frac opportunity.
Yes.
Only the drilling opportunities, but we have additional re fracs as well there are a little hard to quantify.
We are working on that now we have some internal numbers.
Around the re Fracs and I can tell you it's more than just where does it work from a reservoir standpoint, it's also where does it work from a well construction standpoint, you have to be able to reenter these wells for an economic.
Economically and be able to re stimulate and really stimulate new rock is the key to success there.
And as you study the opportunity set how would you describe the economics.
<unk> today, and how would you think about layering in.
Next couple of years.
Yes, I would say we are.
We're still in the early stages of really rolling that into our portfolio I would say, it's still in the assessment bucket that I referenced early.
It could be very meaningful not just in the Eagle Ford maybe in other areas as well and so the quantity that we've done this year and I expect for next year is relatively small.
As I've mentioned, it's finding the right recipe what was the original stimulation that well what was the stimulations and the offset well, what's the spacing to the offset wells, what's the casing construction of that well and does it lend itself to the right recipe. So that we can reenter properly stimulate hopefully charged.
New rock and therefore really get the Bang for the Buck what I can tell you. The early results are very encouraged I think we're finding the right recipe, but it's too early to really lean into hard just yet.
Okay I appreciate the color. Thank you.
Thank you Scott.
Yes.
Thank you.
Our next question comes from Neal Dingmann with truly Neil Your line is now open.
Thanks for the time this morning guys.
First question is on your Delaware Transportation, specifically could you all speak to the continued Delaware takeaway and then also.
How you all are protected from the wild price volatility that we've even seen recently.
Yes, you bet Neal this is Jeff.
We feel really good frankly about our ability to move the molecules you've heard us talk about this in the past.
We've had these dislocations in pricing and Wahaha over the last couple of years and the team's done a great job of kind of protecting us from from that exposure.
Big picture, we move call it north of 50% almost 60% of our volumes are gas molecules out of the basin to the Gulf Coast and so those volumes actually have exposure to.
Houston ship channel pricing with the remainder of molecules that sit in basin, we've hedged almost all of that and so there remain the remainder of volumes.
Specifically exposed to Wahaha is about 10% of our gas molecules.
In basin. So when you when you put that altogether just to give you some context and somebody will correct me on the math here, but I don't have a quite right but.
It's less than 1% of our revenues as a total company are exposed to to why at this point given the given the links that we've gone to note number one move the molecules out of basin, and then number two hedge our exposure there.
Great answers and then my second question is on your natural gas plants specifically.
Could you all give us some more color maybe on that Delta LNG partnership how you might see this advancing and then other potential similar I would call non binding type agreements are opportunities going forward.
Yes, you bet, we're excited about the opportunity with delfin.
We're a little light on details at this point because we're still in the process of negotiating some of the commercial terms, there and how all that shakes out.
But generally speaking, it's really just an extension of our broader marketing philosophy and thought process, which is we're always trying to capture the highest realized price wherever we can for our molecules. While at the same time kind of a balancing our exposure to the different markets that we're involved in and so as we look forward out over the next five and 10 years, we really.
We expect the growth in demand for natural gas to come outside of the United States and so for US It makes sense to have exposure to the water in to those international markets and so we.
We're excited that we could take a step forward with Delfin makeup relatively minor investment with them, which is going to provide us some access to those international markets going forward I'll remind everybody that those projects, we don't expect to come online until the kind of the 2026 timeframe, but we're excited to kind of work things forward with that group.
And then hopefully get a get us exposure to the to the.
The premium markets that we're seeing internationally.
Great details thanks, Jeff.
Thanks Neil.
Thank you.
Our next question comes from John Freeman with Raymond James.
Your line is now open.
Thank you my first question's, a little bit of a follow up.
Janine and Doug.
In Q1 on Slide 18, I guess, just when I think about.
The rest inventory.
Got at the moment, and we think about sort of the balancing act.
Of adding to that risk inventory either via bolt on deals like you've done recently versus.
Appraisal and testing they kind of move that.
Outside location count into the risked inventory I guess can you just sort of look out the next two or three years would you anticipate that more of those risked inventory locations comments from more of these kind of bolt on deals or is it more from kind of a.
Appraisal testing spacing type of of efforts.
Thanks for the question Jon This is clay.
I would say more from the appraisal we think about the work that we're doing and a lot of these horizons that are just not quite defined on downspacing, what's the right spacing test, maybe even vertically or two landing zones. There are there are three landing zones in some of these intervals and then I think about some of the stuff.
It's a little bit further afield, let's say in the powder. There is a lot more opportunity there to bolt on to that number from the appraisal standpoint.
Any additional just to be clear, we don't have any assumptions on future acquisitions or any additional bolt ons and any of these numbers.
And then when I think about.
For next year I appreciate some of the early color on how to think about.
2023 from a from an activity standpoint, and some of the cost inflation.
<unk> is there anything from a midstream perspective on a on a year over year basis that we should we should also consider other whether it's related to some of the bolt ons recently getting bigger in some of these areas.
Necessitate some more midstream infrastructure spend and 23 versus <unk> 22, and we'll kind of trying to finalize what when you think about the 23 budget.
Yes, just think about it kind of similar to 'twenty, two kind of a similar runway.
Great I appreciate it.
Thank you John .
Thank you.
Our next question comes from Matthew Portillo with T. P. H Matthew Your line is now open.
Good morning, Al just to start out a question around Q4, it looks like the market's a little bit Steve.
Steve on the guidance as we look at the well data in the Permian in particular.
Results look extremely consistent on a year over year perspective, but curious as you guys look at the data how you're feeling about your productivity trends and then if you are seeing fairly consistent well results. Just curious if there's anything to take into account regards foothill timing during the fourth quarter that might have led to some of the guidance shaking out in Q4.
Yes, Thanks, Matt.
<unk> been able to talk about that because the well performance is phenomenal. This is an absolutely world class asset we love the position. We're in we love the scale that we have the team keeps delivering.
Still working on the efficiencies, we're still applying technology always trying to get a little better a little smarter each day.
No doubt about it we have some inflation coming our way. So there is some squeezed the margin on the margin, but I would take this world class asset and love, having in our portfolio and really really pleased on what's going on with the team and what they're doing.
And then I guess a follow up question clay maybe on the stack you guys had started the up space program here with DAU. It looks like some impressive initial rates just curious if you could provide some context around well performance with the US base completion design and then.
Italy, just the view on midstream infrastructure.
The asset starts back on a growth should we expect further midstream build out either on the G&P perspective, or some marketing to move gas further south.
Accommodate that growth in 'twenty three 'twenty four.
Thanks for the questions Don stack Matt.
Again, the team's looking looking at this holistically thinking about what's the right way to extract the optimum value back.
Balancing rate of return balancing NPV and thinking about the leverage that we have the first and the most significant is well spacing. The second of course is completion design both of those I mentioned in my prepared remarks, we like the approach that we have clearly we have to understand what commodity price is going to do and as those number.
<unk> rise up on gas and NGL realizations, there is an opportunity for us to maybe even take a step tighter and still achieve supercomputer returns.
So we're still working on that like what we're seeing as we move into the gas window, certainly the higher commodity price and the gas certainly helps thats a significant amount of upside.
For our inventory as we think about the midstream and the nice thing about working in in the Anadarko Basin is a lot of built out midstream. So we feel really good about the runway of course, we have regular conversations with our midstream partners trying to stay out in years ahead, because these big wells, especially with the gas volumes can take up a lot.
Auto space and pipe in implants, and so we want to make sure. We're telegraphing, what we're doing to our midstream partners and I would say that those conversations are going along very very well.
Thank you.
Yeah.
Thanks, Matt.
Thank you.
Our next question comes from Kevin Mccarthy with Pickering Energy Partners. Kevin Your line is now open.
Hey, good morning, guys and congratulations on a good production quarter above guidance. The only area you didn't beat our expectations was in the Bakken and I Wonder if you could talk about the integration of the Red rock assets and what you expect the trajectory of the production would be you mentioned earlier that.
There was a 65000 barrel a day exit rate is that for the full quarter or would you expect to grow above that next year.
Yes, I would say roughly so the 65% or 65000 Boe per days, but.
What will be for the quarter so.
I appreciate the acknowledgement of the third quarter, sometimes that can get lost.
The teams worked exceptionally hard to continue to perform and we're really really.
Pleased with that the Williston as we take over on any of these acquisition deals no doubt about it there's going to be Handoffs and little bumps in the road. There was a particular pad that came in we had some delays and as you know when youre running kind of a sub scale activity just a few days or a week of delay can manifest into a larger delay when you.
Really trying to pick up and lay down equipment and that bid is there and so we had a little bit of a.
A transition.
Issue, there, but I think we've got the team up and running now feel really good ive bragged on many of earnings calls about the Williston team in particular have tremendous regard for them and in faith and their execution and again this is a.
Integration is not necessarily normal core competency, we've taken it as as one that we need to be exceptionally good at this and I'm really proud of the results we're seeing around the organization from HR.
From the.
The it department from the accounting group, everybody coming together to really bring these assets in and ultimately extract the optimum value for the shareholders.
That's it for me thank you.
Thanks, Kevin appreciate it.
Well I appreciate everyone's interest in Devon today, and if you have any further questions. Please don't hesitate to reach out to the Investor Relations team at any time have a good day. Thank you.
This concludes today's Devon energy third quarter 2022 earnings call. Thank you for your participation you may now disconnect your line.