Devon Energy Corp (DVN) — Q3 2017 Earnings Call Transcript

Thank you, and good morning. I hope everyone has had the chance to review our third quarter financial and operational disclosures that were released last night. This data package includes our earnings release, forward-looking guidance and detailed operations report. With today's call, we are going to slightly modify the format of our prepared remarks. As always, I will cover a few preliminary items. Then our President and CEO, Dave Hager, will provide his thoughts on the strategic direction of Devon. Following Dave, Tony Vaughn, our Chief Operating Officer, is going to cover the key operational highlights for the quarter. And then we will wrap up our prepared remarks with a brief review by Jeff Ritenour, our Chief Financial Officer. Overall, this commentary should last around 15 minutes and then we will open the call to Q&A. Before moving on, I would like to remind you that comments and answers to questions on the call today will contain plans, forecasts, expectations and estimates that are forward-looking statements under U.S. Securities Law. These comments and answers are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. These statements are not guarantees of future performance and actual results may differ materially. For a review of risk factors related to these statements, please see our Form 10-K. And with that, I will turn the call over to our President and CEO, Dave Hager.

Thank you, and good morning, everyone. As Scott mentioned, we are making some minor modifications to the format of the call today to provide Tony and Jeff the opportunity to convey key messages and technical insights about their respective areas of business. My comments today will focus on the strategic direction of Devon over the next several years, which we have recently branded as our 2020 vision. The intuitive strategic plan is to accelerate value creation from our advantaged asset base by continuing to deliver industry-leading drill bit results while improving our financial strength. With the 2020 vision, our top objective is to deliver attractive peer-leading returns on invested capital for our shareholders. While the disciplined pursuit of returns is not new at Devon, our 2020 vision will further refine our focus on maximizing full cycle returns at the corporate level. In fact, at our November board meeting, we will discuss incorporating return-oriented measures into our compensation metrics for the upcoming 2018 budgeting cycle. Our refinement and capital allocation will result in more measured and consistent investment through all cycles, positioning us to more efficiently expand our business over time while optimizing returns. This balanced operating model is in contrast to the industry's historical behavior of aggressively chasing top-line growth at the ultimate expense of shareholders. This is not a populist philosophy that we are paying lip service to. We are absolutely committed to doing business differently in the E&P space, and we are taking the appropriate steps to become an industry leader with our disciplined approach to capital allocation. In short, we can lead and we will lead. While having the right capital allocations is critical to achieving our 2020 vision, it is equally important to possess the right asset portfolio and get the most of these assets with superior execution. At Devon, we are truly advantaged with our world-class acreage positions in the STACK and the Delaware Basin. The quality of these two franchised assets is unmatched in the industry with exposure to more than 30,000 potential drilling locations, concentrated in the economic core of these plays. Not only are the STACK and Delaware Basin assets two of the very best positioned plays on the North American cost curve, but Devon’s large, contiguous stacked pay acreage position in these basins provides us a multi-decade growth opportunity. With this long runway of highly economic opportunities, we are executing at a very high level. Over the past few years, Devon has achieved the top well productivity of any U.S. operator, which is quite an accomplishment in this competitive space. Importantly, with these terrific wells, we are significantly enhancing returns by embracing leading technologies to improve drilling times, optimize completion designs and increase our base production. As we continue to advance our development programs and build additional operating scale in the STACK and Delaware Basin, the next phase of our 2020 vision is to further high-grade our resource-rich portfolio. Given the massive opportunity we have in the STACK and Delaware plays, we see the potential to monetize several billion dollars of less competitive assets within our portfolio in a very thoughtful and measured fashion over the next few years. Potential proceeds from these portfolio rationalization efforts would be balanced between further debt reduction, reinvesting in the core business and returning cash to our shareholders. We expect to emerge with a highly focused asset portfolio and enhance profitability as we transition to a much higher-margin barrel. With our 2020 vision, we also plan to have a fortress balance sheet with a net debt to EBITDA target of 1.0 to 1.5 times by the end of the decade. Overall, these winning characteristics will allow Devon to deliver consistent, competitive and major growth rates along with top-tier returns on capital employed. Lastly, I'll finish my remarks with a few preliminary thoughts on our outlook for 2018. First and foremost, our capital program in the upcoming year is being designed to optimize returns, not production growth. While we do expect robust growth from our STACK and Delaware assets, this higher return in production growth will simply be an output of our outstanding asset base and strong execution. While we are still working through the details of our budget, we are directionally planning on an upstream budget somewhere in the range of $2 billion to $2.5 billion in 2018. To be absolutely clear, we expect to deliver this capital spend within operating cash flow at $50 TWI and $3 Henry Hub. With current strip pricing above this base planning scenario, we have no plans to modify our capital range and we would expect to generate free cash flow. I cannot emphasize this enough. This disciplined plan will represent a major inflection point for Devon due to a step change in improved capital efficiency as we shift our full-field development in the STACK and Delaware Basin and leverage technology to lower our cost structure. With this highly efficient capital program, we expect to bring online more than 25% more development wells in 2018 as compared to the 2017 program. This means both more wells online and a focus on our highest return places. This high-returning capital program is expected to increase oil production in the STACK and Delaware Basin by more than 30% in 2018. We will provide more detailed production guidance on other components of our production mix in the coming months, once we have better insight into the planned activity levels for our non-operated Eagle Ford asset. With that, I will turn the call over to Tony Vaughn for additional commentary on our operations.

Thanks, Dave, and good morning, everyone. My remarks for today will be focused on a few key operating things that are integral to the success of Devon's 2020 vision. First, the prolific wells we are bringing online lead the industry in well productivity and reflect the quality of our underlying asset base, our STACK’s operating capabilities, and our willingness to deploy cutting-edge technologies across our asset base. In the third quarter, the well productivity from our U.S. resources plays was nothing short of outstanding. We commenced production on 50 new wells that achieved 30-day rates of greater than 2,100 BOEs per day. Importantly, we delivered these high-return wells with capital investment that was below the low end of our guidance range for the third consecutive quarter. The second key message I want to leave you with today is our capital efficiency will dramatically improve as we transition to fulfilling development as we further leverage technology to maximize performance. With the size and scale of our STACK and Delaware positions, our top priority is to efficiently convert the resource associated with these world-class assets into production and cash flow. To maximize the value of these stacked-pay reservoirs, our capital activity is shifting towards low-risk, multi-zone developments to increase capital efficiencies and recoveries on a per-section basis. Early results from this thoughtful leading-edge development concept were quite positive. At the end of the Corner project in the Delaware Basin, which is Devon's first multi-zone development, drilling time has improved 55% compared to historic results in this area. We also attained significant efficiencies due to less smoke times, more repetitive operations, improved productivity from zipper fracs, and we achieved supply chain savings by debundling our completion work. Overall, these improvements resulted in capital savings of approximately $1 million per well compared to traditional pad developments. Also of note, we were able to compress the spud to first production cycle time at Anaconda to only 5.8 months. We will continue to leverage this advantage development scheme with a majority of our capital activity going forward. In fact, we will have several multi-zone projects under development across STACK and Delaware by year-end and I fully expect to report more positive results in this topic next quarter. Finally, I'm excited about our supply chain efforts underway that will help ensure the certainty of execution with our future multi-zone projects. As we have discussed at length today, Devon is uniquely positioned to maintain and build operating momentum for the foreseeable future with our STACK and Delaware basin assets. To profitably execute on this massive opportunity, we have integrated teams across Devon proactively securing equipment, crews, materials, and takeaway capacity at competitive prices and flexible terms to ensure the resources and capabilities to execute our capital plans. A recent example of this integrated planning effort was our ability to lock in essentially all sand requirements for our capital programs through 2018 at rates significantly below market. This accomplishment was achieved in a tight market and the advantageous rates were secured by sourcing all fine sand requirements from regional sand mines in the southern U.S. Due to substantially lower transportation costs, we expect total delivered cost from our regional stored sand to be around 30% less than the equivalent grades in northern white sand without any degradation in performance. To provide additional flexibility with our operations, we have also secured appropriate amounts of local trans load capacity in both STACK and Delaware to further improve the final amount of logistics. These are just a few of the many initiatives underway across Devon that will help enhance returns on the capital investment and the certainty of our ability to execute on these development projects. So to summarize, we are building a very progressive culture that emphasizes data-driven decision-making and innovation across multi-disciplined teams. This effort is consistently delivering best-in-class drill bit results, improvements in capital efficiency as we shift to multi-zone developments, and we have planning efforts underway to ensure certainty of execution with our future activity. And now, I will turn the call over to Jeff for our financial overview.

Thanks, Tony. I would like to spend a few minutes today discussing Devon's financial strategy within the context of our 2020 vision and build upon the points made by Dave in his opening comments. A great place to start is with a review of our current financial position. Our upstream currently has $6.9 billion of outstanding debt with no significant maturities prior to 2021. Devon also has excellent liquidity with $2.8 billion of cash on hand and an undrawn credit facility of $3 billion. In the coming months, we expect our financial strengths to be further enhanced with the completion of our ongoing divestiture program. This solid financial position provides significant optionality as we move forward in pursuit of Devon's 2020 Vision. Our top near-term objective is to fund our operational plans in the STACK and Delaware basin as these early-stage assets transition to full development. Growth in these assets will drive additional operating and capital cost efficiencies along with higher overall margins for the company. This disciplined capital program will be funded directionally with operating cash flow. In conjunction with funding our capital programs, we are also intent on reducing outstanding debt. As Dave mentioned earlier, a critical component of Devon's 2020 Vision is the commitment to improve our investment-grade financial strength. By the end of the decade, we expect to improve Devon's leverage metrics from 1.0 to 1.5 times net debt to EBITDA as compared to our current level of just below two times. To be clear, we expect to achieve this goal with a reduction of absolute debt. We are not planning on higher commodity prices to deleverage our business. Given our strong liquidity, the first step in our debt reduction plan will be to utilize a portion of cash on hand to tender for outstanding debt. We will finalize the size and timing of our tender after we complete our 2018 capital budgeting process, but we expect to further reduce debt by at least $1 billion over the next year. Looking beyond 2018, the second phase of our debt reduction plan is tied to the progression of our STACK and Delaware development programs. As these world-class assets build scale and become self-sufficient, we expect to take additional steps to high-grade our resource-rich portfolio with the monetization of less competitive assets. Use of proceeds will include additional debt reduction, reinvestment in the core business, and the return of cash to our shareholders. In summary, the achievement of Devon's 2020 Vision positions the company with a top-tier balance sheet in the E&P space, facilitating consistent investment in our assets and optimal returns through all cycles. With that, I'll turn the call back over to Scott.

Thanks, Jeff. We will now open the call to questions. Operator, please take our first question.

My first question, Dave. I know in your opening comments you talked about prioritizing improving the balance sheet near term to ensure execution under a range of commodity prices and have an active asset program. How do you think about the potential return for cash to shareholders longer term on the back end of your Vision 2020 strategy? I am presuming capital efficiency will be higher in '18 with all bases in development mode and you'll have proceeds of several years’ worth of non-core asset sales on the book. So can you give us kind of color on that distribution strategy and that maybe longer or medium-term period?

Evan, we are definitely considering this for the medium and long term. In the short term, our focus is on building scale in the STACK and the Delaware basin. We have optimized our capital program for 2018 to achieve what we believe is the best capital spending for the highest return by concentrating our efforts on development activities with greater efficiencies. We aim to have significantly more starts and completions, with an increase of 25% or more compared to 2017, particularly in the areas of our portfolio that promise the highest returns. As we scale up and execute our 2020 Vision, which includes several billion dollars in asset divestments, we expect to use some of these proceeds to pay down debt, strengthening our balance sheet to better handle any potential downturns in commodity prices. Looking beyond that, we anticipate generating free cash flow in the medium and long term, along with proceeds from asset sales, and we will focus on returning value to shareholders in some form.

Great. I appreciate that. And second, I know you've introduced the preliminary CapEx guidance range to $2 billion to $2.5 billion is lower than expectations but soon to be looked appeared assume a 4Q run rate or annualized run rate. On the other half of the picture, I believe you mentioned that a 25% more wells on a similar drilling dollar assumption, I mean can you give us kind of a baseline of what that's assuming in 2017? I know there were some backlogs…

That could be around 240 wells drilled and completed in 2017. Simply put, it would be incorrect to take our Q4 capital run rate and project that for all of 2018. We have a few rigs working in Q4, including one in the Rocky region, one in the Barnett, and some exploratory tests that won’t be active in 2018. Therefore, our capital spending in Q4 2017 will be higher than the average for each quarter in 2018. Our efficiency is improving as we transition into development drilling, where we are realizing efficiencies and focusing more of our total capital spend on development drilling. This means we are becoming more efficient, allocating more funds to development drilling and targeting the best return wells. When you combine all these factors, that’s why we are optimistic about the program not only in 2018 but also beyond. We are entering development mode, which can persist for a long time.

That’s great. I think a follow-up to that, to your comments. What percentage of the '18 wells would be drilled on multi-well pads versus 2017? I think I missed that.

Evan, it is something about two-thirds of our program in '18 will be on these multi-zone projects. I think a good readout on what Dave was talking about is really to go back and dissect the results that we had on really a serial number one, which was our Anaconda project in the Delaware Basin, and there we were able to reduce cost some 20% on a per-well basis just through the efficiency gains from these multi-zone concepts.

I mean, you mentioned focusing on the STACK and the Delaware but perhaps the best returns on limited programs that they have been in the Powder River Basin and the Rockies. How does that fit into your program next year? And do you have the scale there or the runway to be able to accelerate that or would it be more there or how do you think about that within your portfolio?

Well, you are right, Bob. We've drilled some really nice wells that’s still early on in the Powder River Basin, but that certainly provides additional strength and optionality to the overall portfolio. I'll let Tony detail out the potential 2018 plans, but we're proud of what we've done so far and we have a lot of acreage that we have yet to evaluate there. It looks like we focused primarily in a shorter term on the turner as we described in the operations reports. But Tony want to detail it out a little further.

Well, just to add on what Dave said, Bob, we are doing some really outstanding work. You are seeing the returns on that. We have historically been focused on some of the shallow conventional horizons from the Teapot and Parkman and those offer some of the best returns we have seen, essentially 95% overall stream. Now we are bringing on some of our turner wells. We think this is more of an unconventional type play in the basin, perhaps a little bit more ubiquitous across our position. We have got a substantial permit there. In fact, we picked up about 100-plus permits from the Casper BLM office, which is quite unusual in terms of the pace of permits being approved. So we have got the capacity to stand up additional rigs and repeat high-quality results. It's going to be a matter of going through the budgeting process this year and allocating capital to the best opportunities we have.

And how do you think about your footprint there? Is it somewhere that you think you could expand your footprint of all these tests working the different formations? Or is there enough running room there to really make this a core part of your portfolio?

Bob, we have got 400-plus thousand acres in Powder, so we think we have got the position that we wanted. You just really map out what would be classified as Tier 1, it's something less than the 400,000 acres, but we have got a substantial portion of that locked up in between our position, our legacy position that we had on the north end of our play in Campbell County to the south end of our newly acquired position in Converse County. There is some good work going on by EOG and into the south. There is some other good work going on by just speaking of a few others. So we are really in the heart of the play and have the position that we like there.

Could you provide an update on each of your key core plays? Starting with the Permian, what is your early impression? You mentioned drilling a three-mile lateral; do you have any comments on its potential to become a more significant part of the program as you move forward with the multi-zone development plans?

You bet, Ryan. We are flowing that well backward, we don’t have the 30 days behind us to report on that. You will hear from us next quarter, but we are quite pleased with the results of what you have today. Really on an opportunity going forward basis, we got a three-mile lateral in Delaware. We also are in the process of preparing the flow back in three miles in the stacked play as well. I don’t know that this will displace all the two-mile laterals that we are working on and established. There are going to be some unique footprint opportunities that allow us to go to three miles and I think these first two wells are proving and giving us confidence that from an operational perspective, we can drill, complete, and flow back and a high-quality well in three miles.

Any ideas on extending the three-mile lateral and the STACK as well or are you keeping the Permian for now?

We are currently preparing to flow back our first three-mile lateral in the STACK play. It's still early, so I can't provide any specific details yet. However, the drilling operation proceeded exceptionally well and was very cost-effective. We have reached the toe of the well and are now preparing to flow it back. There will be opportunities to expand our three-mile concept within our footprint, but much of our position will remain focused on the two-mile laterals.

And then maybe another follow-up on the STACK, a couple of things. In the cleaner pie that was clearly the strong results, can you maybe talk a little bit more about what you learned on staking there and in the upper Meramac? And then you also said that was assigned wider in all new wells you're moving a little further, pushing the boundary. Is that further to the north and even to the east? Can you talk about maybe what you've seen in terms of the extent of the core of the play as you tested the boundaries a little bit?

Ryan, we are pleased with the work we are doing. You may have seen the report on the Fleenor work, and we're quite satisfied with that. We want to highlight that while we achieved exceptional flow back results on the flinger wells, we did it with a different cost structure than we historically used, which is tied to the modified completion design. We're happy with our efforts on the east side of the play. Looking at our 2018 work, we're planning to extend our projects to the north and west portions. In fact, we've already initiated our second multi-zone project called the Coyote on the northwest side of the play, and we've piloted some wells in that area, which we are optimistic about and will report on soon.

And Ryan, to add a few more details to Tony's comments, the Fleenor pilot was a stagger test within the Meramac 200. In that area, which is the thickest zone, we aimed to maximize recoveries in this very productive area. It was very successful, and we will apply those learnings to our upcoming multi-zone projects. We're continually refining our approach, and this will inform our other projects as we move forward.

So, Dave, obviously this is a little bit of a change from the cash inflow versus operating cash flow, I guess, that's the subtlety of your vision 2020. So I guess my question is as you focus on the two core areas given I guess the increase in inventory what does it say about the asset sales definition in terms of what becomes non-core? And I'm specifically thinking about Tony's comments around the Powder, because obviously while the returns are great the scale is not relative to the other areas. So does that become a for-sale asset and just maybe some color on your thinking around scale and timing of executing our program?

Well, first off, you're right. We have made a subtle change in what we say live within our cash flow from operations, and the reason for that is simply the strength that we're seeing both in terms of the capital efficiency that we're able to achieve as well as the returns we're able to achieve when we're focusing even more dollars into development side and in our highest return areas. So it's really a very good new story that we have been able to spend lower capital dollars live within operating cash flow and deliver the kind of returns that we're which again we're focused on returns on production growth but we'll see strong production growth as a result. Now as more specifically to the Powder River Basin, it's still early days in the Powder River Basin. We like the optionality that the Powder River Basin provides. We see that on a go-forward basis, as Tony said, we will be focusing more of our activity on the Turner and we really need to see a more results from the Turner to really understand certainly how does it compete for capital versus the STACK and the Delaware plays. So we have a lot of optionality around and we have said we will divest several million dollars of additional assets. It is because of the incredible strength of our portfolio that we have a lot of optionality that may come from. We are certain that we are going to have areas throughout our portfolio that someone could come in and drill development wells that will achieve returns well above the cost of capital but not as good as we're going to get in our poor plays. So that gives us a lot of optionality around where we decide to do those divestments from, and we haven't made a final decision on that and maybe one area or maybe a combination of acreage from a number of areas, but we are absolutely committed, though, to the vision that we have is just with how we execute that vision we're still talking about.

My follow-up, Dave, it might be for you or might be for Jeff but it really goes to the net debt to EBITDA target and the relationship with EnLink I guess is the broader question. In years gone by, you did sell down a little bit of EnLink that’s stopped obviously, but when you look at net debt, obviously you are consolidating EnLink debt, but you’re going to be going strictly intellectual about it, deconsolidating handling with also like the marketable securities and your definition of corporate net debt the recourse to Devon level? Sorry, for the lengthy question, I guess, but what’s trying to understand is what is our future relationship with EnLink? Like how does it factor into that net-debt target and do you look at it on a just Devon basis as opposed to the consolidated EnLink basis now we do there?

Doug, this is Jeff. Yes, we think about it and the targets that we've outlined are based on Devon’s standalone basis. So we are not including the EnLink debt or the EnLink EBITDA in that calculation.

What about the handling of equity as marketable securities?

That is not included in the calculation either. Yes, if you are asking if we’ve reduced the debt for the value of the EnLink securities, we are not.

Okay, that's very clear. As far as your relationship with EnLink goes going forward?

Well, I can just add from a strategic level. First off, we like the relationship very much and we think they are doing an outstanding job and particularly supporting us in one of our key development areas in the STACK but also in every area where we have common operations. So we like the relationship strategically. Now whether we would ever consider sell-downs or not, that’s certainly not on the table at this point. I would never rule it out. There's always an option that we have out there where we certainly have no current plans around that.

Dave, focusing on your comments around changes to management incentives, what should we expect on those changes? You mentioned that drilling rate of return as a potential metric, has there been a consideration for corporate returns level metrics like ROCE and then for any growth metrics will they be measured on a debt adjusted per share basis?

Let me begin this response and then ask Jeff to elaborate on the details he can provide. We have not reached a final decision on this matter. We need to discuss it with our board to determine our next steps, but I want to share our initial thoughts that we will present to the board. First, I want to emphasize that we fully recognize that our industry has not achieved satisfactory returns, and this includes Devon. We are committed to delivering acceptable returns to our shareholders moving forward, and this effort is aimed at ensuring we accomplish that. We are aligning our capital program to support this goal. We possess the necessary assets and execution capabilities to achieve these returns, and we are committed to offering appropriate internal incentives to ensure we deliver. Additionally, we will strive for transparency so that shareholders can assess our effectiveness. As I mentioned in my opening remarks, we have the potential to lead in this area, and we plan to take on that leadership. Jeff, could you provide more details about some of the metrics we are currently considering? Again, this is just our thought process, and no final decision has been made.

Yes, that's correct. As Dave mentioned, we are still discussing this with our board. We plan to present a variety of metrics that you would typically expect. If I were to categorize them, one group would be closer to a gap metric, such as ROCE or cash return on capital employed. The advantage here is the transparency and straightforward calculation of these metrics directly from the financial statements. The second group represents what we believe is a more accurate reflection of our returns on our capital program each year, which encompasses all capital—not just drilling capital—allocated by the company in any given year along with the future cash flows generated from that capital expenditure. While we consider this to be a better metric, providing the level of transparency that you and the investor community desire could be more challenging. We are carefully evaluating both options and will discuss them with the board later this month to reach a decision. Additionally, as you noted, Paul, our analysis and historical review of these metrics indicate that a debt adjusted per share metric is the most strongly correlated with equity returns in this area. Therefore, I believe whatever we decide will incorporate elements of that approach.

And again, just to be clear, on that second major that Jeff talked about, which is our rate of return metric, we are thinking in terms of burdening that as much as we can with all other costs we incur within the corporation, so you are getting that even though it's based on wells, it is really burdened with all the costs that corporation, so you look at more of a total corporate return from our capital program.

First in regard to exploration. We are certainly in a great position where we have such a strong development inventory as we have right now. So there is not the need in the short term for exploration in order to accomplish certainly the 2020 vision. Now if you look at longer-term for the company, I think that you always have to be mindful that some level of exploration should be thought about in order to have a long-term sustainable company. But certainly in the next few years, the amount of capital that will be dedicated to exploration is going to be less than you might normally think for a company of our size. Now with regards to hedging, we think that hedging is an important part of the overall company business in order to make sure that we're delivering consistent results. We also think it's important to give us confidence around the cash flow that we're going to have in a given year in order to execute our capital program. We have designed our hedging program for hedging out approximately a third of our volumes in the given year on just what we would call a systematic basis where we just take the existing prices in the market and hedge forward for a number of quarters on that basis. Then we intend to roughly get around 50% overall hedge with the other 16%, 17%, or whatever, and could very little bit from that but somewhere around that, on more of an opportunistic basis. Certainly with the strength that we've seen in the market recently that we're opportunistically hedging as we speak.

One follow-up question regarding EnLink and the response you provided. Can you share what other strategic benefits there are from being integrated with EnLink? Have most of the necessary midstream developments in the STACK been completed, or is there still a significant amount of work remaining?

There is still midstream development that’s ongoing. As we speak, we're certainly getting into the development program, but there certainly is still quite a bit of midstream infrastructure still in front of us. Obviously, the hooking up of very large number of wells on a timely basis, it's important to deliver our returns.

So certainly through '18 and maybe into '19, strategic business revision would be joined, is that fair?

No, I think that's certainly true, yes, there's a benefit there.

My follow-up question relates to the idea of achieving a more balanced approach and potentially becoming free cash flow positive in the future. You highlighted this year’s increase in activity, particularly in the STACK and Delaware regions, for efficiency reasons. These areas are currently experiencing cash flow deficits. At the field level, could you generally discuss your future monetization strategy? Will you aim to implement this once those assets can sustain themselves? Right now, some of your mature assets that aren’t receiving capital are actually generating free cash flow for those regions.

Scott, this is Jeff. That's exactly right. The way we're thinking about it internally is we'd like to see the STACK and Delaware assets to get to a more mature level. They’re relatively immature today in our portfolio, just by the nature of the assets, but as Tony described with the multi-zone development that we're going to head into much bigger way here in 2018, the capital efficiency and the cost efficiency that we're going to see in those assets, we expect them to reset kind of self-sufficiency point in the not too distant future and that will give us the confidence to embark upon a broader divestiture program that Dave described in his opening comments.

Just perhaps the follow-up on that question, are there assets today outside of the Delaware and STACK that you have considered as core or perhaps you can describe the attributes of the assets that you think will remain in the portfolio and along basis?

Well, the key attribute that we would look at is do they compete for capital in our portfolio and is there additional value that we can create by if there are development opportunities that may not compete in our portfolio, but that we could be paid for some of that upside from that development opportunity by someone else. So we will be looking at areas that and certainly all of our areas we feel what you are talking about the Eagle Ford, you are talking about Barnett the pattern they have some element and there may even be areas within the STACK and Delaware on a much smaller scale basis that we may not get to. They are not absolutely core to us, but that we could look at divestment? Or these are not going to be large scale numbers but they are probably somewhere within those basins as well that are not going to necessarily meet our return requirements just because of the very high return capability of so many of our development opportunities. So that's the key thing that we'd be looking at is we think the bulk of the value creation that we do in the company is when we can deploy capital at returns that are very far above the cost of capital and that's what we're doing in our key development areas. If we aren’t doing that and we aren’t going to fund that, perhaps someone else will see an opportunity there and pay us for that opportunity.

And my follow-up, I just wanted to check or had a housekeeping question on Jackfish. Just given the improvement in oil prices, do you expect any of those projects to reach a threshold where the royalties would increase in 2018, and also wanted to see if there is any turnaround scheduled at any of the three Jackfish projects in 2018?

Arun, this is Tony. We are planning a turnaround once each year. You saw us complete the turnaround for J3, and we did some maintenance on J2 this year. We will have a turnaround on J1 in the summer of 2018. We do not anticipate any changes to the royalties in 2018.

Then that change at all given any of the three projects in '18?

And Arun, just a real quick just to provide some color there is obviously Jackfish one is post payout. That's been post payout for quite some time. Jackfish 2 and Jackfish 3 are pre-payout, and based off current strip pricing, we wouldn’t expect those to be have any meaningful adjustments in royalty factors on that front until next decade.

The highlights kind of in the release around a projected NPV uplift upgraded that 40% as you look forward to the STACK and Delaware kind of caught our eye, but can you help us understand kind of to find the starting point for where the NPV is in the STACK now and then how the 40% or more is there, and then same thing for the Delaware’s starting point so kind of know where you are going on that uplift for the multi-zone development?

Dave, this is Tony. The comment about the 40% uplift in NPV is really in comparison to a typical historic four or six-well pad. That’s just the delta that we see in front of us by utilizing this multi-zone concept. As we have mentioned before, we already saw 20% of the cost come out of the first project in the Delaware basin. We really haven’t even optimized in my mind the opportunity in front of us. You are starting to see the concept of more batch operations utilizing sputter rigs to get the surface hole drilled followed by the conventional drilling rig to drill the production string. The utilization, the centralized production facilities that will be equipped to handle production from multi pads have a drill-to-field type concept is a substantial boost. If you just look at the typical work process and the game chart, this is the way that we are lining out all components of that and give you order to magnitude. When you take a rig on a typical Delaware basin well, you take the rig and move it to another pad a couple of miles away. It's an additional 3.5 days of nonproductive time until you are back moving a bit. Simply scaling over for a multi-well pad, you have got about a half a day of downtime. This is the type of work that we think is a game-changer for the type of contiguous multi-zone switch spot type projects that we have.

I guess I'm going to try a little harder. If I think about a four or six well pad, I mean if we just think about NPV per well of kind of $15 million to $20 million bucks and you get 40% more than that on each set of four to six wells, in fact how it ends up flowing, I'm trying to get the hard numbers on where the four to six well pads would have been, and this is incremental NPV beyond invested capital?

David, this is Scott. A lot of numbers float around there and I think I’ll honestly that I have a spreadsheet that it’d be very happy to walk through at my desk after the call. So just to maybe keep a little bit harsh strategic questions so that I can handle later on.

We have received many questions about capital allocation, so I want to focus on a few related to our operations support. Referring to Slide 16, it illustrates several interesting multi-zone projects, starting with the condo at the top and continuing down. Given the various zones and multiple intervals involved in these projects, I am curious if any of these could still be considered delineation projects, testing zones, or something similar. I don’t want to label them as exploratory, but rather, are they purely development projects aimed at efficiency at this point?

These are all development projects, and we've conducted significant pilot work over the past few years, which has given us a strong understanding of the lateral space and requirements for the various zones we operate in. We are continuously gaining insights into vertical connectivity. For example, in the Delaware Basin, there are approximately a dozen known commercially productive horizons. Through our pilot work, we have identified zones that are pressure dependent on one another, as well as those that operate independently. We are leveraging this knowledge to focus on what we consider high-return, low-risk development projects. However, we will still perform some spacing work and test zones that we know have pressure communication with the surrounding columns. Overall, in the Delaware Basin for 2018, around 90 to 95 percent of our capital spending will be directed toward development.

Returning to TRP, earlier in the discussion, it was mentioned that you have a very large acreage position there. However, I think I understood Dave to say that moving forward, the focus will be on the turn, and you have the Super Mario project area laid out. I am wondering that as you concentrate on the return going forward, will there still be enough resources to support a core play as results develop? What I am thinking about is the illustration on Page 17 that shows the Parkman, the Teapot, and the Turner, which all seem to be discreet in different parts of the acreage.

You're a little bit right. Now there are some vertical opportunities in the Turner. There's a couple of different zones in the Turner that we look at, and there's a portion of the footprint here that'll have the traditional multi-zone potential but not like you see in the Delaware Basin, but I would tell you that in addition to the key department Turner that we talked about there's a lot of activities happening in the deeper horizons, the Niobrara is the source rock here. There are some results happening just south of our footprint in the Niobrara. We got about eight producing Niobrara wells on our footprint that we acquired a couple of years ago, and on the per foot basis even though the wells the laterals were very short laterals and probably not frac with the knowledge that we have today, they're encouraging. If you look at the Niobrara being ubiquitous across the play source rock there, moving that into a commercial development over the next few years would be a step change for the Powder. There are some other zones that both Devon and others are pursuing outside of the Turner and the Parkman.

Another way to describe it is to look at Page 18, where you can clearly see the potential that exists with the Turner having about 400 high-quality locations. This is very early in the spacing test, and its outcome is uncertain. However, that area could be significant. Additionally, it's important to consider what you might monetize outside of some core area defined in the pattern, and to understand what you might be giving up and the appropriate value for that. Although there are potential opportunities, as mentioned by Tony, it's essential to have a clear understanding of that potential to ensure you're providing proper value for the shareholders before considering any decisions.

I mean I think that's a great point, and if I could just follow-up it's just first time I'm aware that you guys are talking about the Niobrara, one word just to have something to visualize. We are thinking about some areas that might have the potential to have a DJ Basin type of setup where there is an A and B and then C or is it kind of essentially be one extra zone that could be added to the Turner or suff0x or whatever else you might mess around with?

I think it's too early to define that. I know the B and the C have been tested in the Basin, but I'd say for our particular area we are going to do some work in 2018 and start to understanding that and we've got a good technical team just map this southern port the southern work that has been ongoing and there is some new work that’s just north of this that is also helping us connect the docs in activity. So a little bit early to define what this might look like.

I know it's been touched on a little bit but just wanted to talk about the spending at operating cash flow again and if it's to be implied that this handling distribution are going to be used to cover the dividend and also just wanted to think about the delta between handling distribution, which are quite a bit higher than a dividend and how you all think about that as that continues to pick up?

Jamal, this is Jeff again. Yes, you’re exactly right. As Dave mentioned earlier, several differences in how we've described our going forward game plan, which is to spend within operating cash flow. So that would meet the handling distributions on top of that. But as you pointed out, we do have a dividend and the EnLink distributions more than offset that. So we are still between the two with some incremental cash available.

And then just quickly one to talk on at the Jacob's pad, that was whether mix in this release just kind of wanted to think about your updated thoughts in terms of development in 2018 for that pad specifically given some of the ongoing spacing incurred by your partner?

Yes, I think we're anxious to see some of the spacing test just south of our Jacob's and Lou. I think that's going to be very informative for us to continue to design work on our particular project. We've actually engineered the Jacob's project and have continued we are thinking about deferring that outside of the 2018 capital program. Most of that thought process is really because the Meramac and the STACK work we're doing right now is so commercial and prolific. The Jacob's and Woodford are now getting displaced by the Meramac type opportunities from a return perspective, and as we've mentioned before, we're setting up these multi-zone developments in both the STACK and Delaware. In fact, we have about 29 known projects identified that will get us through the next couple of years on these two basins alone. So we got it engineered and slaved as it competes but right now we're finding that we have got other opportunities that have higher returns that we will displace that.

Jeff, just a quick follow-up question on the Fleenor pilot. Is that the two wells in the 200-zone testing should have the optimum landing point? Or in that area, do you have sort of enough thickness to have two separate wells within the 200 zone?

This is really testing the landing zone is the primary purpose of the test, and again, this is a staggered approach. We have seen some advantages by staggering even within the same specific interval. That just to settle difference tends to provide better performance from the offset well. So it was really a landing zone with a staggered concept, and then again we slightly modified our completion design there which really moved about $200,000 out the completion and still got the results that we posted here.

And those completion improvements, is that replicated in STACK or not? Is there any of that built into the 2018 sort of preliminary plans you’ve provided?

It will be. It’s a data point that we have here, so we will continue to work that. It happens to be with some of the product that we use during our completion process. So we got a data point now that was positive and will continue to better understand that. Those are the subtle opportunities that we are seeing across the board. We have got a culture of innovation in the company that frankly we haven’t seen to-date that are exploring every component of our business, and it’s a combination of a lot of subtle changes like this that’s really heading up until that present value up list, perhaps 40% on these type of projects.

We’re now at the top of the hour and there are several still in our queue. So, if we did not hit your question today, please don’t hesitate to reach out the Investor Relations team at any time today, which is obviously consisting of myself and Chris Carr. But we appreciate your interest in Devon and we will talk to you next time. Thank you.