Q2 2023 Devon Energy Corp Earnings Call
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Ladies and gentlemen, welcome to Devon Energy's second quarter earnings Conference call. At this time all participants are in a listen only mode. This call is being recorded.
Now I'd 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 to cover our results for the second quarter and our outlook for the remainder of 2023 throughout the call today, we will make references to the earnings presentation to support our 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.
<unk> 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 pleasure to be here. This morning, we appreciate everyone, taking the time to join us.
Second quarter performance can be defined as another one of solid execution on all fronts as our business continued to strengthen and build operational momentum throughout the quarter.
The attractive per share growth, we've consistently delivered quarter after quarter demonstrates the efficiency of our disciplined business model the quality of our Delaware focused asset portfolio and the team's execution capabilities and the benefits of our cash return framework.
The chart on slide four provides a very compelling visual of this success showcasing our impressive track record of value creation. Since we unveiled the industry first framework in late 2020, we have deployed $12 billion towards dividends share buybacks debt reduction.
And accretive bolt on acquisitions, but cumulative value of these actions equates to nearly two times the value of devins pro forma market capitalization from just a few years ago.
As you can see from our diversified <unk>.
Actions to date, we have carefully designed or cash return framework to be nimble with our flexibility to allocate free cash flow across multiple avenues to optimize financial results through the cycle.
Importantly, this disciplined execution has been rewarded by the market with our equity performance achieving the highest return of any stock in the entire S&P 500 over this period.
Now, let's go through some of our second quarter highlights and operating trends in greater detail.
Beginning with production the team did a great job growing oil volumes by 8% on a year over year basis this past quarter.
This result surpassed midpoint guidance expectations and for US set a new all time high oil production record for the company by averaging 323000 barrels per day in the quarter.
Additionally, this volume growth was supported by an infrastructure that includes several strategic midstream assets that we have selectively invested in through the years and have taken equity stakes and in an effort to enhance the result from our core E&P operations.
A key driver of this.
Record setting result was higher completion activity.
In the Delaware basin by leveraging the benefits of a temporary fourth frac crew and consistently improving cycle times, we were able to bring online 76, new Delaware wells in the quarter, which was a few more than we originally planned due to efficiency gains importantly, the well productivity from this batch of wells in Delaware was excellent and include.
<unk>, a wolfcamp b appraisal success that strengthens the depth and quality of our resource in the area.
We also had a successful redevelopment test in the Eagle Ford and advanced a handful of other interesting appraisal projects across our diversified asset base that it reinforces our confidence in the resource upside that currently exist across our portfolio.
Looking ahead with higher levels of completion activity in the second quarter, we expect our production profile to continue to strengthen the upcoming third quarter.
Good visual of this operational momentum can be seen on slide seven with oil volumes expected to grow to a range of 322000 to 330000 barrels per day in the upcoming quarter.
As I touched on earlier.
The capital spending to drive this growth trajectory was a touch ahead of expectations due to very strong execution from our drilling and completion teams that brought forward activity into the quarter.
Clay will spend time and cover this topic later, but I am extremely proud to share that we set several operational records at both the basin and company level contributing to the record setting drilled and completed feet per day metrics, we've achieved year to date.
In addition to our strong operating efficiencies our business is also beginning to benefit from service cost deflation.
As contracts are refreshed.
This is driven by reduced activity from natural gas focused companies and private producers over the past few months resulted resulting in improved availability of services and cost deflation in virtually every category. Although this is a very dynamic environment. We've observed the most downward pressure to date in the areas of tubular.
Rig rates fuel and other miscellaneous drilling services that will begin to positively impact our cost structure as we as we enter the end of this year. We also anticipate price movement with pressure pumping, which is our largest cash cost category in a very near future.
While it is still somewhat premature to say, what and set what our firm outlook for 2024 is our expectations for deflationary trends should continue.
We have the potential for meaningful savings from peak well costs as pricing improvements congratulate throw through our flow through our cost structure over the next year or so.
With a free cash flow model that our business our business generated we had another great quarter of cash returns, we returned $462 million to shareholders through our fixed plus variable dividend, which we have paid out now for 12 consecutive quarters and we also have an active buyback program there.
Resulted in the repurchase of nearly 4 million shares over the past three months. We believe this balance between dividends and buyback offers investors the powerful combination of an attractive yield and steady per share growth through the cycle.
Now moving to slide 11, with the progress that our business has made year to date, we are well on our way to meeting the capital objectives associated with our 2023 plan.
The momentum we have established places us on track to deliver our production per share growth rate of approximately 9% for the year importantly.
The activity required to fund this growth is self funded at a $40 <unk> price or approximately half of where we are today.
And is delivering returns on capital employed greater than 20% at today's commodity prices.
While once again it is too early to provide firm guidance for next year.
Trajectory of our business sets us up for a strong outlook in 2024 as well.
Given current.
Market fundamentals, we plan to invest at levels that will sustain our productive capacity and any improvements that we see from lower service costs will accrue to our shareholders in the form of higher free cash flow generation.
Disciplined pursuit of value over volume positions us to continue to deliver another year of differentiated cash returns and highly competitive returns on invested capital versus the broader market.
And now with that I'll now turn the call over to clay to cover our operational highlights play. Thank.
Thank you Rick and good morning, everyone. Our second quarter operating results demonstrated that our business is performing at a high level and building momentum as we head into the second half of the year.
As Rick touched on this positive trajectory is underpinned by improving capital efficiency from faster cycle times, improving service costs and positive appraisal results that will contribute to our production profile and financial results over the balance of this year and more significantly into 2024 today.
Today I plan to provide a brief overview of the second quarter results across our assets as well as highlight some upcoming catalysts.
The most significant contributor to Devin second quarter operating success once again, our franchise asset in the Delaware Basin as you can see on slide eight more than 60% of our capital activity was deployed to this prolific basin, allowing us to run a consistent program of 16 rigs.
With a fourth completion crew of work in the first half of the year, we were able to place 76 wells online in the second quarter more than 80% compared to the first quarter.
This elevated completion activity grew our Delaware production to 420000 BOE per day and is expected to underpin volume growth in the third quarter as well.
While we had great results across our acreage position a key project I would like to highlight from the quarter was our <unk> development in Eddy County, New Mexico.
We've talked in the past about the important appraisal work that we do each year with 10% to 20% of our capital budget. The meal pad as an example to provide you some visibility into the fruits of this labor. This 11, well project successfully co developed multiple landing zones within the Wolfcamp with particularly exciting results from the appraisal.
Deeper wolfcamp B benches. The initial results from these six wells targeting the Wolfcamp B landing zones average greater than 3100 Boe per day with 44% oil cut.
Per well recoveries are on track to exceed 2 million barrels of oil equivalent.
Importantly, these highly commercial appraisal results de risk and enhance the economic expectations on approximately 100, Wolfcamp b locations in the cotton draw area.
Furthermore, these deeper wolfcamp locations are expected to be highly competitive within our capital allocation framework going forward.
The Delaware team also continued to make progress advancing drilling and completions efficiencies across our operations in the basin and.
In the Wolfcamp, we improved drilling productivity by about 10% on a per foot basis over the past year, while some of our best spud to release times for two mile laterals pushing below 15 days.
Completion efficiencies are also steadily improved with our cycle times decreasing by 9% year to date and compared to 2022.
Averaging a record completion pace of more than 200 feet per day in the quarter. This operational progress.
Has been accomplished in conjunction with an even higher safety and environmental focus and expectation.
The great work our team has done to drive improvements across the entire planning and execution of our resources, coupled with a broader service cost deflation trends, our positioning our business to be even more efficient as we head into 2024.
Moving to the Eagle Ford or three rig program resulted in 29 gross wells placed online during the quarter.
This activity, which was concentrated in the recently acquired acreage in Karnes County.
Drove a 9% increase in productivity versus the previous quarter.
This margin is high margin growth was driven by strong well productivity achieved from a balanced mix of development and appraisal activity designed to refine the next stage of development for this prolific resource play.
Our top development project in the quarter was headlined by our LP Butler pad. This four well pad developed a highly charged theme of pay in the volatile oil window of the play that exceeded pre drill expectations.
Reaching an impressive average 30 day rate of 3600 Boe per day with a 56% oil cuts.
On the appraisal front a key success in the quarter was the <unk> unit.
This development project in Karnes County tested infill spacing ranging from 140 to 150, excuse me 180 foot and roughly 30 wells per section.
The initial 30 day rates from this package of wells averaged 2000 Boe per day, resulting in highly commercial returns that adds to the depth and quality of our inventory in the play.
Also adding to the commerciality of this tighter spacing was our drilling performance, where we broke a company record averaging over 2000 feet per day, which included the fastest spud to rig release time in the company history of only five seven days.
As we look to allocate capital for 2024 and beyond.
The positive operating results, we've achieved year to date served as valuable data points to optimize future development activity in the Eagle Ford and other and further deepens our convictions.
Of the resource upside that crop that exists across this entire field.
Moving to the Williston.
Volumes began to rebound in the second quarter growing 4% quarter over quarter to 56000 Boe per day.
This growth was driven by improved weather higher uptime on existing producers and successful adjustments to completion and production techniques for some of the new well activity.
These completion and production modifications consisted of change to a larger proppant size designed to mitigate mobility of sand and a shift in artificial lift techniques to improve well uptime with the favorable flowback results on two pads that have deployed these techniques, we have high confidence that the wells productivity will improve as we see.
Progress throughout the year.
Looking at inventory, we now have more than 150 wells remaining and identified significant re frac opportunities across hundreds of producing wells in the field, providing us the optionality to deploy steady reinvestment in this play for multiple years to come.
Turning to the powder River basin. The key objective of our 2023 program is to continue to appraise and method and methodically refine our understanding of the Niobrara. So that we can optimize this resource for future development.
With this focus the team has made substantial progress over the last year, establishing repeatable commercial results with three mile laterals across a significant portion of our acreage in converse County. Furthermore, since we're not observing any degradation in the results from three well spacing, we plan to test four well per section later this year.
And lastly, we're also encouraged by the early flow rates from appraisal activity recently brought online in the northern portion of our leasehold position that could extend the niobrara potential into Campbell County.
I will provide more updates on these tests in the coming quarters.
But it has been evident that our 300000 acre net acreage position in the powder River basin is providing devin important resource catalyst for the future.
Lastly, in the Anadarko basin production volumes grew 10% from the previous quarter driven by the ramp up in completion activity funded by <unk>.
Drilling carry from our Dow joint venture the operational execution from this program was superb.
With well costs consistently coming in below pre drill expectations and.
And the initial flow rates from several wells exceeding 3000 Boe per day to date, we have only utilized approximately half of the 133 well carry agreement we have in place with down we anticipate the remaining Carrie will provide us sufficient runway to support our current pace of activity for the next 18 to 24 months.
And we are open to expanding the scope of partnership as we successfully demonstrated in the past for the remainder of 2023, we plan to bring on 10, new wells weighted towards year end.
In summary, I'm proud of the capital efficiency results at each of our asset teams are delivering during the quarter and the strong momentum that we have build heading into the second half of 'twenty, three and with that I'll turn the call over to Jeff for the financial review Jeff.
Thanks, Glenn I'll spend my time today, covering the key drivers of our second quarter financial results and provide some insights into our outlook for the rest of the year bigger.
Beginning with production a key driver of second quarter volumes exceeding midpoint guidance was efficiency gains that compress cycle times, leading us to capture a few more days online than planned looking ahead, the benefits of higher completion activity from the Delaware in the first half of the year is expected to drive volumes oil volumes higher.
In the upcoming third quarter and leaves us on track to meet our volume targets for the full year as well.
On the capital front, we've invested 55% of our budget year to date. This weighting to the first half of the year is due to higher completion activity driven by our fourth temporary frac crew in the Delaware Basin with this temporary crew recently released we expect a lower capital spending profile as we head into the second.
Half of the year and remain confident in our capital spending guidance range for the full year.
Regional oil pricing once again remained strong with realizations near <unk> benchmark levels in the second quarter. We're also seeing strength in the oil price curve for the second half of 2023.
This positive trend is providing a meaningful impact to our returns and cash flow generation capabilities with every $1 uplift in <unk>, resulting in about $100 million of additional annual cash flow for the company.
Despite the strength, we saw in oil pricing in the second quarter, we did experience weakness in both natural gas and NGL realizations, we do expect improved markets for gas and Ngls in the second half of the year, which should translate into better price realizations for us across the portfolio.
Moving to operating expenses, our field level costs were right in line with expectations for the quarter. However, we do expect a minor uptick in per unit cost in the second half of 2023, driven by our recently executed water handling joint venture in the Delaware Basin, our new water JV provides us significant.
<unk> flexibility through enhanced scale in multiple disposal options. In addition, the JV materially lowers our future midstream capital requirements in the area looking forward our equity stake in the JV will provide us distributions over time offsetting the incremental operating cost at the asset level, we could also.
Choose to bring forward value by monetizing this asset at some point in the future.
Cutting to the bottom line, we generated $1 4 billion of operating cash flow during the quarter combined with the low reinvestment rates to fund our disciplined capital program, we were able to generate free cash flow for the 12th straight quarter. Furthermore, we delivered these results across a variety of market conditions showcasing the durability of our business.
Our strategy.
With this free cash flow our top priority was the return of capital to our shareholders a key use of our excess cash in the quarter was the funding of our fixed plus variable dividend with the board declaring a payout of <unk> 49 per share. This distribution will be paid at the end of September .
In addition to dividends, we also see great value in our equity and continued to be active buyers of our stock during the quarter, we repurchased an additional $200 million of stock, bringing our year to date total to approximately $750 million.
With the authorization we have in place we remain on pace to repurchase approximately 9% of our outstanding shares by the end of next year. These opportunistic buybacks are a critically important tool for us to compound per share growth for investors over time.
And to round out my prepared remarks. This morning, I'd like to give a brief update on our investment grade financial position.
We exited the quarter with $3 $5 billion of liquidity and a low net debt to EBITDA ratio of <unk> seven times. This leverage resides well below our mid cycle leverage target of one times or less subsea.
Subsequent to quarter end, we took the next step in improving our financial position by retiring $242 million of debt at maturity with a strong cash flow. Our business is generating we will have additional opportunities to pair down our debt maturities coming due in 2024 and 2025 as well.
With that I'll now turn the call back to Rick for some closing comments.
Thank you Jeff good job.
I would like to close out today by reiterating a four key messages from our prepared remarks.
For one our disciplined execution in the second quarter demonstrates our business is performing at a high level and building momentum as we head into the second half of the year.
Number two this positive trajectory is underpinned by better capital efficiency from higher and faster cycle times.
Wrong, well productivity and improving service cost that will.
Tribute to our financial results over the remainder of this year and into 2024.
Number three our resource base continued to strengthen this quarter. This was evidenced by our highly commercial appraisal result in the deeper wolfcamp and a positive redevelopment test in the Eagle Ford that adds to our conviction of resource upside across our portfolio.
Number four.
With this advantaged resource base, we are deeply committed to a disciplined pursuit of push per share value creation over production volume growth.
Foundational to this commitment is our carefully designed cash return framework that has the flexibility to allocate free cash flow across multiple avenues to optimize shareholder value through the cycle.
And now with that I will turn the call back over to Scott as we get into 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 more of your questions on the call today with that operator, we will take our first question.
Thank you.
With our first question comes from Neil Mehta from Goldman Sachs. Neil Your line is now open.
Yes. Thanks, so much. The first question is just on the production profile for the back half of the year.
Indicated you guys are focused on value over volume, but some of the pushback. We've done this morning, it's been centered around <unk>.
Volumes being a little bit below consensus for the back half of the year. So maybe your thoughts on.
Thoughts on whether there is some conservatism in the way that the model this out and where areas potentially that could surprise to the upside of that thanks.
Hey, Neal Thanks for the question. This is clay I just wanted to reiterate we are we feel good about our full year guide.
Certainly with the accelerated activity things moving a little quicker on the D&C front that pulled a little bit of our production forward.
That's great on a per well basis, but you get a little bit of lumpiness in the productivity. So we get we pulled some of that third quarter volume forward. So.
We maintain our full year guide, but we've always seen kind of a role as we pull back from that for Frac fleet in the Delaware to the third so nothing new nothing unplanned, but consistent with what we've been showing and once again feel real good about the full year guide.
Alright.
Great and then the follow up is just can.
Talk a little bit that this water handling contracts in the Delaware.
Modest bump up in the low <unk>.
Okay.
And the guide so a little bit of background on what it is.
And how we should think about it.
Yes, Neal this is Jeff happy to do that yes, we are excited about the flexibility and the scale that thats going to bring to our water handling in the basin.
We're going to have multiple disposal options as opposed to what we had before it does bring a little higher operating costs at the asset level, but as I mentioned in my prepared remarks with the equity stake that we have got in the joint venture.
Receiving distributions on a go forward basis, which is going to more than offset that.
That additional low cost that we're going to see so.
Im also mentioned in the prepared remarks, we also think it provides us a great opportunity with that equity position to monetize the asset at some point in the future. So I'm really excited about the flexibility it gives to us operationally.
Clay will attest, there's certainly a fair amount of water, we got to move out in the Delaware Basin. So this additional flexibility and scale. We think is going to be a real positive for us.
Also add.
It certainly helps us on the capital efficiency front, because it helps us to eliminate a pretty material amount of capital that we otherwise would have had to spend on water infrastructure as you look out over the next couple of years.
Alright, guys. Thank you bye.
It's Neil.
Thank you.
Our next question comes from a net income loss from Mizuho. Your line is now open.
Hi, good morning, Rick and team I'm glad to speak to you.
Rick you've kind of mentioned a little bit of.
Acceleration of activity into the first half, it's a little bit different than what you had said when we gave the guidance for the year.
It does imply a little bit slower cadence of completions in the second half of <unk>.
I was just wondering could we use that as a baseline for 2024 in terms of activity levels.
Nick I'll tell you what we'd like to do is what you think the most important thing for US is we like the consistency as you think about quarter over quarter, we've been pretty consistent for a while on our on our production and we'd like to look at things on an annual basis as clay mentioned, the fact that.
That you do have some lumpiness from time to time just through acceleration you could have working interest changes you could have some assess.
Assessment work you'd all sorts of things like that but I think for us the <unk>.
Most important thing mitten would be then let's just look year over year and I know that.
People like to look at things on a quarterly basis, but from my perspective, I want to watch that year over year profile and less let's lean in on share repurchases unless let's make sure that we get that growth on a per share basis.
And clay's or anything else you want to add to that yes, and your question was should we expect that run rate just remember that fourth frac crew in the front half of the year. We are consuming ducks essentially in that period. Just if you look at Delaware Basin and then we were running three frac crews as we will in the second half of the year, we're essentially generating docs.
And our fully optimized world, we would pick up and drop that that fourth spot crew.
To optimize I would say in today's world, where we're doing is really trying to bring that crew and get them fully up to speed, let them run through the opportunities that we have and then put them on pause in this case, we're about six months, we will pick them back up again in January Youll see capital tick up, but you'll certainly see the product production tick up as well.
Weighted to that crew so that does exacerbate the lumpiness that we talk about I'd love to have.
Have a straight line, but again when you pan out and look at an annual basis like Rick talked about you really see the consistency of our of our program.
Great. Thanks for the color, Rick and Clay I guess for my follow up.
Seeing some private assets change hands here in the last three months or so.
The shape of the Delaware Basin is it.
Exchange a little bit.
<unk> previously talked about scale and named partners that the new business model that Devin initiated three years ago. So just any thoughts on the M&A market going forward do you see room for consolidation here and what is the role that you think you might say.
Okay.
That's great question I think we've talked about this fairly consistently.
As far as consolidation I think its going to continue to happen.
I think as you start looking across many companies' portfolios and we're not one of those companies, but theres a lot of companies out there many of the smaller companies.
They're going to start looking for options because they are getting light on.
Light on inventory.
The private.
Consolidations that we've seen recently that you're referring to.
Many of those companies.
Companies that.
That exhibited.
Performance It was really.
Quite honestly it was pretty impressive in how fast they grew their production how fast they were going through that inventory, but they also see the.
Challenge.
Of where theyre going to go in the future and for companies like us we're going to be very very disciplined.
And we just havent had an appetite to really take on that steep decline rate that you would be inheriting you'd have to be very very thoughtful and it gets it gets to be tricky now.
I will say there were some pretty creative solutions with some of those companies that had those.
Bringing some.
Two and three companies altogether to make some some pretty pretty interesting transaction, but I think it just represents the creativity in our sector I think youre going to continue to see consolidation I think it makes a ton of sense.
And it's going to happen for for numerous numerous reasons and overtime Youll continue to see companies.
Consolidate and there will be there'll be companies, such as Dev and I believe that will be the beneficiaries of those because we're going to be very disciplined and I think we'll try to be opportunistic and make sure that we make moves that just build a stronger and stronger and stronger more durable company and so.
But you're spot on I think consolidation of our industry is going to continue.
Thanks, Thanks for the answer Rick.
I think unit.
Thank you.
Our next question comes from Scott talked about from Citigroup. Scott. Your line is now open.
Yes, good morning.
Curious about the returns youre seeing on the re Frac wells in the Eagle Ford how did those compare.
A new well in the basin.
How does that influence your process.
You bet that program going forward.
Yes. Thanks for the question Scott. This is clay, we're really excited about the work that we've seen to date, we have about 30.
Tests.
We're still learning on what's the right wells to go in and re Frac, what's the right techniques to go in and and prosecute those and so I would say for only being 30 wells in 30 Refracts in we're very encouraged about the results. We are encouraged about the inventory that we had.
Note. The Validus acquisition, we did we had zero re fracs underwritten in the acquisition price and now were seeing more material upside both in redevelopment and in re Fracs I would say on a heads up basis. When you think about returns the better ones certainly compete heads up with the wells that we're drilling today.
But you really have to really think about how do you prosecute those the right approach and you end up getting a variety of them. So I would say it's too early to tell on a on an exact quantity and the overall return, but certainly the top half of what we've de risked today, we feel really good about and we will certainly become more of a regular part of our.
Sure.
<unk>.
Investment opportunities on an annual basis.
Okay I appreciate that color.
And just one unrelated follow up.
I did notice that.
The gap on the quarter.
Versus our numbers was largely driven by the Anadarko level by the school.
The growth going on in April .
Right.
Gas production step up.
Are you seeing the gas oil ratio of the base.
There are step higher just some color on.
Gas production and Anadarko will be great.
Yes, thanks for that the Anadarko basin, certainly as our gasior option we.
A lot of running room right now we're more focused on the liquids rich portion of it but even relative to the rest of our portfolio. That's certainly a gas year part of the mix when we look to the wells that we're developing in Williston, a little bit higher gas cut there as well very importantly, we're doing a good job of getting that gas down the law.
<unk> through the meter and sold rather than flaring happy to report our flaring numbers continue to be heading in the right direction around the company, especially in Williston and Thats certainly not without challenges I think that's the bigger contributors to the increase in gas getting that through the meter getting that sold as always.
Hi objective, but we're also really focused on the oil side of the equation, which is where our revenue is really come from.
I appreciate the color. Thank you.
Thank you.
With our next question comes from Aaron <unk> from J P. Morgan.
Your line is now open.
Yes, good morning.
I know you guys arent.
To kind of.
Good morning, Rick.
I know you guys aren't yet ready to provide more specific.
Specific call it soft commentary on 2024.
But I did want to get maybe some of your early read on 2020 for Capex.
If we look at your second half 'twenty three capex guidance, it's around $1 7 billion.
Or $850 million a quarter.
If we annualize that that would be about $3 4 billion. It sounded like you would need a caught up a partial fourth frac.
That crew.
To execute your 2024 plants. So I just wanted to say if those are kind of the elements should we be thinking about capex in the mid call. It $3 5 billion counter range, but again just wanted to get some preliminary thoughts.
Yes, I appreciate that Arun I think your.
Your logic on how to get there as far as rig count Frac fleet count I can tell.
Totally agree with him a hold back on giving you a number for next year.
Theres a lot of things going on around what's happening in commodity price. Therefore rig count therefore inflation deflation those things have pretty material impacts and we're just going to hold back, but I think directionally think of the same similar activity as a really good starting point.
Great.
And my follow up maybe for Jeff, Jeff I wanted to kind of zero in on the Williston Basin.
This is a call for the third quarter in a row that we've seen relatively low realizations and for natural gas and NGL.
Ngls.
So I was wondering if you could provide what's going on there and is this going to be a persistent.
Impact to you going forward.
Yeah. Arun this is Jeff I appreciate the question as Clay mentioned earlier, there, particularly in the Williston.
<unk> got some gas is obviously not the lion's share of the production mix, but it can be a real challenge obviously to move the gas up there given the infrastructure and the constraints that we have.
I would tell you when you look at those realizations in particular on the excuse me the Williston Youre going to see some some wild volatility just given the deduction that we have from a realization standpoint.
So it's not as it's not going to be as clean as consistent as you would would usually see in some of our other basins I would also point out as Youre well aware, it's pretty immaterial in the Grand scheme of things given.
The margins that we see from the oil barrels there.
Fair enough. Thanks, a lot Jeff.
Thank you.
We have our next question comes from New England from the trough.
Neil Your line is now open.
Good morning, all thanks for the time My first question guys is on the Delaware Basin, specifically, maybe clay could you speak to what benefits that recent wolfcamp b appraisal success might have on I mean, maybe it's too early to say what it might have on total production, but maybe what what you think the upside will that that could drive and I don't know later this year next year.
And then just wondering how you view also the benefits you've touched on this earlier on your comments, how you view the benefits of bringing some of those wells forward this year.
The appraisals of course, but the others.
Yes, Neal first question around the B I mean this is this is so important and fundamental to what we do around the assessment work talked about on several calls this 10% to 20% of the dollars that aren't directed towards the most.
Near term capital efficient, but it's so important that we dig deeper into the portfolio to de risk these opportunities and when we see after.
After several reps are really understanding what that opportunity is and they certainly jump up to the front of the line compete even with some of the best stuff. We're investing in today, it's pretty exciting and so that's something we just wanted to share specifically in cotton draw specifically in these b zones. These are really accretive and very valuable now full.
Closure, there already baked into the.
The inventory numbers that we guide to but they are baked in and a risk standpoint, so as we derisk them net net to US there is real value creation and being able to prosecute on those the second question was around moving the opportunities forward. So that's just we have 16 rigs running they're all running just a little bit ahead of pace.
The completion crews same same deal there for Frac crews for the front half of the year in the Delaware Basin, They're just running just a little bit ahead of pace and so that fourth crew that we toggle on and off originally was slated to run through October and then we pulled it back to September than August . We finally were able to release that.
In July and accomplish everything that we needed to accomplish so you can imagine the well cost savings and the value creation on a per well basis now it kind of monkeys with our quarterly numbers a little bit as you can see but overall, we're always trying to pull that value forward, we're thinking about per well full cycle costs, how do we continue.
To drive that and then how does it manifest to the bottom line of the company.
That makes sense and maybe the last one for Jeff just on capital allocation.
Aggressively do you all think.
Think about going forward you all plan to target net debt, while combining this with your strong shareholder return program.
Yes, I appreciate the question I think going forward youre going to see our.
Framework has been pretty consistent from day, one as Rick mentioned in his in his opening remarks, you Shouldnt expect a material change in that approach, we're going to be pretty balanced as you saw this year year to date.
The variable dividend the stock buyback, it's been about 50 50.
Which to me is a great example of how well our frameworks working last year. When you had much higher prices and significant free cash flow generation, we leaned in on the variable dividends in this year when you've seen that pull back you've seen much more balanced from us with the stock buybacks as well going forward.
Where we are from a cash balance.
A framework standpoint, as we generate excess free cash flow here in the back half of the year given the lower capital spend we expect and the higher oil prices that we're projecting in the back half of this year.
We should generate significant free cash flow, we're going to look to build our cash balance back and then with the remainder of the cash we're going to we're going to focus on obviously, the variable and the stock buybacks on an opportunistic basis.
Very good thank you.
Thank you.
We have our next question comes from Doug Leggate.
Bank of America. Your line is now open.
If you don't mind, one is on mix on one is on portfolio of capital intensity and I guess it's.
We've seen this trend obviously in across a number of your peers, but if you look at the oil mix in your production.
It's obviously been up and down a little bit over the last couple of years, but seems to have dropped below 50% I'm just wondering when you think about.
How you are allocating capital between.
Your different operating areas, particularly I guess Anadarko versus Permian.
Do you anticipate.
You optimize your spend about oil mix is going to trend and I've got a follow up please.
Yes, Doug This is Jeff I would say, we view that the mix of the oil to be pretty consistent on a year over year basis.
We're really focused on rate of return and the returns that we generate in our play we're agnostic frankly to the oil and gas, but as we all know certainly oil is the higher margin product today and our focus has been.
Particularly in the Delaware, so with the with the Dow JV that we have in the Anadarko basin that obviously juices those returns and helps from a capital efficiency standpoint.
And makes that activity pretty competitive with our broader portfolio, but I think we would all tell you.
It is not going to be a surprise to anybody on the call that the Delaware without doubt is our most capital efficient asset today its oil weighted.
Where the bulk of our margins come from and as we move forward into 2024 and beyond we would expect it to capture the lion's share of our capital investment.
Okay, I guess, we'll take another look at that but my follow up Jeff is look I realize the inflation in cost and everything else is a well trodden path everyone understands what's going on there what has gone on there, but what I wanted to share an observation with you just to get your opinion on this and CV.
Sink.
When I looked at your peers, obviously, one of your large peers reported this morning.
The capital intensity Simplistically on a per Boe basis.
About 30%.
<unk> is up about 80%.
For example, if I take your spend in the first half of last year was about 10 Bucks in the.
First half of this year is about $17 a Boe.
And production is obviously up small so.
I'm just wondering if you can address that and tell us. What you think is going on is there a capsule in there that is transitory for example.
Infrastructure, you talked about or what else should we be looking at to try to understand what's changed there.
Yes, Doug I would say as you know, it's a mix of things without a doubt one of the things that we've talked about a lot is the inflation that hit us in the certainly started in the back half of last year and worked its way into this year.
A big driver of that the timing of our contra tracks in the roll off of our contract structure as it relates to all the different cost categories. I think is also disproportionately hit us relative to our peers said another way I thought our teams did a great job of protecting us from the inflation.
The very early part of the cycle. So think about the fall of last year and the early part of this year and now as we've worked our way through 2023, a lot of those contracts have rolled off into a higher price environment from an inflation standpoint, and so you've seen some of the capital efficiency.
For our asset base relative to some others certainly change obviously mix is a big driver of that the shifts that we've made with the acquisitions and Validus and rimrock Youre moving away from a more capital efficient asset in the Delaware from a mixed standpoint to really great assets really great returns in the Bakken and the Eagle Ford.
But as I mentioned in my my response to the previous question. There is certainly not as capital efficient as what we what we see in the Delaware. So you put all that together and I think thats, what youre seeing really driving that capital efficiency rate of change relative to some of our peers I will say, though when you step back and you look at that capital efficiency on an absolute basis.
Company versus company, we feel really good about where we sit and we look really really competitive against the top tier companies in the in the space that rate of change as you point out has just been pretty material.
And it's been a challenge on a relative basis as you as you all screen for capital efficiency, but when we look at the capital efficiency on an absolute basis, we still feel really good about where we sit and we expect that to improve as we work our way into the future for all the reasons you mentioned earlier, which is we do expect to see some deflation.
As we work our way through the back half of this year into next year and as Clay mentioned earlier, the mix of our asset base and the things we're focused on and we think that only is going to add to our productivity moving forward.
Okay. Thanks for the answers I appreciate it.
Thank you.
Our next question comes from Matthew Portillo from PVH Matthew Your line is now open.
Good morning, all.
Maybe a question for you to start off on the Bakken.
Thats an asset that is based on the technical challenges to start the year could you unpack some of the headwinds a bit more that you faced in the first half and maybe a little bit more around the completion design change that you guys have made that may start to show some improvement in the well results in the back half and heading into 2024.
Happy to do it Matt Thanks for the question.
As I think about the Williston It is certainly.
Maybe the most mature of all the oil resource plays we're learning things for the first time with these late innings really look like.
Certainly with the Rimrock acquisition, bringing those wells in we faced some challenges really from a subsurface standpoint, but also from a relatively surface standpoint, and I'll talk about both from a subsurface standpoint, one of the challenges we faced specifically with some of the wells. We acquired is the nature of the depletion.
These cross cut wells are really unique and so we've seen wells we've drilled through essentially have a depletion and then essentially Virgin pressure and then back to depletion throughout the lateral producing those completing those in producing those have been a relatively unique challenge we haven't seen anywhere else. We've gotten some solution have talked about earlier I think we are doing.
Really well on getting those wells producing consistently getting them on loaded, allowing the proppant to stay in stock.
Stay in place, which is fundamentally important to be able to producing the wells more on the surface side. Once you get that that proppant in place. Then you don't have the challenges of artificial lift you don't have the sand flowing back to surface and adding additional complications we really faced in the first quarter was some of these operational challenges and then.
I'm a very tight.
Workover rig environment, reaching for that Workover rig having to stand in line or the opportunity cost of pulling it off of something else. We were trying to do is been pretty uniquely challenging I think we've gotten a good recipe for the wells going forward a lot of our inventory that we're able to go back to now will not have some of these same challenges.
It's more run of the mill, what we've been dealing with in the Williston for the last several years and really delivering some really good well results. So yes. The first quarter was challenging from an operational standpoint, especially in the first quarter compounded by weather I feel good about the direction. We're headed the response, we've had from the team and the outlook going forward.
Perfect and then just as a follow up in your prepared remarks, you mentioned.
Quite a bit of success in the Anadarko basin.
For a further expansion of the partnership just curious is that something that you may pursue with Dow or are you looking at bringing in potentially other partners continue to progress the asset from a development standpoint.
We love, we cherish our partnerships and we love it when it's a mutual win win <unk> been very pleased with this partnership we have is well it's allowed the Anadarko basin to compete and are pretty rigorous portfolio and so expanding that certainly down is a very good knowledge of the basin it would be.
The easiest to pursue with them certainly look where we are.
Objective, we have other partnerships around the company, but it's something we're regularly talking about with now how would this work for them. How would this work for US we haven't made any decisions on that but just thought I would mention we have an additional runway beyond the current scope that we may end up pursuing at some point.
Thank you.
Thank you Matthew.
With our next question comes from Scott Hanold from RBC Scott. Your line is now open.
Yes. Thanks.
Just wondering if.
<unk> have some thoughts on just the overall maturation and depth of your inventory.
It appears.
You all that there is.
A little bit more exploration and re frac and other kind of opportunity.
Does that point to the maturity of some of the assets.
Is there a little reason more to do.
More kind of exploration and development of that sort or just give us a sense of like when you think about like primary drilling of economics, you have today like how much of a runway do you have.
Hey, Scott strict we.
Feel really good about our runway, but we also are compelled to.
To continue to explore to continue to assess what we already own <unk> heard some several com.
Comments commentary around consolidation opportunities I think it's incumbent upon his management team to first let's understand what the opportunities we already have in hand, you've heard clay talk about how we had in the Wolfcamp B, we feel really really good about.
Some resource potential there we had it in <unk>.
Risked basis, and you go out and you execute on those and do you find out that they really are good and the implications there not only the offsets of where we're at.
But when you think about a 400000 acre position that we possess in the Delaware and you can continue to do these in these assessment.
Activities.
Quite honestly, you either meet or exceed what your expectations are that's a good thing that's better than good that's a great thing because that adds to your <unk>.
Risk or your own risk.
Are you assuming your risked inventory that you would feel really good when I say that that's inventory you're pulling off the shelf and executing on and with phenomenal returns and so whether it's whether it's in the Delaware whether it seize these opportunities we have in the Eagle Ford, which we're really bullish on which it's the opportunities you see in the Bakken.
Which we continue to see some some nice opportunities there.
We feel really good about it but I think it's incumbent upon this team to continue to assess what our current acreage position is as we compare and contrast.
Executing on that holding what we have.
Versus going out and buying more consolidated more so just it's real fundamental of our business.
Yes, that's good to hear.
The question is a lot on sort of the capital efficiency trend as you move from a very high core prolific.
Delaware Basin to some of these other zones or even to some of these other plays like the Anadarko in Eagle Ford and <unk> right. So it's more about that capital efficiency trend relative to kind of the best stuff you've already drilled.
Yeah.
Right I think thats, what youre going to see I think youre seeing maturation in a lot of these basins and you can just think about whether it's you've seen at the Midland Basin. We are not in the Midland basin, but you've seen that for several years, where.
Every year until you start, bringing new resource on youre going to be continuing to evolve and people tend to go to their highest.
Returns what you.
<unk> seen it in the Bakken we've seen in the Eagle Ford, but I can tell you theres. Many of these base and we're excited about the <unk>.
Potential.
That we see with re stimulation.
And some tighter spacing in some cases, we up space in our other areas. We just learn more about the resources we have.
But that's been the history of our business over the last 100 years is.
As.
Plays and basins will mature over time until there is there is either a change in technology, new intervals or or found and so I think youre just youre seeing that play out in real time, we're continuing to two.
But we're excited about what we're seeing so hopefully that's coming across.
Not only are prepared remarks, but some of our answers that whether it's re stimulation down in the Eagle Ford whether it's what we're seeing the assessment work in the Delaware.
In other other place powder Anadarko works real excited about what we have.
Okay. No I appreciate the added color and just one quickly on the fixed dividend you spent a little time, Jeff on buybacks and variables but.
Remind us of your thoughts on.
The fixed dividend, what where you want that to be.
I think it's about a one 5% or something to that effect is do you feel good about that or would you like to see it.
Stronger relative to the S&P or to some of your obviously E&P peers.
Yeah, no absolutely I'm glad you asked the question we are absolutely focused on growing the fixed dividend as we work into the future and so you should expect us on a year over year basis.
To lean in and grow the fixed dividend.
We get more and more confident obviously in our base game plan and our framework. It's it's certainly should have mentioned it earlier, it's the priority one as it relates to our cash return framework and it only falls behind obviously the financial strength in the balance sheet. So absolutely expect to see us grow.
Into the future.
Thanks.
Thank you Scott.
Our next question comes from Paul Cheng from Scott to your Bank. Paul Your line is now open.
Thank you good morning.
Two questions. Please.
I think Craig you mentioned that Bakken is most mature, which certainly is the case.
And you talked about.
And the development opportunity in the Eagle Ford.
Paul about within your portfolio have you already look at what is the backend development opportunity in Boston in that law.
You may be able to hold their current production right.
Second question going back into the Eagle Ford I know, it's still early but.
Correct.
Obama.
Hi.
UTI and Henry hub gas price minimum unit in order for those to work. Thank you.
Yes, so I'll tackle those starting with the Williston, it's a very different reservoir rock than the Eagle Ford. The Eagle Ford is very is notoriously tight low permeability, which is a challenge and trying to initially develop will run.
Finding is there is some benefits in redevelopment being able to spacing wells later in life and not having some of the challenge that we see in other basins, we're not going to be able to do that same kind of model in many other basins because it's fairly unique to the Eagle Ford when it comes to re fracs that a little bit different scenario will.
And being on the more mature and also having a fair amount of the development early in the industry's understanding of how best to complete. These wells there are some really inferior completions and so the opportunity there is a little bit different not from a reservoir standpoint, it's more from a completion standpoint, how do we go in and re stimulate some of these.
Wells that were massively under stimulated so therein lies a different opportunity there.
The Eagle Ford you asked about kind of breakeven cost for the re fracs.
We have a very good number for that I would say in the top half of the opportunities that we're looking at many of those are very competitive with what we're drilling today, which is pretty.
Very very solid return so I would put it in that bucket, there's still a lot of work to do on refining how do we figure out where is the line and certainly commodity price will play a role in how many of these re fracs and then potentially even try for actually come back again.
At a later date those opportunities are certainly be commodity price dependent.
Yes.
Paul It's Rick I would just say that when I think about those <unk> opportunities down the Eagle Ford.
In my mind in a $50 world as long as Europe , North of 50, and a $3 Henry hub Youre going to have some pretty pretty pretty good returns.
Pleased with that one of the things I will add the previous question.
Had was around some of the assessment work.
Everybody as you'll recall, we are only doing a small percentage of our capital budget.
With assessment work, it's not luck, we're really leaning in and all that we do think it's important too to allocate a certain amount of capital and really excited about what the.
What it holds for us that being said I know at a time when when people are hyper focused on on capital efficiency Thats fair. It really is but we also need to think about the future and I want to say the future it's not next quarter.
It's the next 510 15 20 years.
Thank you.
Alright, it looks like 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 have a good day everyone.
Thank you ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.
Have a good day everyone.
Yeah.