Devon Energy Corp (DVN) — Q4 2020 Earnings Call Transcript

Good morning, and thank you to everyone for joining us on the call. Last night, we issued an earnings release and presentation that covers our results for the year and our forward-looking outlook for Devon in 2021. Throughout the call today, we'll make references to our earnings presentation to support our prepared remarks, and these slides can be found on our website. Also joining me on the call today are Rick Muncrief, our President and CEO; Clay Gaspar, our Chief Operating Officer; Jeff Ritenour, our Chief Financial Officer; and a few other members of our senior management team, including Dave Hager, our Executive Chairman. Comments today will include plans, forecasts, and estimates that are forward-looking statements under U.S. Securities law. These comments are subject to assumptions, risks, and uncertainties that could cause actual results to differ from our forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials. With that, I'll turn the call over to Rick.

Thank you, Scott. It's great to be here this morning, and we appreciate everyone joining us. With the merger of equals between Devon and WPX Energy now complete, we have an exciting story to share about our new company's prospects. We have executed this merger at an opportune time, catching the bottom of the cycle and positioning ourselves to benefit from the recent improvement in macro conditions. Devon is very focused on capturing synergies and executing our plans. We are managing our capital program carefully and achieving positive results ahead of schedule, despite disruptions from COVID-19, politics, and winter weather. We will provide an update on the impact of the recent Arctic storm later, but our field teams are doing an excellent job navigating these challenges and meeting the energy needs of consumers. Extreme weather reminds us how essential our products are for improving the quality of life. For those new to our story, let's review the advantages of the merged Devon on Slide 3. In January, we successfully completed the all-stock merger between Devon Energy and WPX Energy in just three months, a remarkable pace for such a significant transaction. I want to thank both organizations for their hard work to achieve this milestone. Integration efforts are progressing well, with our leadership team working effectively together. By combining our companies, our shareholders can expect enhanced scale, immediate cost synergies, increased free cash flow, and the financial strength to return cash to shareholders through our innovative fixed plus variable dividend strategy. Devon's attractive valuation is one of the best in the energy sector. As we execute our strategy and optimize our federal acreage in the Delaware Basin, I expect Devon’s value to increase. Now, moving to Slide 5, the combined company's power was evident in our outstanding fourth-quarter results, which exceeded expectations. Our teams are delivering results that surpass production and capital efficiency targets while reducing per unit operating costs and maximizing margins. For instance, our oil production exceeded guidance by 5%, driven by well performance rather than increased activity. Both our operating and corporate costs decreased significantly year-over-year, resulting in $263 million of free cash flow. Coupled with the closing of our Barnett divestiture, we generated nearly $600 million of excess free cash flow in the fourth quarter, an excellent achievement for our organization. Now on to Slide 6. Devon has a long history of returning cash to shareholders, paying uninterrupted quarterly dividends for 28 years. The merger with WPX enables us to enhance our approach by implementing our fixed plus variable dividend strategy. With the free cash flow generated during the quarter, I am pleased to announce our commitment to reward shareholders with a variable dividend of $0.19 per share. Jeff will discuss the details of our unique dividend policy later, but this framework will be essential in our capital allocation process, allowing us to return significant cash to shareholders under various market conditions. Moving to Slide 11, the positive momentum in our business is leading to an improved operational and financial outlook for 2021. An improved outlook means lower breakeven funding levels and higher free cash flow generation. Based on strong results in the second half of 2020, we now expect to maintain higher oil volumes throughout 2021. This optimistic outlook is supported by improved capital efficiency compared to our estimates at the time of the merger announcement. Even after increasing production expectations for 2021, our upstream capital program is projected to be around $1.7 billion, representing a reinvestment ratio of less than 70% at a $50 WTI price. Most of the corporate capital anticipated for 2021 won’t be repeated in 2022 or beyond. Along with cost synergies from the merger, we are effectively lowering our funding requirements to a WTI breakeven price of $32, which gives Devon a 13% free cash flow yield at current prices. Additionally, unhedged and considering cost synergies, our free cash flow yield could exceed 20%. This high free cash flow yield places Devon at the top of our industry, making it a highly attractive investment compared to the record-high valuations in other sectors and asset classes today. Lastly, while rising commodity prices are beneficial for our free cash flow generation, I want to be clear: we will not initiate any growth projects until demand fundamentals improve, inventory levels stabilize, and OPEC+ production reductions are absorbed by the market. I urge other producers to be thoughtful and disciplined with their capital plans. High returns on capital employed, reduced reinvestment rates, and free cash flow generation will determine the winners and losers in the next cycle, rather than just top-line growth. Devon is committed to leading in this initiative. Finally, I would like to highlight our commitment to top-tier ESG performance. Excellence in ESG is fundamental to Devon, impacting every aspect of our business and our long-term social license to operate. Environmentally, our top priorities will be reducing greenhouse gas emissions, lowering methane intensity rates, and advancing water recycling. After fully integrating our operations post-merger, I intend to establish quantitative targets for these environmental priorities. Alongside these objectives, we are enhancing our governance practices to better align executive compensation with shareholder interests and promote inclusion and diversity in our organization. Our commitment is to operate responsibly for the benefit of all stockholders. Now, I’ll turn the call over to Clay to discuss our operating highlights for the quarter. Clay?

Thank you, Rick, and good morning, everyone. The strategic combination of Devon and WPX creates a powerful asset portfolio that strikes a great balance between sustainable growth opportunities and strong free cash flow generation. Given the strength of our fourth quarter operating results and 2021 outlook, we're off to a great start executing on our strategy that will drive the next phase of financial growth and strong returns for the company. Let's turn to Slide 14, and I'll give you a brief overview of our incredible Delaware Basin position. Our world-class Delaware Basin asset is a capital-efficient growth engine for driving Devon's operational performance. As you can see, we have amassed a dominant position of 400,000 net acres of stacked pay in the economic core of the basin that accounts for about 60% of our pro forma production. The operating scale of our consolidated Delaware footprint provides a multi-decade inventory of high-return opportunities at our current activity level. Another important point that this slide demonstrates is our position's geographic diversity between New Mexico and Texas. By having a blend of federal, state, and fee lands and positions in both Texas and New Mexico, we're able to leverage the significant economies of scale and, at the same time, benefit from market diversity and navigate the evolving regulatory climate. While we fundamentally believe that we'll be able to efficiently develop our federal acreage in New Mexico, we have proactively managed this risk by building up an inventory of around 500 approved drilling permits that cover our planned activity on federal lands for multiple years. Our forethought has allowed us to secure the necessary permits, easements, and rights of way required to execute our near-term capital program with minimal impacts to our day-to-day operations. Looking beyond the 60-day regulatory transition, we will be highly engaged and collaborative with policymakers to ensure that we retain the ability to efficiently develop our federal leases and maximize value for all stakeholders involved. Moving to Slide 15. The fourth quarter operations results across the Devon legacy position highlight why we believe this basin to be the best resource in North America. Our oil production from this operating region continued to increase rapidly, growing 41% year-over-year. This growth was supported by 23 high-impact wells that were brought online across the Southeast New Mexico during the quarter. While we had great results across our acreage, our activity in the Cotton Draw region, targeting the Second Bone Spring, topped the highlight list. This package of 8 wells delivered average 30-day rates of more than 4,000 BOE per day, which equates to an impressive 450 BOE per 1,000 feet of lateral length. With D&C costs averaging less than $6 million per well, the overall returns from this Bone Spring activity rank among the very best returns Devon has ever delivered in the basin. Turning your attention to the far right-hand side of the slide, another noteworthy trend is our improving capital efficiency. With consistent improvements throughout the year, our drilled and completed costs exited 2020 at around $560 per lateral foot. We believe these results to be best-in-class among our peers in the area. The key drivers of this performance were optimized completion design, repetition gains, and nonproductive time improvements across all phases of the value chain. I expect this positive trend of steadily improving cycle times and costs to carry into and benefit our 2021 program. Congrats to David Harris and the Devon legacy team for this outstanding set of results. Moving to Slide 16. We also continue to build operational momentum across the legacy WPX acreage position. Beginning with our Stateline area, the key takeaway is our co-development drilling program in the Upper Wolfcamp and Bone Spring that is providing great results at a 4 to 5 well spacing per bench. The 26 wells that were brought online in the Stateline area, we continue to outpace type curve expectations with peak 30-day rates averaging around 2,300 BOE per day and the D&C costs associated with this activity improving by 44% compared to just a few years ago. We've also made significant progress in our Monument Draw area with encouraging results at our Cathedral and Bridal Veil projects. As you recall, WPX acquired this asset from Felix about a year ago. With the 2020 slowdown in activity, we're just getting to see the results of the first WPX drilled and completed wells, and we're very pleased with these results and continue to see significant upside to the asset. A critical subset of these projects, which co-developed the Upper Wolfcamp and the Third Bone Spring line, was a trial of a more aggressive flowback methodology, along with improved spacing and also a more efficient completion process. The results were lower well cost and again, improved productivity. This approach, which is similar to the techniques in Stateline, was applied to a subset of 6 Wolfcamp wells across the 2 projects. The 38-day IP rates for these wells averaged 2,300 BOE per day with 76% oil. The wellbore cleanout process has improved, and we're not seeing any geomechanical or geochemical downsides to the more aggressive flowbacks. With these positive tests, we will continue to evolve the completion design in the Monument Draw program in 2021. As we extrapolate these results, the Monument Draw will compete very effectively for capital with our Delaware Basin portfolio. Turning to Slide 17. I will cover our other positions in our border-to-border premier oil fairway. From the WPX portfolio, the Williston Basin continues to provide phenomenal returns. We will continue our highly profitable program into 2021. In the Powder, we will continue to deliver on appraisal and leasehold objectives with a focus on advancing our understanding of the emerging Niobrara oil play. The Anadarko Basin is back to work with 2 rigs funded by a joint venture partnership. By the way, I have a long history with the Anadarko Basin. I have full confidence in Devon's ability to extract significant value from this asset with the right well placement strategy and operational excellence and where the opportunity presents some leverage through partnerships. Finally, in the Eagle Ford, with our partner BPX, we plan to run a 2-rig program in 2021 and jump-start our activity by bringing online 22 high-impact DUCs in the first half of the year. Turning to Slide 18. The first key point is that our maintenance capital program is designed to optimize capital efficiency, with approximately 80% of our capital allocated to the Delaware Basin. Within the Delaware, the capital will be relatively evenly split between New Mexico and Texas, with an abundance of flexibility to reallocate capital if we see a differential economic opportunity on either side of the border, or even an unforeseen delay on federal lands. As Rick stated earlier, the capital efficiency associated with this plan is outstanding. We expect to maintain our production at levels slightly elevated to 2020 for roughly 10% less capital on a year-over-year basis. We expect to invest about 30% of our capital in our 2021 capital in Q1 due to the timing of D&C activity, with some momentum rolling in from 2020. After this heightened activity for the first quarter, the capital is expected to be more ratable for the balance of 2021. While we expect the current weather conditions to negatively impact first-quarter production, we also expect the balance of the year to be relatively flat. As you can see on the right-hand side of the slide, we also continue to act with a sense of urgency to materially improve our cash cost structure in order to get the most value out of every barrel. With this intense focus, we are on track to reduce LOE and GP&T costs by 8%. To achieve this step-change improvement in the field-level costs, we have line of sight to meaningfully reduce our recurring LOE expense across several categories, including chemical, water disposal costs, compression, and contract labor. The gains that we make in this area often act as ongoing annuities that we will benefit from for years to come. I want to commend the production operations team that fights for these improvements every day. I also want to add some additional color on the severe weather event that's impacting a large part of the U.S. today. First, we are focused on ensuring the safety of our employees and the service company partners that work with us each day in these challenging conditions. I've talked to several of our field leaders over the last few days. And consistently, the first thing they mentioned is protecting the health and safety of people. We also know the critical value of the commodities that we produce. Many of us, as well as our family and friends, have been personally impacted by the lack of electricity necessary to keep up with the demands associated with this intense winter storm. We're doing everything we can to safely keep production flowing to the communities that desperately need it. As we try and quantify the impact of our first-quarter production numbers, I would just say it's too early to tell. We've included some downtime in the annual numbers, but we have elected not to give first-quarter guidance at this time. In the coming weeks, we'll have a much better understanding of the impact, and we'll provide additional information on the first-quarter expectations. With that, I'll turn it over to Jeff for the financial review.

Thanks, Clay, and good morning, everyone. My prepared remarks today will focus on the progress we've made advancing our financial strategy, as well as providing some context on a few key metrics that have improved in our 2021 outlook disclosed last night. Beginning on Slide 7 with a review of our balance sheet. Over the past 3 months, we've continued to make progress strengthening our investment-grade financial position. As Rick touched on earlier, the strong operational performance of the combined company allowed us to generate a substantial amount of free cash flow in the quarter and build an incremental $500 million of cash in the quarter. With the benefit of this cash build, Devon possessed $5.6 billion of liquidity at year-end, consisting of $2.6 billion of cash on hand and $3 billion of undrawn capacity on our unsecured credit facility. As market conditions allow, we'll look to further reduce our absolute debt level with select repurchases under our $1.5 billion board authorized debt repurchase program. Subsequent to quarter-end in February, we took our initial step in this debt reduction plan by redeeming $43 million of senior notes that were due in 2022. This action completely clears Devon's debt maturity runway until the second half of 2023. We'll have another opportunity to reduce absolute debt in the second quarter with the potential early redemption of our $500 million tranche of 2026 bonds, which become callable in June at a fixed price. With the remainder of our debt reduction program, we'll remain flexible and evaluate opportunities as we keep a close watch on interest rates and credit spreads. Longer-term, it's our firm belief that a successful E&P company must maintain extremely low levels of debt, given the volatility of our cash flows. We'll continue to manage towards our stated leverage target of 1x net debt-to-EBITDA or lower, and we've charted a pathway to get there within the next year at today's spot pricing. Our disciplined financial model grounded on a low capital investment ratio, excuse me, reinvestment ratio, and variable dividend payout of only 50% of excess free cash flow allows us to consistently build our cash balance, reducing net debt over time and driving us to our 1x net debt-to-EBITDA target. In addition to our debt reduction efforts, we expect to accelerate the return of cash to shareholders in 2021. Given the stretched balance sheets across the sector, many of our peers will have to reduce debt with free cash rather than returning cash to shareholders. We believe we're uniquely positioned, given our financial strength to do both. To optimize the outcome of our cash return strategy through the cycle, we've adopted a fixed plus variable dividend framework. This cash return strategy is designed to pay a sustainable fixed dividend and evaluate a variable dividend on a quarterly basis. The fixed component of this policy is our legacy quarterly dividend that is paid at a rate of $0.11 per share and targeted at a sustainable payout level of approximately 10% of operating cash flow at mid-cycle pricing. The variable dividend is intended to be a supplemental distribution in periods of excess free cash flow beyond the fixed dividend. More specifically, after the fixed dividend is funded, which is the first call on our free cash flow, up to 50% of the remaining free cash flow in a quarter will be distributed to shareholders through a variable dividend. As Rick touched on earlier, given the strength of our fourth-quarter results, the Board has approved Devon's inaugural variable dividend at a rate of $0.19 per share. The remaining excess free cash flow builds upon our balance sheet and reduces our net debt, as I mentioned earlier. Once again, the variable dividend is in addition to Devon's previously declared fixed quarterly dividend of $0.11 per share. Both the fixed and variable dividend will be distributed on March 31st for a total payout of $0.30 per share. And lastly, I'd like to wrap up my comments today on Slide 8 by covering the progress we've made capturing the merger-related synergies that are expected to drive $575 million in annual cash flow improvements by year-end 2021. I won't go through all the details on this slide, but we have a detailed plan in place to meet this target, which includes a range of actions to achieve more efficient field-level operations, lower drilling and completion costs, better alignment of personnel with go-forward business, and a reduction of financing costs. To be clear, our efforts to reduce costs go beyond just dollars and cents and represent a meaningful shift in our culture to more streamlined leadership, more reliance on technical expertise, and intense focus on delivering top-tier returns on our investments. The team is acting with a sense of urgency, and we're running well ahead of plan with approximately 60% of these cost reductions already reflected in our 2021 outlook, and the remaining synergies to achieve our $575 million target have been identified and are expected to be captured on a run-rate basis by the end of this year. The value creation of these synergies are very material and impactful to our go-forward value proposition, resulting in a PV10 over the next 5 years of more than $2 billion, or roughly 15% of our market capitalization. We'll provide further updates as we progress through the year. And with that, I'll now turn the call back to Rick for some closing comments before we open the call to Q&A.

Thanks, Jeff. Nice job. We have covered a lot of good information today, and I'd like to reiterate a few key points. Number one, this transformative merger creates a leading U.S. energy company that possesses arguably the best value proposition in the entire E&P space. Number two, the power of our portfolio is evident with our outstanding fourth-quarter operating and financial results. Number three, the momentum that our business has established is resulting in an improved operational and financial outlook for 2021. Number four, our business is scaled to generate substantial amounts of free cash flow, and we are proud to reward shareholders with an industry-first variable dividend. And lastly, number five, we are committed to delivering top-tier ESG performance. And we expect to establish quantitative targets for our environmental priorities later this year. And with that, I'll now turn the call back over to Scott for Q&A.

Thank you, Rick. We will now begin the question and answer session. Operator, please take our first question.

Rick, I wanted to get some insights regarding the decision to start the variable dividend program before the merger, particularly for the period prior to the merger being finalized, and I would like your thoughts on accelerating the variable dividend.

Yes, that's a great question. Ultimately, when we reviewed the pro forma results for the fourth quarter, both legacy companies performed exceptionally well, and we added significant cash to the balance sheet. We saw it as an ideal opportunity to fulfill our commitment to implement the variable dividend in 2021. After discussions at the Board level, we concluded that now was the right time to proceed. We wanted to ensure that the dividend was substantial enough to demonstrate our leadership and commitment to returning cash to shareholders, especially since this has been a point of concern in our industry. We viewed this as a perfect chance to lead and swiftly acted on it.

Great. And my follow-up is, perhaps for Jeff, maybe a two-parter for Jeff and Clay. Maybe, Jeff, could you help us maybe reconcile the CapEx guidance between upstream, midstream and total relative to Devon's previous commentary around a, call it, $1.7 billion sustaining kind of program? And Clay, my follow-up there is, maybe if you could talk through the trajectory of 2021 oil volumes. I know you clipped 305 for the fourth quarter. But just maybe help us think about the trajectory over the balance of the year.

Thanks for the question, Arun. To summarize, the capital program we introduced during the merger was based on a run rate, assuming we achieved all synergies from day one. This included our hedging program at that time, and we projected it for the entire year. What we have presented today reflects our actual anticipated cash expenses for 2021. As we continue our integration process, the timing of some synergies will unfold throughout the year. Initially, we estimated a $100 million synergy related to capital, and this is included as we progress through 2021. We have made an effort to provide detailed disclosures to clarify what the cash flows and capital expenditures will look like this year.

Yes, Arun, I'll respond to your second question. You want to stick to one question and one follow-up; I'll accommodate that. Let me address another point as well, regarding the timing of capital and production. Starting with capital, we have some ongoing activity from 2020, which means we have increased activity in the first quarter of 2021. We indicated that about 30% of the capital for 2021 will be utilized in the first quarter. While we're not providing precise first-quarter guidance, we wanted to ensure you factor this into your models to avoid surprises. The activity in the first quarter will be higher. Looking beyond that, from the second to the fourth quarter, the activity will be fairly consistent and reach a steady state. On the production side, it's somewhat the opposite. In the first quarter, we have a few factors to consider. First, keep in mind that we’re only accounting for partial WPX production in this quarter. Additionally, we expect weather impacts that will also affect our first-quarter production numbers, and we don't yet have precise figures on that. However, once we move past the first quarter and look at the full year, the second to fourth quarters should remain steady. We anticipate some disruptions in the first quarter, and we’ll provide more details about that in the coming weeks. But overall, from the second quarter onward, we are looking at a steady-state environment.

My first question is with regards to the capital plan. And I think, Rick, you were very clear in saying that the capital plan, you're going to look very closely before reconsidering, based on demand fundamentals, inventories, and OPEC+ curtailed volumes and making sure that those are absorbed in the market. And I wanted to follow up to ask if this means that the capital budget that you've announced today is firm until the above or until those three boxes are checked, or if there is flexibility within the 70%, 80% reinvestment rate framework to move activity around?

No. I think those sort of boxes are checked. I think you have it captured well. And Brian, we are going to be very disciplined. I know that we're all excited about the strengthening commodity price, but we're not back on demand where we need to be. And I think you see that in the strip. We're in the upper 50s on WTI today, but you lose about $10 a barrel over the next 2 to 3 years. So I think we just need to keep that in perspective. And we will keep that in perspective, and we'll stay disciplined.

Great. My follow-up question is about how you're allocating capital between New Mexico and Texas in the Delaware Basin. You mentioned the 500 permits on federal land that are expected to last 4 years. Can you provide more details on your ability to execute those 500 permits and any associated risks, particularly if other permits are needed and whether those will be obtained midstream or if there are other types of permits beyond drilling permits? Additionally, how might the capital allocation change relative to an even split between New Mexico and Texas based on federal government decisions?

You bet. I'll start by saying that we feel very optimistic about the resumption of permits and other activities within the next month or so, possibly extending to two months. Importantly, we have a backlog of permits and a number of constructed pads and pipelines in place, which gives us confidence to proceed with our planned capital activities. We believe the strong results from our Stateline activity in the fourth quarter, particularly from Bone Springs and Upper Wolfcamp, along with the performance in Monument Draw, have significantly contributed to our success on the WPX side. We maintain open communication with the leadership in New Mexico, a state we know well, as we've been operating there for nearly 50 years. Personally, I have deep ties to the state, having lived and been educated there. Given these connections, we feel we have a clear understanding of what to expect moving forward. With that, Clay, would you like to add more information?

I believe that was well articulated. The only addition I would make, Rick, is that it is our responsibility to remain flexible and proactive regarding any challenges we may face, whether they are related to weather, politics, or other factors. The efforts we've made, particularly regarding the Devon legacy, to prepare for these challenges serve as a great example of that approach. We can only discuss what we know at this point. Currently, we have a 60-day pause in leasing, and we have managed this situation effectively. From that standpoint, we are in excellent position. I can assure you that we are prepared to adapt to whatever comes our way. Reflecting on a thought from Phillips Brooks, a 17th-century scholar, we don't ask for an easier burden; we request a stronger capacity to handle it. That's the essence of our role. So, let's keep moving forward.

I appreciate all your remarks today from Rick and your team. Rick, I've got 2 questions. I wanted to pick up on a comment you made, something we care very deeply about, which is you expect Devon to re-rate. I wanted to put it to you that the multiple is the output of 2 inputs, which is capital efficiency and portfolio debt. So my questions are basically on those 2 things. Those are the 2 things, I guess, you can control. So when I look at Slide 8, you've given an update on progress and the synergies. I'm just wondering how you see the risk to those numbers going forward as you've got chance to really peel back the layers of the combined company. That's my first question. My second question is maybe to Clay. You talked about decades of drilling inventory at the current pace. So I wonder if you could break that down for us by basin and specifically speak to the future of the Bakken and the portfolio. I'll leave it there.

You bet, Doug. Great questions. Regarding the synergies, we feel very confident. Our confidence in the merger rollout has increased since then. I hope everyone can sense that. We've already captured a significant amount of the synergies, which is included in our 2021 forecast. So Doug, we are very optimistic about this, and I want to assure investors that we are diligently focused on it. This management team is really committed to these efforts. Clay, would you like to discuss the capital?

Sure. Regarding inventory, Doug, I feel very confident in our capability to operate continuously in the Delaware Basin. We have a significant amount of high-quality inventory, and I understand that investors might have limited visibility on how far we can extend that. I want to emphasize that we are very optimistic about the next decade of opportunities and are also refining prospects for years 11, 12, and beyond. This basin continues to provide value. Recently, we had exciting developments around the Second Bone on the Stateline side, which we’ve been working on for the past couple of years. While it's not entirely reflected in our forward outlook, the potential there is substantial. I am equally confident about the North side, where similar opportunities exist as we explore deeper into the Wolfcamp. As for other basins, I know there are many newcomers to the WPX story, but we have consistently acknowledged our quantifiable inventory in the Williston Basin. It has been a key asset for WPX, contributing greatly to our growth and operational success. However, we plan to operate only one rig due to our limited remaining inventory. It’s still too early to determine the future of that asset or our other assets. I'm excited about some new opportunities in different basins that I haven't explored in a while. We'll be sharing more information about these in the upcoming quarters.

Doug, I want to emphasize the diversity within our portfolio. We are just over 50% in crude oil, but we also have a significant exposure to natural gas and natural gas liquids. When we refer to being diversified, it reflects not only a multi-basin opportunity but also a multi-commodity aspect, and I want to ensure we address that.

Maybe just to kind of get to the punchline. The $32 breakeven has already been trending a little lower, Rick. I'm just wondering if there's additional downside potential for that breakeven. I guess that's really the summary question I was trying to get.

I think there will always be opportunities for us to lower the breakeven point, Doug. I want you to know that we have a dedicated and creative team working on this. I believe there is potential to bring that breakeven down into the upper 20s.

I hope everybody is managing okay with 50s freeze out there. My first question is for Rick. It's on the reinvestment framework. We know that the "up to 50% payout of the excess free cash flow," that's got certain criteria attached to it related to the balance sheet and the macro. And one of the criteria is strong leverage. And I know a lot of things can happen, and we don't want to get ahead of ourselves, but I guess we are here. But at strip pricing, Devon gets down to its 1x leverage goal within a few years. And even if you do around the max payout, you're still left with sufficient cash after all of that. So if this scenario ends up playing out, is there a next evolution of your corporate strategy, such as revisiting the max 50% payout or moving to additional buybacks? Or would you rather reduce leverage further beyond the 1x just to be conservative?

Yes, Jeanine, those are good questions. The strength of Devon today lies in generating substantial free cash and having significant cash reserves without any imminent debt maturities. As Jeff mentioned in his prepared remarks, we have a solid plan for debt reduction over the next couple of years, which will be our focus. We are considering distributing up to 50% of the variable dividend while continuing to reduce debt and maintain moderate growth, capped at 5% for oil production. If everything aligns and we are still generating additional free cash, we will certainly reassess our strategies. However, our primary focus right now is on implementing the variable dividend, being proactive in reducing debt, and taking pride in the free cash flow generated by our exceptional team and assets. So, Jeff?

Yes, Jeanine, I would add that Rick covered all the key points. If we find ourselves in that situation, we will not only reassess the upper limit of the variable dividend target, but we will also consider increasing the fixed dividend. It's important to keep it at a sustainable level in a normalized price environment. This would be another option for us, focusing on growth in the fixed dividend and evaluating the upper end of the variable as well. Additionally, we would certainly discuss buybacks with the Board if a good opportunity arises.

Thank you for the question, Jeanine. I'm really excited about the synergies as we start blending teams. This week, we are finalizing the organizational structure, and the teams have yet to connect and discuss how to share best practices. Those who have been engaged with the task have noted that some of WPX's completion techniques and efficiencies can be applied to Devon's operations. Additionally, some of the casing design and drilling efficiencies from Devon can benefit the operations on the other side of the border. There are immediate opportunities that we need to explore, and we are experimenting with them in real time. On the supply chain side, I believe Devon excels in understanding contracting strategy and has implemented innovative approaches to contracts in supply chain management. Similarly, the engineering side of WPX has done well in grasping these contracts and maximizing value. The combination of these strengths will lead to additional value, and I'm enthusiastic about the drilling and completion capital synergies that lie ahead. I'm also looking forward to the annuitized payments like LOE and GP&T, where we're beginning to see some early successes. We are making significant progress on G&A savings, which we anticipate will crystallize fully by early 2022, with visible benefits starting this year. Overall, I'm very optimistic about our direction, and we're just getting started.

Clay, I was wondering if you could elaborate on your comments regarding the aggressive flowback methodology you mentioned in the legacy Felix section of the Delaware Basin. I'm interested in your thought process there, considering you were testing a slowback strategy about a year ago. What have you discovered so far? Will this approach be applied in other areas? Also, is this strategy influenced by your outlook on absolute commodity prices or the shape of the forward curve when we consider initial production rates versus the production curve?

Thanks for the question, Brian. Yes. Certainly, all of these things are dependent on the macro environment: well cost, service cost environment, commodity price certainly plays into the overall economic decision. And that's how we make these final decisions, is how do we generate the most dollar to the bottom line. I think it's broader. As I think about what we call Monument Draw, the Felix assets, it's broader than just a more aggressive flowback. I think we tend to use a little bit of terminology that's kind of easy to convey in these calls, but it's bigger than that. We have a little different completion strategy. Spacing is incredibly important. And then also, how do we manage the facilities and the ability to flow back more aggressively? If you might recall from the Felix acquisition a year ago, we were very open to understanding their slower back strategy in how that creates incremental value. But we are also very clear, we're going to explore different options on all of these techniques to really kind of get to what is the best of. We were slowed down during 2020, as you can imagine, with the slowdown in activity. And so we've had a delayed response to the first of some of these trials. Now what I'm saying is that we are seeing incremental gains, both on the cost side of the equation and the productivity side of the equation that are yielding much better returns. And this is still very early. So if I think about absolute returns today, Monument Draw versus Stateline, Stateline's ahead. But the trajectory for Monument Draw is very, very favorable. And what I said in my prepared remarks is I fully expect it to compete head-to-head with the best of our Delaware Basin portfolio. So I'm really excited about the direction we're headed there and the work that the team's done, boots on the ground.

And your point about the facilities, does that impact at all the capital spend? Like is there any benefit of the flowback strategy beyond the initial production rate?

Yes. Again, all of that comes into play. How you design your facilities maybe for efficiency, maybe you need to scale them up; maybe you can combine with multiple wells on a pad. Those are all things. I mean, even direct flowback, straight bypassing tanks into the markets, into the oil lines, the gas lines, and to the water disposal. Those are all things that we're exploring right now to bring out those dollars, both from the capital side. And of course, you don't want to give up on the productivity side. And so we're very cognizant of that at the same time.

First of all, I want to congratulate you on fulfilling the promises related to what we call Shale 3.0. Rick, we've discussed the federal acreage issue, and you've addressed that. Using Clay's words, your focus should be on looking ahead. The regulatory environment is evolving. Are there other factors you notice, and how are you adapting the operations of the combined company to manage challenges like the DAPL issue, flaring, taxes, and similar concerns?

I would say that, as Clay mentioned, we are just starting to bring our teams together and engage in meaningful discussions about future opportunities beyond what we have already outlined from the synergies in the merger. Regarding DAPL, we ensure that we would not be hindered in any way. We have taken out a one-year rail agreement to manage a small portion of our total volumes in the Williston, which provides us with additional protection. I believe there is likely more upside ahead. The market currently seems to be focused on downside, which I think is somewhat exaggerated. When considering the efficiency of DAPL in transporting crude oil to the markets safely, efficiently, and in an environmentally friendly manner, I believe the new administration will appreciate that as well. As for flaring, we continue to work on reducing it further. The legacy Devon has done well with WPX, but we faced more challenges in the Bakken; however, we have made significant progress. The additional midstream investment planned for this year is a direct result of the excellent outcomes we achieved in the Stateline area. We encountered limitations with some of our systems, which could lead to increased flaring if not addressed. We want to proactively manage that. Nitin, you can be assured that Clay and his teams will focus intently on these matters, and you will hear more about it as we move forward. This is extremely important to us.

Great. And Rick, you always looked forward, I remember when you were at WPX, you had looked forward to the midstream issues, the basin had, and kind of planned ahead for it. The other topic is ESG, and I appreciate your comments earlier on the different pillars there. But is there an opportunity for the new Devon, given your balance sheet, given your footprint, to create any opportunity out of that? And I'm thinking about any lines of business or revenue streams down the road that you could participate in.

Nitin, our senior leadership team recently held our first combined strategy session to explore those opportunities. We will provide more updates on this, as we are dedicating significant time to assess the genuine opportunities and real threats related to the energy transition. We want to be deliberate and responsible with our capital and cash flows. You can expect more discussions from our team as we move forward. We are committed to being thoughtful in our approach.

Two questions, please. I think the first one is for Jeff and Rick, and the second one is probably for Clay. Historically, the E&P sector, the balance sheet is weak, and they spend too much money. So everyone is evolving with a lot of hedging. As Devon today, with a much stronger balance sheet, much larger scale, and a very low breakeven requirement, do we really need to have the hedging program? I mean, long term, this doesn't really create value since no one can predict the future. And yet if you want a re-rating from the long-only accounts, could it be possible that by not having the hedging, it will simplify and make it easier for the long-only account to understand and analyze the company and make it easier for them to invest? So that's the first question. The second question relates to the Powder River Basin, that for this year, you are looking at appraisal and derisking. So Clay, can you maybe share with us what the timeline and what type of program we could see for the Powder River Basin and in the Niobrara over the next, say, 3 to 4 years?

Paul, this is Jeff. I'll address your first question regarding hedging. Our perspective has remained consistent; we believe it's crucial to utilize both the balance sheet and our hedging strategy to uphold our financial strength. It's essential for our investors to reduce the cash flow volatility we experience from quarter to quarter and year to year. This stability enables us to effectively plan and manage our operations while maintaining a steady level of activity, which is vital for our daily business operations. Currently, we aim to hedge about 50% of our cash flows in a given year. Right now, we are just below 50% for oil and slightly over 50% for natural gas in 2021. Looking ahead to 2022, we have some hedges in place, but only about 15% of our position is hedged for both commodities at this time. As usual, we employ a systematic approach to the market on a monthly basis to layer in hedges and supplement that with our discretionary program as market opportunities arise. We plan to continue with this strategy in the foreseeable future. While rising commodity prices are advantageous, we prioritize minimizing cash flow volatility moving forward.

Yes. Paul, I'll take your second question regarding the Powder River. What I could tell you is I've personally worked the Powder, worked at Eagle Ford, worked the Anadarko Basin over the years. And what I'm very strongly trying to do with a lot of discipline is not let my view from 10 or 15 or 20 years ago overshadow what's the current state of what's going on. What we have right now is such an incredible opportunity. We're going to have fresh eyes on all of these assets. And so to really take a fresh look at what's the opportunity ahead, how do we fund that, how do we maximize the value to shareholders with this incredible footprint, and know that we're a 0% to 5% growth company, we are cash flow generators, and that is kind of the overall structure and drive of the organization. So I would say it's a little early. My views are a little bit dated. And that team, I think, has a lot of opportunity ahead. And the doors are wide open to whatever we see as the most viable economics for our disciplined capital allocation program.

Great job so far, Rick. Clay, regarding Slide 14 and the significant acreage, could you discuss how you plan to approach this not just for this year, but in your 2 to 3-year outlook?

Yes. Neal, I want to refer back to what I said to Paul earlier. It's challenging to predict what will happen in 2 to 3 years. I want to avoid letting my biases influence my perspective. I have a much better understanding of the south side of the acreage compared to the north side. We have new teams working on the north side. On the south side, our teams are collaborating to share best practices. The key takeaway for investors is that we have significant flexibility. I fully expect, as we've indicated, that the initial guidance will allocate 80% of our capital, fairly evenly divided between the north and south sides of the border. However, I believe that by the end of the year, we will start to see different economic opportunities that could shift resources either north or south, but I can't predict today which options will be more favorable. It would be presumptuous for me to do so. I'm looking forward to our teams delving deeper into this. We have great flexibility and options, and we'll utilize that effectively without bias. Thank you for the question.

Yes, I have one last follow-up. I'm trying to recall the WPS deal from a year or two ago regarding key right of ways. I believe there may be ongoing potential with the new administration's initiatives. Can you discuss your and Rick's thoughts not only on infrastructure but also on your access to right-of-ways moving forward?

Yes, Neal, what you're referring to is our surface acreage acquisition. A couple of years ago, we completed a $100 million deal where we acquired a substantial amount of land beneath our most promising subsurface acreage. The rationale was to ensure we retained the flexibility to fully develop this asset. We understood that a third party could potentially constrain us on the surface level. This operation is exceptionally well-structured with regard to roads, pipelines, and electrical infrastructure. Moving forward, regardless of how we choose to utilize this resource, I can assure you that our $100 million investment has been immensely beneficial. We are very satisfied with the outcome, although I must mention that opportunities like this are rare. Stateline is a distinctive continuous block of about 50,000 to 60,000 acres. It was indeed a unique situation. However, as individual opportunities arise, we will continue to assess them and ensure we act responsibly in managing the shareholders' investment.

Neal, this is Rick. As you remember, we had some inquiries about why we wanted to lead in on that $100 million investment when our capital was limited. This decision aligns with our strategy to proactively address potential future challenges. You can expect to see us continue with this approach. We understand that we might face questions regarding the clarity of some of our capital allocations, but we believe we have built a solid reputation for being prudent with our capital expenditures.

All right. Well, I see that we're at the top of the hour. I appreciate everyone's interest in Devon today. If you have any further questions, please don't hesitate to reach out to a member of the Investor Relations team at any time. Have a good day.

Thank you very much.