Devon Energy Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 14 speakers on the call.

Operator

Hello, everyone, and welcome to the Davins Energy 4th Quarter and Full Year 2023 Conference Call. At this time, all participants are in a listen only mode. During this presentation, you can register to ask a question by pressing star followed by 1 This call is being recorded. I would now like to turn the call over to Scott Cody, Vice President of Investor Relations. Sir, you may begin.

Speaker 1

Good morning, and thank you for joining us on the call today. Last night, we issued an earnings release and presentation that covered Devon's results for the past year and our outlook for 2024. Throughout the call today, we will make references to the earnings presentation to support prepared remarks, and these slides can be found on our website. Also joining me on the call today are Rick Munkrief, our President and CEO Clay Gaspar, our Chief Operating Officer Jeff Rittner, 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.

Speaker 1

S. Securities law. These comments are subject to assumptions, risks and uncertainties that could cause our 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.

Speaker 2

Hey, thank you, Scott, and appreciate everyone taking time to join us this morning. For today, my comments will be centered on 4 key themes: Devon's accomplishments in 2023, the catalyst of our improved outlook for 2024, the depth of the resource we possess in our portfolio and the strategic priorities that will drive our free cash flow allocation going forward. Now beginning with the Q4, we exited the year with a solid quarter of execution highlighted by production that exceeded the top end of guidance, meeting consistence across all products. Disciplined reinvestment resulted in our 14th consecutive quarter of free cash flow and we took steps to increase cash returns by stepping up the pace of our stock buyback. These positive results rounded out another successful year for Devon, where we achieved several key milestones that I am extremely proud of.

Speaker 2

On Slide 7, you can see we delivered production growth rate of 8% in 2023 resulting in new high all time production for oil. This healthy growth rate was also paired with returns on capital employed that outpaced the S and P 500 by a substantial margin for the 3rd straight year. With the free cash flow our business produced, we rewarded shareholders with an impressive cash return yield of around 10% that was balanced between buybacks and dividends. As I touched on during the last call, our team has done a great job of designing a plan to deliver improved capital efficiency in 2023 excuse me, 2024. With the current industry conditions, we still believe it is prudent to deploy a steady capital program designed to optimize returns while maintaining volumes around levels where we exited 2023.

Speaker 2

Importantly, we expect to deliver this production for 10% less capital versus last year, funded at a WTI breakeven price of around $40 In conjunction with this outlook and given the confidence that we have in the underlying health of our business, the Board has approved a 10% increase to our fixed dividend payout. Now looking briefly at the trajectory of our capital and production profile in 2024 on Slide 9, we plan to be spending to be slightly elevated in the first half of the year due to the addition of 4th completion crew in the Delaware Basin. Due to timing of completions and recent curtailments from extreme winter weather, we expect Q1 production to be the lowest quarter of the year. However, we expect volumes and capital efficiency to move higher over the remainder of the year. In 2024, a key contributor to our improved capital efficiency will be the well productivity improvements we expect to achieve in the Delaware Basin.

Speaker 2

Turning to Slide 12, And with the easing of constraints across the basin, we plan to concentrate roughly 70% of the Delaware's capital in New Mexico, while optimizing remaining activity across our acreage in Texas. This allocation to New Mexico is meaningfully higher than what we were able to deploy during 2023 and is more in line with our historic activity in the basin. Overall, this refined capital allocation expected to increase well productivity in the Delaware by up to 10% on a year over year basis. Given that 2 thirds of our Delaware Basin inventories in New Mexico, we anticipate being able to sustain our pace of activity on both sides of the state line for the foreseeable future. With this advantaged acreage footprint, you can see on Slide 14 that we have one of the largest inventories among operators in the basin, providing us with a multi decade resource that will drive our enterprise wide performance for many years to come.

Speaker 2

The quality of our Delaware weighted resource base combined with our disciplined strategy positions us to generate a differentiated amount of free cash flow for many years to come. As you can see on Slides 1516, our business is set to deliver a free cash flow yield that is up to 3 times that offered by the broader markets. With this free cash flow, we are targeting a cash return payout of around 70% while earmarking the remainder to further strengthen our balance sheet. With our flexible cash return framework, we will judiciously allocate our free cash flow toward the best opportunity, whether that be buybacks or dividends. Given that the equity market is heavily discounting valuations in the energy sector, it's an easy decision to prioritize a buyback over the variable dividend to capture the incredible value that Devon offers at these historically low valuations.

Speaker 2

Slide 19 helps better visualize this compelling value proposition. On the right, you can see energy represents less than 4% of the S and P 500, while contributing more than 10% of the EBITDA in 2023. This is noteworthy given that Energy's S and P weighting historically tracks its earnings contribution over time. I believe this gap exists due to extreme valuations in tech, combined with a pervasive misunderstanding of hydrocarbon demand over time. With global energy demand forecasted to increase 50% by 2,050, the world is going to need growth from all sources of energy, including oil and natural gas.

Speaker 2

With the world's power needs continuing to grow, it is evident that peak oil demand is nowhere in sight and our industry will be an important contributor of energy growth for the foreseeable future. Furthermore, high quality names like Devon provide significant equity upside over time as you collect outsized cash returns. And as I said earlier, this is why we are putting our money to work actively repurchasing shares. And with that, I'll turn the call over to Clay.

Speaker 3

Thank you, Rick, and good morning, everyone. The Devon team did a really good job of rounding out 2023 by exceeding our operational targets for the Q4. These positive results were driven by 3 key factors: number 1, improved uptime driving base production number 2, increased efficiencies through faster cycle times resulting in lower capital per well and number 3, better new well productivity, improving our wedge production volume. Slide 5 provides a good visual of these favorable operating trends. The chart on the left highlights the efficiencies we've delivered in our drilling and completions operations.

Speaker 3

On the right, you can see this track record of efficiency gains is also paired with some of the best well productivity of any producer in the U. S. While these results can certainly vary from quarter to quarter, our consistency over time demonstrates the quality of our assets and execution capabilities. The most significant contributor to this advantaged capital efficiency was our franchise asset in the Delaware Basin. In the Q4, roughly 60% of our capital was deployed to this prolific basin allowing us to run a consistent program of 16 rigs.

Speaker 3

This activity with this activity, we brought online 62 new wells, grew productivity 6% year over year and expanded our DUC inventory allowing us to add a 4th completion crew earlier this year. While we had strong results across our acreage position in the quarter, the top contributors to our performance were several large pads within our Cotton Draw and Stateline areas. At Cotton Draw in the core of the basin, we brought on 11 3 mile laterals that showcased the stacked pay potential and prolific rates this area can deliver. These extended reach wells were diversified across 5 different producing intervals in the Avalon, Bone Spring and Wolfcamp formations. In aggregate, the oil weighted production from these wells achieved a 30 day rates of 4,400 BOE per day with impressive per well recoveries trending as high as 4,000,000 BOE.

Speaker 3

In addition to the high rates at Cotton Draw, we also delivered record steady drilling and completion times. This performance included a record completion pace of 3,100 feet per day and drilling times for these 3 mile laterals came in as low as 19 days with the final mile drilled in a record time of just over 24 hours. Another standout performance during the quarter and possibly my favorite in terms of naming convention was our Clawhammer project in the State Line area. Clawhammer was named by a geologist after the style of playing the banjo that his dad used in their family jam sessions. The good news for him and his family is that these wells are fantastic.

Speaker 3

This 8 well pad consists of 2 mile laterals, co developed in multiple intervals in the Wolfcamp A. With production rates averaging 3,900 BOE per day, this package of wells delivered the highest well productivity per lateral foot of any project during the quarter. As I look ahead to 2024, I expect another big year for the Delaware Basin as we have a great slate of projects lined up. We plan to bring online around 2 15 wells for the year with most of the capital deployed towards the best parts of our acreage in Southern Lea and Eddy Counties and the Stateline area of Texas. This plan is designed to deliver improved capital efficiency and better well productivity through the full column of development of the Upper Wolfcamp along with select landing zones in the Wolfcamp B where applicable.

Speaker 3

The derisking of multiple targets in the Wolfcamp B over the past year has allowed us to pursue more extensive multi zone developments in 2024 bolstering our high quality inventory, delivering higher net present value per project and still delivering exceptional rates of return. Turning to Slide 13. To build upon Rick's comments from earlier, we're confident in our ability to deploy more capital to the core of the Delaware because of a long list of improvements in infrastructure. These improvements include 2 Bcf a day of processing additions, gas processing additions, expansions to the downstream gas takeaway, enhanced water handling capabilities with our WaterBridge joint venture, build out of gathering and compression and investment in self generated power and microgrids to increase the reliability of the electrical infrastructure. With these improvements, we are very well positioned to execute on our 2024 plan.

Speaker 3

In fact, year to date, we're delivering at a pace ahead of schedule, allowing us to fully offset the winter weather downtime we experienced in January across the field. Shifting to the Eagle Ford, the successful integration of our Validus acquisition was one of the key drivers of the production increase of 56% during 2023. With our enhanced scale in the basin, the team did a great job of capturing synergies by driving improvements across each phase of our operations. This progress can be seen through several indicators including year over year 15% decrease in production costs, a 30% plus improvement in completion cycle times over the course of the year and we set a company record spud to rig release of only 5 days. Our activity during the year continued to demonstrate that the Eagle Ford provides one of the most promising opportunities for resource upside in the U.

Speaker 3

S. Shale. Through tighter redevelopment spacing and refracs, our capital program not only replenished but expanded our risk resource in the play to an inventory runway of around 10 years at today's pace of activity. Looking to 2024, our key focus for the Eagle Ford team is to sharpen capital efficiency by incorporating appraisal learnings from the past year along with more balanced activity across DeWitt and Karnes Counties. This plan is expected to deliver single digit production growth for roughly $75,000,000 less capital over last year.

Speaker 3

In the Rockies, we possess a unique combination of assets that can provide both growth and free cash flow, specifically in the Powder River Basin. We're building upon the well productivity improvements achieved over the past couple of years where the average 6 month cubes increased nearly 20% from historic levels. A recent highlight was the SHU Iberlin 3X well, which reached peak rates in Q4. This 3 mile Niobrara well achieved initial production rates greater than 1500 BOE per day with an 85% oil cut and then hung in at that rate for quite a while. In addition to the strong oil productivity, the Hybrilyn attained a record drilling performance of 13 50 feet per day, a 45% improvement compared to the average Niobrara well.

Speaker 3

In 2024, our efforts will be focused on refining spacing, reducing costs and continue to ready this asset for full development in later part of this decade. In the Williston, I want to thank the team for safely working through the incredibly severe winter storm weather that we experienced in January and rapidly restoring affected production. As I look into 2024, our focus for this asset will be to optimize base production, deploy selective investments to high confidence projects and harvest $300,000,000 of field level cash flow. So far this year, our capital program is off to a great start with our Bull Moose project maxing out our production facilities at over 15,000 barrels of oil per day with several of the wells flowing 3,000 barrels per day or more during their flowback. Lastly, I'd like to briefly cover our activity in the Anadarko Basin where we delivered an 8% production growth rate during 2023.

Speaker 3

The 3 rig drilling program funded by our Dow joint venture delivered very impressive well production. The value of this production was also enhanced by our ability to route volumes into the premium Southeast gas markets and by the team driving operational costs 10% lower. In 2024, we plan to maintain a similar pace of drilling activity in the Anadarko with a keen focus on developing the liquids rich window of the play where returns from our joint venture activity will benefit from higher condensate cuts. And with that, I'll turn the call to Jeff for financial review. Jeff?

Speaker 4

Thanks Clay. I'll spend my time today discussing the highlights of our financial performance in 2023 and the priorities for our free cash flow as we head into 2024. Beginning with our Q4 financial performance, Devon's operating cash flow totaled $1,700,000,000 exceeding consensus estimates and represents the highest quarterly total of the year. This cash flow comfortably funded our capital spending and resulted in $827,000,000 of free cash flow, driving full year free cash flow to $2,700,000,000 Even in the face of headwinds from lower commodity prices, this level of free cash flow ranks as one of the highest in Devon's 50 year plus history, another powerful example of the consistent financial results our disciplined strategy can deliver. As Rick touched on earlier, with this free cash flow, we're targeting a cash return payout of 70% with the remainder reserved for balance sheet improvement.

Speaker 4

Slide 23 in the appendix is a good exhibit representing how we allocated our cash returns in the most recent quarter. Given the compelling valuation of our equity, we prioritized share repurchases over the variable dividend. This resulted in us repurchasing 5,200,000 shares in the 4th quarter at a total cost of $234,000,000 In 2024, we've continued to actively acquire shares through our 10b5-1 program and we plan to supplement this with systematic buying with open market purchases during the year. With plenty of runway remaining on our $3,000,000,000 buyback authorization, we see Devon's current valuation as a great opportunity to compound the per share growth for our investors. In addition to our buyback activity, we delivered investors an attractive stream of income through our fixed plus variable dividend framework.

Speaker 4

In the Q4, we declared a dividend payout of $0.44 per share that is payable at the end of March. This dividend consists of the Board's approval to increase the fixed dividend by 10% to $0.22 per share and declare a variable distribution of $0.22 per share. We continue to believe dividends are a great way to reward shareholders and are a critical contributor to total returns over time. We also believe that the flexibility designed into our dividend framework allows us to return meaningful and appropriate amounts of cash to shareholders across a variety of market conditions through the cycle. Moving to the balance sheet.

Speaker 4

Devon's investment grade financial position continued to strengthen in the 4th quarter with cash balances increasing by $144,000,000 to a total of $875,000,000 In addition to our strong liquidity, we exited the year with low leverage marked by a net debt to EBITDA ratio of only 0.7 times. Looking ahead with the excess free cash flow that accrues to our balance sheet, we plan to build liquidity and retire maturing debt. Our next debt maturity comes due in September of this year, totaling $472,000,000 And we will have the opportunity to retire another $485,000,000 of notes in 2025. So in summary, our financial strategy is working well. We have successfully scaled our business to consistently generate free cash flow.

Speaker 4

We are boosting per share results by opportunistically repurchasing our shares. We offer a dividend yield that far exceeds that of the broader markets and the balance sheet is in great shape with a clear pathway of continued improvement over the next few years. With that, I'll turn the call back to Rick for some closing comments.

Speaker 2

Thank you, Jeff. So to wrap up our prepared remarks, I want to reinforce a few key messages. Number 1, Devon is a great company that has created a tremendous amount of value for shareholders since we unveiled our industry first cash return strategy announced in 2020. Since that time, we've deployed $13,000,000,000 to dividends, buybacks, debt reduction and accretive acquisitions. I'm extremely proud of this accomplishment, but we're just getting started.

Speaker 2

2024 is setting up to be another wonderful year for Devon. By incorporating learnings from the past year and refining our capital we expect to deliver a step change improvement in capital efficiency this year. This improved capital efficiency is anchored by our assets in the Delaware Basin where we expect to deliver the powerful combination of improved well productivity for much lower capital cost. Our long duration resource base underpinned by the Delaware is one of the deepest of any company out there. The resource quality provides us an advantage platform to drive attractive per share growth and outsized cash returns for many years to come.

Speaker 2

And with that, I'll turn the call back over to Scott and let's have some Q and A.

Speaker 1

Thanks, Rick. We'll now open the call to Q and A. Please limit yourself to one question and a follow-up. This allows us to get to more of your questions on the call today. With that, operator, we'll take our first question.

Operator

Perfect. Thank you. We do have our first question registered comes from Neil Mehta from Goldman Sachs. Neil, your line is now open.

Speaker 5

Yes. Thank you very much, Rick and team. Rick, I know over the last year you've talked about some of your frustration around an important year for that operational inflection. It does seem like we're seeing some evidence of that with capital efficiency and holding the 315 oil guide. So maybe you could just give us your perspective on whether we're at that inflection point from an ops perspective?

Speaker 2

Neal, that's a good question. We have expressed our frustration, I think, in the market really. We really traded down on some of our variances we saw last year in our production volumes. But even though they were minor, from a volumetric standpoint, they weren't from a stock performance standpoint. So I think the setup is really good for investors as we look forward.

Speaker 2

So it is going to be, I believe, a point of inflection for us as we've mentioned. Really bullish about our performance. The team has done a wonderful job getting this through some tough weather. We've seen some increased productivity. I think Clay went through the assets really well and we're seeing nice growth on the oil side coming out of this Q1 as we enter second, 3rd, 4th quarters of this year.

Speaker 2

And I'll also say, Neil, I feel really good about the next several years on our ability to keep crude volumes where they're at. I think that it's we're still early. We still are not getting what I think is a strong, strong signal for demand. But when that call comes, I think we'll be ready to step up for it. But really feel good about the trends we're seeing.

Speaker 5

Yes. And just maybe to build on this, it might be a question for Clay, but just can you talk about what you're seeing in terms of well productivity that gives you confidence in your ability to hit or exceed that 315 oil number this year?

Speaker 3

Yes. Thanks for the question, Neil. This is, one of the frustrating things about a publicly traded company. We get to see what's coming. We get to see what's happening well before the market does.

Speaker 3

And so where I can see the improvement internally in the well productivity from the first half of last year to the second half of last year, those numbers are just starting to hit the public markets and through the public sources. And so I think that's pretty evident for those that are paying attention that this is not a Q1 of 'twenty four we decided to turn on the production. This is an evolution. We wanted to make some really thoughtful investments in the future of the company. We did that.

Speaker 3

The market, I believe, responded pretty vigorously to that. We've since made some changes in the planning, the well delivery. The well performance has really significantly taken an uptick. As I mentioned, even late last year, you see some of that coming through the public sources. We're going to it's really going to manifest in 2024.

Speaker 3

And as Rick mentioned, we're just off to a really good start, even recovering from a pretty severe storm that we saw somewhere 1% to 2% impact. We always bake in winter weather, but an event like that was pretty out of the norm. The productivity of the wells, the performance, we've been able to overcome that and we feel really good about delivering being able to deliver the 24 full year numbers.

Speaker 5

All right. Thanks, Clay. Thanks, Rick.

Speaker 6

Thanks, Neil.

Operator

Our next question comes from Arun Jayaram from JPMorgan. Arun, your line is now open.

Speaker 6

Yes. Good morning, gentlemen. Rick and Clay, you've highlighted your expectations to deliver up to 10% well productivity gain in Delaware Basin. I was wondering if you could maybe help us provide more details on what is driving that. It sounds like there's going to be some high grading for Monument Draw to Southeast New Mexico.

Speaker 6

But I was wondering if you could talk a little bit about what's driving that and if completion optimization is also a driver of better year over year productivity?

Speaker 3

Thanks for the question, Arun. I think both things come into play. The big headline thing is just a refocus to more where we've historically allocated our capital kind of in the core of the basin predominantly where our inventory, our portfolio lays out between New Mexico and Texas. I would say 2023 especially first half of twenty twenty three was a little bit of an anomaly on where we were allocating that capital and we needed to do some work from the infrastructure standpoint, but also really understanding where all these fit together. We're benefiting tremendously from that work, from that infrastructure build out and that's where we're seeing the improvement really late 'twenty three to what we're showing today.

Speaker 3

On the completions questions, I wouldn't point to it's a big knob that we've changed on like sand concentration or how we're doing what we're doing. But the team is working every single day to think about how do we do it better, how do we touch a little bit more rock and how do we do it more cost effectively. And I can tell you we're winning on all fronts. These are small wins at this point. It's a relatively mature way of thinking about these assets, but really, really pleased with the continued improvement there and that shows up in the numbers as well.

Speaker 6

Good follow-up. Rick, Devin, as you know, has been linked to a few M and A deals in the financial press. I was wondering if you could just comment on where you sit today in terms of your A and D strategy and how you gain some of the inorganic opportunities versus, as Jeff mentioned, the ability to buy back your stock at a 9% kind of free cash flow yield today?

Speaker 2

Yes. Very good question. Arun, our answer has really not changed that much over the last several years. We're going to continue to evaluate opportunities. When you're in 5 basins, you have some great opportunities in all five of those and we watch that.

Speaker 2

We stay attuned to those opportunities as they come available or it's the right time for us to think about that. So I think we're going to continue to see the high bar. We're going to it's got to be it has to have some accretion. It has to have the industrial logic that we have always talked about. And it just has to make us a better company.

Speaker 2

And if it fits in that framework, man, I think that's our job is to create value for shareholders. And so we're going to do that. We also have been advocates for consolidation. I think some of the transaction that's been announced that I think that's they're positive for industry and it just shows that we are a depleting industry. And so you always have to replenish that's your portfolio.

Speaker 2

That's not changed. It's not changed since the beginning of this industry. And so we'll always be active. We've got a great team. We've got great analytics capabilities in house and we do our own internal analytics compare that with what you see on the public market and adjust.

Speaker 2

But once again, we're going to be very, very measured, very disciplined. And we will make some more, I think, the right decisions. And that does include buying our Staunton stock back because I can tell you that at these levels we are very, very

Speaker 3

attractive. Great question.

Speaker 5

Thanks guys.

Speaker 2

Thanks Arun.

Operator

Our next question comes from Nitin Kumar from Mizuho. Nitin, your line is now open.

Speaker 7

Great. Thanks guys. Good morning and thanks for taking my questions. Rick, I've heard you say and just say multiple times today that buybacks are very attractive, especially at these levels. But as I look at 4th quarter, the mix actually favored dividends, including the variable payout a bit.

Speaker 7

Not to nitpick or anything like that, but just want to understand what drove the decision? We applaud the 10% increase to the base dividend, but what drove the decision for the variable dividend and how should we see that evolve in 2024?

Speaker 4

Nitin, this is Jeff. Keep in mind that there is some variance in the timing of the variable dividend payout, right? So when we announce it, it actually gets paid in the subsequent quarter. So maybe that's what you're alluding to as it relates to the mix. But with our framework going forward, we're going to simply each quarter focus on delivering about 70% of our free cash flow back to shareholders in the form of that fixed dividend, which obviously we grew at 10% here on a year over year basis.

Speaker 4

That's the first and foremost going to be a priority for us and we're going to look to continue to grow that on an annual basis going forward. Then beyond that, we're absolutely biased towards leaning in on the share repo here in the near term. And frankly, the variable dividend will fall out of the back of that based on that 70% threshold that I hit on earlier. So we're going to continue to expect to have a higher mix of buyback going forward. And that's going to be our priority as we walk it through this year.

Speaker 7

Great. Thanks, Jeff. And then my next question is really for Clay probably. Clay, impressive improvements in operating efficiencies, days drilled, days completed. Just curious, is there any specific technology that you would point to that have helped you achieve those?

Speaker 7

And I just never say never, but where are we in terms of those efficiencies? Are we getting to some sort of baseline or you think we can continue to deliver those type of improvements?

Speaker 3

Highly highly talented, highly motivated individuals that are absolutely trying to do the right thing ultimately for the shareholders they work for. Now I will remind you, this is the same team working just as hard with just as much creativity this year as they were last year. What we found is we really needed to focus. We underestimated what a slight change in capital efficiency during the first half of twenty twenty three meant to investors. I think that was way over extrapolated into us running out of inventory not being able to do this anymore.

Speaker 3

We lost our minds all that good fun. And what we showed is like, hang on one second, we still have the capabilities. We've got some really impressive inventory, some great quality. And importantly, these are hardworking, impressive people that continue to find a way to do it better each quarter. And this is so many things below the radar that don't always show up in the INVERIS data or don't show up in the financials.

Speaker 3

I can tell you we're winning on lots and lots of fronts and there's more of that to come. So really excited about the go forward. I think we've got some good transparency in our slides on quantity of resource, quality of resource. I expect in 2024 that we'll regain a little bit of public mojo, but that to me is just it's a little overdue. So looking forward to sharing that win with the team.

Speaker 8

Okay. Thanks guys.

Speaker 6

Thanks, Vinton.

Operator

Our next question comes from Doug Leggate from Bank of America. Doug, your line is now open.

Speaker 5

Hey, good morning, guys. This is actually Kule on for Doug. So thanks for getting me on. For my first question, I want to go back to the buyback just to follow-up. I want to understand the motivation behind the strategy for 2024.

Speaker 5

Shifting capital back to the Delaware and the margin is obviously an efficiency shift and that makes sense. But in tandem, you're also leaning back into the buyback and that looks rather intentional. So can you talk about why you see the buyback as the preferred allocation today? And why has that changed over the past several months?

Speaker 4

Yes, you bet. So again, on the buyback front, what's pretty clear to us is as we kind of walk through our framework for evaluating share repo versus the other capital allocation opportunities that we have, whether it be organic investment, inorganic investment that Rick spoke to earlier, whether it's M and A or otherwise. And then when we step back and look at the valuation, we look at the multiples, we look at our intrinsic value model that we keep in house and run multiple sensitivities on that. Every which way we turn, what we keep coming back to is the our shares look undervalued relative to the broader market, relative to the sector and certainly relative to the results that we expect to post as we walk our way through this year. So that really has been the driver and our focus going back to the back half of last year and as we walk into 2024 And it's why we're biased towards having the lion's share of our cash returns be focused on the share repurchase going forward.

Speaker 3

And if I could, I just wanted

Speaker 9

to just clarify. I want

Speaker 8

to add

Speaker 3

one comment on that prior question. I think it's a common misconception the way we lay the numbers out that we are leaning in or that we're increasing capital to the Delaware so somehow accelerating. That's not really the case. We are the same rig count, same level of activity. The capital is actually coming down not just in the total company but in Delaware.

Speaker 3

But where we're seeing the 10% inflection from the company is really a reduction in some of the other areas. So proportionately Delaware is moving up. But on an absolute basis, we're not consuming that inventory any faster than we had in 2023 or years before.

Speaker 5

Got it. I appreciate that. And that's where my follow-up will go. So I'm wondering if the reduction in the capital in these other areas, what kind of permanence does that have? Is it sort of a stopgap until you figure out what's going on in the Bakken or is this now the direction of the program?

Speaker 3

Was the question permanent?

Speaker 5

Yes. The permanent is the capital allocation.

Speaker 3

Permanence meaning how long

Speaker 5

Yes. Yes.

Speaker 10

Can we

Speaker 3

do it multiple years? I'm just making sure I understand the question.

Speaker 5

Yes. How many years can you run this kind of capital program?

Speaker 3

Okay. All right. Thank you for that. Sorry. The acoustics in here weren't quite right.

Speaker 3

So sorry about that. Yes. I think in pulling back the activity for example on the Williston Basin that prolongs that basin's opportunity to continue to deliver free cash flow and offset some of that fall in production with some really healthy wells. What we found is we were pushing a little too quickly, a little too much capital to that asset by having the multiple basins that we do, having our franchise asset in the Delaware Basin, it allows us to take a little bit of pressure off that team, allows them to really make sure that all the ducks are in a row ready for that next pad. And then selectively, we're going to fund those.

Speaker 3

And as you saw with the bull moose that I talked about on the call, these are phenomenal. These are awesome returns. And we've got more of that to come.

Speaker 5

Thanks for the comments.

Operator

You bet. Our next question comes from Neal Dingmann from Truist. Neal, your line is now open.

Speaker 10

Good morning, guys. Thanks for the time. Clay, my first question is probably for you on your Delaware infrastructure and takeaway. I'm just wondering, after adding so much I saw the slide where you talked about adding so much processing, gathering, compression, water. Just wondering now, are you all able to handle the continued notable upside that's going to come with the development plan or will there be a continued build out?

Speaker 3

We feel really good about being able to effectively produce. Remember, we are really watching our flaring. We don't want to have unnecessary shut ins. We are reliant on so many third parties. We wanted to make sure that we had that runway ahead of these very prolific pads coming online.

Speaker 3

We want to make sure we have that. We do feel very confident in that today. And remember, it's not just our immediate wells. We've got some really high quality offset operators that know what they're doing as well. It's a phenomenal basin.

Speaker 3

And we have to make sure that all of that plays together very nicely and so that we have the reliability in the infrastructure to bring these wells online and make sure we ultimately get them to market.

Speaker 10

Yes, makes sense. And then my second is just on the Eagle Ford. Specifically, can you give details, I think you talked about an 85 to 95 well plan. I'm just wondering what the focus here beyond on existing key areas like you're doing in the Dell and just maybe talk about any improvements we should think about specifically in this area?

Speaker 3

Thanks for that question. I'm really excited about the Eagle Ford. One of the things, unlike a lot of other areas, we've continued to test down spacing, tighter wells, subsequent wells after the initial development has been done, bringing additional wells in, which is really not very favorable in most basins, it tends to work and continue to provide upside in the Eagle Ford. Now when you pair that with some of the refrac activity, we can actually feather in new wells, refrac some of the existing wells and we're seeing phenomenal results. As I mentioned in my prepared remarks, we are continuing to expand the runway there without any M and A dollars, without just from the existing footprint, the opportunity set continues to expand and these are very prolific, very accretive to the bottom line kind of numbers that we're really excited about.

Speaker 3

Great to

Speaker 10

hear. Thank you all.

Speaker 3

Thanks, Neil.

Operator

Our next question comes from Kevin McCurdy from Pickering Energy Partners. Kevin, your line is now open.

Speaker 11

Hey, good morning. My first question is on the capital budget. We appreciate that the $3,300,000,000 to $3,600,000,000 range is a significant decrease year over year. But if we look back at last year's budget, we noticed that the range is wider both on absolute dollars on a percentage basis this year. I was wondering if you could provide any color on what might put you at the low end of that range versus the high end of the capital range?

Speaker 11

Is that driven more by deflation, turning lines or midstream spend?

Speaker 3

Yes. It's interesting, Kevin. One of the the first thing that comes to mind for me is the efficiency that I talked about on a couple of my slides. You guys know this very well. We've been at this game for quite a while.

Speaker 3

Sometimes that efficiency can pull more activity into the calendar year. Look, this is not our first rodeo. This is February. We're already watching that for the full year. We're committed to this range.

Speaker 3

But if I had to think of what could cause us to, kind of float to the upside, it's probably that kind of work where you're seeing more opportunities bring some of that activity from 2025 into 2024. I think on the downside, there's we're early in the year. I think the supply chain deflation opportunities are still we've got a 5% year over year kind of baked in. I feel good about that. I feel very confident we're going to be able to deliver that.

Speaker 3

As the year plays out, we really need to see where that changes over time. My current crystal ball doesn't see a lot of inflation, but there's certainly deflation opportunities in that number and that potentially could allow us to float or float down to the lower end of that range.

Speaker 11

I appreciate the detail on that. And as a follow-up, the Eagle Ford had a strong production quarter and it looks like the CapEx guidance for that asset is fairly consistent year over year. Can you talk about the production and capital efficiency outlook in the Eagle Ford and if there's any major changes between 2023 2024?

Speaker 2

Hey, Kevin, this is Rick. One of the things that I've been really proud of over the last 12 to 18 months is coming on the heels of the Validus acquisition. What we have been able to learn, it's a solid acreage. I would say it is second certainly to our Blackhawk acreage. But the thing about it that we need to remind investors of and analysts of is that on the Blackhawk acreage, it's a fifty-fifty joint venture with BPX.

Speaker 2

BPX operates the drilling and the completion of that. And what we felt it was really from a, not only a productivity increase, but also just a strategic perspective. We thought it was imperative that we had an asset that we owned, that we did the drilling, that we did the completions on. The 5 day well that Clay referenced a while ago, I can tell you that absolutely exceeded anything that we had in our Validus development plan. So when I look at that, I look now we're having some very, very meaningful discussions with our joint venture partner there.

Speaker 2

And they're very constructive. And I think it's going to lead to even better performance over time at the Eagle Ford. I'm really pleased with what we're seeing with the refrac program. It's going to continue to drive some, I think, some long term sustainability down there that a lot of people I think are underestimating. So I'll turn it over to Clay to add any additional color.

Speaker 2

But the Eagle Ford is an area I can tell you that we're very excited about.

Speaker 3

Yes. Thanks for those comments, Rick. I think that's spot on. Kevin, the only thing I wanted to add is I do show a relatively meaningful drop, probably about a 10% or so drop in capital, about $75,000,000 is a rough number I had from 23 to 24. And so and again that's with single digit production growth on top of that.

Speaker 3

Now there is some well mix in there. We have a joint venture partner on part of the assets. We own the rest. We operate kind of a normal fashion. So there is some change in mix.

Speaker 3

But from a capital efficiency standpoint, things are moving in the right direction and we continue to see upside potential on this particular asset.

Operator

Our next question comes from Scott Gruber from Citigroup. Scott, your line is now open.

Speaker 8

Yes, good morning. The 10% improvement in productivity that you forecast in the Permian is normalized on a 10,000 foot lateral. Is it going to be a step up in lateral length in the play as you refocus on the quarter? Or is that going to be rather consistent?

Speaker 3

Scott, it's pretty consistent year over year. We're always trying to drill longer laterals. It's kind of the opportunity set in front of us. We're always we feel very confident in our ability to deliver 3 mile laterals from a productivity, from an operational standpoint. The land mix doesn't always allow for that.

Speaker 3

So we're going to be north of 2 miles, but not too much north and it will be fairly consistent year over year.

Speaker 8

Got it. And then just a nuance one on the 1Q guide. Last quarter you provided that $305,000,000 of oil per day. Today you're guiding for $640,000,000 with a 2% weather impact. But 6.40 at 48 percent -ish oil cut, you kind of still around maybe even slightly better than that 305 figure from last quarter.

Speaker 8

So the question is, is the underlying trend in oil production slightly better and it's just being offset by a bigger weather impact? Or is the weather risk that was incorporated in that original 305 guide kind of similar to what actually transpired?

Speaker 3

Scott, I think it's really the well mix. We've got some wells coming on. The Williston wells are exceptionally high oil cut. We'll continue to bring those in. I think that's just working in our favor in that regard.

Speaker 8

Okay. I appreciate it. Thank you.

Speaker 3

Thanks, sir.

Operator

Our next question comes from Scott Anult from RBC. Scott, your line is now open.

Speaker 12

Yes, thanks. If I can delve into the infrastructure a little bit more. On Page 13, you obviously bucket 3 areas that you're focused on in terms of building support for the 2024 plan. As you think about the Permian development over the next 2, 3, 4 years, like which area really are you focused most primarily on to make sure you're executing on the plan? Like where do you see the risk of the biggest constraint I guess is the question?

Speaker 3

Scott, is all of the above an option? No, I mean seriously, any one of these things gets constrained and you're dead in the water or at least constrained. And so we work really hard to not just build what is the best rate of return opportunity set in our portfolio, but we're very thoughtful about modeling our own infrastructure, even modeling 3rd party infrastructure if we don't feel that they do an adequate job. And then there's the occasional curveball where 1 of the 3rd parties, maybe even in the electrification front, can't come through with their normal pace. We need to have enough flexibility, enough forethought, enough creativity to be able to solve some of those problems essentially for them.

Speaker 3

So one of the things I mentioned is building out more of our own electrical infrastructure. We have about 700 miles of electric lines in our basin already. We generate some of our own power. We have our own micro grids. And this is really taking the bull by the horns out of necessity because otherwise, the local power providers were not going to be able to keep up.

Speaker 3

So those are the kind of proactive steps that we really leaned in probably with double effort in 2023 because some of these historical norms have really changed and we wanted to make sure that we didn't just bring on a bunch of wells and then be abnormally constrained and have to answer questions about why our wells are so terrible. So anyway, I feel really good about the work that we did in 'twenty three that we continue to do in 'twenty four. But look, we're not out of the woods. We continue to look at infrastructure needs in 'twenty six, 'twenty seven and 'twenty eight. We're working with partners as best we can.

Speaker 3

And I really think we have a great runway ahead of us, but the team is always on caution to make sure that we are prepared for those unforeseen challenges.

Speaker 12

Okay. Thanks for that. And as my follow-up, it's going to be on M and A and I was hoping to get a deeper sense of how you think about M and A. And it's really 2 parts. 1, first, if you can comment on some of the recent deals that have been out there, if you all participated and really what was the gives and takes of why if you did why Devon didn't win out?

Speaker 12

And then number 2, you all mentioned obviously you're a multi basin player, but like when you think about like does Devon have the scale right now that it would like? And if you were to add, would it be really most Permian thing or are other, of those basins open to more significant M and A for Devon?

Speaker 2

Yes, Rick. I'll peel that one. Number 1, I really like the scale that we currently have. We have a deep resource base across our 5 basins that we're in. So I feel really good about that.

Speaker 2

Now we're always as I mentioned earlier, we're always going to be looking to be opportunistic to add resource, to add investment opportunities at a reasonable value, at an attractive value for our shareholders. I think that's just really incumbent upon this management team to always being on the hunt there. That being said, we are going to be very disciplined. Some of the recent transactions I think were that were out there that were announced. When I look at the metrics on those, those were rich.

Speaker 2

They really were. And others, there's been a couple of them that were hats off, really nice deals that we certainly weren't participating in those processes, but good for them. And that's great. Congratulations. But for us, I want to just continue to drive on the point.

Speaker 2

We're going to continue to be disciplined and we have to balance short term accretion with long term, how that fits in for the long haul for Devin. We're a 50 year old company. We're not a 5 year old company. And we have to be really, really thoughtful about that. And so, we'll continue to look for opportunities, but we're going to maintain that discipline.

Speaker 2

And at the end of the day, we have a deep, deep resource base. And I think that's something that is incumbent upon this management team that we have to continue to drive home and we have to demonstrate not only how we execute hitting numbers exceeding whatever that is, But we just have to do a wonderful job in working with the outside community, outside investors on the resource that we have in house currently.

Speaker 12

And regionally, is there an area you focus a little bit more time on? Is it Permian, Bakken, Eagle Ford like are all areas of focus?

Speaker 2

I think for us, we're going to stick to our strategy. Just real simply put, we want to stay as oily as we can for as long as we can. I think we're seeing that play out in real time with I'm not sure we got more gas prices or as we sit here this morning again, but it's sub-two dollars That's not a good spot to be in. And so for us, we want to stay as oily and as liquid rich as we possibly can because throughout the entirety of my career, that's been the place to go. Now we're all I think we all are optimistic about what the future of natural gas could be.

Speaker 2

And we spend quite a bit of time in D. C. Talking about the importance of tone, the importance of consistency with some of our public policy, those sorts of things and in our foreign trade policies. And so we so for us, I think near term to answer your question, we're going to be very interested in oil prone basins. Oil is going to drive the margins for the foreseeable future and that's kind of where we want to be.

Speaker 12

Thanks for the color.

Speaker 13

You bet.

Operator

Our next question comes from Charles Meade from Johnson Rice. Charles, you may proceed with your question.

Speaker 13

Yes. Good morning, Rick, Clay and Jeff. Rick, I want to ask a question about your Delaware Basin completion crews and more specifically, if you could give us a sense of the composition of the 4 fleets you're running right now, whether those are all zipper fracs or whether there's any simul frac crews in there? And I where in the bigger sense where I'm going with this, has there been any thought or is there any possibility of adjusting that mix to so that you more on a steady state program there?

Speaker 2

Yes. I'm going to let Clay answer the balance of that. But just in real time, just yesterday, I was talking to our one of our completion managers down there and we're picking up the 4th crew as we mentioned. But the 3 that have been out there, it's incredible, Charles, on the efficiencies and what we're doing out there, the number of stages. And it's interesting, there's we're it's healthy competition between the team members and certain companies that are involved with it.

Speaker 2

And we're actively comparing and contrasting ways that we can get better and better. And at the end of the day, we want to make sure that we do this very, very safely and efficiently. And so we're constantly changing. Every pad has its unique characteristics. But I can tell you that more and more we just see these efficiencies that are just incredible.

Speaker 2

And things that just 12 months ago we knew that you'd see some efficiencies, but we're exceeding some expectations. Clay, won't you? Maybe I'm sure I'll follow-up.

Speaker 3

Charles, we have more simulfrac coming we're completing today and more to come throughout the year and go forward. One of the challenges of simulfrac, you really need to plan that 12 or 18 months ahead when you're planning the well site location, how many wells on one particular location because that enables more ability to do some of that. So about 12 months ago, we started really kind of leaning in, building a little bit larger number of wells per pad instead of separate pads. That allows more simul frac opportunity, which we're seeing great results and we're continuing to benefit from. We're also testing some very interesting things where we artificially tie pads together with some big lines between the two.

Speaker 3

So there's some really creative stuff that again is a little below the radar typically of what we talk about in earnings calls. But But I can tell you that the teams are doing just amazing work and really adding material value through these efficiencies to the bottom line of Devon. So really appreciate the great work there.

Speaker 13

Got it. And then Clay, I want to go back to your prepared comments. You were talking about I think I heard you talk about some additional landing zones in the Wolfcamp B. I'm not sure I kind of I caught it all when you were talking about it. So I was wondering if you could elaborate a bit on that and perhaps include in your answer an indication, is this something that you're going to be that you're working into the 2024 program?

Speaker 13

Or is this an out year sort of project? Yes.

Speaker 3

I think sometime last year when we were deep in the penalty box, we talked about the highlights of some of the great work that the team did around understanding the Wolfcamp B. Now that work is manifesting and more of that B coming to kind of that front end of the priority list really competitive, super accretive and we're incorporating that landing zone into some of the development that we have during the course of 'twenty four and beyond. And so here's how I would characterize it. This is landing zones that we knew were viable. We needed to test, we needed to understand, we needed to try some different configurations to really find the best approach During the course of 2023 2022 and 2023, we did that.

Speaker 3

We optimized a development approach. And now in 2024, we're benefiting from some of that. So again, it probably was lost in some of the shuffle last year, But this is work that we did during the course of 'twenty three that we're significantly benefiting from. This expands what I would consider some of our really Tier 1 runway. It's stuff that was a little further out in the priority.

Speaker 3

On a risk basis, as we derisked it, boy, it really has moved to the front of the pack, and we're really excited about the continued good work there.

Speaker 13

Thanks for that detail.

Speaker 3

You bet.

Operator

Okay. And our next question comes from David Deckelbaum from Cowen. David, your line is now open.

Speaker 9

Thanks for squeezing me in guys. I appreciate the time. Rick or Clay, I wanted to ask just you talked about Rick obviously or Clay, the total dollar amount for the Delaware actually coming down this year. It looks like you're still obviously growing that asset. You guided obviously to a slight decline, I guess, at a corporate level.

Speaker 9

I'm wondering, when you think about capital allocation, should we be consistently thinking about the Delaware as a growth asset over the next several years given the visibility that you have now where you can be allocating capital to within that basin?

Speaker 3

I think it's I would put it in the same category as Devin. We are a low growth kind of 0% to 5%. Delaware will play a certain role. Some quarter, some years it's going to be a little bit of a tick up. Others it's going to be relatively flat.

Speaker 3

I wouldn't think of it as a standout growth asset. We're really pleased with the year over year performance. As I mentioned it did grow. We also were able to build a few extra DUCs during the course of second half of last year that we were able to capture the benefit of in the first half of this year. So there's kind of that going on in the background, but I wouldn't say it's materially out of step with overall Devon or with the other basins.

Speaker 2

Hey, David, it's Rick. I will add that when we talk about it being flat to up slightly in the Delaware, that's on the oil side. And as you think about an improving structurally improving gas and NGL structure, you will see growth there. So I think you can look at it from an equivalent standpoint. It is a growth basin and it's going to continue to be.

Speaker 2

That's what drove a lot of our 8% growth as a company last year. And so I think you're going to see that continue to play out. That's not only true of us. That's true of the entire Permian Basin, whether it's on the Midland side or the Delaware side. You're going to continue to see gas production, NGL production continue to grow even in a flat oil scenario.

Speaker 9

Thanks, Rick and Clay. And maybe just Rick, one of the, I guess, other parts of the capital budget that continues to grow every year, albeit still small, is carbon capital. In a world where you're trying to enhance returns of capital to shareholders, could you kind of contextualize how you see that spend generating returns for Devon as a whole? And why that's sort of seeing a larger piece of the pie this year, albeit small?

Speaker 2

Yes. I think it's a really good question and it's a really important topic for us, not only as Devon but as an industry and it's something we're going to stay ahead of. We have changing regulations. Devon wants to make sure that we stay ahead of the curve and these regulations are coming at us quickly. What a lot of people don't understand is some of these regulations coming are so onerous that many of the low volume wells that we have across this nation are going to end up being plugged.

Speaker 2

And so you're going to see oil and natural gas wells that basically are stripper wells that we always refer them to that are such low volume. They just quite honestly cannot

Speaker 3

afford

Speaker 2

to spend capital on. And it's just it's going to be a fact of life. And so there are studies by API and some of the other trade groups to talk that impact, but it is real. So what Devon wants to do, we want to make sure that we're ahead of the curve as I said. And it's something that will I think you'll see over time is going to continue to creep up for the next 2 or 3 years.

Speaker 2

We want to be very thoughtful about that and prudent with it and strategic about it. But it is something to that we all just have to deal with. It's a fact of life.

Speaker 9

And just for my own edification, is that capital being earmarked for projects that would allow you to prolong production on some of these wells such as increasing methane capture? Or is this capital associated or tied to plugging and abandoning some of those wells that would be more regulatory headaches?

Speaker 3

David, what I would characterize most of it is, is retrofitting existing facilities with better designs to lower emissions and by the way keep us well ahead of this coming regulation wave. So you could look at this out of necessity. I think we're half a click ahead. We try and stay well ahead of just necessity. But these are regulations that we will always make sure that we are staying in front of to continue to reserve our important rights as an organization to provide energy to fuel the world.

Speaker 3

So thanks again for the question, David.

Speaker 9

Thanks, guys.

Speaker 1

Well, it looks like we've run a little bit past time here. So 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.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.

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Earnings Conference Call
Devon Energy Q4 2023
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