Devon Energy Q2 2024 Earnings Call Transcript

Hey, thanks for the question, Arun. This is Clay. Yes, so you nailed it. The first half of the year was benefited by the fourth frac crew. Now interestingly, we moved that frac crew in and out a little quicker than the original plan. So you saw some second-quarter capital benefit from that. But I would say to the heart of your question, it's a little bit front-end weighted, but relatively flat over the course of the year. And so we'll benefit from that -- that fourth frac crew in the front half. We get a little bit of benefit of depressed capital in the second half that should balance things out nicely.

Sure. It definitely affects the capital. But the -- we try and manage that through the year. I can tell you, it's hard to manage that in addition to all the other important levers. And so as -- as we as we march through the year, we could actually see a little bit of a step-up in the -- in the first-quarter. Well, first quarter, we had a little bit of a step up. So second half we'll have a little bit lighter working interest.

Yeah, obviously, too early to telegraph too much on 2025, but I get that it's part of your job to ask. So what I can tell you is directionally, that's not too far off. What happens between now and the announcement of our budgeting process is we have a strategy session with the Board in the next month. We'll talk about all kind of different scenarios and really challenge ourselves. And then we refine it. We run internal sensitivities. Then, of course, we need to close on Grayson. We hope that still lines up in the end of the third quarter. And then once we get that out, we'll be able to talk a little bit more holistically about where it fits in the overall project. So more to come on that, but I would say from the start, directionally, you're not too far off.

Appreciate it.

Good morning, Neil.

Hey, Neil, it's Rick. I'll start with that and hand it off to Clay. The reality is, I've seen time-and-time again over the last 40 years when you -- things are looking good only to have some kind of a downstream constraint to surprise you, weather, whatever it may be. So what we did is we decided volumes were looking really, really, really good. We stuck with our game plan, exceeded the expectations and -- but we did have some discussion around that and -- but we stuck with a plan, you saw the performance. I thought it was important also for us to show once again, when we talk about 10% uplift, we talked about that for the Delaware position over 2023, what kind of performance we expected and we wanted to deliver that. And I think the team did a phenomenal job doing that.

So Clay, why don't you provide a little more color, a little more detail?

Yeah, Neil, great question. And I think it's pretty fundamental. As we think about do we absorb those accelerations and kind of continue to provide to the upside on production or do we trim back? I would tell you there's a mixed bag. We are always way below the radar doing a lot of things. I mentioned the fourth frac crew. As that frac crew was able to develop its amount of work quicker, we're able to release that earlier. We've high-graded a couple of rigs. We've actually gapped a couple of rigs during the year. We continue to evaluate for the balance of the year. And certainly, as we look into 2025, what is this increased productivity per rig, per frac crew really mean?

I think you pointed to the right thing. We're thinking more about capital. We're thinking about net wells, maybe more importantly, net footage that we're delivering and how does that translate into the best-value opportunity? We'll still continue to hold to our 0% to 5%. I think we'll stay well inside that range, but it's -- we are on the winning side of this, right? We've got improved cost structure accreting to better per well economics. The challenge is you drag a little bit more capital in and that still remains to be seen how do we manage that? So far so good. We're staying inside of our capital guide range. Feel good about that. More information to come on the balance of the year and how we shape things up for 2025.

Hey, Neil. Our mantra has been and always will be that we will always have our eyes open, but the reality is that we have once again a high bar and we're really laser-focused on getting Grayson Mill closed, getting it integrated, executing once it is integrated in the company. And so we'll see how that all plays out. But I can tell you, we're all excited about this company we've bought and I think it's going to be a great addition and shareholders are going to truly benefit, but we'll maintain that discipline and high bar.

Thank you.

Absolutely, Neal. It's something we talk about quite a bit. I'm going to have -- I'm going to have Jeff weigh in on this. But certainly, the way our equity is priced, we just think it's a great opportunity right now to be leaning in on the buyback. But Jeff, why don't you?

Yeah, you bet, Neal. Appreciate the question. And I know you're familiar with our financial framework. We're -- as Rick highlighted in his opening remarks and just there in his response to your question, we think the -- our bias is going to continue to be to lean in on the share repo. Our approach to that has been to be consistent quarter-after-quarter. We think somewhere in that $250 million kind of spend per quarter makes the most sense. The variable dividend falls out of that, right, as a function of the free cash flow we generate in each period. We take some back to the balance sheet. We make sure we're paying our fixed dividend and growing that over time. And then the balance is going to be dedicated to the share repurchase program.

We're excited about Grayson Mill and getting that closed because that's going to add some incremental free-cash flow to our company, which is going to allow us to think about even expanding upon that absolute amount of share repurchases that we do on a quarterly basis. So without question, the bias is going to continue to be towards the share repo given what we're seeing in the market right now.

Thanks for the question, Neal. Yeah, I think both of them are complementary assets. In the case of the Anadarko Basin, having that partnership with Dow really helps promote those returns to compete in our portfolio. On the Powder River side, we think it's think it's an important future piece of our business. And so we're investing in it kind of prospectively to really understand what's the right combination, what's the right approach, and really unlocking that very material, very oily potential for our future. So you're not going to -- never going to -- not going to see these kind of dominate our capital call, but they certainly have a place in the portfolio and continue to allow us to look for our future, build for our future. Thanks, Neal.

Hey, Roger, it's a great question. In our mind, the share repurchases, that share repo program, that's kind of our base case. That's what we know that we're going to be doing. And as far as the transactions, that's -- you can't always predict how that will play out for a number of factors as you can understand. But I think that I'm going to turn it over to Jeff, let him talk about some of the metrics, but certainly, our track record has been that we absolutely have to have that accretion to make it -- make us a stronger company with the acquisition than without.

Yeah, you bet. Roger, appreciate the question. And I'll echo much of what Rick just said, which is that you all are familiar with our financial framework and we've been, I think, pretty transparent as it relates to our thoughts around M&A and what's required for us to go out and capture incremental assets or think about merging with other companies, right? It's very much driven by that free cash flow accretion that we're looking for in any transaction. You're always going to hear me say that the balance sheet is a priority. We're going to be very thoughtful about any transaction, what we do, what the impact that that has on our investment-grade credit rating, and what that looks like into the future.

So those are going to be a few of the priorities. As it relates to whether or not we use equity in a transaction, that's very dependent upon the specific opportunity that we have in front of us, right? Our bias is always to buy back our shares and not issue shares wherever we can. But depending upon the specific situation and the transaction that we're looking at, what the seller is interested in, those are all the different things that we'll think about as it relates to the capital structure and ultimately how we finance that deal. But without question, our bias is to buy back our shares given the current environment and the opportunity set we have in front of us in our base portfolio.

Yeah, Roger, this is Clay. Appreciate the question. We are pretty excited about what we're seeing specifically in South Texas around re-fracs. We have more experience and frankly, more running room there. We've quietly put -- posted some really nice numbers, really kind of de-risked that potential from how we approach these, how we screen the wells to begin with, the operational pieces of how do we clean out the wellbore, prepare them for the stimulation and then ultimately, what's the right stimulation? When you run all that through, it's a pretty compelling return and it's all upside to existing portfolio. We've also tried this in a few other areas. We've had okay results in the Anadarko Basin. We've had okay results in the Williston Basin.

Then you flip to the Grayson Mill and the Grayson Mill guys have done a fantastic job on some of these re-fracs. This is one area that we talk about synergies. How can we learn from what they've done specifically in Williston, apply that to even more of what we already have in the legacy assets? But we see it as part of the ongoing business, really I think more of a supplement to the base production. So we're probably not going to be highlighting this as the big capital call on where we spend a significant portion of our overall capital dollars, but think of it as more supplemental. And as we try and ring out more and more of the resource out of these incredible basins, I think this will be a very important tool in our portfolio.

Morning, Scott.

Scott, we -- I like the way you started with thinking about well counts from spuds, from initial deliveries and really thinking about the cadence of that. As an earlier question came up, the net definitely plays into effect when you're talking about capital but also production rolls into that. I think the rig count really is kind of a by-product of the great work that the teams are doing and our service company partners and making that equipment more and more efficient. So I would set the actual rig count aside a little bit. And again, we do things when we high-grade rigs, sometimes there's an opportunity to overlap, sometimes there's an opportunity to gap those rigs a little bit.

Again, we are less focused on the day-to-day rig count and more focused on how do we maintain that expectation and always look to improve from a productivity and a capital efficiency standpoint.

Yeah, Scott, this is Jeff. I appreciate the question. Yeah, we're -- first of all, let me say we're excited to get Matterhorn online and I think it's going to be a positive, obviously, not just for Devon specifically, but with the broader sector as we move more of those molecules away from the WAHA hub. You've also heard about Blackcomb coming on in the 2026 timeframe. Again, we're excited to be part of that project. And again further the movement to get the molecules away from WAHA, specifically to Matterhorn, it -- from our standpoint, it absolutely is going to move molecules over to the Gulf Coast. We're hopeful to take advantage of the LNG pricing improvement that we'll see over time as those projects get built out.

But you're right, there's absolutely a risk of some of that backup of molecules being transferred from WAHA over to KATY [Phonetic]. And that's why we've also taken advantage of -- of some other opportunities to move the molecules further away from KATY into Louisiana and beyond. And so the marketing team has done a really great job of kind of thinking about the entire value chain and how we move these molecules to where we can get the highest realized price because at the end of day, that's what we're trying to accomplish.

So we feel really good with the commitments that we've made and our ability to move the molecules around not just over to the Gulf Coast but outside of the Gulf Coast. If you think about our Oklahoma gas is another example, we have the ability to move that gas to the Southeast markets where in the second quarter we were able to capture our premium to Henry Hub. So a lot of great work done by the marketing team and think we're well set up for the future.

Yeah. This is Jeff again. I'll start and give you a little bit of color on how we think about these -- making these firm commitments and then Clay can speak further about our depth of inventory in the Delaware. But I like the way you started the question, which is it begs the question, why are we making these pretty significant commitments if we're worried about our Delaware inventory position? And so that probably -- that probably answers the question. But without a doubt, we believe we're going to continue to see gas production grow, obviously in the Delaware Basin as we continue to pursue our oil dedicated and oil commitments or excuse me, our commitment to drilling more and more oil projects in the Delaware Basin.

We're going to continue to see that gas grow. And so that's why we think it's so important to help support these projects like Matterhorn and Blackcomb by making these volume commitments. So without question, we feel like we're going to have the ability to make our commitment on both Matterhorn and Blackcomb, and I'll flip it over to Clay and he can talk a little bit more about the inventory and the position that we have there.

Yeah, thanks for the question. I'll take the inventory piece and happy to talk about it. This is something I remember 18 months ago, 12 months ago when folks were worried that we were falling off the cliff and running out of inventory. And here we are producing some of the best, most productive wells that we've ever produced and posting some fantastic numbers. So I think our runway looks incredibly strong. I'll refer you to Slide 11, where we have third-party data looking at the inventory, not just ourselves, but of our pure companies.

And again, our team does an amazing job of trying to unlock that white part of the bar on those curves, which is the upside potential. And as we drive down these costs and improve the efficiencies, slightly improve on those recovery factors, eke out a little bit more of those resources, that white spot becomes more of a gray and then it becomes really part of that in-hand inventory. And so we literally have thousands of wells ahead of us. We feel really good about our Delaware Basin activity. Feel so good that we're certainly willing to sign long-term deals, underwrite these pipes that desperately need to be in place. And I think that just underscores our commitment to this area and our confidence in the position that we're in. Thanks again for that question.

Not really. I think we've not transacted on major, major transactions we have a really healthy ground game going on out there. I can tell you that. But we have not transacted in the Permian recently. We participated in a couple, but I can tell you that we are continuing to stick with our mantra of being very disciplined and having a high bar in some of -- some of the premiums that we saw that may fit some people, it didn't fit us at the time and that's just the way it works.

Thanks for the question, Betty. We are constantly updating our forecast, both in timing, capital, and of course, production, and things like the operational improvements are a little bit easier to kind of grab a hold to and really bake into the forward forecast. When we're finding unlocked upside in the productivity, we're bouncing around. We've got a huge area, specifically in the Delaware Basin, but really around the company. We believe in time that we will be able to continue to unlock that. It's a little harder to bake into the -- to the current forecast on a month-to-month basis. And so I would say there's continued upside in that the teams are continuing to work on. And we just -- we want to make sure that what we put forward, we're able to achieve.

And like I said, it's a little easier to predict on some of the capital things, especially operational timing issues, casing designs, some of the simul-frac changes, those things we know we can do. As we look to the well performance, we want to make sure that we've got a clear line-of-sight to what those productivities are -- and within a certain area, we certainly understand where we can make improvements and we capture those as we do.

Yeah, Betty, thanks for the question. So as you recall, from '23 to '24, we forecasted in 5% deflation gains during that period. I think we've continued to make improvements on that. At the same time, there's an opposing race on these operational improvements, and that capital kind of creeping in. So it's been a battle of can we outrun the deflation or is the operational improvements kind of going to overtake a little bit? What we're seeing so far is we are seeing the 5%, probably even beyond that 5% as we look to the balance of the year.

That is so far a little bit more offset by that operational improvements. The good news is, I want to make sure we connect on this. The good news is both deflation and the operational improvements help the project economics. These are both material gains for the well's capital efficiency and overall economics and that especially on the operational side are sticky. Those will translate into the future opportunities that we have, not just in the Delaware, but around the company.

Thanks, Betty.

Yeah, Charles, good question. That's something that I think we have seen over time is that with efficiencies and cost-control and all the things that we've learned over the last 15 or 20 years in these shale places, what was once Tier 2 has become core. And I think that what we're seeing is some of this could arguably have been 15, 20 years ago a Tier 2-plus. And what we're seeing is it's, I'd call it between a Tier 2 and a core. So we're going to see some really nice returns. At the end of the day, when you start looking at the efficiencies, the fact that we're changing orientation slightly. We're drilling three-mile laterals instead of two. We're drilling three-mile wells in the same time or less than it used to take us to drill two and completions with these efficiencies.

What you see is at the end of the day, whether it's core, whether it's Tier 2, Tier 3, Tier 4, whatever it may be, at the end of the day, it all comes down to well-level returns and what it does for your capital efficiency. And that's how we price all of our transactions, anything we do or quite honestly in our existing development program with our current assets. So we feel really good about it. And recall, it's a basin that we're very familiar with. Personally, I've been there, this is the 40th year that I've been involved with in the Williston Basin. It's pretty incredible. So I've watched this evolve. And I can tell you having 3,000 acres to develop, 3,000 acres to explore on over the -- that's a ton of running room for the next several -- several decades.

So our Geoscience team -- I'll go back to some of my prepared remarks, they're really, really excited about what might lie ahead on top of what we already know with our 500 new drills. So yeah, we feel pretty good about it.

Charles, what we refer to as redevelopment is basically taking units that look like they're fully developed and then looking for those downspacing opportunities and very unique to the Eagle Ford. What we're finding is we're able to feather in these wells that are much tighter spacing into fully developed units and these new development wells, essentially the redevelopment of that are coming in at phenomenal rates. It's the gift that keeps on giving. Now when you complement that with re-fracs on some of the existing wells, we're really finding a one, two punch that continues to provide lots and lots of running room in these areas that from a map view look very developed. So that's both in the Karnes and in the DeWitt County areas. We're excited about that continued running room and gives us great encouragement about our position in the South Texas area.

Thank you, Charles.

Kevin, this is Clay. Thanks for the question. We actually across-the-board beat. We had -- I was listening to some of the calls and questions last night and different analysts were picking up on different areas and I took it as a great compliment that across-the-board, our teams are really performing. So from another angle, you could say, wow, Williston really carried the day, or maybe it was the Delaware, but you're right, the Eagle Ford played a very critical role. Unique to our operations in the Eagle Ford, about half of our assets we run in a more conventional way. About half of our assets in the Dewitt County area, we have a 50-50 partnership -- JV partnership there.

And so we are -- be a good neighbor, we work with our partners. And sometimes what that means is some quarters we get more opportunity, more activity on that JV than others. This happened to be an area -- a quarter where it got a little bit more of the opportunity and it's just some really good -- some really good potential and really good wells that we're drilling there. So I think it's nothing to extrapolate necessarily, just a little bit of a real nice quarter that we'll take credit on and continue to move forward.

Well, Permian has advantage because we currently have 16 rigs running there and three frac crews. And with that, those economies of scale and those reps and that competition, I mean, we rack and stack all 16 rigs every day on how they're doing. And there's a first place and there's a last place and those guys know, those companies know, those engineers know exactly where they stand. And that healthy competition really adds to it. As opposed to an area like Powder that we have one rig and we have a part-time frac crew, that's a challenging area to really apply those learnings and really that scale. So when we fast-forward and we look at some of those other opportunities, Powder comes to mind as one, that what is the potential on cost-savings and efficiency, there's so much more to be had when we do end -- are able to lean into that.

And so really trying to understand what that potential is and evaluate when does that fit eventually into our portfolio, I think that's part of the consideration. Now we're always trying to export the learnings from Delaware and from Eagle Ford and from Anadarko to all the other areas as well, and they learn from each other. So that competition doesn't just stay inside the basin. We try to provide that -- that healthy competition and collaboration kind of around the company. And now that we have the Grayson team about to roll in, we're excited about, again, sharing some of those learnings, learning back from them and that's the nature and the culture of this continuous improvement that I pointed to in the prepared remarks.

Yeah. Thanks for the question, Paul. I appreciate it and I think it's a really good one. As we think about the Powder, I mentioned it as a complementary asset. The great news is we're going to be able to ride the back of the Delaware Basin and the other really strong basins that are much more mature and developed while we unlock the potential in the Powder. So plan on us having kind of one to two rigs in that -- in that realm. And what we're really focused on is productivity, understanding spacing, applying some of the learnings that we can around well construction that are material improvements.

I've mentioned a couple of things. There's a new casing design we just applied. It is a very material cost savings. Those are the kind of things that we'll be able to get our arms around, but it's really on the productivity side, the consistency side. That allows us to really understand that productivity side of the equation. Now on the cost side, there's 100% certainty in my mind that when we scale this up, costs are going to come down materially. And that's on the back of every other basin we've ever worked in, and we've had success with that. And I also know we will never achieve the full potential until we get that. That's the chicken and egg conundrum that you pointed to. I think what we'll get to is we'll run our one to two rigs, we'll be able to achieve some of those productivity wins. We'll be able to achieve some of the cost wins as well, but we also can look over the fence.

A couple of companies have a little bit more activity and then we can learn -- we can extrapolate our learnings from the other basins to allow with certain confidence what the potential can be and when will that really start to play a bigger part. To answer the second part of your question, look, we've got time. Time is on our side. We've got long-term leases. We have a great inventory that allows us to derisk this play in time. So don't think of any of my remarks as all of a sudden, there's going to be a rush of capital towards Powder. I just want to keep it on your -- on your horizon as a really valuable piece of our portfolio that probably has zero value out there in the world from our share price, but one day will be an incredible part of our return of overall value-creation and return of capital to the shareholders. And in the meantime, we will continue to derisk this and unlock this potential in a very systematic way.

Yes, certainly, we evaluate capital. I mentioned a strategic -- strategic board meeting we have annually in September. And this is where we're looking 10 years out and how do all these opportunities fit. What I would also mentioned on Slide 11 is the incredible inventory we have in the -- in the Delaware Basin. There's a big chunk of that, that's still yet to be kind of on the development kind of Tier1 ready to go. As we continue to unlock Delaware asset potential, which we still have a lot of unlocking to do there, that puts other things probably a little further out on the runway.

But I think it's incumbent on us to make sure that all of these potentials are understood well in advance of us needing them. And so what I would expect in time, maybe second half of the decade, there'll be more of an opportunity for the Powder to really step in. In the meantime, the front half of the decade, we really need to make sure that we're ready for that. And what my signal to you today is, we're really pleased with that steady progress that we're seeing.

Well, there's some important differences. The first thing I would point to and the reason we're so attracted to the Grayson is the running room. Additional 300,000 acres, an incredible running room, well-positioned for a lot of three-mile development gets us really excited. Now, objectively, the East side of the basin on the -- on the reservation where we're at in our legacy position is just better rock, which has been an incredible asset for us to lean on for a decade from the WPX side. And so we've created some incredible value from that. As we look on the Grayson side, incredible running room.

Rick mentioned a lot of the stuff not too long ago was Tier 2 acreage. So it hasn't been developed. And then importantly, with the nature of this kind of rock, we think there's more upside potential in things like re-fracs and further upside potential from enhanced oil recovery and other ideas further down the road. So really excited about Grayson. From a well-cost standpoint, I would say really too early to tell. It will be in the same ballpark, but look for us to gain some efficiencies as we really think about those rigs holistically for the entire basin, we'll gain some great efficiencies there as well.

Hey, Paul, it's Rick. I'll interject a couple of other things. Number one is, yeah -- number one is that I think on the Grayson project, the Grayson Acreage, you're going to have a slightly less oil cut percentage, but I also think we'll see better margins because of the control or the inflows we have with the infrastructure there that -- which we don't have overall in the legacy position. So I think that's going to be a net plus for us on that. So we're excited about it. But thanks for the question.

We have reached the end of our Q&A session. We want to appreciate everyone for your interest in Devon. And if you have any further questions, please reach out to anyone in the Investor Relations team, and hope everyone has a wonderful day. Thank you.