Q4 2022 Devon Energy Corp Earnings Call
Okay.
Welcome to Devon Energy's fourth quarter earnings Conference call.
At this time all participants are in a listen only mode.
This call is being recorded.
I'd now like to turn the call over to Mr. Scott Coody, Vice President of 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 that cover our results for the year and our outlook for Devon in 2023.
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 Moncrieff, 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 materially 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.
Right to be here. This morning, we appreciate everyone, taking the time to join US on the call today I will cover three key topics our record setting performance in 2022.
The strong outlook, we have for 2023, and the cadence of our capital and production in the upcoming year.
Now to begin with I'd like to turn your attention to slides six and seven which cover our results for the past year.
As you can see for Devon Energy 2022 was another year of outstanding accomplishments, we achieved all of the capital objectives associated with our disciplined operating plan, we delivered the best financial performance in our company's prestigious 52 year history, and we took important steps during the year to strengthen the depth and quality.
Of our asset portfolio.
The slides on slide six.
Show a great visualization of the solid execution, we delivered over the course of 2022.
Production per share advanced by 9% year over year.
This growth resulted from a combination of record oil production that has more than doubled since 2022 accretive.
Acquisitions and timely stock buybacks.
Our streamline cost structure captured a full benefit of favorable commodity prices expanding per unit margins year over year.
Returns on capital employed set a new company record of 39% for the year.
This impressive return profile outpaced the S&P 500 by a substantial margin.
This strong capital efficiency translated into free cash flow, reaching an all time high of $6 billion in.
In 2022 more than doubling the previous year.
I want to congratulate the entire team at Devon for these accomplishments in 2022 this type of operational excellence and financial performance differentiates it even as one of the Premier energy companies in the U S.
Another key highlight for 2022 was a market leading cash returns we deliver to investors on.
On slide seven.
We have included a comparison of our total cash payout they reached around 10% for the year versus other opportunities in the market.
As you can see in the Red portion of the bar <unk> dividend payout was more than double that of the energy sector and vastly superior to every sector in the S&P 500.
However, I want to be quick to add that we are not just a high yielding dividend story. We are also compounding per share growth for investors through the execution of our $2 billion share repurchase program.
By Upsizing this buyback authorization twice during the year, we reduced our outstanding share count by 4%.
Since program inception, and security shares at a substantial discount to current trading levels.
We also supplemented per share growth in 2022 by deploying a portion of our excess cash towards taking advantage of unique M&A opportunities.
These acquisitions in the Williston and Eagle Ford.
We are highly complementary to our existing acreage.
We secured a meta and attractive and accretive valuation and captured top tier oil resource and the best part of these prolific fields, while tough to come by these transactions successfully demonstrate another way our plan can create value for shareholders.
On slide 11, as we shift our focus to 2023.
To be clear that there is no change to our disciplined strategy.
At Devon, we are driven by per share value creation, not the pursuit of produce volumes for the upcoming year. We have designed a consistent capital program to sustain production deliver high returns on capital employed and generate significant free cash flow that can be harvested for shareholders.
Now, let's run through some of the highlights of our 2023 outlook.
Beginning with production, we expect volumes to build throughout 2023 to reach an average of 643000 663000 Boe per day for.
For the full year of which approximately half is oil combined.
Combined with a tailwind from share repurchases and our two well timed acquisitions.
Our volumes on a per share basis or on track to deliver an attractive high single digit growth rate once again in 2023.
The capital investment required to deliver this production profile is expected to range from three six to $3 8 billion.
With these capital requirements being self funded at pricing levels as low as a $40 <unk> oil price.
This low breakeven funding level showcases the durability of our business model and positions us with an attractive free cash flow yield in 2023 screens as much as two times higher than.
And other key indices in the market.
With this strong free cash flow, we will continue to prioritize the funding of our dividend, which includes an 11% hike to our fixed dividend payout beginning in March.
We will also have plenty of excess cash after the dividend to evaluate opportunistic share buybacks or take steps to further improve our balance sheet.
Lastly, on slide 12, I would lock in today's comments with a few key thoughts on the trajectory of our capital spending and production profile as we progress through 2023.
Beginning with capital we planned for spending to be slightly elevated in the first half of the year due to the addition of a temporary fourth frac crew in the Delaware Basin.
This elevated a completion activity in the Delaware is expected to be wrapped up by mid year, resulting in reduced capital spending over the second half of 2023.
Looking specifically at first quarter production, we expect volumes to approximate 635000 Boe per day.
Our production during the quarter is expected to be temporarily limited about three factors.
First due to the timing of activity, we expect to bring online around 90 gross operated wells in the first quarter. This will be our lowest quarterly amount for the year.
However activity does ramp up from here with roughly 15% more wells online per quarter over the remainder of 2023 compared to the first quarter.
Another factor impacting near term production as infrastructure downtown down time in the Delaware basin due to a temporary outage at a compressor station in the Stateline area.
Along with some minor third party midstream interruptions in the area. We estimate these outages will limit first quarter volumes by around 10000 Boe per day.
However, we expect to fully resolve these issues and resume operations by the end of the quarter.
Lastly, our forecast is also assuming that we elect to reject ethane at several processing facilities across our portfolio in the first quarter. This is expected to limit volumes by roughly 10000 Boe per day during the quarter.
But the key takeaway here is that while our first quarter production will be held back a bit due to timing of activity and infrastructure. We do expect volumes to fully recover and increase over the remaining few quarters of 2023 to an average of roughly 660000 Boe per day.
So in summary, since we first unveiled the industry's very first cash return framework in late 2020, we have created tremendous amount of value for our shareholders two.
<unk> 2021 was a great year 2022 was one for the record books in 2023 is shaping up to be another excellent year for Devon.
Outlook beyond 2023 is also exceptionally broad given my belief that we are still in the early stages of a multi year energy up cycle.
This conviction is anchored by supply constrained from a decade of global under investment.
Ongoing sanctions on Russia, and production, a generational low and OPEC spare capacity fiscal.
Fiscal discipline among U S producers and the inevitable rise in demand for our products as global economies normalize and grow post COVID-19.
I fully expect this favorable supply and demand set up to be another catalyst for our energy appreciation or equity appreciation as more investors rediscover highly profitable and value oriented names like Devon with that I'll now turn the call over to clay to cover a few operational results and more details regarding our capital.
<unk> in 2023.
Thank you Rick and good morning, everyone. And addition to our strong 2022 financial results. Devon also continued run of strong operational execution as well as you can see on slide 14. This was evidenced by several noteworthy accomplishments, including a new all time high for oil production that was underpinned by another year of world.
Class well productivity in the Delaware.
Devon is oil weighted production mix, coupled with our low cost asset base allowed us to capture record margins and maintained low reinvestment rates of just over 30% of cash flow.
We also efficiently expanded our resource base in 2022 with proved reserves advancing 12% through the combination of strong drilling results and by seamlessly integrating two property acquisitions during the year.
Flipping to slide 15, you can see that these strong operating results in 'twenty. Two also places in the top echelon of capital efficiency for the entire industry.
<unk> Devin in this crowded and competitive space.
These operational achievements across every phase of the business demonstrate the power of devins advantaged asset portfolio.
The success of our rigorous capital allocation process and the quality of our people to extract the most value out of these assets through superior execution.
For the remainder of my prepared remarks, I plan to discuss the key capital objectives and catalyst of our 23 operating plan.
423, we plan to maintain a very similar activity level as compared to the fourth quarter of 'twenty two.
Which was the first full quarter of operations with our recently acquired assets in the Williston Basin and Eagle Ford.
Overall, we plan to run consistently 25 rigs throughout the year, resulting in approximately 400, new wells placed online in 2023.
Turning to slide 16, once again, the Delaware basin will be the top funded asset in our portfolio, representing roughly 60% of our total capital budget for this year.
To execute on this plan, we will operate 16 rigs across our acreage footprint with the sweet spots in southern Lea and Eddy counties in the state line area of Texas, receiving most of the funding.
Approximately 90% of our capital will be allocated towards high return development activity in the upper Wolfcamp and bone spring, while the remaining 10% will be allocated towards delineating upside opportunities in the deeper wolfcamp that will add to the depth and quality of our inventory in the basin.
Importantly, we expect overall well productivity from this program to be very consistent with the high quality wells, we brought online over the past few years.
We are also well positioned to maximize value for our production in the Delaware for the upcoming year.
The marketing team has done an excellent job of diversifying across multiple transportation outlets and sales points, allowing us to avoid many of the takeaway constraints in the basin.
Looking specifically at the gas volumes approximately 95% of our gas in the Delaware is protected by either firm takeaway constraints excuse me contracts or Gulf coast.
By regional basis swaps with.
With oil production, we expect our revenue to benefit from our access to premium Brent pricing through <unk> export terminal in Corpus Christi.
This advanced pricing combined with low LOE, plus <unk> cost structure of around $7 per Boe will.
We will drive another year of strong margins and excellent free cash flow from this franchise asset.
And lastly on this slide I would like to provide a few more thoughts on our first quarter infrastructure downtime in the Delaware as pointed out on the map in late January we had a fire at one of our compressor stations in the Stateline area that severely damaged the electrical system and the <unk> unit.
The station is our largest operated compressor facility in the basin with capacity of 90 million cubic feet per day and is a key component to our centralized gas lift operations and the surrounding area.
We have secured necessary replacement equipment and the team is currently on site repairing the facility with this disruption and other third party midstream downtime in the area. We expect to have a negative production impact of 10000 Boe per day in the first quarter.
With the quick reaction time, and the team's focus on safety and recovery, we expect to have the facility back up and the affected production fully restored by mid March and we do not expect to have any negative production impacts dragging into the second quarter.
Turning to slide 17, and moving onto the Eagle Ford team.
Team has done a great job integrating the <unk> acquisition into our operations, resulting in our fourth quarter production nearly doubling to 68000 Boe per day.
With this increased scale the Eagle Ford will play a much bigger role in our capital allocation in the upcoming year accounting for just over 15% of our total capital spend.
During the year, we plan to run a steady three rig program with 70% of the activity deployed towards developing our recently acquired acreage in Karnes County.
With the remaining capital invested in our JV partner <unk>.
<unk> and <unk> County.
Overall this development oriented activities designed to maintain steady production in 2023.
Looking beyond the production trajectory a key catalyst for this asset at an upcoming year will be the continued appraisal of resource upside from tighter redevelopment spacing and re fracs.
Early results indicate there is a lot more oil to be recovered from this prolific play over time as we get more data points I expect to provide more commentary on this important resource expansion catalyst in the near future.
Moving to the Anadarko basin in 2022, the team's approach of wider well spacing and larger completions design consistently delivered triple digit returns with the benefit of our $100 million carry with them.
As we look ahead to 2023 I expect continued value creation as we plan to deploy a steady program of four operated rigs once again carried by down.
This program is expected to result in around 40, new wells placed online.
Focused on primarily the co development of the Meramec and the Woodford formations in the condensate window of the play.
The carried returns of these projects will once again be very strong, allowing us to maintain a steady production profile throughout the year, while harvesting significant amounts of free cash flow.
For both the Williston and powder River basins I want to begin by acknowledging the tremendous job our field personnel did an fighting through extremely challenging weather conditions over the past few months.
While operations in the fourth quarter were certainly slowed due to these already conditions. The production from the business was resilient collectively averaging 80000 Boe per day between these assets in the Williston and powder River basin.
Looking ahead to 2023, approximately 10% of our capital spend will be to be.
<unk> deployed across these two plays resulting in approximately 50, new wells placed online during the year.
Approximately two thirds of the Rockies capital activity will reside in the Williston basin in 2023, the capital objectives for this asset are to efficiently sustained production through low risk infill drilling evaluate resource upside with a handful of <unk> tests.
And generate around $700 million.
Of cash flow at today's pricing.
In the powder. Our objective is designed to build upon the three mile lateral success from last year by taking the next step in the progression of the Niobrara with spacing tests of up to four wells per unit. These pilots will not only help us better understand spacing, but also help us inform optimal landing zones and compete.
<unk> designs.
The key takeaway here is that powder is one of the few emerging oil plays in North America, and we have a 300000 acre net position in the core of the oil fairway, providing devin and important oil growth catalyst for the future.
Overall, we're very excited about the prospects in 2023 I.
I believe with a high quality slate of projects, we have lined up for the upcoming year, we expect to continue to deliver top tier capital efficiency that investors have become accustomed to we're also well positioned to refresh and add our depth of inventory as we execute on these programs in 2023.
A good visual reminder of devins depth of inventory and upside potential is on slide 18, I've covered this topic at length during previous calls so I won't go through the details today, but I do want to emphasize two key takeaways from this slide.
We have identified roughly 12 years of high return development inventory.
Evaluated at mid cycle prices.
This inventory positions us to deliver highly competitive results for the foreseeable future and secondly, I want to highlight that this inventory does not fall off a cliff at the end of the year 12, we expect to systematically refreshes inventory overtime as we successfully characterized and de risk the many upside opportunities.
Is that exist across our diverse set of assets.
And lastly on slide 19.
We are continuing to make significant strides in our environmental performance as outlined in our recently published sustainability report.
This comprehensive report details devins aggressive mid and long term ESG targets, including those highlighted on the right side of this slide as well as meaningful steps that we've taken towards meeting these targets.
Our actions demonstrate the priority we have placed on long term carbon reduction intensity of our operations.
Really proud of the team's commitment to doing business in the right way, which means mandating, which means balancing three mandates.
First providing the critical energy to power the world's economy.
Can provide compelling and sustainable returns to our investors and third do all of this and in an environment in a minimally conscious way.
Can expect them to continue to raise the bar on all three of these imperatives.
With that I'll turn the call over to Jeff for the financial review Jeff.
Thanks, Craig I'd like to spend my time today discussing the highlights of our financial performance in 2022, and the capital allocation priorities for our free cash flow as we head into 2023.
A good place to start is with a review of <unk> 2022 financial performance, where operating cash flow totaled $1 $9 billion in the fourth quarter, an 18% increase versus the year ago period.
This level of cash flow funded all capital requirements and resulted in $1 $1 billion of free cash flow for the quarter.
For the full year 2022 free cash flow reached $6 billion.
Which is the highest amount Devin has ever delivered in a year and is a powerful example of the financial results our cash return business model can deliver.
Turning your attention to slide eight with this significant stream of free cash flow a unique component component of our financial strategy is our ability and willingness to accelerate the return of cash to shareholders through our fixed plus variable dividend framework.
Under this framework devins dividend payout more than doubled in 2022 to a record high of $5 17 per share.
Based on our strong fourth quarter financial performance, we announced a fixed plus variable dividend of <unk> 89 per share that is payable in March and includes the benefit of our 11% raise to the fixed dividend.
Another priority for our free cash flow is the execution of our ongoing $2 billion share repurchase program on slide nine you can see that we upsize this buyback authorization twice during the year and we bought back $1 $3 billion of stock at prices well below the current market level.
Over the past two quarters, our buyback activity has been limited given the large cash outlays associated with our recent acquisitions and our preference to rebuild cash balances to optimize our financial flexibility.
As we head into 2023, we expect to be active buyers of our stock, especially if we see trading weakness relative to our peers.
On slide 10, I'd like to give a brief update on our efforts to improve the balance sheet in the fourth quarter, our cash balances increased by $144 million to total $1 $5 billion.
With this increased liquidity Devin exited the quarter with a very healthy net debt to EBITDA ratio of only half a turn our strong investment grade financial position provides us the opportunity to return more free cash flow to shareholders and be less aggressive on debt reduction moving forward, we will look to retire debt as it comes due.
<unk> utilizing our healthy cash balance.
Our next debt maturity comes due in August of this year totaling $242 million, we will have additional opportunities to pare down debt with maturities coming due in 2024 and 2025 as well.
And finally I'd like to highlight the excellent return on capital employed we delivered in 2022 as Rick touched on earlier, we achieved a company record 39% return on capital employed during the year importantly, even with today's lower commodity price environment, we expect to deliver another fantastic.
Result, with return on capital employed projected in excess of 25% based on our provided guidance and current strip pricing.
This showcases the durability of our financial model to deliver highly competitive returns through the cycle.
With that I'll now turn the call back to Rick for some closing comments.
Thank you, Jeff great job to wrap up our prepared remarks today I want to reinforce that at Devon, we are wavering in our focus to deliver differentiated results for our stakeholders, including our shareholders and employees.
To meet this high standards. It all begins with our commitment to be a financially disciplined company that delivers high returns on invested capital attractive per share growth and large cash returns to shareholders to.
To achieve these financial goals, we have carefully assembled a long duration resource base that has high grade to the very best plays on the U S cost curve.
This resource, but this resource depth, coupled with the execution capabilities of our team position us as a premier energy company that can deliver sustainable results through the cycle.
Since the merger announcement in 2020, we have delivered on exactly what we promised to do with this disciplined operating model and I expect more of the same in 2023.
While we will be slowed down a bit in the first quarter by an unfortunate unfortunate outage the pathway to recover as well define communicated and the trajectory of our business will only strengthen as we go through the year. Overall 2023 is going to be another really good year for Devon and with that I will now turn the call back over to <unk>.
Got 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 to more of your questions today on the call with that operator, we'll take our first question.
Thank you thank.
I would like to ask a question. Please press star one on your telephone.
Pat If you change your mind, Please press Star fleet.
When preparing to ask your questions. Please ensure that you cited some niches lately.
Our first question comes from Jeanine Wai from Barclays. Please go ahead.
Hi, good morning, everyone. Thanks for taking our questions.
Good morning, Janine, So I guess, maybe good morning, I guess, maybe if we could start off with the 2023 plan. Just wondering if you could bridge between kind of that annualized Q4, Capex guide, which would have implied about three five to $3 6 billion in Capex and then the 2023 budget of kind of the 300.
Fix the three eight just wondering if the increase was primarily related to inflation activity or something else.
The new level of Capex is kind of the sustaining number going forward. Thank you.
Yes, Thanks, Jenny and good question and happy to talk about it. So yes, we soft guided in last couple of months extrapolating, our fourth quarter. I think we were very much in line, but it is notably just a touch higher and so we are continuing to see inflation and I wanted to define inflation because it's <unk>.
As we have conversations at the tip of the spear I don't sense that we are seeing incremental inflation coming our way. What we have is a maturing of older steel contracts that are coming up to a little bit more kind of current rates. So we experienced some of this in the fourth quarter, we're baking in assumption that we'll see more of this.
Throughout 'twenty three now some people have wondered on our on our projection for the second half of 'twenty three do we have any deflation or.
Maybe even inflection to more inflation in the second half I would say what we have is a more steady runway run rate, including just a little bit of incremental inflation really on the order of maturing our contracts that may be a little bit on the conservative side, but I think as far as we can see I think that is kind of what we are.
<unk> today.
Okay, great. Thank you I appreciate all that detail.
Maybe moving to you Geoff we heard your commentary about the buyback slowed down in Q4 for good reason.
Maybe there could have been some kind of catch up in the quarter, because Q3 was probably impacted by the acquisitions, but can you provide any color on just the pace of the buyback in Q4 and is it reasonable to think that you could finish up the remaining $700 million in authorization, which I know would be big but.
Talked about being opportunistic but is it reasonable to think that maybe you can finish authorization by the end of Q1 or is it more likely to kind of be done by early may when it expires. Thank you.
Yes, you bet Jeanine and thanks for the question, Yes, Youre exactly right on the back half of last year as we walk into the acquisitions with the cash outlays, there as well as all of the noise that you are well aware of related to blackouts.
During that time period, and certainly in the fourth quarter as we as we're leading towards year end that made it more difficult for us to get into the market and then frankly, we were just in a position where we wanted to build back our cash balances to maximize our financial flexibility as I mentioned in our opening comments.
Going forward to answer your question specific to 2023, we do expect to get back into the end of the market.
Bigger way.
As it relates to our authorization as you highlight that authorization kind of wraps up in the second quarter of this year of course, just as we did last year. My expectation is we will have plenty of opportunities to go back to our board to reload that authorization to build upon it as we work at Ford and certainly our expectation here in the first quarter and moving into the second quarter.
It will look more like the pace that you saw from us in the first half of last year as it relates to the buyback and particularly on days like today, where we're trading off relative to the group. That's a point in time, where youre going to see us be real real opportunity to mystic and aggressive getting into the market and buying our shares back.
Thank you gentlemen.
Thank you.
Next question comes from Mr. Kumar from Mr. <unk>. Mr. <unk>. Please go ahead.
Good morning, and thanks for taking my questions.
Rick I wanted to I think we have spent a lot of time on capital efficiency today, but I want to start with cash return if I may.
Some of your peers have talked about maybe steering away from variable dividends and more towards buybacks just because the dividend payout is a bit variable just by this term.
Can you talk about why the current mix of the fixed plus variable and opportunistic buybacks as the right cash return strategy for Devin in your view.
Yes, great Great question, it's one that we've debated here internally, but we always come back to our starting point, where we were.
Back in September of 2020, when we announced the merger.
And we feel that this framework.
It gives us all types of flexibility number one is the fixed dividend is something we've been very proud of.
Now decades that Devon has delivered on the variable certainly.
Getting 50% of your free cash back to shareholders.
It's a very transparent method of cash return.
Admittedly.
What we like about this strategy and this approach is it still gives us opportunity opportunity for share repurchases or for that.
Debt Paydown, if youll recall in the first year after the merger of 2020.
One we actually retired $1 2 billion of debt at <unk>.
Some great terms and so really really pleased when you look back and certainly that move.
So I think for US we feel that there is still is the right framework for us and so we're going to we're going to stick with it and it gives us plenty of opportunities.
To do the share repurchases as Jeff just mentioned certainly when you see these kind of dislocations from our peer group or our longer term outlook.
Certainly.
Contemplate that and will be.
Moving on that.
So thats no don't change.
That's why we feel very committed to this framework.
I appreciate that Rick.
I guess as my follow up.
Some of your basin peers have been talking about new technologies that can help improve recovery factors in the Delaware basin in the Permian.
I'm just curious you mentioned the.
Test that youre doing or the stuff that you're doing in the Eagle Ford, but anything in the Delaware that you can speak to in terms of improving well productivity or efficiencies.
Yeah, let me I'm going to start it and then I'm going to pivot and led to clay wrap it up but the reality is it Devin we've got a got a unbelievable technical team here.
And it's not just in the Delaware I know we've got some.
Some of our competitor companies are talking about some things, we see we see that as well, but I can assure you we see we see longer term opportunities in the Bakken and longer term opportunities in the Eagle Ford as well so.
As clay touched on Youre going to hear more and more of this.
In the future from us, but we're really excited with what we see and I'll just say this I can't drive home this point.
Hard enough and Thats weather, whether its the incremental resource assessment that we're doing to develop new inventory for the long term for the company or.
What we can do from a technical perspective operational perspective, too to enhance the longevity and the sustainability of our assets were all over that and im going to be real.
Cited due to in the future be able talk about it to clay I'll pivot to you I think Ricky I think you nailed it I'll add just a little bit of color I mean, I think this is kind of the the brave new frontier as we think about the maturing of resource plays the land capture the kind of the easy relatively easy stuff has been done and so now we're thinking about how do we take these overall.
Recovery factors and where there are significant opportunities how do we eke out that next incremental opportunity I mentioned, a couple kind of teased ahead on a couple of things we're doing in the Eagle Ford as well as in the Williston I can tell you all of those things are extrapolated bowl to other basins as well those happen to be.
Two of our more mature assets, where we truly understand the geology, we understand the development, we have the opportunity to kind of feather in some of these interesting approaches so theres quite a bit of excitement around that I would tell you. It's a little too early for prime time, but you know that our focus is clearly on that.
As we think further out into the portfolio.
Alright, thanks, guys. Thanks for the answers.
You bet. Thanks Darren.
Thank you.
Our next question comes from Scott Gruber from Citi, Greg Scott. Please go ahead.
Yes, good morning, I wanted to come back to the comment on inflation.
And at the tip of the spear youre seeing a bit less inflation.
At this juncture are you starting to sense that some of the gas director of equipment in the Haynesville is starting to get that into the Permian and I know you mentioned your base case.
As for a bit more inflation over the course of the year. It sounds like you are mainly our contract will.
But is there a case building for deflation in rigs and Frac pumps before the end of the year just given.
Given where gas prices.
Thanks for the question Scott, Yes, I would say as I look at it steady state today.
We are at a.
I had a service cost point that is higher than the current strip and so what that tells me is in time as steady state as we get into a little bit more steady state conditions.
These two things will come together either price will come up for service cost to come down to kind of converge. What we're seeing is in the front half of the year, we want to make sure. We're clear on this as we have things pretty well locked down and so youll see a lag towards something.
That convergence potentially in the second half of the year that again.
We will see we will benefit from and are lagging way, but honestly with all of the cross winds in 'twenty three I'm not sure where commodity price is going to go and therefore net activity, we've seen a pretty wild swing and gas prices over the last six months absolutely that will have impact these rigs are pretty fungible can.
Move from basin to basin by design and so if that trend continues we will absolutely see coming down in service cost certainly in the Permian now again I want to be real clear, we have not baked that into our our capital program, we're assuming very steady very steady state.
Kind of single digit type inflation as we think as we turned the page from fourth quarter 'twenty two to 'twenty three because it's real.
It's really too early to bake any of that and we're having some very interesting kind of real time conversations I can tell you. The tone is vastly different than was just a couple of months ago and thats encouraging, but I think it's too early to really bake into our capital forecast.
I appreciate all that color.
And then just a quick one.
Delaware operational efficiency it looks like it.
Drills until this year.
Maybe a handful versus last year, but pretty similar level.
So you guys are running a few more rigs versus early last year and you've got that fourth frac crews coming in for the first half.
Can you just speak to kind of expectations around lateral length.
Any other factor in kind of impacting overall efficiency in the basin kind of mix impact from.
Wells targeted in the program this year.
Yes, thanks for that Scott I would say directionally, the lateral length and the working interest when you're paying out are about the same we may be a little bit longer overall.
As we start thinking about net spend you have to think about.
Working interest as well that varies throughout the year.
Probably within the margin of error when I really look at the efficiency of how quickly we're getting wells down when youre looking at days Youre looking at hours of pump time on Frac crews those points of.
Of efficiency I continue to see steady improvement very encouraging in that regard and so I would say there is a marginal increase in operational efficiency.
Ultimately what that will yield as I mentioned, a couple of times in my prepared remarks is essentially the same type well performance productivity kind of year over year and were kind of claim and that is a victory honestly. When you look at the maturation of the overall resource plays and where some of the rest of the industry as we continue to see kind of flat productivity.
<unk> certainly when you bake in a little bit of inflation that capital efficiency erodes from a numerator standpoint, not from a denominator. So we're baking all of that and we're well prepared but when you really think about where we're at.
Still the remaining margin is pretty outstanding very optimistic about the net financial results as we project for 'twenty three to be quite an outstanding year.
Okay got it I appreciate that color, Thank you and I'll turn it back.
Thanks Scott.
Thank you.
Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead.
Yeah. Good morning team correct first question to you is just on M&A you talked about the two property acquisitions.
Last year, how do you think about.
Balance in incremental bolt ons relative.
Buying back your stock in that.
What do you think the activity sat around M&A could look like in 2023.
Neal it's a great question.
A foundation for Us is really.
The high bar that we've always had on transactions and so we will we'll look at transactions if it makes sense.
We'll compare and contrast that with what you were talking about the share repurchases I think what you saw.
That's the beauty of our model. We had earlier question about that the beauty of our model is we can do a little of all of those and so we made some great dividends.
The share repurchases took place we were able to pay cash for two very accretive acquisitions of bolt ons and so.
I think that's.
That is a winning combination it really is now.
I do think that youre going to continue to see consolidation in our space I think there's consolidation needs to take place and it's healthy for our industry and.
Right.
I'm very much in that camp for us I can tell you we're going to continue to be disciplined and thoughtful and once again think about over the long haul it needs to be something that.
It can compete we've got a wonderful.
Wonderful portfolio and.
And so we'll we'll always and will always be so if we look at.
As a as an option.
Thanks, Rick.
Follow up.
So the team is just on the outlook for natural gas, we shared your comments around the oil markets gas, it's a lot more uncertain.
It does feel like we need to see a supply response in order to calibrate the market given where inventories are so just perspective on the gas macro in 2023, and then how is the lower flat price for gas changing the way Devin is approaching its activity program in 2023, you see.
Any.
Changes that you need to make on the margin to respond to the margin environment.
Yeah, Neil I'll start and then I'll have Jeff follow up clean up any of my comments, but I think for US we were on record is going.
Out there a year ago, where we felt like gas actually similar commodity price has actually got a little ahead of itself and we're a little surprised it went up quite as fast as it did.
I can also say that it's come down a little faster than I thought it would as well, but I think that's driven by two things number one certainly was report with the you take two two BS a day there is a cumulative impact of that export.
Capability being lost and then the second thing is probably a lot of parts of the country a little milder milder winter natural gas is still and we all know this it's still somewhat weather dependent is a lot different than crude oil and so.
I think that for us.
We're going to continue to stay.
As oily as we can for as long as we can I can assure you. We just think that's a winning combination obviously some some strong gas gas guys out there that probably are more appropriate.
To answer the questions, but do you have how are you looking at it.
Longer term, yes, you bet Neal Thanks for the question and I think I will.
Echo Rick's comments, we continue to.
Believe that longer term there is going to be increased demand for for natural gas out of the U S. Given the LNG projects that are going to be build out obviously as we all know that still still a couple of years out in the meantime, we're going to be.
Susceptible to some.
Some volatility depending on what weather does and other dynamics like Freeport that that impact the market.
As Rick also mentioned, we view ourselves as an oil company and $8, 90% of our revenues are around oil. So we're more focused there to your second part of your question Neal.
Has it changed our game plan for this year or going forward as it relates to activity. The answer is no again, most of all of our activity as oil focused and.
And driven by the prices that we see you would see there in the cost structure. So no no big change to our game plan as a result of.
What we've seen in the natural gas market.
One thing I may add is that even some of our some are more gassy development actually is here in the Anadarko, but you have to remember that a big part of that is on our Meramec and so that's a lot different.
Project than then.
I'd say in Appalachia, where our Haynesville type project. Many of these wells IP 500 barrels a day of condensate so there hi.
High liquid content and that's what drives returns that's what drives our our interest in it.
Thanks, everyone.
Thank you.
Next question comes from Doug Leggate from Bank of America, Doug. Please go ahead.
Thanks, everybody well Dang.
Thanks, Jeff for everybody.
I guess someone else stole my my variable dividend question. So I'll have to go with something else.
Anyway nice to join the call. Thanks for taking my questions.
Two related questions guys, if I may.
And I guess, Jeff they both might be for you.
A year ago on this call you talked about an ultra low breakeven around 30 Bucks and then your press release yesterday, you talked about presentation rather.
You talked about a $40 breakeven.
It seems that with the moderate inflation I guess expectations those two numbers don't really seem to align.
Walk through what's changed to about $40 a $10 increase in breakeven is.
What youre trying to communicate.
Yes, you bet, Doug So no question the cost structure as we've been talking about has moved higher.
On a year over year basis, we had the benefit for the better part of 2022.
Given the supply chain work that we did in the great work. The teams did to kind of lock in kind of firm contracts with term youre starting to see some of that unwind now as clay referenced earlier and so that contract refresh has resulted in a.
Higher cost structure that youre seeing in this year and so that's really what's driven that breakeven higher now there are some other impacts as youre well aware our cash taxes.
We expect to be higher this year.
We've utilized the Nols in 2022.
That's been an impact thats driving that that cost higher but by far and away I know everybody is tired of talking about it I certainly am as well, but it's the inflationary impact that we've seen.
Across frankly every cost category and you used the word moderate I would I would actually choose a different additive.
You think about most of these cost categories, we've seen anywhere between 30% and 50% kind of inflation, depending on which cost category you're talking about that's what we're walking into in 2023.
And again I'd like to think we protected ourselves well and benefited from the other side of that for the bulk of 2022, but certainly as we refresh contracts in the fourth quarter of last year and walking into the first and second quarter of this year youre seeing some of that impact and it's certainly driven that break even higher.
I guess I was referencing moderate versus the fourth quarter, but yes, you are quite correct. Thanks, Jeff for correcting.
Well thanks for the clarification I guess my follow up it might be for you or Jeff.
For Rick but.
Im looking at the free cash flow in the fourth quarter of 2022.
It's basically the same as the free cash flow in the fourth quarter of 2021 with high oil and gas price.
I guess my question is that with the deferred tax so it looks like that's ballpark is going to move or to your point versus the fourth quarter.
On a normalized basis, Q4 would probably be lower than year ago then.
<unk> moves.
Your guidance. So I guess my question is I.
I don't want to see free cash flow has peaked but it kind of feels like outside of a commodity call. It kind of has and so when you think about Cree.
Creating value in an inflationary environment.
How do you how do you expand free cash flow I would say dare I say of something like an acquisition what do you do.
Drive volume.
Accretion, which is ultimately a function of free cash flow expansion and I'll leave it there. Thanks, Yeah, you bet Doug I. Appreciate the question you're spot on I mean, that's that's why our focus here internally and clay referenced this in his comments earlier is around the focus on that cost structure of the productivity and the efficiency of the well.
So that we're drilling that's the piece that we can control right. Obviously, we don't have a lot of help on the revenue side Youre certainly correct to the extent that commodity prices go higher which we frankly expect that to happen given what we've seen in the market that certainly would be incremental free cash flow to us, but we can't count on that and so what we're focused on as a company internally is around our.
Cost structure and being more efficient every day in the field and the office on the things that we can control and so the good news is clay referenced as we're continuing to see improvement on that front, we're continuing to squeeze white space out of the Gantt chart and.
On a day to day on each of our projects, but it's got to be focused around cost structure, because thats, what we can control and thats, how we can drive greater margins relative to the inflationary environment, we're seeing today.
Well Barry I appreciate the answer Jeff I guess I was thinking about taking out someone else's cost because you have got a strong track record of M&A, but I'll.
I'll leave it there thanks so much.
Yeah, Doug I'll, just add on and again just to Echo Rick's comments earlier, we continue to be believers that consolidation is going to happen in this space and that certainly is going to be a driver of that we feel like we're well positioned to take advantage of those opportunities, but but as you've seen from us in the past we've got a really high bar as it relates to what we would bring into the portfolio and how it would compete.
With the assets that we've got but again, we can't that's hard to control as well the timing and the nature of those transactions. So we got to stay focused on what we can control, which is the work we're doing day to day.
I appreciate it thank you Jeff.
Thank you our next.
Next question comes from Paul Cheng from Scotia Bank. Please go ahead.
Alright. Thank you good morning, guys.
Two questions.
In your press release.
I'm sorry in the fourth quarter net total linked quarter well tie in is about 17% lower than the third quarter.
It's a structural recently is just so happened that for the reason that that end up to be every single basin.
That's a language is lower and also maybe.
In your press release, you also said that.
A negative 55 million barrel of oil.
<unk> negativity.
Adjustment arbitration.
What is that what we need to then what causing negative migration there.
And then.
My second question is that.
Do you have a net debt.
Them to longer term target I know, Jeff yes.
<unk> mentioned that youre going to pay down debt that based on the maturity, but is there a gross net on net debt target you have in mind, what would it be a pop here for the company longer time. Thank you.
Hey, Paul as clay I'm going to jump in on the reserves question and then I'll, let Jeff handle the debt question. So.
So I appreciate the question I am really I want to stress. This very importantly, we're super confident in our reserves booking process the quality of our reserves.
This is one of the hidden benefits actually from our merger.
WPS had one auditor Devon had another we've actually brought in a third party to look at both sets of books and just take a brand new refresh this year, which has been a great process.
Inevitably there's gives and takes but we just we were very very much in line with this world class New look fresh auditor.
The nature of reserves in general is that we there is no strong incentive to overbook theres lots of incentives to.
There is a strong disincentive to overbook.
So we want to make sure that we have a conservative outlook as designed by the SEC I think the general phrase is much more likely to go up and down but sometimes you have with a five year rule theres things that move around and so specifically to the oil question you hinted that there was some some movement in the rig.
<unk> and the rig focus from some of the Texas assets in Delaware to a little bit more new Mexico focus and that caused some of those wells to fall off in the five year rule and so they fall off one category, obviously, they can come on and other other parts of the additions as well until.
So that tends to balance but in when you look at the overall.
Quality of the reserves year after year, there's lots of really important hence to look at it.
Finding and development cost as a run rate.
If you think about Pud percentage booking you think about pud conversion percentage. There is a lot of things that are very important to look at when you watch all of those Devon is in a very very strong position, we feel very confident about our reserves. There is one other piece and a nuance of the reserves booking thats very important.
When you first thing you do is youre looking at price revision. So you make a change on price. This.
Second thing you start looking at are things like cost structure, and all of that and in our case and everyone's case, but in our case in particular, our LOE ticked up year over year and that falls into a reserves.
Non price related revision and so it's in that bucket, it's really as a result of higher inflation due to prices, but it doesn't quite fit into that to that price revision category. So there's some interesting nuances I just want to emphasize the confidence that I have personally and and the team has in our reserves process.
It to Jeff and let him talk to that.
Yeah, Paul I think Jack.
Before Jeff can you also comment.
Comment about lateral length in the fourth quarter.
It's about 17%.
Shocked up and third quarter is there any structural reason or it's just a one off because of other reasons.
Hey, Paul This is Scott I'll jump in real quick and then pass it over to Jeff for that question, but the key driver of the shorter lateral length is largely the incorporation of Validus you brought online in the Eagle Ford you brought online about 30 wells in the Eagle Ford So that by nature of the drilling configuration, there they're shorter laterals.
But overall if you exclude.
That impact largely everything else with close to two mile lateral which is in line with our previous trend. So that's going to be the big variance there and.
And probably all things equal you should see that kind of waiting b very similar going forward given the capital plan that we have planned for 2023 Jeffrey.
Yeah, Paul I think your last question was around our net debt to EBITDA and any targets that we have related to that what we've talked about historically.
Internally and externally it was kind of a one times net debt to EBITDA target as you heard in my opening comments, we're well below that today.
And we're very comfortable frankly, with our overall leverage position as we highlighted in the materials, we've got a strong investment grade credit rating.
We have really positive conversations as it relates to the rating agencies and frankly, just given the strength of our core of our business. We feel really good about where we are as I mentioned in my opening comments that allows us to be less and less aggressive trying to take down the absolute debt level, we feel really good with the maturities coming due here over the next call it two to three.
Years, our expectation is we will just take those out as they mature.
I wouldn't expect us to step up any incremental debt reduction. In addition to that now certainly should market conditions change or something else come come come to light that might change our point of view, we would we would adapt and be flexible given the cash balance that we have and the free cash flow, we expect to generate.
And I'll, just reiterate something Rick mentioned earlier, which is that one of the beauties of our financial model as it provides us a lot of balance.
To do multiple things, whether it's debt reduction variable dividend stock buybacks or Italy, or certainly even evaluate some cash transactions. So we feel really good where we are on the leverage and we'll expect to just take those maturities as they come due over the next couple of years.
Thank you.
Thank you.
Our next question comes from Neal Dingmann sure.
Neil Please go ahead.
Good morning, guys.
My first question just on the reinvestment rates, specifically it looks like the showing that the rate maybe has increased to potentially this year a bit over 40% versus 31 last year I'm. Just wondering how do you anticipate this trending and is this just largely driven.
Higher reinvestment rate because of cost or are there other factors, we should think about.
When sort of determining what this reinvestment rate is going to continue to trend towards.
Yes, Neal this is Jeff.
I think if youre speaking to our overall reinvestment rate at a corporate level. That's exactly right. It's just it's just the math and the function of <unk>.
Higher cost as a result of the inflation that we've seen and then the and then the lower the lower commodity prices, which we all know have been well certainly on natural gas has been dramatic, but but more so important to us as an oil and certainly on a year over year basis. The strip would suggest a lower oil price for this year as it relates to last and so that math just works out.
To be a higher <unk> ratio.
Okay. Okay. Thanks, Jeff and then just secondly climate for you just on the you touched on this a little bit just on the infrastructure you mentioned in the.
The prepared remarks on the compressor and third party.
I think you mentioned that you expect this to be back to normal next quarter, whether I guess proprietary changes or are there new contracts or anything that you've done to help mitigate this going forward to give you more confidence unless and this happened in going forward.
Neil I'll say, it's a little too early to kind of really digest all of the lessons learned the team. This is really days, maybe a couple of weeks old.
<unk>.
Team want to make sure first of all there was no one injured there's no one on location. So that worked very much in our favor we want to understand the impact to see if there was anything immediate that we had to address on any other compressor facilities with similar designs. We didn't see anything in that regard. The teams are now doing.
Deep investigation in parallel to the real time fixing and what I would say is so far there is no glaring issues. There is a lot of mechanical parts a lot of moving pieces.
We will learn some things we will apply some some learnings, but I don't think theres anything that really stood out.
Right off the bat that we thought we could improve in the and the offset operations.
But you do expect that that locally normal play by second quarter you said.
Yes, I would say middle of March we should have production fully up and running again.
About that time, and so shouldnt bleed into the second quarter feel really good about that.
Very good thank you.
Thanks, Dan.
Yes.
Well I see we're at the top of the hour 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, Thank you and have a good day.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Yes.
Yes.