Q3 2024 Devon Energy Corp Earnings Call
Welcome to Devon Energy's third quarter 2020 Fall Conference call. At this time, all participants are in listen-only mode. This call is being recorded. I'd now like to turn the call over to Mrs. Rosey's due click-fice president of Investor Relations. You may begin.
Speaker Change: Good morning, and thank you for joining us on the call today. Last night, we issued Devons 3rd Quarter, earnings release and presentation materials.
Speaker Change: Throughout the call today, we will make references to these materials to support prepared remarks. The release and slides can be found in the Investors section of the Devon website.
Speaker Change: Starting this quarter, we are providing slides specific to the earnings call discussion. In a week or two, we will publish a more comprehensive decked out that will include slides that were previously provided.
Speaker Change: Joining me on the call today are Rick Muncrief, President and Chief Executive Officer, Clay Gaspar, Chief Operating Officer, Jeff Ritenour, Chief Financial Officer, as well as other members of management.
As a reminder, this conference call will include forward-looking statements as defined under U.S. Security laws. These statements involve risks and uncertainties that may cause actual results to differ materially from our forecast.
Please refer to the cautionary language and risk factors provided in our SEC filings and earnings materials. But that will turn the call over to Rick.
Rick: Thank you Rosie. I appreciate it won't take a time to join us this morning. Let's begin on slide two by covering a few of our third quarter key highlights.
Rick: Once again, we delivered strong, operational and financial results, driven by the continued focus on executing our strategic plan.
Speaker Change: We reached an all-time quarterly record of total production averaging 728,000 barrels of oil equivalent per day, including 335,000 barrels of oil per day.
Our production has surpassed guidance expectations every quarter this year. In the Delaware Basin, well productivity was strong once again this period and across all five basins, we delivered another solid based production performance.
on production for share bases. This represents a 12% year-over-year growth.
Rick: With the operational performance and our recently closed acquisition, we're pleased to be able to raise our four-year production guidance again for this year.
Rick: We now expect to produce about 730,000 B.O.E. per day for 2024 and increase of 12% to this year's budget.
Rick: This phenomenal performance enabled us to generate $786 million of free cash flow in the third quarter.
Speaker Change: and returned 431 million of it back to shareholders. We leaned in heavier on our shared, uh, repurchase program, and we continue to thank reinvesting in our company at today's process is the right thing to do for shareholders.
Speaker Change: We also closed the Grace and Mill transaction very quickly. This acquisition enhances our position as one of the largest producers in US with average daily oil rates estimated at around $380,000 per day.
Speaker Change: In the Willis in Basin, our production will nearly cripple, and we have extended our resource depth giving us about 10 years of inventory at current activity levels.
Speaker Change: We successfully accomplished these things during a very volatile market backdrop.
Speaker Change: We remain focused on the things we could control. With our high quality portfolio, strong balance sheet and discipline business model, we are positioned to succeed through a variety of commodity cycles.
Speaker Change: We don't have a crystal ball to know where commodity prices will be in the short term, but continue to be very constructive on oil and gas, and believe that the world will continue to need all forms of energy.
Speaker Change: We remain committed to operating excellence and will continue to look for innovative ways to improve our capital efficiency.
Speaker Change: We believe our multi-basin portfolio in the top U.S. resource place is superior to most and provides us with over a decade of low-risk development inventory. We will continue to look for opportunities to further enhance our portfolio and grow our resource base.
Speaker Change: To succeed in our business, we need to maintain our financial strength and flexibility. We will remain disciplined in our approach to maximize free cash flow and are committed to having low leverage.
Speaker Change: And we're focused on delivering value to our shareholders through dividends and share buybacks.
Speaker Change: Now 2025 is shaping up to be an exceptionally strong year for Devon. With the Grayson acquisition, we are well positioned to deliver healthy growth in oil and expect robust free cash flow even in a lower commodity environment.
Speaker Change: Our legacy portfolio and key U.S. basins will provide a solid foundation for us to continue the momentum that we have demonstrated so far this year.
Speaker Change: As a result, Jeff will be providing preliminary 2025 guidance.
Speaker Change: that is actually better than we previously communicated. Before I hand the call over to Clay, I want to thank all of the Devon employees and contractors who challenge themselves daily to come up with innovative ways to create value for our company.
Speaker Change: Also want to thank the teams working the integration of Grayson Mill. I'm excited to see the results from teams sharing best practices and with that I'll now turn the call over to Clay.
Clay Gaspar: Thank you Rick and good morning everyone. Turning to slide 4, Devin's third quarter performance reflects exceptional operational execution across the board. The third quarter performance is a continuation of outstanding quarterly results and a product of our focused approach to operational excellence.
Speaker Change: The organization continued to build on the wind that we've captured in the first half of the year, positioning us around 2024 with very strong momentum.
Speaker Change: These results tie back to three key factors. Our premier asset portfolio, a talented and value focused organization, and third, a disciplined capital program designed to optimize returns throughout the cycle.
Speaker Change: Each of these elements combine to contribute excellent well productivity, improved cycle times, and better base production results across our diversified portfolio. I'm confident we will continue to build on these accomplishments into 2025 and beyond.
Speaker Change: Moving to slide five.
Speaker Change: The Delaware Basin was the primary contributor this quarter to our earnings with approximately 60% of the capital allocated to this basin.
Speaker Change: The volume growth was fueled by 55 new wells, primarily targeting the Wolf Camp Formation with a subset of Bonespring and Avalon wells included in the mix.
Speaker Change: Collectively, these projects exceeded expectations, achieving average 30-day rates more than 3,100 BOE per day per well.
Speaker Change: On the map to the left, we highlighted one of the primary contributors from this quarter, the CBR 12-1 development.
Speaker Change: This project co-developed the Wolf Camp A, Wolf Camp B, and shallower zones in the Bone Spring. In total, this state-line area development targeted six different landing zones.
Speaker Change: We brought these wells online during the second and third quarters, successfully managing any localized facility constraints. The 30-day rates from this 21-well package average 3,300 BOE per day per well, and estimated recoveries exceed 2 million BOE per well.
Speaker Change: Our team continues to de-risk multiple secondary targets across our core development areas in the Delaware Basin.
Speaker Change: The great work that the team is doing in balancing the near-term performance with the long-term inventory considerations confirms our confidence in a multi-year runway of outstanding performance from the Delaware Basin.
Speaker Change: As shown on the right-hand side of the slide, we also continue to realize meaningful operational efficiencies.
Speaker Change: Notably, the broader adoption of SimulFrac across the Delaware Basin activity has been a key driver, enhancing completion efficiencies by 12% year-to-date and consequently increasing our days online.
Speaker Change: These efforts have yielded tangible results, evidenced by a reduction in drilling days and a 14% improvement in drilling efficiencies in 2024 compared to the previous year.
Speaker Change: Efficiency gains have allowed us to reduce drilling activity from 16 rigs to 15 rigs this quarter. We plan to drop an additional rig in the first quarter as a result of these efficiencies.
Speaker Change: At the current pace, we expect to duplicate 2024 16-rig output with 14 rigs in 2025.
Speaker Change: Let's now shift to the Williston Basin on slide 7.
Speaker Change: We closed on the Grayson Mill transaction in late September. I'm pleased to report that the integration is progressing quite well and I would add that is our best integration to date. The teams on both sides have jumped in and are excited about the opportunity to learn, challenge, and improve existing processes.
Speaker Change: We're currently operating in three rigs in the Willison Basin and plan to roughly maintain this level of activity going forward.
Speaker Change: For 2025, we aim to sustain the acquired assets at approximately 100,000 BOE per day. Our capital plan will feature two and three monolaterals and tactical refracts to supplement the base production.
Speaker Change: Enhanced scale in the basin will drive additional capital efficiencies, operational improvements, and marketing synergies. The acquisition also adds 500 undrilled locations, further enhancing Devon's free cash flow profile for many years to come.
Speaker Change: I'll now hand it over to Jeff to go over the financials for the quarter.
Jeff: Thanks, Clay.
Jeff: Starting on slide 8, highlighting our third quarter financial performance, Devin's core earnings totaled $683 million, or $1.10 per share. EBITDA was $1.9 billion, and we generated operating cash flow of $1.7 billion, each exceeding consensus estimates.
Jeff: Our cash flow generation was underpinned by oil and total production that exceeded the top end of our guidance due to the excellent operating performance highlighted by Clay earlier.
Jeff: Production cost improving 7% from the prior period, driven by less downtime, resulting in lower work over expense, and finally a lower cash tax rate, primarily a result of accelerated tax depreciation due to the Grayson Mill acquisition.
Jeff: Our solid financial performance enabled another quarter of strong cash returns for shareholders.
Jeff: During the quarter, we distributed $431 million to shareholders through fixed dividends and buybacks. We spent $295 million on share repurchases, bringing our program total spend to just over $3 billion.
Jeff: We elected not to pay a variable dividend this quarter. The variable dividend will remain a tool within our cash return framework, but in the near term, we expect to deliver cash returns to shareholders through our fixed dividends and share repurchase program.
Jeff: Foregoing the variable enabled us to reduce net leverage in pursuit of our 2.5 billion dollar debt reduction target. We expect to utilize cash on hand and a portion of free cash flow generated each quarter to pay down the 1 billion dollar term loan we put in place for the Grayson Mill acquisition.
Jeff: As highlighted on slide 9, we exited the quarter with a net debt to EBITDA ratio of just over one times and strong liquidity between our cash balance and undrawn credit facility.
Jeff: We've already retired $472 million of outstanding senior notes this year and have additional opportunities to further reduce our leverage with upcoming maturities, the pay down of our term loan, and outstanding callable debt.
Jeff: Moving to slide 10 and looking ahead to 2025, we expect another year of strong performance with total production forecasted to average around 800,000 BOEs per day. This production outlook is nearly 5% higher than what we communicated just a few months ago when we announced the Grayson Mill acquisition.
Jeff: On the capital front, we anticipate spending to be between $4 and $4.2 billion for the year. Importantly, with this disciplined plan, we are well positioned to generate robust free cash flow at today's prices and offer a free cash flow yield that exceeds the broader market.
Jeff: Moving forward with the allocation of our free cash flow, we believe our financial framework provides us the necessary flexibility to deliver market-leading cash returns for our shareholders and achieve our debt reduction goals.
Jeff: We will continue targeting up to 70% of our free cash flow as a cash payout for shareholders and make progress on our $2.5 billion debt reduction program.
Jeff: We expect share repurchases in the range of 200 to 300 million each quarter and will retain free cash flow beyond our share repurchases on the balance sheet to reduce our net leverage.
Speaker Change: We'll provide complete 2025 guidance on our February call after we finalize our budget with our board. With that, I'll now turn the call back over to Rosie for Q&A. Thank you, Jeff.
Rosie: We'll now open the call for questions. Please limit yourself to one question and a follow-up. Emily, we are ready to take our first question.
Emily: Thank you. Our first question today comes from Aaron Jairoan with JP Morgan. Aaron, please go ahead.
Aaron Jairoan: Yeah, good morning.
Aaron Jairoan: I was wondering if you could highlight some of the drivers of the uptick in well productivity in the Delaware Basin. I know you shifted some activity from Monument Draw back to southeast New Mexico. And maybe, but I'd love to get more details on that and what you're underwriting in terms of well productivity as we think about your 2025 plan.
Rosie: Unknown Speaker 0
Rosie: Hey Arun, this is Clay. Thanks for the question. First, let me reiterate the 25 plan is still a soft guide.
Rosie: I'd like to note that this soft guide is a little better than the last soft guide, so we're continuing to improve our soft guide towards a February more constructive guide.
Rosie: But let me tell you a little bit about what we have baked in. There's an assumption on the cost side of the equation.
Rosie: relative to where we're at stamp in time today. There's obviously a lot of macro in the air so we haven't assumed presumptively additional deflation or other significant moves in the system.
Rosie: the wells that we have in place, we probably haven't fully baked in some of the upside that we've seen in regards to some of the breakthroughs we've had around well placement combined with completion design compliant combined with the sequencing. And I think that's where we really continue to outperform and really had some great breakthroughs as we feathered in some of these other more
Rosie: secondary type zones.
Rosie: You know, you're building in a multi-development strategy, and sometimes those wells, while economic, can be diluted to the overall picture.
Rosie: What we've seen is, with the right techniques going in, we're continuing to see some really phenomenal results from these deeper and some shallower benches as depicted in this 12-1 as an example.
Rosie: So I would say there's a little more upside in where we're headed, but objectively, you know, we've got a soft guide out there. We feel good about where we're at. We'll continue to hone that and then see how we can improve from there.
Aaron Jairoan: Great. My follow-up is, you know, you guys are six, seven weeks into, you know, since the close of Grayson Mill. I was wondering, Clay, maybe for you or Rick, is if you could identify any self-help opportunities where you think you could, you know, further improve kind of capital efficiency in the Bakken in particular?
Speaker Change: Yeah, you know, as a reminder, this, this deal was.
Speaker Change: built on its own merits and justified just on the acquisition and what what it really does to make us a better company.
Speaker Change: Those have been some really instantaneous wins. Things that we're working on in progress right now, there's some debundling opportunities that we had taken full advantage of on the Devon side that I still see is unlocked potential on the Grayson side. And then I think the real upside potential, and this is hard to quantify really in synergies, but think about the value of having teams that have been working problems side-by-side and when you bring them together, take for example the Refracts.
Speaker Change: and all of that experience and that wisdom coming together to really figure out how do we do it better and not just better in Williston, but better in South Texas and better in the other amazing basins that we have.
Speaker Change: So more to come on that and synergies. We probably won't tally it up every time we have one of these wins, but that's certainly an accretive part of the value proposition when you bring in such a strong team as we did with Grayson.
Speaker Change: Great, thanks.
Speaker Change: Our next question comes from Neil Mehta with Goldman Sachs. Neil, please go ahead.
Neil Mehta: Good morning, Rick and team. I guess the first question is, as you think about your M&A strategy,
Neil Mehta: Transcripts provided by Transcription Outsourcing, LLC.
Neil Mehta: you've definitely demonstrated an interest in being active. What do you think is the right path? And how are you thinking about, you know, maximizing value via M&A?
Speaker Change: Yeah, Neil, that's a great question. And you know, I think from our perspective, our commentary has been very, very consistent over the last several years, and that is we'll continue to
Neil Mehta: to look for opportunities, make sure that we're not missing something. We've got a team that...
Neil Mehta: David Harrison is his folks do a really really nice job and staying plugged in with what's what's in the market and what's out there we
Speaker Change: We debate internally on things that could make us a stronger company. More often we just pass on it and move on down the road. So that's something I think if you look at
Speaker Change: And our actions over the last couple of years, you know, we'll continue to to evaluate things, but don't forget the organic piece, too. And that's that's some things and.
Speaker Change: Clay, you talked about the CBR pad. That's another way we'll continue to build inventory for the future organically. We've got a great geoscience team and a Reservoir Engineering team that works very hard day in day out and so I think that you'll see it.
Speaker Change: You'll see a combo pat forward and that is the organic and the inorganic and the inorganic could be They'd be a common
Speaker Change: of the smaller, just,
Speaker Change: or something that's more of an asset like you saw with Grayson Mill, which, once again, works very, very well for us. And so we have a...
Speaker Change: Strong team, it does a good job with integrations, and I think that's the bottom line, the key takeaway is the same path going forward as what you've seen over the last couple of years.
Speaker Change: Okay. Thank you.
Speaker Change: The follow-up is just maximizing your natural gas realizations, particularly in the Permian.
Speaker Change: you've discussed the in service of Matterhorn. So I'm curious on how you think that ultimately is going to flow through.
Speaker Change: Scott Coody, Clay Gaspar, Unknown Executive, Richard Muncrief
Speaker Change: and then maybe as part of this discussion you could also talk about blackcomb and how that resolves potentially the next bottleneck in permean gas too. So broader permean gas question there.
Speaker Change: Yeah, Neil, this is Jeff. Yeah, as you know, we obviously have a commitment on Matterhorn and have an equity contribution there as well. We're excited that the pipe is up and going and flowing to VCF a day at this point.
Speaker Change: So now with Matterhorn Online we have
Speaker Change: You highlight the potential for a backup there at Katy. That's certainly something that we've been mindful of. Our team's done a great job and got out in front of that. We've taken capacity away from Katy over into the Louisiana LNG hub. So we feel like we've taken some really positive steps to protect ourselves from some of the dislocation and pricing that you've seen there. We feel good about pricing longer term. As you mentioned, we're still in a spot today with a lot of the maintenance that we've seen on some of the other pipe there in the Permian Basin has led to kind of a depressed WAHA price.
Speaker Change: even with Matterhorn coming online, but initially once the pipe came on we did see some improvement and once some of this maintenance settles out we expect that to continue and our realizing pricing going into the fourth quarter and and certainly into 2025 we expect to improve over time.
Speaker Change: Thank you. Bye. Bye.
Speaker Change: The next question comes from Kalei Akawain with Bangalore America, Merrill Lynch.
Speaker Change: Please go ahead.
Kalei Akawain: Good morning, guys. Thanks for getting me on.
Kalei Akawain: For my first question, I'm also going to take a shot at 25.
Kalei Akawain: You kind of addressed the permanent piece of the puzzle, that there is an upside scenario there.
Speaker Change: But in your conservative base case, do you kind of see the Delaware oil flat or up?
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Speaker Change: Fair enough. For my follow up, just kind of thinking about debt reduction, in September you made a first go at your two and a half billion dollar target and taking out the 500. In the next several years, before 28, you've got about two billion dollars coming due. In the base case, do you take those out as they come due?
Speaker Change: Yeah, Clay, this is Jeff. Yeah, that's exactly the game plan. You know, we feel really good about the balance sheet that we have a lot of strength and liquidity, as I mentioned in the prepared remarks, we're not in a hurry to go out and pay down a bunch of debt in the near term. But we are going to build towards that. And as you mentioned, our game plan is to take out the maturities as they come do we I mentioned the 475 million that we took out here this year already. We'll have another call it 485 million in the fall of next year that we'll look to take down. And then as I mentioned previously, the term loan, which which has a maturity in 2026, we've got a couple of years to start chipping away at that over time as well. So, you know, over the next two to three years, as we as we've highlighted, we'd like to get kind of roughly two and a half billion dollars.
Speaker Change: of Absolute Debt out. But we feel really good about the kind of financial flexibility that we have with our framework to deliver on that, as well as again, I'll just highlight, you know, our intention to deliver really competitive cash returns to shareholders over that time frame as well.
Speaker Change: I appreciate the comments, guys. Thank you.
Speaker Change: Thank you. Thank you.
Speaker Change: The next question comes from Scott Gruber with Citigroup. Please go ahead.
Speaker Change: David Deckelbaum, David Deckelbaum, David Deckelbaum,
Scott Gruber: Yes, good morning. How should we think about your LOE and GPT costs going forward post-closing? We got the 4Q guide. Is there an opportunity to squeeze OPEX lower? Should we use the 4Q guide as the baseline for 25?
Speaker Change: Yeah, I think the 4Q guide is a good starting point. Again, we'll continue to refine that, look for opportunities.
Speaker Change: You might have noticed the 3Q to 4Q change. That varies quite a bit with the workovers. We're always trying to get more efficient, less downtime. That's a lofty goal. Things tend to tick up a little bit during the winter months on some of this downtime. So we've got that baked in in the fourth quarter. So if you run that forward, I think it gets you in the, certainly in the right ballpark.
Speaker Change: completion efficiencies, you know, quite impressive.
Speaker Change: How should we think about, what do you guys think about in terms of, you know, driving the next leg? Where do you guys stand on, you know, EFRAC deployment? You mentioned the SimulFrac, but are you thinking about EFRAC deployment? Where do you guys stand on that front? And, you know, latest thoughts on, you know, potentially looking at, you know, something like TrimulFrac. Just kind of what drives, what could drive the next leg of completion efficiency gains?
Speaker Change: Yes Scott I would say all of those things are on the table we continue to evaluate them.
Speaker Change: very objectively. Um, we stay in the market pretty continuously, um, to understand what those opportunities are. As you're well aware, some of the fleets
Speaker Change: required some pretty long-term contracting early on. As we cycle through those as an industry I think there's more opportunity for us to participate and to see things that are really kind of contributing to the bottom line. So far we're pretty objective about the fuel types.
Speaker Change: and many of the fleets that we run actually run very high percentage of natural gas and so think of an e-fleet as a hundred percent natural gas where some of our fleets are maybe sixty to eighty percent natural gas and so we're getting a lot of that cost-benefit from depressed natural gas prices.
Speaker Change: and at the same time we're in the market that maybe a little bit secondary, some of the premium
Speaker Change: are advantageous for us.
Speaker Change: getting tired of trying to out guess them on is this the time that we plateau so you know if you're thinking about when do we plateau man your guess is as good as mine but I'm gonna bet on the on the over on the creativity and the innovation that these folks have and they continue to apply so more to come on that and look forward to sharing with you
Speaker Change: Don't bet against human ingenuity. Appreciate the color. Thank you.
Speaker Change: You got it, Scott.
Speaker Change: Our next question comes from Roger Readwood, Wells Fargo. Please go ahead.
Roger Readwood: Yeah, thank you. Good morning.
Roger Readwood: Kind of two questions. One, to follow up on your comments earlier about not really building in any productivity or efficiency, maybe just a way to look back over the last 12 months, last six months, what those productivity and efficiency trends have been. In other words,
Roger Readwood: If things were to continue along that line, what's sort of the potential for improvement on well costs as you think about it?
Roger Readwood: productivity and let's just focus on the Delaware because that's such a large piece of our business.
Speaker Change: When I look back year to year productivity, you know, we've been in a band and it's a relatively tight band, but it certainly is affected by
Roger Readwood: our geographic contribution inside of the Delaware, also the zonal contribution, how much of which zones do we do, and then going forward, our ability to move more of these multi-zone developments.
Roger Readwood: There's also some kind of technical tension on maybe we need to tighten a few more of these up and really lean into this inventory opportunity and not miss these. We all know this is incredibly precious inventory that doesn't exist really anywhere else on the planet. And so we want to make sure that we're thinking about the balance of near-term returns, the ultimate net present value of the project, but also the inventory considerations.
Roger Readwood: Shifting over to the to the bigger capital picture, you know, I think about that productivity as part of the equation
Roger Readwood: Speed is part of the equation and then deflation is part of the equation.
Roger Readwood: And so you think about those three inputs, we highlight on slide six the completion efficiencies and drilling efficiencies.
Roger Readwood: That actually...
Roger Readwood: You know, obviously on a per well basis makes those wells cheaper.
Roger Readwood: but it works a little bit against you because you're working faster and you're pulling more of next year's activity into this year.
Roger Readwood: We've mitigated that by dropping rigs, lowering kind of headline number activity, still getting the same output.
Roger Readwood: But as you see from our productivity and our continued beat and raise throughout the year, that productivity gains combined from the well productivity and from the more wells online, we're outrunning even our internal estimates.
Speaker Change: I appreciate the details and the answer. I'll turn it back. Thanks.
Speaker Change: Thank you, sir.
Speaker Change: Our next question comes from Neil Dingman with Truist.
Speaker Change: Please go ahead now.
Neil Dingman: Morning, guys. Thanks for the time. My first question is likely for Rich, for you or Jeff, just on capital allocation. I'm just wondering, very generally, any...
Roger Readwood: Thoughts these days any differently about how you're thinking about the buybacks versus dip going forward and then secondly on the Recent buybacks so that includes any PE shares and would you all consider in stepping? Largely, you know larger way in the buybacks if any the PE's decide to sell
Roger Readwood: Yeah, Neil, this is Jeff. So, first priority for us on the cash returns is the fixed dividend. We're in a position today where, you know, obviously with our business model, we're really comfortable with where the fixed dividend is and frankly expect to grow it as we work our way into next year. Once we start working through our finalized budget with our board, you know, I expect, you know, after we get past the first of the year, you'll see us announce a growth in the fixed dividend. So, that's the first priority. Beyond that, we've been pretty clear for the last several quarters that our bias is towards the share repurchases. So, we think there's great value in our equity today from an intrinsic value standpoint and kind of our view of the long term. So, you're going to continue to see us lean in on the share repurchase program. I think if you go back and look at our track record
Roger Readwood: Obviously, we've paid a variable dividend in the past.
Roger Readwood: That really was attuned to the market dynamics that we're seeing with what we would characterize as above mid-cycle pricing. We think it worked incredibly well for us. Now with the pullback that we've seen in commodity prices, we think it makes more sense to, you know, eliminate the variable for the near-term and really lean in even further on the share repurchases and the growth in our FIC. So that's going to be our game plan going forward. Obviously, if we see the market dynamics change, we'll adjust our strategy. But that's what we really feel like is the beauty of our financial framework, is it provides us all the flexibility that we need to kind of manage through the dynamic environment that we're all living in.
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Speaker Change: Yeah, I like that game plan, Jeff. And then just secondly, Rick, for you and Clay, just a broader on potential future JV plans. And it seems like some of your peers have started talking about power and nuclear. I'm just wondering if you all started any of these conversations for any potential JVs with these type of plans? Unknown Speaker
Speaker Change: have had a litany of discussions, but I can also tell you that
Speaker Change: What I've personally been involved with is talking to utilities and power pools just to make sure that we have the right framework and structure, and more importantly, the support
Speaker Change: to get some of this done, because until we address some of those sorts of things, I think we're kind of waving our arms a little too much, but to answer your question, yes, we've been very, very engaged in discussions.
Speaker Change: Yeah, Neil, I'll just follow on that as well. I think there's, you know us as a pretty creative bunch and we've got some folks that are really thinking outside of the box on how do we connect some of these dots.
Speaker Change: We have tremendous resources, specifically in the Delaware Basin, and it's obviously not lost on us.
Speaker Change: The current cost of electricity, the scarcity of electricity, and at the same time, we have the source of that electricity that is getting a terrible price realizations. And so connecting those dots with our incredible footprint, I think is a real opportunity. And yes, we're absolutely engaged in some of those conversations today.
Speaker Change: Our next question comes from Paul Cheng with Scotiabank.
Speaker Change: Please go ahead.
Paul Cheng: Thank you. Good morning, guys. I'm just curious that as you are trying to do more cure development and looking at the other branches, have you seen a noticeable difference in the gas oil ratio or the sour gas exposure and all that?
Speaker Change: I would say we've actually seen some upside to the oil cut and some of the what we call B200, B300 benches that have really proven a lot oilier. We've got a couple of tests that we're doing our first half of this year that we're pretty excited about even deeper benches. We have done a whole lot of geologic mapping and science work, oil fingerprinting, really understanding where those opportunities are.
Speaker Change: to really drill deeper, include more of these deeper benches and still keep our oil cuts up.
Speaker Change: And so I'd say positive to the upside there, pretty excited. But overall, remember, we are moving down dip. You're kind of fighting uphill on the gas cut. So we're obviously very aware of that. Specific to the H2S, the only place we see it is in the far eastern side of the Delaware Basin in material amounts.
Speaker Change: and we're very aware of that. We work around that. We've got third party, midstream partnerships.
Speaker Change: that are very engaged in that.
Speaker Change: pretty much throughout that stack of rocks and so it's not something that typically surprises us. We're very aware that we certainly take that into account and make sure that we have the appropriate safety and midstream infrastructure in place as we dig into that area.
Speaker Change: And, Kay, the second question is that on inventory backlog.
Speaker Change: Now that we have Grayson, I think you're saying that you have a 10 year of the inventory life on that and how about in the permanent?
Speaker Change: If we look at using a, they call it a $50 WTI and $3 gas price, what is your inventory life and how many wells you need in the permit per year in order for you to sustain the operation?
Speaker Change: Some of these have much longer, as an example, the Powder River Basin, but even in our core, the Delaware Basin, we certainly feel really good about that runway. Now, no doubt about it, Paul, as you think about the front five years versus the back five years, we have much more confidence in that front five years. In fact, when you look at the overall productivity and capital efficiency for the organization, I feel very good about that front five years de-risked and some really good continuity to what we're doing today.
Speaker Change: and then even beyond that, Rick Segal and Timmy over here. There's a lot more beyond that and he's a great champion for our innovation beyond as we think about deeper zones, uphold zones, adjacencies to that in a business sense and adjacencies in the sense of a geologic sense.
Speaker Change: There's a lot more to go from there. Again, don't underestimate these teams. You know, the human ingenuity, the scrappiness of these folks across the industry is just, it's so exciting to be part of and I'm so proud to see it.
Speaker Change: Thank you.
Speaker Change: Thank you, sir.
Speaker Change: The next question comes from Doug Leggett with Wolf Research. Please go ahead Doug.
Doug Leggett: Thank you. Good morning everyone. Guys, I think all of us have been obviously trying to figure out why the stock has had such a tough time over the last
Doug Leggett: period of time. And there's a couple of things you brought up this morning I wanted to try and hit. And the first one is, Jeff, when we hear you talk about
Doug Leggett: 70% free cash return buybacks, and you're gonna raise a dividend.
Speaker Change: but at the same time, you've avoided the variable because of your concerns over the commodity. Well, your capital structures still get $8 billion of debt in a backward dated oil curve. Why is the balance sheet not getting more attention than a buyback?
Speaker Change: given the uncertainty that you've yourself, you know, laid out this morning on the oil price.
Speaker Change: Unfortunately, that's it.
Speaker Change: There's no precision here.
Speaker Change: But we did have a substantially higher oil price when you made that acquisition, that $5 billion deal. As you look at it today, at the current forward strip, how do you see the value of the forward free cash flow, the forward asset versus what your planning was at the time that you did the deal? I'll leave it there. Thanks.
Speaker Change: Yeah, that's a good question, Doug. I mean, the bottom line is we were about $75, $75, $76 as I recall when we did that transaction.
Speaker Change: And it's, you know, I think you have to always think long term.
Speaker Change: about
Speaker Change: about what the commodity price is going to be. And none of us, as I said, none of us have rose-colored glasses or people have been calling for $4.50 gas price by the end of this year. That doesn't look like that's going to happen either. So it's, you know, and you've been in this business a long time as well. And it's, you know, picking a commodity price is probably
Speaker Change: You know, one of the trickier things that we do, but eventually you have to put a stake in the ground. So this is where we're going to head. And what we liked about Grayson Mill...
Speaker Change: is that the economics around that transaction, we felt very, very good about it, mid-cycle pricing, or probably a little bit cheaper than or lower than where we are today. So we felt very good about it.
Speaker Change: We structured the deal to be, you know, two-thirds, two-thirds debt.
Speaker Change: That's kind of how we look at it, so we feel really good about the transaction, we feel really good about the long-term inventory.
Speaker Change: As you know, the Bakken is a great reservoir. Williston Basin has been a tremendous provider of energy for a long time. So we really like the position we're at. So I can tell you we have no regrets whatsoever. So we feel really, really good about it.
Speaker Change: Great. Thank you guys. I appreciate the answers.
Speaker Change: Unknown Speaker Thank you.
Speaker Change: Our next question comes from Jay Phillips Johnston with Capital One. Please go ahead.
Speaker Change: Hey, thanks for the question. Just a clarification for Jeff on the return of capital and strategy. If I heard you right, you're sticking to the 70% target and I think you said you'd...
Speaker Change: You'd expect, you know, 200 to 300 million of buybacks each quarter to sort of get you to that 70% target at the strip. I just wanted to clarify.
Speaker Change: What we might expect in an upside oil price scenario, would you stick to the 200 to 300 million and let the return fall below 70% in order to
Speaker Change: Yeah, Phillips, the way I'd answer that, as I said, we have the option to do both. Our near-term plan is to be pretty consistent. We're going to deliver a fixed dividend of, you know, call it $575 million annually a year. With the repo range that we've given, the $200 million to $300 million over time, a quarter, that's going to get you north of $1.5 billion, $1.6 billion of cash returns to shareholders. To the extent that we deliver on, as we did this last quarter, we got to the top end of the range on our share repo game plan. Any incremental cash above that, we'll consider taking back to the balance sheet. But that being said, if we move back to an environment where we think we have above mid-cycle pricing, we'll reevaluate that thought process.
Speaker Change: may be leaning further on the share repo, or frankly, even consider the variable dividend at some point in the future again as well. But in the near term, with kind of how we look at the world, we think the fixed dividend, the share repo, leaning in on that is going to make the most sense. And then as we generate some incremental cash above that share repo gain plan that we've laid out, we may take that back to the balance sheet.
Speaker Change: Sounds good. Thanks, Jeff.
Speaker Change: The next question comes from Charles Mead with Johnson Rice. Please go ahead.
Charles Mead: Yes, good morning Rick, Clay and Jeff and the whole Devon team there. Clay, I want to go back to your prepared comments and you were specifically talking about Delaware Basin activity levels and I think you were referencing slide six.
Charles Mead: You've addressed this a bit, but you've got a 14% improvement in drilling days, year-to-date, over 23. But if we think about the delta in your
Charles Mead: In how many rigs you need to run going forward versus 24, is that number maybe a little lower than that 14% as far as to keep the same drilling footage, what do you have to run?
Speaker Change: Well, the simple math, if you're running 16 rigs, multiply by 0.86, you get about 14. So that's where we're headed by first quarter. We're probably, we don't move this, we don't want to get ahead of ourselves on dropping rigs too quickly. And so we're probably erring on the high side and that's why you're seeing a little bit more days online and certainly helps the production numbers.
Speaker Change: Got it, OK, well thank you for that clarification and then.
Speaker Change: One one question I'd like to ask this is a see if you want to take a stab at this and this this place to Matterhorn so Jeff. I think you gave some good detail there about you know the other pipelines going in into a Having some maintenance because you know one of the big surprises was that you know wah-ha flip you know
Speaker Change: It was positive for it seemed like a couple of days and then it went right back negative again, but
Speaker Change: return above zero for natural gas and also maybe you know one of the big questions that that we've batted around with clients is how much if any incremental oil volumes come to market now that there's more
Speaker Change: Gas Egress. So if you kind of take a stab at either or both of those, it'd be great.
Speaker Change: Yeah, you bet, Charles. I'll take a stab at it. I would say our perspective is we definitely think once some of the maintenance cleans up on the other pipes in the basin, with the benefit of Matterhorn, you should see pricing improve. Whether that's next month or three months from now, I can't tell you. I think it's certainly going to be dependent on when that maintenance kind of clears up. As it relates to incremental volumes coming online, oil volumes or otherwise, we don't have direct line of sight to that. I can tell you we haven't changed our behavior at all as a result of Matterhorn coming online. We haven't turned on incremental wells as a result of having that additional takeaway. So specific to Devon, our behavior hasn't changed, but I certainly can't speak for other operators out there.
Speaker Change: Out there and if it's if it's changed the way they've thought about things.
Speaker Change: The next question comes from Betty Jang with Barclays. Please go ahead.
Betty Jang: Hello. Hi. A lot of questions have been asked.
Betty Jang: I just have a follow-up on the Permian.
Speaker Change: Unknown Speaker The CBR, the multi
Speaker Change: Scott Coody, Clay Gaspar, Unknown Executive, Richard Muncrief
Speaker Change: Do you think you'll see any impact on the average productivity in the premium and how much that could extend your inventory life in the premium?
Speaker Change: Yeah, thanks Betty. This is one of the things we wrestle with and I mentioned this a couple times in the prepared remarks just around
Speaker Change: The balance of returns.
Speaker Change: If you just want to maximize the return of a well, there's one way to do that, and it's probably not going to maximize the NPV of the productivity of the overall pad. If you want to maximize the NPV of the pad, you may sacrifice things like some of the overall inventory. And so there's an interesting tension between those three kind of pieces and important factors when we think about inventory, returns, and NPV of the overall project.
Speaker Change: to really maximize the opportunity. And so what we're thinking about is not just these incremental zones but also the spacing. In some areas we've tightened up a little bit, in other areas we've loosened up a little bit.
Speaker Change: But it really, this interplay in a three-dimensional sense of these other zones, is one of the things that we've learned how to improve some techniques.
Speaker Change: some appropriate spacings where some zones can take a little tighter spacing and other zones where we need to loosen up a little bit. I would say that's where we've seen productivity improvement.
Speaker Change: that's outpaced
Speaker Change: our risk model going into 24. And that's probably been the most important tangible thing that we've changed, controlling the controllable kind of thing. And I think that does extrapolate going forward. Now, there's no doubt about it. I mean, Betty, you know this as well as anybody.
Speaker Change: We have a full inventory of assets and we're always trying to drill the best stuff up front and so it's kind of that
Speaker Change: You're fighting the resistance of that ultimate degradation that we will all see in this prioritization. But as you see in 2024, we didn't wait to drill some of the best wells we've ever drilled until 2024 because we wanted to really hold out until then. This is the innovation of the teams and really thinking about how do we continue to do this better. And I know that there's more to come in that space to improve these future wells that on a risk basis don't look quite as good as what we drilled in the past.
Speaker Change: I appreciate that. Maybe just on the efficiency standpoint,
Speaker Change: I mean, the 21 wells.
Speaker Change: project, these type of larger projects do.
Speaker Change: Allowed for greater efficiency gains, both on drilling and completion side, like, do you see, what would, what do you see as the average project size going forward? Is there more of these larger size projects going forward?
Speaker Change: You know, if we started from scratch, we would definitely do more of these. In some of our areas, what we're finding is we're feathering in after an initial development, and so in the 12-1, it was an opportunity to really develop all of these zones at the same time.
Speaker Change: But what we're finding is, when we go back in, we now understand essentially the depletion effects from that prior development, and how to mitigate downside from that, and then maximize the upside of some of these zones that, again, objectively, we've waited later in the cycle to develop.
Speaker Change: and they continue to prove really, really productive.
Speaker Change: I would say we tend towards larger pad development where applicable. It does provide efficiencies on drilling and completions. But much more important than the cost side of the equation is the productivity side. And as we continue to innovate and improve that productivity well to well in an overall pad, that's where our real money is made. And that's where we try to highlight really on slide five. Yeah, slide five about how much productivity we have and really calling out this 12-1. That's a very large...
Speaker Change: project that has just continued to exceed our expectations from all of these benches.
Speaker Change: Understood. Thank you.
Speaker Change: Thanks, Betty.
Speaker Change: Our next question comes from Josh Silverstein with UBS. Please go ahead.
Josh Silverstein: Good morning guys. The GME assets came with a big midstream footprint. How are you thinking about the value of this asset now that it's in-house? Are there opportunities or a need to expand the footprint or could this be a potential divestiture target to accelerate the debt reduction plans?
Speaker Change: Hey Josh, thanks for the question. You know, as you know, we've got a lot of midstream assets.
Speaker Change: Inside the portfolio, I would say they're all in the portfolio for a reason, but we also remain very objective about when there's a better opportunity for the organization to exit some of these opportunities.
Speaker Change: I would say uniquely to Grayson, I really commended the team on the last call about the great work that they've done to build this out and how it translates into higher margins and lower overall operating costs.
Speaker Change: and you're really trying to pick up.
Speaker Change: These remaining opportunities, extend the laterals, lower that cost threshold.
Speaker Change: So that more and more of these opportunities meet our return threshold.
Speaker Change: So I would say they're much more likely to stay in our portfolio. In fact, I believe on the last call I highlighted an opportunity that we're going to be building some infrastructure on the east side, some of the legacy assets.
Speaker Change: to really open up some additional inventory in the Williston Basin. And with the expertise from Grayson, we feel even more confident about our ability to execute on that, bring that in, run that, and then I think it'll provide additional runway of other stranded assets to further enhance our existing footprint. So excited about those opportunities, that skill set. I would say we're pretty objective about all of those assets. When the right time comes, you'll see us.
Speaker Change: Buy assets, sell assets, but I would say specific to the Grayson assets, we're really happy that we have them in the portfolio, and it was a critical piece of our ability to transact on that deal.
Speaker Change: That's helpful. And then within the 2025 plan, how should we think about the capital allocation to the other assets that we really haven't discussed here today, Eagleford and Anadarko and the PRB? Are these assets just in cashflow harvesting mode? Is there any uptick or downtick in terms of a percentage there? Thanks.
Speaker Change: Josh, I would direct you to it's directionally looking similar. Okay, one thing that will be a notable change, obviously, with a larger Williston footprint, you know, the overall pie will shift a little bit, you'll see higher to the Williston, you'll see Delaware Basin.
Speaker Change: drop from about 60% of the portfolio to 50. Otherwise, I would say directionally we're in the same ballpark and we'll resist the urge to give you too much more granularity on 25 until the February call.
Speaker Change: Yeah, thanks guys.
Speaker Change: Thank you, sir.
Speaker Change: Unknown Speaker
Speaker Change: So we have met our time commitment. I want to thank everyone for your interest in DEVIN and if you have any further questions, please reach out to Chris or me. Thank you again for joining us on our call today.
Speaker Change: Unknown Speaker