Q1 2023 Devon Energy Corp Earnings Call
Welcome to Devon Energy's first quarter 2023 conference call.
There's talk all public and only need might this call is being recorded.
Now I'd like to tend to correlate with Mr. Scott Coody, Vice President Investor Relations 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 first quarter and our outlook for the remainder of 2023 throughout the call today, we will make references to the earnings presentation to support prepared remarks Andy.
And these slides can be found on our website also joining me on the call today are Rick one increase 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 it's pleasure to be here. This morning, we appreciate everyone taking time to join US for today's discussion I'll be focusing on three key topics that I believe are most important to our shareholders at this point.
First I plan to cover our solid first quarter execution.
I'll run through the steps, we've taken to bolster the return of capital to shareholders and third our plan to share insights on how our business is positioned to effectively control cost and gained momentum throughout the rest of the year.
So to start off lets turn to our first quarter results on slide six where we had several key highlights first total oil production exceeded our mid point guidance at 320000 barrels per day, representing a growth rate of 11% compared to the year ago period.
This level of oil production was the highest in our company's 52 year history.
Our strong well productivity in the Delaware Basin was once again, a key contributor to this result, and our recently acquired assets in the Eagle Ford and Williston Basin also provided as higher volumes in the quarter.
I will touch on our well productivity in greater detail later in the call, but I do want to highlight that the average well placed online in the quarter is on track to recover more than a million barrels of oil equivalent.
These strong recoveries are right in line with our historic trends over the past few years, demonstrating the quality depth and ability to deliver sustainable results across our resource base.
Another notable achievement from the first quarter.
It was our team's effective cost management. This was demonstrated by capital expenditures being in line with expectations and operating costs coming in better than our guidance by a few percent.
I'll cover this topic in greater detail later in the call with our outlook, but this positive start to the year puts us in a great position to potentially spend fewer dollars in 2023 to achieve our capital objectives for the year.
With our first quarter capital activity, we limited reinvestment raised a prudent levels, resulting in over $665 million of free cash flow.
This marks the 11th quarter in a row, our business has generated free cash flow with oil prices over this time ranging from as low as $40 a barrel to as high as $120 a barrel.
This is a great example of devins ability to generate meaningful amounts of cash flow free cash flow across a variety of market conditions.
Further showcasing the durability of our strategic plan to create value through the cycle and deliver returns on capital employed that compete with any sector in the S&P 500.
With this free cash flow, we continue to reward shareholders through our cash return framework, which was well balanced between dividends and stock buybacks in the most recent quarter.
As shown on slide seven the total cash payout from the shareholder friendly initiatives reached an annualized rate of around 12% yield in the first quarter, which significantly exceeds the available opportunities in other sectors of the market.
Really have this payout was derived from our distinctive fixed plus variable dividend framework.
This consistent formulaic approach, which began almost three years ago has allowed Devon to offer one of the highest yields the entire S&P 500 census groundbreaking implementation.
Now turning to slide nine in addition to our strong dividend payout, we continue to see attractive value in repurchasing our shares which.
Which we believe trade at a significant discount to our intrinsic value to capitalize on this compelling opportunity we made substantial progress advancing our buyback program by repurchasing.
$692 million of shares year to date in addition to our corporate buyback activity multiple members of our management team myself included have also demonstrated their conviction and devin the value proposition by purchasing stock in the open market over the past few months.
With our board of directors approving the upsizing of the capacity of our repurchase program by 50% up to $3 billion. The company is well equipped to be active buyers of our stock over the course of the year.
Now moving to slide 11, looking to the remainder of 2023, there is no change to our disciplined operating plan, we laid out for you earlier this year.
Now that our Delaware infrastructure is fully operational and actively ramping to place more wells on line, we expect our production to grow over the remainder of the year. This momentum places US right on track to average just over 650000 Boe per day.
This year, which translates into a healthy production per share growth of approximately 9% on a year over year basis.
With capital, we've not made any revisions to our outlook of three six to $3 8 billion for the year. As a reminder, this capital forecast assumes a low single digit inflation rate compared to our 2022 exit rate. However.
However, in the first quarter, we did experienced service stock service price stability for the first time in many quarters and we began to see signs of increased availability of goods and services due to an overall slowdown in industry activity.
If these trends continue we see potential for downward pressure on service costs later, this year and into 2024.
With much of our contract book shifting towards shorter duration agreements. We are now well positioned to work with our service partners for better terms is more frequent contract refreshment occurs over the next several quarters.
Lastly on slide 12, I believe this chart does a good job of summarizing the competitiveness of our outlook in 2023 with the plan. We've laid out we continue to possess one of the most capital efficient programs in the entire industry that is self funded at a $40 <unk> oil price with.
This disciplined plan Devon is well positioned to continue to generate significant free cash flow and execute all aspects of our cash return model, making 2023, another successful year for us now.
Now with that I will now turn the call over to clay to cover our operational highlights clay. Thank you Rick and good morning, everyone as Rick touched on earlier, our team did a great job of meeting the first quarter operational targets through solid well productivity effective cost management and the steady progression of upcoming development.
Projects that will benefit us over the coming quarters remember, we're focused not just on delivering the numbers for this quarter and year, but also derisking opportunities for the coming years and also investing in R&D that will create value throughout the coming decade.
We're making great progress on all three fronts.
This positive start to the year put us in great position to continue to build momentum throughout the course of the year and achieve our corporate objectives for 2023.
A significant contributor to the success in this quarter was our franchise asset in the Delaware Basin.
As you can see on slide 15, roughly 60% of our capital was deployed to this prolific basin, allowing us to run a consistent program of 16 rigs and four frac crews in the quarter.
With this level of drilling and completion activity, we brought online 42, new wells in the quarter with the majority of this activity targeting high impact intervals in the upper Wolfcamp.
This focused development program resulted in another quarter of volume growth year over year with oil representing 51% of the product mix.
While we had great productivity across our acreage position our performance during the quarter was headlined by our exotic cat radar project. This six well pad located in Lea County, New Mexico targeted a highly productive area with three mile laterals in the upper Wolfcamp individual.
Individual wells at exotic cat flowed at rates over 7200 Boe per day, and well per well recoveries from this pad or on track to exceed 2 million barrels of oil equivalent.
The flow rates from this activity rank among the very best projects.
<unk> has ever brought online in the basin.
And lastly on this slide another key event for us during the quarter was the resumption of operations at our Stateline eight compressor station. This was possible. Thanks to the team's timely efforts in securing replacement equipment and personnel to safely repair this critical facility.
Although this repair work did temporarily limited our production in this part of the field during the quarter. We are confident that we resolve this issue and we do not expect any further disruptions of this nature.
Furthermore, we also commenced operations at our Stateline 10, compressor station, providing us another 90 million cubic feet of throughput and even more flexibility in the region going forward.
Turning to slide 16, as I look ahead to the remainder of the year, our Delaware asset is well positioned to build upon the solid results. We achieved in the first quarter overall with the 200 wells that we plan to bring online this year in the Delaware, we expect well productivity to be very consistent with the high quality.
The wells, we brought online over the past few years.
And for context as shown on the chart to the right. This level of well productivity would not only position Devin among the top operators in this world class Basin.
Also surpassed the performance of other top shale plays in the U S. By a noteworthy margin. This impressive well performance coupled with a long runway of high high value in inventory further underscores the competitive advantage and the sustainability of our resource base and the Delaware Basin.
Turning to slide 17, another asset I'd like to spend some time on today is the Eagle Ford.
Which is our second highest funded asset in 2023.
Over the past few years, we've taken the discipline and scientific approach to refine the next phase of development in this prolific field.
Through thoughtful and measured appraisal work.
The momentum generated from these learnings is evident in our current capital program, where we're pursuing tidy tighter infill spacing and have active re frac program.
With the goal to effect efficiently sustain a steady production profile and harvest significant free cash flow.
This year, we plan to spud over 90 wells with the majority of this drilling focused on redeveloped acreage with much tighter spacing than originally conceived when we first entered the play a decade ago we.
We attributed this infill opportunity to high reservoir pressure, a fracture network that heals quickly and low but consistent permeability.
This unique combination allows us to pursue significantly tighter spacing with redevelopment activity targeting 16% to 20 wells per unit across multiple landing zones in the Eagle Ford.
In addition to the benefit of oil weighted recoveries that are projected to exceed half a million barrels per well our ability to leverage this existing infrastructure in the play also it also bolsters the returns these.
These unique and favorable reservoir characteristics in the Eagle Ford provides us with many years of highly competitive drilling inventory.
The team has also made steady progress on our re Frac program in the Eagle Ford.
Cheating consistent successful.
Re stimulating the productivity of older wells.
To date, we have roughly 30 re fracs online that have successfully accessed untapped resource, resulting in an immediate uplift to the well productivity that has expanded per well reserves by more than 50%.
In 2023, we plan to execute around 10 re fracs and we've identified several hundred high return candidates across the field to pursue in the future.
While we have made significant progress on improving recoveries through infill spacing and re Fracs. We believe there is still meaningful resource upside in this play.
Catalysts to help us accelerate our learnings in this area as our sky by pilot in <unk> County, which is supported by a grant from the U S Department of energy.
The objective of this grant is to fund a field study and create an underground laboratory to improve the effectiveness of shale recoveries by testing new monitoring techniques for both initial stimulation and production.
As well as collecting critical data to enhance recoveries via re fracking and EUR.
While we're still in the early stages of gathering and interpreting the data from this project we have already incorporated learnings into the date into our day to day operations.
These learnings will enable us to optimize recovery of resource in not only in the Eagle Ford, but across our broader footprint in the U S. I expect to have more positive updates on this topic in the future.
And finally on slide 18.
I'm also excited to talk about the positive results were seeing delivered on other key assets across our portfolio as you can see on the graphic to the right over the past year. We've done some good work to Opportunistically buildup operating scale in these areas.
An increase of production by 9%.
The main factors that drove this growth were our Dow JV partnership, which helped us regain operational momentum in the Anadarko basin. The rimrock acquisition in the Williston and the quality of assessment work, we've done in the Niobrara oil play in the powder River basin.
That has helped us build for the future.
In addition to the solid production growth. This diversified group of assets is on pace to generate a meaningful tranche of cash flow that we can deploy to other key strategic priorities such as the return of capital to shareholders. I. Appreciate the team's hard work and the effort that goes into delivering near term free cash flow and also de risks.
Valuable future inventory with that I'll turn the call over to Jeff for a financial review Jeff.
Thanks, Clay I'll spend my time today, covering the key drivers of our first quarter financial results and I'll also provide some insights into our outlook for the rest of the year beginning with production. Our total volumes in the first quarter averaged 641000 Boe per day. This performance exceeded the midpoint of our guidance for the quarter due to better than forecasted well pro.
<unk> across our asset portfolio.
Looking ahead, our second quarter completion activity is weighted towards the back half of the period as a result, we expect volumes to be relatively flat in the second quarter as compared to the first.
However, given the cadence of activity, we do expect to build momentum throughout the second quarter setting up the third quarter to be the highest production quarter for the year.
On the capital front, we invested $988 million in the first quarter, which was in line with expectations.
Looking ahead to the second quarter, we expect capital spending to remain essentially flat versus the prior period. As a reminder, we do expect to spend more capital in the first half of the year given the timing of completions in the Delaware Basin.
This higher level of investment in the first half of 2023 setup Devin for a stronger production profile in the second half of the year.
Moving to expenses, we did a good job controlling costs in the quarter with several of our expense categories coming in better than forecast looking ahead as Rick touched on earlier, we're seeing cost pressures plateauing across our business and with the solid start to the year, we feel very comfortable with our full year guidance ranges for operating cost and corporate expense.
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Jumping to income tax after adjusting for nonrecurring items cash taxes were 11% during the first quarter. This better than expected result was driven by R&D tax credit that was taken in the quarter. Looking ahead, we expect our cash tax rate to step up to around 15% for the remainder of the year.
Cutting to the Bottomline Devins core earnings totaled $952 million or $1 46 per share. This level of earnings translated into operating cash flow of $1 7 billion.
After funding our disciplined maintenance capital program, we generated $665 million of free cash flow in the quarter.
With this free cash flow our top priority was to accelerate the return of capital to shareholders as we've communicated in the past the first call on our excess cash is the funding of our fixed plus variable dividend based on our strong first quarter financial performance, we declared a dividend of <unk> 72 per share. This distribution will be paid at the end of June .
June and once again includes an <unk> 11 per share benefit from the divestiture contingency payments received earlier in the quarter.
Another highlight for the quarter was the continued execution of our ongoing share repurchase program. We remain confident in the intrinsic value of our equity as evidenced by the repurchase of $692 million of our stock. So far in 2023 with the board expanding our share repurchase program to $3 billion, which is equivalent to 9% of our <unk>.
Standing share count, we have plenty of runway to compound per share growth as we work our way through the year.
Moving to the balance sheet, we exited the quarter with $3 9 billion of liquidity consisting of $887 million of cash on hand, and $3 billion of Undrawn capacity on our unsecured credit facility with its strong liquidity Devin exited the quarter with a low net debt EBITDA ratio of six <unk>.
<unk> well below our mid cycle leverage target of one times or less looking ahead, we plan to further improve our balance sheet by retiring additional debt as maturities come due our next debt maturity comes due in August of this year totaling $242 million, we will have additional opportunities to pair down our debt with maturities.
Due in 2024 and 2025 as well.
As I look ahead, I'm confident that our financial framework provides us the necessary flexibility to effectively manage through the unpredictable fluctuations of commodity prices, while optimizing value creation for our shareholders with a business plan designed to generate substantial amounts of free cash flow, we will look to grow our fixed dividend overtime pay.
As much as 50% of our excess cash flow via a variable dividend opportunistically buy back shares and take additional steps to improve our financial strength.
Furthermore, we possess the flexibility within this framework to lean in to any one of these options to maximize results for shareholders. We believe this balanced and transparent approach is differentiated versus peers.
With that I'll now turn the call back to Rick for some closing comments.
Thank you Jeff great job.
Like to close today by reiterating a few key messages number one for team did a superb job of meeting the operational targets, we set out for ourselves in the first quarter through solid well productivity and effective cost management number two our disciplined execution resulted in another strong financial performance for the <unk>.
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This is evidenced by the attractive per share growth, we are delivering substantial cash returns realized by investors and the high returns seen on invested capital.
Number three with a solid start to the year. We're now on track to achieve all of our capital objectives in 2023 infill.
Inflation is showing signs of plateauing and our businesses are well positioned to build momentum and generate substantial free cash flow as we progressed through the year.
Number four and lastly, we have the resource depth execution capabilities financial strength and disciplined business model to continue to deliver sustainable results through the cycle, where premier energy company are also perfectly positioned to benefit from this multiyear up cycle.
And with that I'll now turn the call back over to Scott for Q&A. Thanks, Rick We'll now open the call to Q&A. Please limit yourself to one question and a follow up this allows us to get to more of your questions on the call today with that operator, we'll take our first question.
Thank you.
Next question comes from Neil Mehta from Goldman Sachs. Please go ahead.
Yes. Thank you so much and I appreciate the time.
Rick you alluded in your comments that you might be tracking towards the lower end of the guide as it relates to Capex and costs can you talk about.
That is.
Is that a function of any early signs.
Cost of service cost deflation as well.
Well Neal I think as.
We're watching a lot of things we have seen a softening in the market, but I think as we've laid out in our guidance. It's really no change youll see how it plays out through the year, but as I alluded to and then clay had in his prepared remarks, we are seeing some some softening and we will just see on.
If that plays out, but obviously right now no change.
And then the follow up is just around the Q2 guide obviously strong Q1 results Q2 oil guide was a little bit below consensus is that just timing.
<unk> and an activity and just.
You can say around the cadence of volumes over the course of the year.
Yes. It is it is strictly timing I'll have clay weigh in on some more color Neil.
Yes, Neal just think of the.
Our band as we try and pursue flat production is somewhere in that $3 20, maybe $3 30, excuse me two to $23 20 to $3 30 excuse me.
That band in there and I think the second quarter's kind of be on the low end as we expect that third quarter to be on the high end of that range, but no our original guide.
That's still very much intact and feel good about it.
You start really dialing in the plus or minus 1%.
Of our numbers.
It's definitely affected by timing you bring a big pad on early in the quarter later in the quarter. We've got some other things when we were a little front end loaded on the on the capital with that fourth Frac crew. So youll see that as kind of peel off that affects kind of the very tail end of the year, but we will see the biggest.
The biggest quarter of the year in the third quarter.
Thanks, a lot of sense. Thanks, guys.
Thanks Neil.
Thank you.
Next question comes from Irene <unk> from Jpmorgan. Please go ahead.
Yes, good morning clay.
Clay maybe for you I was wondering if you could.
<unk> some thoughts on the integration of the rimrock and the latest.
Assets, we've seen production, maybe down a little bit since on a pro forma basis versus when you announced the deals but I'm wondering if you could talk about how those assets are performing relative to your expectations.
Sure good.
Good question I appreciate it and I'll, let I will pan out just a little bit because we did rimrock and validus kind of back to back I would say from an integration standpoint, they both gone gone exceptionally well, we certainly learned some things on rimrock, we immediately applied to Validus and always looking to continue to get better specifically on the valve side, we're certainly learning thing.
<unk> alluded to in some of my remarks additional upside that we didn't even contemplate.
And that acquisition on the Rimrock side boy.
The Williston really the northern U S has been plagued by some pretty cold weather.
Has not.
We've definitely been affected by that and then digging out from that everyone's region for those work over rigs kind of all region for the same equipment was a little bit of a backlog associated with that and then honestly, we've seen a little bit of more offset.
Frac activity that we've shut wells in four so that impacts things, but one of the things we're learning about the late innings in Williston and some of these wells that have kind of complicated depletion.
Metrics too so you'll have maybe had a cross cut well that has a lower a little bit more depletion and part of that lateral that's causing some interesting things around how do we clean these wells out how do we provide the right artificial lift we've made some really good strides there really excited about the latest group of wells that are coming online, but I think all three of those factors.
This has caused us to.
Probably underperformed a little bit in the second quarter relative to expectations first and second quarter, but I see that already in the second quarter things are starting to pick up and I'm really excited about.
That asset and it continues to be such a critical piece of Devon portfolio.
Great and my follow up clay it sounds like the team is working on some R&D efforts to unlock.
Inventories. So I was wondering if you could maybe.
Detail, what what exactly you're testing and perhaps some opportunities to grow your inventory base.
Yes, Theres a lot of it going around the company and a lot of stuff that is pretty early innings, we're not talking a whole lot just yet, but one that we are talking about is in south Texas. This sky by project in particular department of energy funded something that we've shared pretty broadly with the industry in a number of forums and.
The real win so far have been from completion design.
<unk> and then the earliest knowledge, we're getting around some some EUR some and some.
Enhanced oil recovery. So that's all very exciting I can tell you already put some of that information to work. The re fracking activity is very encouraging some of that is pretty unique to the eagle Ford talked about some of the reservoir characteristics. There. It has an ability to stay really the original completion tends to say very near <unk>.
Wellbore and so it gives you that opportunity to feather in a few more wells or other basins that just really doesn't work very well and then the <unk>.
Figuring out the techniques how to go about this how to prosecute this and we've seen tremendous upside. So all of that is great inventory and most of it to be honest as upside from what we underwrite with underwrote with the Validus acquisition.
Thank you.
Thank you.
Next question comes from Neal Dingmann from Trinity.
Neil Please go ahead.
Good morning, guys. Thanks for the time My first question is just on shareholder returns specifically recur.
One of the guys just are there certain levels, where you would continue with materially leaned into the buybacks based under assume.
Sort of mid cycle prices and then.
If you continue to have some nice divestitures like you had with those continue to go to incremental variable desk.
Yes, Neal this is Jeff thanks for the question.
Well youre going to see from US is more of the same on the model and you described it well, which was certainly to the extent, where we see opportunities to buyback our shares when we see that that valuation.
Located if you will from our view of the intrinsic value, which certainly happened in the first quarter you know post our February call.
We saw the trade the stock trade on a relative basis to the peers in a negative way and we jumped in with both feet and bought back shares in a big way.
We think thats, the beauty and the balance of the.
The flexibility of our of our model, which is it provides us the cash and the wherewithal to go take advantage of those opportunities. So moving forward that's absolutely our expectation if we see the.
Stock trade off relative to the group or dislocate from our view of intrinsic value over the longer term you should expect for us to lean in on the share repurchase program all the while our first priority is to sustain and grow the fixed dividend, which we plan to continue to do and then feather in the variable dividend up to 50% on.
Of our free cash flow in any given quarter.
It's going to go to the variable dividend so.
That flexibility and balance that we have in the model. We think has served us really well over the last three years and you should expect that to continue going forward.
Hey, that's great you are stepping into that and then secondly, my question probably play for you or Rick just on the Delaware infrastructure.
Rick It sounded like you're confident you all have the need infrastructure now in place to handle the growth the remainder of the year I'm. Just wondering if you all could talk about now maybe what the build outs look like or what type of growth that infrastructure now can handle the company coming quarters. So it looks like it sounds like it's where you want it to be.
Yes, I think so Neal.
As I mentioned clay and clay drove home the point, we're really confident in our infrastructure actually the recovery and.
Downtime and more importantly, we are staying ahead of it we have a great team that.
Build out its working really well and then we have third party providers that we have great relationships with and we have a tendency to try to work a year in two and three three years down the road.
And when you've got the inventory we do the execution you do you can you can so that when people and planning that out because that's what that's what the Permian is going to continue to need year after year after year as continued infrastructure growth.
I'd say its going real well.
No I appreciate that thank you Rick Thanks, Jeff.
Thanks.
Thank you.
Next question comes from John Freeman from Raymond James. Please go ahead.
Good morning, Thanks, a lot.
Looking at the <unk>.
Accessible to revile.
You did on the six Wolfcamp wells.
Do you have a sense of how much of your <unk>.
Your acreage what percent maybe of those undeveloped locations would be candidates for those three mile.
Developments in the Delaware.
Yes.
John I'm, a wing at a little bit I think it's about 20%.
This year that we're going to be that we're going to be drilling the three mile laterals, it's always a little bit in flux, we're always trying to trade the opportunity as I can tell you we feel very confident in the returns of the two mile laterals, that's kind of our go to with most of our acreage is set up I think it is just really where we see those opportunities to turn a one mylan.
202, or turn a few ones into a three.
Those turn into really phenomenal economic economics, so what I would say is operationally, we're very comfortable drilling three mile laterals. Today I think we've got that recipe down so operationally, it's not a challenge it's strictly just a looking at the land and where does it set up for twos and where does it set up for threes.
Yes.
Great and then just my follow up question just want to make sure that.
I'm kind of interpreting this correctly so that it can.
Interesting payments.
Meaning $130 million <unk> got through that.
The Barnett at the current strip.
Sorry.
Yesterday, the remaining $65 million warranty 24, the other 65 million <unk> 25 at the current strip.
Yes, John .
You are exactly right as it relates to the contingency payments.
It varies obviously by commodity prices, both oil and gas and at a $65 oil price, which above $65 oil price, where we are today we.
We would expect to receive around $20 million and then from a gas price standpoint, its tiered from $2 75, all the way up to $3 50.
And the variability there is anywhere from $20 million to $45 million, So where the current strip sits today I haven't looked at it youre probably somewhere in the mid threes I would guess so that'd be another 25% to $35 million that you could expect to receive on top of that oil payment.
That's great. Thanks, a lot guys I appreciate it.
Okay.
Thank you John .
Thank you.
<unk> comes from David Stack coupon from Cowen David. Please go ahead.
Thanks for taking my questions Hey, guys.
Just wanted to follow up on some of the thoughts around the buybacks in the first quarter and using the cash balance opportunistically.
Does that in any way.
Sort of inform your view on how Youre looking at further consolidation. This year, obviously, Devin was a pretty active participant last year, but.
Are the opportunities that youre seeing in the A&D market is sort of less robust than what you would have seen last year relative to the value of your own stock.
Dave Good question I think for us when we did the two transactions last year, we talked about the metrics that we bought those packages add and you've heard clay.
Talk about some of the space.
Particularly down in the Eagle Ford some additional upside that we've seen so we feel very very good about those I think the market is has pulled back up to expectations are little higher.
Some of the packages in the market today I think we.
We will probably take a look at them, but once again, we have a high bar and.
<unk>.
I don't know that Youll see us be.
Dean.
That active and some of the some of the packages that are out in the market. Today. So is that all plays out but.
Once again I would take away is a high bar.
If it fits us makes sense for our strategy.
Something we may consider.
I appreciate that.
Cliff.
If I could just ask a little bit more about sky by.
Just more around the scope of the project how long the Doe Grant last four in this partnership and then.
In terms of EUR or are you looking at gas reinjection or is it all cotwo.
Re fracs I guess, just the total scope and duration and how this might be applied to some of your other active basins.
Yes excellent question Love talking about.
This was a project that I think it was originally conceived in west, Texas that project ended up falling through and through some great work of our team here being very heads up and say Hey, we've got an opportunity where we can do some of those same things in the Eagle Ford We've got.
The right set up the geology operations and it was taken up so we did a lot of very interesting work, we took a horizontal core.
To really understand that fracture network I talked about these fractures healing up and what that means to that stimulated rock volume and ultimately our depletion.
Zone that we're seeing on any individual wellbore. So we were able to see where do those fractures kind of breakthrough where do we actually have proppant and therefore, where do we think we're actually seeing some of the depletion.
We've used that information in our stimulation design, knowing what the original recipe was kind of how do we altered of that and then as we go back into these re fracs as you can imagine it's a mechanical complicated.
Activity you have to go in and run a liner and then ultimately you are trying to stimulate new rock and so with this information we've been able to leverage that science and go in and really we believe stimulate new and incremental rock and really up the reserves the recoveries from those original Wellbore. That's all been not just.
Scientifically exciting in practice seeing the returns and seeing that value come through when we look at EUR. This project is really about.
Injecting natural gas in a huff and puff kind of model that is still an early project.
Understanding how that works with a lot of months monitoring subsurface from gauges to fiber optics and really watching for what are we influencing from that injection and how ultimately we are recovering more rock. So there's a lot of good information out there. The team has done a phenomenal job of presenting at very various technical conferences.
So if you're interested there is lots of great until out there to dig further into.
Thanks, Clay and thanks for the time guys.
Thank you Dave.
Thank you.
Our next question comes from Matthew Portillo TBA hedge Markie. Please go ahead.
Good morning, all.
Yes.
To start out.
We look across the portfolio, it's nice to have a diversified asset.
Curious as you guys look at the returns by basin and with the volatility in the commodity strip.
Are you thinking about capital allocation to some of the basins like the Anadarko in particular, given low natural gas and NGL prices as well as some downside volatility to crude oil.
Rest of the year.
Hey, Matt This is clay great question and the last 12 months, we've kind of tested every every flavor of commodity price high oil price low oil price high relative gas price, we tend to one that was $80 eight at one point and so we've run the sophisticated model that we have in a number of scenarios really looking for windows are.
Portfolio really command that we shift the capital allocation materially and what was interesting is and all of those scenarios that we ran even some of the gas levered opportunities, it's still said keep pushing towards oil.
Keep pushing towards the Permian the Delaware Basin, we're still always commanding capital one.
As we have matured our understanding in places like the Eagle Ford certainly, it's risen up and with the acquisition acquisition of Validus is commanding more capital as I mentioned earlier.
As we stress test the gas side, certainly things like the gas prone areas of the Anadarko become more stressed but remember the preponderance of our investment is on the Dow JV, which is the gas condensate area. So you get a high significant amount of condensate in those wells and then also that care.
<unk> really helps us support pretty phenomenal economics, even in this commodity price environment now look we're always watching we're always rerunning. This this isn't a single once a year scenario. This is a monthly exercise we're always stress testing and you can bet, we're making changes on the margins, we will pull a few wells out of the.
Out of the system for this year.
Replace a few as opportunities come our way maybe it's a trade that just came to us or a new opportunity that the team has discovered we're always evolving on the margins. What I can tell you is our program is very consistent and very robust certainly even in today's commodity price and service costs, because we believe the service cost is still decoupled.
Today's commodity prices.
Great and then clay, maybe as a follow up for one of the longer dated resource basins in your portfolio. Just curious your updated thoughts on the powder I know, it's not overly active this year, but you will continue to progress the Niobrara in particular kind of curious how you've seen the results so far.
As far as maybe the costs are stacking up there as well.
Yeah.
Matt Great question lets talking about the powder because it is.
Kind of behind the behind the scenes. It is something that I'm really really proud of the work that the team's done.
On the front end of the challenge is de risking the productivity, making sure that when we drill a well wherever we are in the basin that we have a good understanding of what it can deliver the second order is how do we get the cost structure down so that we generate the right competitive return.
I can tell you on the former we've made tremendous progress and that is that's really exciting to me. That's the that's the if you don't have good rock you can't you can't you can't do anything about that we've got good rock, we've been able to improve the productivity prove that up time and time again on the well cost to me that surface.
Considerations that we can always improve on have a tremendous confidence in the team to be able to drive those costs down in time and so that is something we are now working on to ultimately get to a place of more competitive and sustainable returns, but you know we've got a ton of inventory there. It is very oil prone and.
And that will certainly have its day in the Sun in the coming years, So really great progress from the team there.
Thank you.
Thank you Sir.
Thank you. Our next question comes from Scott Hanold from RBC Scott. Please go ahead.
Yes. Thanks.
Jeff I was just kind of curious when you step back and look at the balance sheet. I mean, you got 800 $900 million of cash I know you talked about.
That coming do you want to take down later this year, but.
As you start thinking about the quantum of incremental buybacks do you all just really focus on.
What is left in free cash flow or is there some optionality to utilize the cash balance.
Any color on kind of working cap.
Our cash needs for working capital to it would be helpful.
Yes, you bet Scott, it's a good question and one we've been thinking a lot about.
If you think about our cash balance where you have heard me say historically is somewhere between $500 million to $1 billion cash balance on the balance sheet is kind of what we try to optimize for and work towards <unk>.
<unk> seen it kind of hover around that that level certainly over the last several quarters moving forward, we're going to stay focused on the financial model that that we've been pursuing for the last three years with the 50% going to the variable and then 50% accruing back to the balance sheet, we feel really comfortable with our leverage position where it is today, obviously, we've got a.
Target out there of kind of one times net debt to EBITDA were significantly below that currently we certainly would flex up and back and forth depending on the market conditions and that again is what we think is the real beauty of our model, which it provides us the flexibility as we as we did this last quarter to utilize free cash flow generated.
Whether it's the current quarter or previous quarters, and then push that back into a buyback program right. So obviously over this last quarter, we chose to pull down the cash balance that's certainly something we might do in the future as well depending on the market conditions that we see.
And really it's the it's the real benefit of the flexibility of the model that we've rolled out which.
Allows us along with the strength of our balance sheet to really step in and take advantage of of opportunities whether it be acquisitions that we saw obviously last year.
The stock buyback opportunity that we saw here in the first quarter.
Thanks have a good answer.
Maybe just one for clay when you think about the tighter spacing in the Eagle Ford I know the industry has gone from tightening and widening and tightening and whether it's a Permian Eagle Ford before and it seems like there is always in there.
<unk> eventually go back to wider spacing and oil prices come down, but can you kind of speak to the resiliency. This tighter spacing. If we do see lower oil prices do you guys think you'll stick with it or is that just work given the current context around oil prices and the strip.
Yeah, that's an excellent point because it certainly is an evident.
Industry have lived all of those spectrums and myself included so.
While we generally believe up spacing is the right move in most basins.
We would rather have more robust returns and be able to withstand a falling commodity price I think that is generally served us better time and time again.
As we look at the Eagle Ford and certainly the maturity of that basin. We're really looking at how do you get those remaining resources most effectively depleted and so the work that we did at sky by as part of the a significant part of the highlight when you really kind of sampling that rock.
Understanding how that.
That wellbore drainage is really happening downhole that gives you great insight into not just blindly downspacing and hoping for the best or statistically hoping for the best. This gives you a very good kind of tangible evidence of what we're doing there we're going to be real cautious about it.
Certainly we have we've been very very.
Very pleased with the results so far but we will continue to watch service costs continue to watch commodity price and always reserve the right to get smarter.
Fair enough. Thank you.
Thanks Keith.
Our next question comes from Doug Leggate Bank of America. Please go ahead.
Thanks, Good morning, everyone. Thanks for taking my questions.
Rick.
Good morning is not long ago that Devin.
Not only the best performing stock in the sector over an extended period, but the best performing stock in the S&P 500.
I think it was.
Most of 2021, if I recollect.
I'm wondering.
Given the one one could argue the market is therefore recognized the value of what the combined company is.
And benchmark in the free cash flow capacity with some additional tax headwinds, perhaps going ahead.
Im wondering how you would characterize your value proposition today.
Do you think you'd need to do.
Breakout beyond.
Just a call on the commodity.
Yes, I think Doug.
Incumbent upon this management team, we need to execute we stay confident in our plan.
Our strategy that we've got great assets and.
I do think we've seen some volatility you speak to the outperformance that we saw a couple of years ago.
That's real very well documented.
And.
So when you when you have a period of.
The softness of what appears to be softness in execution.
Whether it's.
The whether or not.
And not weather, but whether or not we saw we saw a pullback and because it impacted our numbers and I think in my <unk>.
Mind, maybe maybe a little bit too much so.
But at the end of the day that sets us up for the share repurchase program that we just think that our that our shares are under way too much pressure that it provides a great opportunity for us and ultimately for shareholders. So so that's how we're addressing it bottomed.
Bottom line is we.
We have got as I mentioned the assets, we've got the inventory.
We're doing some great things I think you've heard some examples from play around.
So on the technological advancements that we're making I think in some cases, leading the industry and thats going to continue as part of our genetic makeup.
And so I think we just have to stay after it and stay confident with with our plan and keep executing.
And I think I think things will work out for us.
Okay I know, it's a tricky one to answer and I. Appreciate your perspective my follow up is on the 5% growth.
So the target or not target necessarily come that you laid out at the time of the merger obviously the incremental bolt ons of got you there.
This year.
What about the go forward I'm thinking what would the capital, but you have to look like to support that and do you think 12 years of inventory there is enough to support that kind of go forward visibility.
Yes, well first off.
When we talk about the 12 years of inventory.
Make sure you.
We're honest with each other and we realize that that's what's that's not contemplated in the additional inventory that we see out there that will move over into the the near term bucket and so well look at it as we are closer to 20 year inventory when you start looking across our entire asset base some of the some of the.
Ideas that we have some of the assessment work that we're doing I think you and I have talked about that before making sure we continue to to to work for the future. So.
We've got an extended runway on inventory so.
The 5% zero to 5% that's what we laid out at the time of the merger we stuck we stuck to that gone the way you are.
The way we've looked at it as really there has not been.
A huge call on.
Getting up to that 5% growth. So our focus has been let's let's continue to.
To implement on a per share basis, and so when you start looking at some of the transactions that we did the accretion there you start looking at it the buyback. So I think that's that's what we hear continually from our largest shareholders. Doug is let's let's focus on those per share growth metrics continue to build this thing for the long haul.
For sure comment thanks, so much Greg.
Okay. Thank you.
Thank you.
Next question comes from Paul Cheng from Scotia Bank. Please go ahead.
Alright, good morning, everyone.
I have to apologize first because I wanted to go back into the variable dividend.
And the buyback.
Greg you just mentioned that we should focus on the per share metrics.
From that standpoint.
My Bank.
Multifamily way.
We turn cash to the shareholders that Dave Davidson and also that after more than two years.
How do we look at it then.
Yes.
Thats or that the company has been where you wanted or the variable dividend given that you're on union So high already.
That's the first question.
Yes, Paul This is Jeff go ahead go ahead do you have and I'll follow up yes.
I'm going to say.
Again, Paul and we've talked about this a lot with you in the past.
With that that's all of the above so we've we've delivered on our sustainable fixed dividend, which we're growing over time.
We've got the framework, which allows for the variable dividend and up to 50% and then stock buybacks on top of that.
We're not biased to one or the other.
Over the long term, we think that balanced approach makes the most sense.
Certainly as Rick mentioned earlier to the extent that we see an opportunity to jump in and buyback our shares when we see a dislocation versus intrinsic value, we're going to do that and that has the opportunity to create per share growth for us over time.
But at the end of the day, it's about total shareholder return right. It's not just it's not just the dividend is not just the buyback it's not just the stock price stock price if that total shareholder return and we think over the longer term.
This model and this balanced approach will deliver the best results in May I'll point out over the last two years, where that more of the number one.
Company and as it relates to total shareholder return and that includes the last several quarters. So we feel pretty confident in our game plan, we're going to keep our head down and execute and deliver on that game plan and we think when we will wake up many many many years from now we will have delivered a great result for shareholders.
Okay.
Second question, yes.
Okay.
Humans.
The onset or another question, saying that 20%.
They have a basin well to be true this year will be three.
Three miles.
At your with inventory of 4500.
A rough estimate what percentage of that.
Number.
Thank you.
Hey, Paul I'm, a fuzzy that number on the 20% reminder.
That's a rough number for this year and I'm, probably a little bit rougher, but I would say directionally is probably about the same maybe a little bit lighter to that number because I think forward on the inventory.
And remember a lot of this happens kind of evolves in our land shop as they make trades and kind of extend that runway a little bit so.
It's a pretty healthy number.
Our standard is two miles again.
Returns on two mile laterals in the Delaware Basin are phenomenal and so we don't need that three mile to make the numbers work, but when it comes our way. It sure is a nice thing and once again feel very confident in our operational ability to execute on three mile laterals, that's become fairly standard fare for the team.
In the Delaware.
And can you just curious that the opportunity of trade.
<unk> makes the waveform than say 2 million to 30 miles or even one multi module.
Focusing primarily in Delaware or that Youre not the basin Danielle.
The opportunity there.
Yes.
We've drilled three mile wells in multiple basins and certainly the <unk>.
Niobrara in the powder is kind of built on a three mile concept, we've drilled at least 20 years 30 wells three mile wells in the Williston. So this is something we feel very confident in our ability to execute on and again most of our our performance most of our wells, we execute on our actually about two mile laterals in general.
And and Thats become kind of our standard, but where the opportunity presents we feel very comfortable in executing three mile laterals.
Alright. Thank you. Thank you.
Thanks, Paul.
Thank you.
Next question comes from Roger read from Wells Fargo. Please go ahead.
Yes, thanks, good morning.
I'd like to come back on a couple of maybe the more operational questions. Your comments earlier about what youre seeing inflation, maybe get an idea.
How some of the let's call. It Disinflation may at this point would flow through.
You're seeing it where we should expect to see maybe the bigger benefits.
Yes, Roger this claim in the last couple of.
Give me the last couple of earnings calls I've talked more about the tone of the conversation and I think Thats. Your best in my view best leading indicators cater of where prices are gone and it's gone from a very aggressive you, we'll take our prices or youre not going to get our equipment circa two to three quarters ago to something a little more along the lines of Hey, we love.
You guys your favorite customer, we really want to work with you, but we're not conceding on price I would say state of the art today is lots of inbound phone calls lots of equipment available, they're really really trying to hang on to pricing, but some areas are starting to slip and so we're starting to see some deflation in a couple of categories. The headline of course is <unk>.
We're seeing that kind of materially start to move through in the second half of the year.
And then we're starting to see some smaller categories as well starting to come down.
Again, I'll remind you for us in particular, we took our fourth quarter numbers put about a single digit inflation on top of that and Thats kind of how we plan for 'twenty three I think we're still kind of in line with that we still have contracts two and three year old contracts that are maturing this year that will be going up to offset some of the wins that we are.
Being in a deflationary deflationary category I would say state of the art today things have leveled out seeing a few wins in a couple of categories.
But the availability is a material change in our ability to high grade equipment high grade crews is really continue to translate into better operations in fact, moving the wells quicker through the drilling and completion space.
Okay. So we should expect not just a decline in costs that you would expect also in it.
And in productivity as you high grade.
Across the board.
Yes, we're definitely seeing some of that we see some of that in the second quarter.
Already activity kind of being pulled forward and these are just kind of a few days at a time, but thats one of the things we're seeing from a capital standpoint in the second quarter.
Okay, Great and then my follow up question is on the re Frac wells.
It's early days on this but I was just curious.
Is there a type of well vintage of wells that works fast and then going back to a question earlier about kind of where you should put your money in terms of the returns I'm guessing oil over gas, but just as a broad comment how does the return on a re frac.
The returns on.
New drilling your capital program is currently laid out.
Yes, I think you're in the right categories when Youre thinking about what is the ideal candidate.
Ideally really good rock.
That was really under stimulated maybe of an ancient design.
That had a larger final string length of five five inch casing string that you can run inside of and seal that back off and kind of re perforate and re stimulate that's kind of our ideal scenario, but we've tested beyond that we've said what about a more modern completion, what about and not the most ideal rock, but kind of the media.
Rock and we have seen favorable results there as you can imagine it stacks up like any portfolio you have some of your best best.
Best candidates that compete head to head with new New Wells and then you have lots of kind of middle grade contact middle grade opportunities and those are the ones. We're continuing to evaluate maybe theres a little tweak on the stimulation design that we can push those into the very best category like some of those ones. We've seen upfront so still relatively early days, but very pleased.
With the progress and again this is the beautiful thing is the land is already paid for the surface facilities already paid for the infrastructure is already in place and that can really help these returns from an immediacy and.
A capital efficiency standpoint.
Appreciate it thank you.
Thanks Roger.
Well it looks like we're at the end of our time slot for today. We appreciate everyone's interest in Devon 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.
This concludes today's call. Thank you everyone for joining US today you may now disconnect your lines.
Okay.