Devon Energy Corp (DVN) — Q2 2021 Earnings Call Transcript

Good morning, and thank you to everyone for joining us on the call today. Last night, we issued an earnings release and presentation that cover our results for the quarter and our forward-looking outlook. Throughout the call today, we will 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. Comments today will contain plans, forecasts, estimates, and 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. We sincerely appreciate everyone taking the time to join us this morning on the webcast. Devon's second quarter can best be defined as one of comprehensive execution across every element of our disciplined strategy that resulted in expanded margins, growth in free cash flow, and the return of significant value to our shareholders through higher dividends and the reduction of debt. Following our transformative merger that closed earlier this year, I'm very pleased with the progress the team has made, and our second quarter results demonstrate the impressive momentum our business has quickly established. Even today, as we celebrate Devon's 50th anniversary as a company this year, we're only getting started, and our talented team is eager, energized, and extremely motivated to win. As investors seek exposure to commodity-oriented names, it is important to recognize that Devon is a premier energy company and a must-own name in this space. We have the right mix of assets, proven management, financial strength, and a shareholder-friendly business model designed to lead the energy industry in capital discipline and dividends. Now turning to Slide 4. The power of Devon's portfolio was showcased by our second quarter results as we continue to deliver on exactly what we promised to do both operationally and financially. Efficiencies drove capital spending 9% below guidance. Strong well productivity resulted in production volumes above our midpoint. The capture of merger-related synergies drove sharp declines in corporate costs. These efforts translated into a sixfold increase in free cash flow from just a quarter ago. And with this excess cash, we increased our dividend payout by 44% and we retired $710 million of low premium debt in the quarter. Now, Jeff will cover the return of capital to shareholders in more detail later, but investors should take note, this systematic return of value to the shareholders is a clear differentiator for Devon. Now moving to Slide 5. While I'm very pleased with the results our team has delivered year-to-date, the setup for the second half of the year is even better with our operations scale that generates increasing amounts of free cash flow. This improved outlook is summarized in a white box at the top left of this slide. With the trifecta of an improving production profile, lower capital, and reduced corporate cost, Devon is positioned to deliver an annualized free cash flow yield in the second half of the year of approximately 20% at today's pricing. I believe it is of utmost importance to reiterate that even with this outstanding free cash flow outlook, there is no change to our capital plan this year. Turning your attention to Slide 7. Now with this powerful stream of free cash flow, our dividend policy provides us the flexibility to return even more cash to shareholders than any company in the entire S&P 500 Index. To demonstrate this point, we've included a simple comparison of our annualized dividend yield in the second half of 2021, assuming a 50% variable dividend payout. Now as you can see, Devon's implied dividend yield is not only best-in-class in the E&P space, but we also possess the top rank yield in the entire S&P 500 Index by a wide margin. In fact, at today's pricing, our yield is more than seven times higher than the average company that is represented in the S&P 500 Index. Furthermore, our dividend is comfortably funded within free cash flow and is accompanied by a strong balance sheet that is projected to have a leverage ratio of less than 1 turn by year-end. Investors need to take notice, Devon offers a truly unique investment opportunity for the near 0 interest rate world that we live in today. Now looking beyond Devon to the broader E&P space, I'm also encouraged this earnings season by the announcement from Pioneer on their variable dividend implementation as well as a growing number of other peers who have elected to prioritize higher dividend payouts. These disciplined actions will further enhance the investment thesis for our industry, paving the way for higher fund flows as investors rediscover the attractive value proposition of the E&P space. Now moving to Slide 10. While the remainder of 2021 is going to be outstanding for Devon, simply put, the investment thesis only gets stronger as I look ahead to next year. We should have one of the most advantaged cash flow growth outlooks in the industry as we capture the full benefit of merger-related cost synergies, restructuring expenses roll off, and our hedge book vastly improves. At today's prices, these structural tailwinds could result in more than $1 billion of incremental cash flow in 2022. To put it in perspective, this incremental cash flow would represent cash flow per share growth of more than 20% year-over-year if you held all other factors constant. Now while it's still too early to provide formal production and capital targets for next year, there will be no shift to our strategy. We will continue to execute on our financially driven model that prioritizes free cash flow generation. Given the transparent framework that underpins our capital allocation, our behavior will be very predictable as we continue to limit reinvestment rates and drive per share growth through margin expansion and cost reductions. We have no intention of adding incremental barrels into the market until demand side fundamentals sustainably recover and it becomes evident that OPEC+ spare oil capacity is effectively absorbed by the world markets. The bottom line is we are unwavering in our commitment to lead the industry with disciplined capital allocation and higher dividends. And with that, I will now turn the call over to Clay to cover some of the great operational results we delivered in the past quarter.

Thank you, Rick, and good morning, everyone. As Rick mentioned from an operational standpoint, Devon is achieving remarkable results. Our Q2 outcomes show the strong operational momentum we've built, the strength of Devon's asset portfolio, and the caliber of our team responsible for these outcomes. I want to take a moment to commend the entire Devon team for their exceptional work navigating the challenges posed by the pandemic and the merger, all while not just maintaining stability but also reevaluating our processes to improve them. We have made significant strides in developing our future strategy, execution plan, and corporate culture, and I foresee many more notable achievements ahead. Focusing on our progress, I am confident we are on track to meet our capital goals for 2021. The impressive operational achievements in the second quarter support my optimism regarding our 2021 program. With efforts centered on low-risk development, we managed to keep capital spending below plan by 9%, thanks to strong productivity in the Delaware Basin, which boosted oil volumes beyond expectations, and improved operational synergies that lowered operating costs. Although we have seen great operating results so far this year, the outlook for the rest of the year remains equally promising, as we put our asset quality, operational execution, and corporate cost structure to the test, leading to sustainable reinvestment rates, stable production, and significant free cash flow. This is exactly what we are achieving at Devon. We plan to keep 16 rigs operating for the rest of the year and aim to bring approximately 150 new wells online in the latter half of 2021. Now, let's discuss our exceptional Delaware Basin asset, which is the backbone of Devon's operational success. In the last quarter, our capital program involved 13 operated rigs and 4 dedicated frac crews, resulting in 88 newly producing wells. This level of activity was concentrated around the New Mexico and Texas border, representing about 80% of our total capital investment during the quarter. Consequently, the high-margin oil production from the Delaware Basin is advancing rapidly, with a year-over-year growth of 22%. Strong performance across our acreage was bolstered significantly by several large pads within our Stateline and Cotton Draw areas, generating over 30 new wells during the quarter. This activity mainly focused on development in the Upper Wolfcamp, along with successful co-development of multiple targets in the Bone Spring region in Stateline. The initial 30-day production rates from Stateline and Cotton Draw averaged over 3,300 BOE per day, with anticipated recoveries set to exceed 1.5 million barrels of oil equivalent. With drilling and completion costs nearly $1 million under predrill forecasts, our projected returns at Cotton Draw and Stateline could approach 200% based on current pricing. While precise estimates can be challenging to provide at this early stage, I can confidently say these investments are remarkable and will bring substantial value to Devon's bottom line and, ultimately, to our shareholders through our cash return model. Finally, I want to highlight the recent success of our Bone Spring appraisal in the Potato Basin with the 3-well Yukon Gold project. Traditionally, we have focused on the Wolfcamp formation in this region, and Yukon marks our first operated test of the second Bone Spring interval here. Given the strong results from Yukon and additional well control from non-operated activities, this will become a new landing zone in our Delaware Basin capital allocation mix moving forward. Moving on, another significant highlight from our Delaware Basin efforts was the improvement in operational efficiencies and the margin expansion we achieved last quarter. Our drilling and completion costs have improved to $543 per lateral foot, a decline of over 40% from just a few years ago. The team set records for drilling times in both Bone Spring and Wolfcamp formations, with our best wells achieving spud release times of less than 12 days. Completions also improved to nearly 2,000 feet per day during the quarter. I applaud the team for this achievement, and I expect these enhanced cycle times will positively impact our results for the second half of the year. Additionally, we have made strides in capturing operational cost synergies. Following strong results in the second quarter, our lease operating expenses and general, administrative, and transportation costs saw a 7% improvement year-over-year. This achievement stemmed from adopting the best and most cost-effective practices from our legacy companies and leveraging our enhanced purchasing power in the Delaware to significantly lower expenses across various categories, including chemicals, water disposal, compression, and contract labor. These cost reductions were achieved while maintaining strong safety performance and making meaningful environmental improvements year-over-year. The cumulative effect of Devon's solid operational performance has led to significant margin expansion compared to both last quarter and year-over-year. Importantly, our Delaware Basin operations are well-positioned for this positive trend to continue throughout the rest of the year and beyond. While the Delaware Basin serves as the growth engine for our company, we also possess several high-quality assets in the U.S. oil fairway that produce considerable free cash flow. Although these assets may not always make headlines, they play a critical role in our sustainable free cash flow strategy. In the Delaware Basin, cash flow nearly doubled this quarter due to strong performance in natural gas and NGLs. Our Dow joint venture is progressing well, and we will soon bring our first pad of new wells online. The Williston Basin continues to provide impressive returns, and at current pricing, it is expected to generate nearly $700 million in free cash flow for the year. In the Eagle Ford, we have regained momentum with 21 wells brought online so far this year, leading to a 20% increase in second-quarter volumes. In the Powder River, we remain optimistic about ongoing industry activity and our strategy for maximizing value from this asset. Our team is innovative and commercially aware, bringing new perspectives to this extensive oil-rich acreage. Overall, we had another solid quarter of execution, and all asset teams did an excellent job delivering amidst our diversified portfolio. Lastly, I want to conclude my remarks with thoughts on the environmental targets we recently announced. The Devon team takes great pride in providing affordable and reliable energy that fuels every industry and enhances the quality of life we enjoy today. We firmly believe that alongside meeting the increasing global demand for energy, we must also deliver our products in an environmentally responsible and commercially sustainable manner. As outlined in our goals, we commit to leading the industry by aiming to cut greenhouse gas emissions by 50% by 2030 and achieving net zero emissions for Scope 1 and 2 by 2050. A crucial aspect of this strategy is to lower our methane emissions intensity by 65% by 2030, using 2019 as a baseline. This emissions reduction goal will involve various innovations, including advanced remote leak detection technologies and our latest low-emission facilities in the Delaware Basin. We aim to work collaboratively with upstream and downstream partners to enhance our environmental performance along the entire value chain. Although this is a journey rather than a destination, environmental excellence is fundamental to Devon. Now, I will turn the call over to Jeff for the financial review.

Thanks, Clay. My comments today will be focused on our financial results for the quarter and the next steps in the execution of our financial strategy. A great place to start today is with a review of Devon's strong financial performance in the second quarter, where we achieved significant growth in both operating cash flow and free cash flow. Operating cash flow reached $1.1 billion, an 85% increase compared to the first quarter of this year. This level of cash flow generation comfortably exceeded our capital spending requirements, resulting in free cash flow of $589 million for the quarter. As described earlier by Rick and Clay, our improving capital efficiency and cost control drove these outstanding results, along with the improved commodity prices realized in the second quarter. Overall, it was a great quarter for Devon, and these results showcased the power of our financially driven business model. Turning your attention to Slide 6. With the free cash flow generated in the quarter, we're proud to deliver on our commitment to higher cash returns through our fixed plus variable dividend framework. Our dividend framework is foundational to our capital allocation process, providing us the flexibility to return cash to shareholders across a variety of market conditions. With this differentiated framework, we've returned more than $400 million of cash to our shareholders in the first half of the year, which exceeds the entire payout from all of last year. The second half of this year is shaping up to be even more impressive. This is evidenced by the announcement last night that our dividend payable on September 30 was raised for the third consecutive quarter to $0.49 per share. This dividend represents a 44% increase versus last quarter and is more than a fourfold increase compared to the period a year ago. On Slide 8, in addition to higher dividends, another way we have returned value to shareholders is through our recent efforts to reduce debt and enhance our investment-grade financial strength. In the second quarter, we retired $710 million of debt, bringing our total debt retired year-to-date to over $1.2 billion. With this disciplined management of our balance sheet, we're well on our way to reaching our net debt-to-EBITDA leverage target of 1 turn or less by year-end. Our low leverage is also complemented by a liquidity position of $4.5 billion and a debt profile with no near-term maturities. This balance sheet strength is absolutely a competitive advantage for Devon that lowers our cost of capital and optimizes our financial flexibility through the commodity cycle. Looking ahead to the second half of the year, with the increasing amounts of free cash flow our business is projected to generate, we'll continue to systematically return value to our shareholders through both higher dividend payouts and by further deleveraging our investment-grade balance sheet. As always, the first call in our free cash flow is to fully fund our fixed dividend of $0.11 per share. After funding the fixed dividend, up to 50% of the excess free cash flow in any given quarter will be allocated to our variable dividend. The other half of our excess free cash flow will be allocated to improving our balance sheet and reducing our net debt. Once we achieve our leverage target later this year, this tranche of excess free cash flow that was previously reserved for balance sheet improvement has the potential to be reallocated to higher dividend payouts or opportunistic share buybacks should our shares remain undervalued relative to peers in the broader market. So in summary, our financial strategy is working well. We have excellent liquidity and our business is generating substantial free cash flow. The go-forward business will have an ultra-low leverage ratio of a turn or less by year-end, and we're positioned to substantially grow our dividend payout over the rest of the year. With that, I'll now turn the call back over to Rick for some closing comments.

Thank you, Jeff. Great job. I would like to close today by reiterating a few key thoughts. Devon is a premier energy company, and we are proving this with our consistent results. Our unique business model is designed to reward shareholders with higher dividend payouts. This is resulting in a dividend yield that's the highest in the entire S&P 500 Index. Our generous payout is funded entirely from free cash flow and backstopped by an investment-grade balance sheet. And our financial outlook only improves as I look to the remainder of this year and into 2022. With the increasing amounts of free cash flow generated, we're committed to doing exactly what we promised, and that is to lead the industry in capital discipline and dividends. And with that, I will now turn the call back over to Scott for Q&A.

Thanks, Rick. We'll now open the call to Q&A.

This is John Abbott for Doug Leggate. Our first question is on M&A. There has been some recent press speculation out there that you are the potential bidder in a process. Now recognizing that you probably won't comment on any ongoing potential transaction, could you just sort of discuss in general what you would see as the benefits to Devon of a large-scale acquisition given the running room that you already have from legacy Devon and from WPX?

Thank you for the question, John. It's a fantastic inquiry and provides great insight. Fundamentally, we maintain a very high standard, and our business is thriving post-merger. When we assess opportunities, whether buying or selling, they must be immediately beneficial and backed by strong industrial reasoning. We strive to communicate this clearly; any potential acquisition must align with our investment strategy and enhance our position. It's crucial for us that anything under consideration strengthens our outlook. If we maintain our current volume levels, we expect to generate an additional $1 billion in cash flow next year, translating to a 20% growth in cash flow per share from 2022 to 2021. That perspective hasn’t changed. We have an excellent inventory and a strong business, and we remain disciplined in our approach to any activities we undertake.

Appreciate it. And then for our follow-up question here, it's on your hedging strategy going forward here. I mean you've historically had a systematic component to your hedging strategy. How are you thinking about hedging going forward from here?

I'm going to have Jeff answer that. Go ahead, Jeff.

Yes, this is Jeff. Yes, happy to provide some color on that. As you probably saw in our prepared materials and what we disclosed last night, we've not added any material incremental hedges since our last call, since last quarter. Going forward, we don't expect that to change. Given where we are in the cycle, given where we are with our business, the balance sheet, the great shape that we have the balance sheet in, the low reinvestment ratios that we've talked about, which we expect to continue going forward, and frankly, just the low-cost structure and breakevens that we have, it's created a margin of safety for us in our business that allows us to be less aggressive on the hedging front. And so we really don't feel the need to add any incremental hedges at this point in time. We'll obviously monitor that, and we certainly talk about it and debate it on a weekly basis here within the walls of Devon and could certainly change our view at some point in the future. But where we sit today, given the strength of our business and projected business and the balance sheet, we really don't feel like we need to add any incremental hedges in the near term.

Jeff, it sounds like from your prepared comments raising the 50% excess free cash flow payout cap may be considered at some point, given the leverage and maturity schedule outlook here. You mentioned it, but share repurchases are still listed at the bottom of your free cash flow priority slide in the appendix. Has that repurchase appetite changed much at all on the margin given the recent equity performance versus commodity price and Devon's forward yield on offer? And if you were to consider repurchases, do you anticipate that being more systematic or opportunistic?

Yes, Brian, I appreciate the question. I would say the share repurchases is certainly moving up the list of options for us, potential options for us as we move through the back half of this year. I talked about it in my prepared remarks, and we've talked about it for a couple of quarters now. Our first focus is on reaching our leverage target, which you all have heard me speak to in the past. We really think about that on a $55 oil price. And so if you do the math on $55 oil, in our current oil production, you get to somewhere around $4 billion, $4.8 billion, $4.5 billion, $4.8 billion EBITDA. We currently have $6.5 billion of gross debt, cash balance of $1.5 billion. We need a couple of hundred million more dollars of cash to get us to that net debt of kind of a 1x ratio. I really expect that's going to happen in this quarter. And as I mentioned in our prepared remarks, that puts us in a position to think about other ways to return more of that excess free cash flow to shareholders. And so things on the table are absolutely an increase in the variable dividend percentage. We're going to maintain the framework that we've outlined and don't expect that to change going into the future, but we could absolutely supplement it with some incremental variable dividends and potentially some incremental share repurchases. I think the other thing we'll look at as we get further into the year and probably into 2022 is the potential to increase the fixed dividend as well. So those are all the things that we'll be considering with our Board as we move into the back half of this year.

Great. And then maybe one for Clay. Clay, in the Anadarko Basin, you mentioned bringing online a half dozen or so legacy Meramec DUCs. Anything you're seeing from those production results, completion costs, or early days of the drilling JV that maybe changes your view of Anadarko returns or how it ultimately fits within the portfolio?

Yes, Brian, I'm quite optimistic about the Anadarko Basin, and I have been for some time. I believe it is generally undervalued. However, it's quite challenging to integrate it into our investment portfolio. I think the team is taking the right steps with the joint venture we entered into and the promoted funding we have, which enhances the competitiveness of our investments. We're also modernizing our assessment of current well costs, completion designs, and the results we are achieving. It's still early in the process for well results, but I'm very encouraged. The Miller pad, which we're bringing online this quarter, is the first one we've drilled this year, and it’s very exciting. I'm looking forward to the opportunities in both the Woodford and Meramec areas. The well costs are impressive, and as you know, every dollar saved on well costs translates directly to present value. We're taking a comprehensive view and anticipate more positive results from our team.

Rick, I want to have Jeff weigh in and help me on fielding the question, and appreciate them. Yes, I think Delaware is going to continue to be the workhorse in our portfolio. I don't see that changing. As Clay just talked about, we've got some great investment opportunities in our other basins. But the reality is the Delaware is really, really hard to compete with internally. And so you'll continue to see the lion's share of our capital program being allocated to the Delaware Basin. I don't see that really changing anytime in the near future. So Jeff, you maybe want to talk about commodity price assumptions that we have?

Yes, I appreciate the question. We analyze various sensitivities and assess different scenarios and potential price levels that could affect us. Fundamentally, we see $55 oil as a normalized price and aim to manage our business accordingly. With our low breakeven point, we can achieve all of our financial objectives, even at $55 oil. We believe we are in a strong position. However, we do consider both higher and lower price scenarios as we go through our budgeting process with our Board.

Great. And my follow-up, you were 9% below expectations on capital spending in the second quarter. We're expecting an improvement through the rest of the year, but you left the capital budget for 2021 unchanged. If I could, is that a function of any inflation that you're seeing? Or could you just help us understand the math there?

Yes, thanks. This is Clay. I'll respond to that, Nitin. I think we've established a clear direction for our capital. We're still operating well within our planned activity levels and have even managed to speed things up a bit by drilling faster. We will not reduce the number of rigs or balance our activity because of that. This means we will likely see a bit more natural activity in the fourth quarter. However, I believe we still have a strong outlook ahead. There will be some ongoing improvements, but I also expect some inflationary pressures to start becoming noticeable. Overall, I still feel optimistic about sticking to our capital plan for 2021, and we will evaluate how the team performs throughout the year.

Yes, absolutely, Neil. That's exactly right. I mean given the strength that we've seen in pricing thus far. And as Clay mentioned earlier, the capital efficiencies that we've seen and continued cost reductions, you marry that with the fact that we've got incremental hedges rolling off into the third and fourth quarter. All those are going to be tailwinds to our free cash flow in the quarter. And my absolute expectation is to see a higher variable dividend in the third quarter on a relative basis.

Neil, this is Rick. I'll augment that a little bit. I think we need to just remind everyone that we were about 50% hedged on crude this year, but the profile of that is about 60% first half, 40% in the second half. And currently, we're about 20% hedged as we look into '22.

That's great, Rick. As a follow-up, regarding the payout, which is currently at 50%, it seems you believe there is a way to increase that. Could you discuss the milestones we should monitor to determine when we might consider raising the payout ratio from 50% to a higher level, and what your ideal payout ratio could potentially look like?

Yes. No, this is Jeff again. Again, as I mentioned earlier, that's something we're absolutely going to debate and talk about with the Board as we move into the third and fourth quarter. Again, I want to reiterate, we want to make sure we get to our debt target that I mentioned earlier, that 1x turn, which I fully expect, given where prices are, we'll accomplish that here in the third quarter. But as we move into our discussions into the fall with our Board around the budget for 2022 and the potential outcome around share repurchases, the fixed dividend and incremental variable dividends on top of the 50%, I think those are all things we'll talk about here over the next, call it, three months and would expect to give you all more color as we move through the year.

This one might be for Clay. Just wondering if you could talk about some of the strong results you're seeing in the Bone Spring around Stateline and how that may impact your future inventory and development plans going forward?

Yes, thank you for the question, Matt. It's really exciting. The initial acquisition was primarily focused on the Wolfcamp A, and while we anticipated some additional potential, it was mainly concerning the Greater or Upper Wolfcamp landing zones. That has been remarkable. The real advantage lies in discovering additional landing zones essentially at no extra cost, which was a key factor for our initial investment in the Delaware. As I mentioned earlier, the ongoing benefits we are receiving from this are noteworthy. We saw opportunities in the second Bone and had drilled some initial wells. As we've improved our understanding of the petrophysics and pinpointed the correct landing zones, we've been very encouraged, identifying at least three or perhaps four landing zones in the Bone Spring. Our main challenge has been determining the proper lateral and vertical spacing and understanding how much of this is in hydraulic communication. We are beginning to address that and are progressing toward the development phase, which presents significant potential given the rich infrastructure available. This infrastructure includes our ownership of electrical systems, water disposal setups, and our partnership with Howard Energy, which enhances our overall benefits. Additionally, we acquired 15,000 surface acres across this area. Therefore, as we continue to explore and identify new opportunities right beneath us, this represents some of the most valuable growth for the organization, without a doubt.

That's great. And then maybe just another follow-up on the operational side. The WPX team was working to widen spacing designs in parts of the Delaware before the merger with Devon. I guess, with both of the teams now combined, could you talk about what you've learned so far from a completion and spacing optimization perspective and how that might influence your results moving forward?

This is one of the hidden advantages of our synergies. We can quantify many aspects and we have set a target of $600 million, which I am quite confident we will achieve by year-end. These situations are inherently synergistic, as two highly capable teams that have been addressing this issue separately can now collaborate, exchange data, share resources, and learn from each other's experiences, both successes and setbacks. While we may not have made significant progress in any single area of spacing, it's noteworthy to see ongoing advancements on the cost side. We're drilling wells in just 12 days with 2-mile laterals in some challenging locations, which is outstanding and greatly enhances the economic efficiency. The key factors for these wells to excel will be well placement, stimulation design, and other related attributes. We're experimenting with various approaches in this area, but it's too soon to establish a consistent strategy across the entire Delaware Basin. I suspect we will ultimately have multiple strategies tailored for different regions. We are continually learning, exploring new technologies, and concurrently making progress on our environmental, social, and governance efforts. I'm pleased to note that this is another hidden advantage of our synergies, as we are making significant advancements in this area as well.

Two questions that's kind of both been asked, I want to ask in different ways. Maybe, Rick, first for you, just first question is maybe on free cash flow allocation. I guess my question around that is, obviously, you're doing a great job on the variable dividend than the first out of the gate. But I'm just wondering, one, do you think you're being appropriately rewarded for that variable and just the total bills in general? And to me, kind of combined with that, what appears to be your stock trading at a discount to NAV, maybe why not do some more buybacks near term given that discount?

Yes, Neal, that's a topic we often discuss internally, and I'm not sure we've reached a conclusion on it yet. There seems to be a concern regarding the consistency of the variable dividend, especially when we see solid dividends quarter after quarter. I'm encouraged by the actions of some of our industry peers. Devon is not just an isolated case; it's part of a broader trend in our sector aimed at returning more cash to shareholders, which is a positive development. From this viewpoint, I believe we will start to see improved equity performance. However, if that doesn't happen, the conversation about share repurchases gains importance, and it's great to have that option. You heard Jeff mention the ability to increase the variable dividend with stronger cash flows, and from an opportunistic perspective, we also have the capacity to repurchase equity. Additionally, when we consider capital allocation, we're thinking more long-term. We don't have any immediate debt maturities, though there are a couple of hundred million due in 2023 and an additional $800 million of callable debt within the next 24 months. So, we have flexibility. That’s what I appreciate about our portfolio and strategy—having options and a robust balance sheet. I believe this will contribute to a compelling narrative in the coming years, and I'm very satisfied with how everything has aligned since the merger. In summary, if our equity doesn't perform as we believe it should, it will lead to a meaningful discussion with our Board, and I think they would be very supportive of us considering opportunistic share repurchases.

Jeff, could you provide some color on the environmental targets Devon recently released and how you're tracking towards those in the near term?

Thanks. I appreciate the question. I think it was very important to us not to just set a very long-range target and say, trust us, we'll get there. So we said intermediate kind of ranges goals as well. And so we have intermediate steps around 2025 and 2030 that are peppered throughout the document. And I can tell you we're well on our way. I mean just to point to some of the areas I think about one of the most important is around greenhouse gas emissions. And I think of the Southern Delaware, which is the legacy WPX asset, we were about 5% a couple of years ago. We averaged about 2.5% last year. State-of-the-art today, last probably quarter, we are somewhere between 1% and 1.5%. And so that's very encouraging. There's a lot of meat on that bone, because when you compare it to the legacy Devon asset, just across the border, they've been running about 0.5%. And so we see line of sight to where that Southern Delaware needs to go. We just need to do a little bit more work on some of the infrastructure, some of the cultural mindset about how we flow back what we're going to do, flow back and build the infrastructure and how we manage the wells themselves. I think about the other areas, both South Texas and Mid-Continent are phenomenal in that regard. Powder is a little bit more challenged. The big challenge is the Williston. And for all the Williston players, you hear the same story. It is a real challenging infrastructure asset. That has continued to be the case. I can tell you we are pushing really, really hard on that. We've dropped the emissions by about 1/3 over the last year, but it's still nothing to brag about, okay? It's still about a 10% number, which we need to continually improve on. We're investing in that. We're leveraging all of the relationships we have to continue to drive that down. And we will achieve our '25 and '30 targets as we've set out, but there's a lot of work to do between now and then.

Jeff, in terms of the cash tax paying, if that trajectory has been changed from what you have said in the past?

Yes, Paul, I understand your question. In brief, there has been no significant change from what we discussed in the last call. As a reminder, we expect to have over $3 billion in federal net operating losses as we move into next year. This places us in a favorable position to avoid paying taxes in the near future. Of course, as you pointed out, fluctuations in prices can greatly affect this situation. Nonetheless, considering our current net operating loss status and forecasts, we do not anticipate being a significant cash taxpayer for several years, even with higher prices. This remains consistent with our previous communications. We are also assessing the broader economic environment concerning our tax situation and any potential changes from the administration regarding intangible drilling costs or other factors related to our tax calculations. However, we still lack clarity on the administration's direction in this area. We are continuously analyzing sensitivities and potential outcomes. With our current tax attributes, we are confident that tax liabilities will not negatively impact our free cash flow for several years.

Yes, Paul, I'll pick up. This is Clay on the inflation question. Was there something else first?

Yes. And then how about the earnout accounting, given your commodity prices that you should be able to get some money from the earnout?

Paul, I believe you are inquiring about the contingent payments related to our Barnett transaction. Yes, that's correct. One thing you might have noticed this quarter is that we adjusted our expectations due to the higher prices. Looking at 2021 results and the prices we've encountered so far, we anticipate receiving a contingent payment from our Barnett transaction, likely around $40 million. This would provide us with additional cash as a result of that deal.

And does you have any P&L impact?

P&L impact? Yes. No, we've adjusted that contingent payment in our results for the second quarter, so you shouldn't see a big impact going forward.

And Paul, it's Clay. I'll pick up on your original question 2 around inflation. My belief is inflation is real. I appreciate the Fed Chairman saying there's some transitory things happening in the macro sense. But I think you go anywhere, talk to any business owner, and there are struggles to get employees and things working, even trying to buy relatively routine things. So I think there's one level of inflation kind of in a macro sense. And then specific to our industry, higher commodity price obviously is driving some increase in activity. The question I have, and I think is still yet to prove out is the historical correlation between commodity price and rig activity is disconnected. And that's a good thing from the sense of our industry discipline. And so I think what we need to do is not necessarily focus on the commodity price, but it's more of the resulting activity. Certainly, some of the private folks have picked up more rigs differentially relative to the larger publics. I think as the larger publics continue to hold the line on disciplined cash flow returning sustainability in that regard, I think we'll continue to see moderate growth on activity. So what that means to us is summing those 2 things up, certainly, we will see some inflation. We're seeing it now. We have certainly baked that into our '21 expectations guidance. I have a lot of confidence in, again, being able to meet our guidance for the balance of the year. As we start to look forward and really try to hone in on '22, I think there's still some questions out there. Clearly, we expect to see some inflation. I'm not ready to prepare and put a number on it today. We're just starting our really deep conversations in a long-term sense with the Board as we work through capital investment levels, some of the things we've talked about on this call, and certainly an incredibly important part of that math is inflation. So we see it coming. We're prepared for it. We're working to mitigate it as best we can. We believe our relationships and the partnership that we can offer from a very consistent and robust program with a company that does what it says it's going to do, I think, offers a lot of value to our service company partners. And end of the day, we will see some higher costs, but not prepared to really point to a number just yet.

Yes, no, it's very appreciated. And just a quick last question here. Clay, I think you kind of alluded to this already, but obviously, with your greater efficiencies and you guys continue to outperform, I guess, even your expectations on your quarterly production guidance and look on pace to be there for the full year. It doesn't sound at least like this year, you're going to probably taper activity much. Is that sort of the concept that we should think about as we think about 2022, if you guys are still running a little bit more efficient. You're going to kind of maintain that activity and maybe grow into that 5%, I guess, kind of cap rate that you have out there?

Yes.

Alright. Looks like we're at the end of our time slot today. We appreciate everyone's interest in Devon. And if you have any further questions, please don't hesitate to reach out to the Investor Relations team at any time. Have a good day.