Devon Energy Corp (DVN) — Q3 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 to 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 members of our senior management team. 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. Great to be here this morning. We appreciate everyone taking the time to join us on the call today. Devon's third quarter results were outstanding, once again showcasing the power of our Delaware-focused asset portfolio and the benefits of a financially driven business model. Our team's unwavering focus on operational excellence has established impressive momentum that has allowed us to capture efficiencies, accelerate free cash flow, reduce leverage, and return a market-leading amount of cash to shareholders. Simply put, we are delivering on exactly what our shareholder-friendly business model was designed for, and that is to lead the energy industry in capital discipline and cash returns. Now, moving to Slide 4, while our strategy is a clear differentiator for Devon, the success of this approach is underpinned by our high-quality asset portfolio that is headlined by our world-class acreage position in the Delaware Basin. With this advantaged portfolio, we possess a multi-decade resource opportunity in the best position plays on the U.S. cost curve. With this sustainable resource base, we are positioned to win multiple ways with our balanced commodity exposure. While our production is leveraged to oil, nearly half our volumes come from natural gas and NGLs, providing us with meaningful revenue exposure to each of these valuable products. This balance and diversification are critically important to Devon's long-term success. As you can see on Slide 5, the strength of our operations and the financial benefits of our strategy were on full display with our third quarter results. This is evidenced by several noteworthy accomplishments, including, we completed another batch of excellent wells in the Delaware Basin that drove volumes 5% above our guidance. We maintained our capital allocation in a very disciplined way by limiting our reinvestment rates to only 30% of our cash flow. We're continuing to capture synergies and drive per unit costs lower. We're also achieving more than an 8-fold increase in our free cash flow. We're increasing our fixed and variable dividend payout by 71%. We're improving our financial strength by reducing net debt 16% in the quarter. Overall, it was another tremendous quarter for Devon and now I especially want to congratulate our employees and our investors for these special results. Now moving to slide 6, while 2021 is wrapping up to be a great year for Devon, the investment thesis only gets stronger as I look ahead to next year. Although we're still working to finalize the details of our 2022 plan, I want to emphasize that our strategic framework remains unchanged and we will continue to prioritize free cash flow generation over the pursuit of volume growth. As we have stated many times in the past, 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 market. With this disciplined approach and to sustain our production profile in 2022, we are directionally planning on an upstream capital program in the range of $1.9 to $2.2 billion. Importantly, with our operating efficiency gains and improved economies of scale, we can fund this program at a WTI breakeven price of around $30. This low breakeven funding level is a testament to the great work the team has done over the past few years to streamline our cost structure and optimize our capital efficiency. Being positioned as a low-cost producer provides us with a wide margin of safety to continue to execute on all facets of our cash return model. With our 2022 outlook, Devon will have one of the most advantaged cash flow growth outlooks in the industry. At today's prices, with a full benefit of the merger synergies and an improved hedge book, we're positioned for cash flow growth of more than 40% compared to 2021. As you can see on the graph, this strong outlook translates into a free cash flow yield of 18% at an $80 WTI price. The key takeaway here is that 2022 is shaping up to be an excellent year for Devon shareholders. Now jumping ahead to Slide 8, the top priority of our free cash flow is the funding of our fixed plus variable dividend. This unique dividend policy is specifically designed for our commodity driven business and provides us the flexibility to return more cash to shareholders than virtually any other opportunity in the markets today. To demonstrate this point we've included a simple comparison of our estimated dividend yield in 2022 based on our preliminary guidance. As you can see, Devon's implied dividend is not only more than double that of the energy sector, but this yield is vastly superior to every sector in the S&P 500 Index. In fact, at today's pricing, Devon's yield is more than 7 times higher than the average Company that is represented in the S&P 500 Index. Now that's truly something to think about in the yield-starved world we currently live in. Moving on to Slide 9, with our improving free cash flow outlook and strong financial position, I'm excited to announce the next step in our cash return strategy with the authorization of a $1 billion share repurchase program. This program is equivalent to approximately 4% of Devon's current market capitalization and is authorized through year-end 2022. Jeff will cover this topic in greater detail later in the call. But this opportunistic buyback is a great complement to our dividend strategy and provides us with another capital allocation tool to enhance per-share results for shareholders. Now, skipping ahead to Slide 11, and to close out my prepared remarks, I want to summarize Devon's unique investment proposition through three simple charts. Beginning on the far-left chart, our business is positioned to generate cash flow growth of more than 40% in 2022, which is vastly superior to most other opportunities in the market. As you can see in the middle chart, this strong growth translates into an 18% free cash flow yield that will be deployed to dividends, buybacks, and the continued improvement of our balance sheet. Lastly, on the far-right chart, even with all these outstanding financial attributes, we would still trade at a very attractive valuation, especially compared to the broader market indices. We believe this to be another catalyst for our share price appreciation as more and more investors discover Devon's unique investment proposition. And with that, I'll turn the call over to Clay to cover some of the great operational results we delivered in the third quarter.

Thank you, Rick. Hey, good morning everybody. In summary, Devon's third quarter impressive results were the result of tremendous execution across nearly every aspect of our business. We had wins in environmental and safety performance, operational improvements, continued cultural alignment, strong well productivity, cost control, significant margin expansion, and ultimately excellent returns on the invested capital. This recurring trend of operational excellence, while managing significant organizational change and macro stress has now been established over multiple quarters and is a testament to the Devon employees, and strong leadership throughout the organization. As I look forward to 2022 and beyond, I believe we're positioned to continue delivering, but also take our performance to an even higher level of cohesion and productivity. Providing the energy to fuel today's modern world is critically important work. I'm very proud of what we do and how we do it. As I look forward to Devon's near and long-term goals, I'm confident in our ability to deliver on society's ever-increasing expectations. Let's turn to Slide 13 and we can dig into the Delaware Basin. Devon's operational performance in the quarter was once again driven by our world-class Delaware Basin assets, where roughly 80% of our capital was deployed. With this capital investment, we continue to maintain steady activity levels by running 13 operated rigs and 4 frac crews, bringing on 52 wells during the quarter. As you can see in the bottom left of this slide, this focused development program translated into another quarter of robust volume growth and our continued cost performance allowed us to capture the full impact of the higher commodity prices. Turning your attention to the map on the right side. Our well productivity across the base continued to be outstanding in the quarter. With the results headlined by our Boundary Raider project. Some may recall that this is not the first time we've delivered on impressive results from this well pad. Back in 2018, our original Boundary Raider project developed a package of Bone Spring wells that set a record for the highest rate wells ever brought online in the Delaware Basin. Fast-forward to today, this edition of the Boundary Raider went further downhole to develop an over-pressured section in the Upper Wolfcamp. This project also delivered exceptionally high rates with our best well delivering initial 30-day production rates of 7,300 BOE per day, of which more than 60% of that was oil. I call that pretty good for a secondary target. Moving a bit east into Leake County, another result for this quarter was our Cobra project, where the team executed on a 3-mile Wolfcamp development. This part outperformed our pre-drill expectations by more than 10% with the top well achieving 30-day rates as high as 6,300 BOE per day. In addition to the strong flow rates, this activity helped us prove the economics of the Wolfcamp inventory in the area, further deepening the resource-rich opportunity we hold in the Delaware. Turning to Slide 14. With the strong operating results we delivered this quarter, high-margin oil production in the Delaware Basin continued to expand and rapidly advance, growing 39% year-over-year. Importantly, the returns on invested capital to deliver this growth were some of the highest I've seen in my career, bolstered by rising strip prices and the capital efficiency improvements we've delivered this year. These efficiencies are evidenced on the right-hand chart, where our average D&C cost improved to $554 per lateral foot in the third quarter, a decrease of 41% from just a few years ago. While we have likely found the bottom of this cycle earlier this year, the team continues to make operational breakthroughs that have thus far fought back most of the inflationary pressure. We continue to win from a fresh perspective, blending teams, and also still relatively, we're still working to get to know each other pretty early on. These accomplishments are clearly demonstrated in the great work our team has done to drive improvements across the entire planning and execution of our resources. To maintain this high level of performance into 2022, we are focused on staying ahead of the inflationary pressures that are impacting not just our industry but all aspects of the broader society. While our consistency and scale in the Delaware are a huge advantage, the supply chain team is working hard to anticipate issues, mitigate bottlenecks, and work with the asset teams to adjust plans to optimize our cost structure and future capital activity. Turning to Slide 15, another asset I'd like to put in the spotlight today is our position in the Anadarko Basin where we have a concentrated 300,000 net acre position and liquids-rich window of the play. As you may know, Rick and I both have a historical tie to this basin, and we're thrilled to see the great work that our teams are doing to unlock this value for investors. A key objective for us this year in the Anadarko Basin is to reestablish operational continuity by leveraging the drilling carry from our joint venture agreement with Dow. By way of background, in late 2019, we formed a partnership with Dow and a promoted deal, where Dow earns half of our interest on 133 undrilled locations in exchange for a $100 million drilling carry. With the benefits of this drilling carry, we're drilling around 30 wells this year and our initial wells from this activity were brought on during the quarter. The 4-well Miller project is an up-spaced Woodford development in Canadian County and is off to a great start with both D&C costs and well productivity outperforming pre-drill expectations. Initial 30-day rates averaged 2,700 BOE per day and completed well costs came in under budget at around $8 million per well. While I'm proud of how well the team hit the ground running as we get our processes lined out and efficiencies dialed in, I foresee material improvements and well costs ahead. The leverage returns from this carried activity will compete effectively for capital with any asset in our portfolio. In fact, the strength of natural gas and NGL pricing, as well as the performance we're seeing in the Anadarko Basin will likely command relatively more capital than it did in 2021. Moving to slide 16, while the Delaware Basin is clearly the growth engine of our company, and we're excited about the upside for the Anadarko, we also have several high-quality assets in the oil fairway of the U.S. that generate substantial free cash flow. While these assets don't typically grab the headlines, their strong performance is essential to the continued success of our strategy. These teams are doing great work to improve our environmental footprint, drive the capital program, optimize base production, and keep our cost structure low. As an example, Williston will generate over $700 million of free cash flow in 2021. Collectively, these assets are on pace to generate nearly $1.5 billion of free cash flow this year. Lastly, on Slide 17, with our diversified portfolio concentrated in the very best U.S. resource plays, we have a deep inventory of opportunities that underpin the long-term sustainability of our business model. As you may have heard me talk about in prior quarters, we have a brutal capital allocation process in regards to the competitiveness of how we seek the best investment mix for the company. The first step of this process is to make sure that all teams are working from the same assumptions and inputs. Since the close of our merger earlier this year, we have undertaken a very disciplined and rigorous approach to characterize risk and force-rank the opportunity set across our portfolio. This inventory disclosure is the result of that detailed subsurface work and evaluation across our portfolio that we converted into a single consolidated platform to ensure consistency. Turning your attention to the middle bar on the chart. At our current pace of activity, we possess more than a decade of low-risk and high-return inventory of what we believe to be in a mid-cycle price deck. As you would expect, about 70% of our inventory resides in the Delaware Basin, providing the depth of inventory to sustain our strong capital efficiency for many years to come. Let me be clear. In this exercise, we are focused on compiling a very important slice of our total inventory. This summary is not meant to convey the full extent of the possible within these incredible resources. These are only operated essentially all along lateral, up-spaced wells that deliver competitive returns in a $55 oil environment. Moving to the bar on the far right of the chart. We also expect inventory depth to continue to expand as we capture additional efficiencies, optimize spacing, and further delineate the rich geologic columns across our acreage footprint. We expect a significant portion of the upside opportunities to convert into our de-risk inventory over time. Examples of this upside include the massive resource potential in the Lower Wolfcamp intervals, continual appraisal success in the Powder River Basin, and the significant liquids-rich opportunity we possess in the Anadarko Basin. The bottom line here is that we have an abundance of high economic opportunities to not only sustain but grow our cash flow per share for many years to come. With that, I'll turn the call over to Jeff for the financial review.

Thanks, Clay. I'd like to spend my time today discussing the substantial progress we've made advancing our financial strategy and highlight the next steps we plan to take to increase cash returns to shareholders. A good place to start is with a review of Devon's financial performance in the third quarter, where Devon's earnings and cash flow per share growth rapidly expanded and comfortably exceeded consensus estimates. Operating cash flow for the third quarter totaled $1.6 billion, an impressive increase of 46% compared to last quarter. This level of cash flow generation comfortably funded our capital spending requirements and generated $1.1 billion of free cash flow in the quarter. This result represents the highest amount of free cash flow generation Devon has ever delivered in a single quarter and is a powerful example of the financial results our cash return business model can deliver. Turning your attention to Slide 7, with this significant stream of free cash flow, a differentiating component of our financial strategy is our ability and willingness to accelerate the return of cash to shareholders through our fixed plus variable dividend framework. This dividend strategy has been uniquely designed to provide us the flexibility to optimize the return of cash to shareholders across a variety of market conditions throughout the cycle. Under our framework, we pay a fixed dividend every quarter and evaluate a variable distribution of up to 50% of the remaining free cash flow. With the strong financial results, we delivered this quarter, the board approved a 71% increase in our dividend payout versus last quarter to $0.84 per share. This is the fourth quarter in a row we have increased the dividend, and is by far the highest quarterly dividend payout in Devon's 50-year history. As you can see on the bar chart to the left, at current market prices, we expect our dividend growth story to only strengthen in 2022. In fact, at today's pricing, we are on pace to nearly double our dividend next year. Moving to Slide 10, in addition to higher dividends, we've also returned value to shareholders through our efforts to reduce debt and improve our balance sheet. So far this year, we've made significant progress towards this initiative by retiring over $1.2 billion of outstanding notes. In conjunction with this absolute debt reduction, we've also added to our liquidity building a $2.3 billion cash balance at quarter end. With this substantial cash build and reduction in debt, we've reached our net debt to EBITDA leverage target of 1.0 or less. Even with this advantaged balance sheet, we're not done making improvements. We have identified additional opportunities to improve our financial strength by retiring approximately $1.0 billion of low-premium debt in 2022 and 2023. Importantly, Devon has the flexibility to execute on this debt reduction with cash already accumulated on the balance sheet. And to round out my prepared remarks this morning, I'd like to provide some thoughts on the $1 billion share repurchase program we announced last night. While the top priority for free cash flow remains the funding of our market-leading dividend yield, we believe this buyback authorization provides us another excellent capital allocation tool to enhance per-share results for shareholders. Given the cyclical nature of our business, we'll be very disciplined with this authorization, only transacting when our equity trades at a discounted valuation to historical multiples and the multiple levels of our highest quality peers. We believe the double-digit free cash flow yield our equity delivers, as outlined on Slide 6, represents a unique buying opportunity. The reduction in outstanding shares further improves our impressive cash flow per share growth and adds to the variable dividend per share for our shareholders. With these disciplined criteria guiding our decision-making, we'll look to opportunistically repurchase our equity in the open market once our corporate blackout expires later this week. So in summary, our financial strategy is working well. We have excellent liquidity and our business is generating substantial free cash flow. We're positioned to significantly grow our dividend payout over the next year. The go-forward business will have an ultra-low leverage ratio of a turn lower. And we'll look to boost per-share results by opportunistically repurchasing our shares. And with that, I'll now turn the call back over to Rick for some closing comments.

Thank you, Jeff. Great job. In closing today, I'd like to highlight a few things. Number one. Devon is meeting the demands of investors with our capital discipline, earnings and cash flow growth, market-leading dividend payout, debt reduction, and now a share buyback program. Number two. Devon is also meeting the demands of the market with our strong oil production results, great exposure to natural gas and NGLs along with our consistent execution. And number three. Lastly, Devon is also meeting the demands of society by providing reliable energy before the pandemic, during the pandemic, and as we emerge from the pandemic. Our people throughout the five states where we operate continue to show up for work and work safely. We didn't overreact with our capital program during the pandemic like many others did. We actually strengthened the company with a merger. And finally, we're laser-focused on achieving our stated short-term, mid-term, and long-term ESG targets. We're proud of the work we've done and look forward to continuing meeting the needs of investors, the market, and society for the foreseeable future. Devon is a premier energy company and we're excited about the value we'll consistently provide to all of our important stakeholders. 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. Please limit yourself to one question and a follow-up. This allows us to get to more of your questions on the call today. With that Operator, we'll take our first question.

Good morning team. Rick, I wanted to start off talking about the inventory depths slide that you put out, 11-plus years of low-risk development opportunities, 70% in the Delaware Basin. We have seen a couple of large Permian Basin trades with Conoco and Pioneer earlier this year. So I wanted to get your thoughts on how you're thinking about portfolio renewal just given that inventory depth. And perhaps Clay could also comment on the ability to de-risk the wells in that 2,500 well bucket, including that deeper Wolfcamp zone.

It's a great question, Arun. I'll have Clay provide some additional details. We're approaching this by emphasizing that we conducted a thorough analysis. These figures pertain strictly to operated projects, as we have non-operated projects that are not included in this assessment. We want to clarify that these projects are operated and we're focused on managing the drilling completion activities. Additionally, we have redefined many of the sections, changing from 1-mile laterals to 2-mile laterals due to some acreage consolidations. In instances involving federal units, particularly in New Mexico, we see opportunities to drill more of the 3-mile laterals. The results we've achieved, not just this past quarter but over the last year, are incredibly promising. We believe there will be ongoing opportunities for us to replenish our inventory. You mentioned a couple of transactions within the broader Permian area, specifically the Conoco purchase, and I can share that we operate wells with Shell's non-operated interest. There are opportunities for more trading and portfolio optimization, which will enhance our returns. Additionally, there are smaller opportunities we are focusing on that align well with our industrial strategy. We will continue to pursue these. Moreover, we held an internal tech conference recently, and it's exciting to see the advanced technology Devon is utilizing, revealing more opportunities within our existing acreage. This has generated enthusiasm within the organization regarding our future prospects. Those are a few thoughts, and I trust our team will maintain a solid pipeline of inventory opportunities. Clay, feel free to add anything further.

Thanks, Rick. I want to emphasize a few of your points. First, Arun, as you know, we always aim to drill our best well next. It's impressive that, despite our long tenure in this business, we are currently drilling the best wells we've ever produced. This isn’t because we saved the best for now; it’s due to our teams continuously innovating and improving. We're focusing on enhancing efficiency and maximizing resource extraction from these exceptional plays. We are also deepening our understanding of these plays. The technology we are currently utilizing, as Rick mentioned, is truly remarkable. I’d also like to commend the land team for their outstanding work in trading within our core areas, which has significantly benefited us. In trades, we typically exchange like-for-like resources, while simultaneously extending laterals and creating efficiencies at a foundational level, which enhances our overall operations. Moving on to your point about transitioning some of the upside inventory to the de-risked inventory, that will definitely happen. The fortunate situation we are in allows us to be selective with our investments in the de-risking program, as we have high-quality prospects ahead of us. We could expedite this process, but we intend to proceed cautiously. Most of our investment is focused on improving operations, reducing costs, increasing efficiency, and generating free cash flow, which we view as strategically important. We are highly confident that many more than 2,500 wells will eventually transition into the de-risk category, and it’s reasonable to expect that when we drill them, some will become our best wells, even five to ten years from now.

Great. Thanks for that and my follow-up is for Jeff. I wonder if you could just maybe provide a little bit more color on how management, the board, is thinking about the buyback. Jeff, you mentioned that maybe post the blackout in a couple of days you would opportunistically look to be back up. Perhaps using the buyback authorization, but I wanted to get a sense of maybe you could better define this sense of opportunistic nature of the buyback and thoughts on, do you think you'd get a billion dollars done by year-end 2022?

Absolutely, Arun. Looking at our current position, particularly referencing Slide 6 from our presentation, we believe that an investment in Devon stock is clearly favorable given the 15% to 20% free cash flow yield. When we compare our trading multiples to those of our highest quality peers, we see that we are considerably below them. This made it a straightforward decision for our board to approve the billion-dollar share repurchase. As I mentioned earlier, once we reach the end of the blackout period this week, we plan to actively engage in the market. We are excited about the investment opportunities available to us along with our fixed and variable dividend framework. To be frank, there are no other companies in our sector providing these kinds of cash returns to shareholders.

Great, thanks a lot.

Good morning, team. And nice quarter here. I want to start off on the NGL side of the equation because it doesn't get enough attention in your portfolio. But it's been a hidden driver of a lot of cash flow generation. Can you just remind us how that business is set up here as you think about fourth quarter into 2022, obviously, Anadarko is a little bit more liquids-rich. And how that changes where that asset in particular competes within the portfolio.

Neil, it's a great question. We appreciate you making the point for us, because again, it's been a real high point for us throughout this year, obviously, with the tailwind that we've seen on NGL prices. Just to remind folks, in 2021, we're producing over 130,000 barrels a day of NGL. And I would expect you moving into 2022, you'll see that grow a bit moving forward, so it's been a really nice tailwind for us. And, as you point out, it's not an insignificant portion of the cash flow that we're delivering, and the free cash flow that we're delivering this year and expect that to grow moving into 2022.

I would like to elaborate on that. Neil, you and your firm have your perspective, but we are optimistic about NGL pricing as the global economy continues to strengthen. I think it’s noteworthy that we are seeing significant volumes, which greatly contributes to our cash flow.

I agree with that point. My follow-up question is about when you plan to transition from this maintenance mode of the current business model. This model generates a significant amount of free cash, allowing for capital returns to shareholders. When do you think it will be appropriate for us to consider pursuing a modest level of growth? What indicators are you monitoring to make that determination, such as demand signals or OPEC's spare capacity?

We are really focused on cash flow per share growth. If you analyze a 40% cash flow growth in 2022 compared to 2021, maintaining flat volumes means strict attention is needed. We'll keep an eye on the OPEC+ barrels returning to the market and approach this thoughtfully. Considering repurchasing 4% of our shares will lead to some per-share production growth. For most investors we engage with, that is sufficient, and that shapes our perspective.

Thanks, Rick.

Hey, good morning, everybody. Had some phone line issues this morning, so I just want to check if you can all hear me okay.

We sure can.

Excellent. Well, thanks Rick for the presentation. I got a couple of questions, I guess the first one is on the break-even. I just want to make sure I'm reading this right. So you're $30 sustaining capital break-even is using $2.50 gas, which is obviously quite a bit below where the strip is right now. So given your comments about your gas exposure, if you use current strip, do you think your sustainable breakeven is and if I may tie go and maybe to that, what is the embedded cash tax assumption and not break even?

I haven't calculated an exact number, but it’s definitely lower. I would estimate that the breakeven is somewhere in the mid-20s, based on the current gas prices around $3 to $4 and including NGLs as well.

And on the tax price, Jeff?

On a cash tax basis, we noted in our presentation that the current situation and commodity prices will determine the final outcome for our NOL balance. Generally, we anticipate it will be around $3 billion that will carry forward into 2022. Additionally, we expect to have some foreign tax credits that will help us manage our income next year. Depending on how commodity prices fluctuate, we should be able to shield a significant portion of our taxable income. However, we estimate that our tax rate will likely be in the mid-single-digits as we transition into 2022, which is reflected in the forecast we provided earlier.

Thank you for the update. I'm pleased to see the introduction of the buyback and am curious about its future impact. My question revolves around the variable dividend, which seems to complicate the total cash return. I believe it has a somewhat retrospective focus and doubt that the market values a forward-looking variable dividend in the same way. In contrast, buybacks are more lasting and can enhance growth per share. How do you see the balance between the two evolving over time?

We see the variable dividend concept as a relatively new initiative, with this December marking the fourth quarterly distribution. It has been very well-received and we consider it a prudent approach. We agree that the share repurchases are important and significant. In our discussions, some have suggested raising the variable dividend threshold to 75%, but we believe that maintaining a 50% level is more sensible for now to observe how this evolves. We also talked about the base dividend, the variable dividend, and share repurchases, along with debt reduction, all contributing to a strong narrative for shareholders. We will monitor the share repurchase program closely. The question you're raising will be clearer in a few months as we see how things develop and ensure that our strategies align. A balanced approach is difficult to match. Jeff, do you have anything else to add?

I would reiterate that last point, Doug, which is we feel like we're delivering all of the above. So whatever your favorite mechanism for cash returns, an investment in Devon is delivering that. As Rick mentioned, as we move into next year, we settle out to the budget, figure out down to the line item how we think the business is going to perform. My guess is we're going to have opportunities to even build further on this framework with the potential to raise the fixed dividend on a go-forward basis. And then we'll reevaluate other additions to the framework as we move through the year and see cash build.

Guys, let me instead close out with a comment because you've led the market on this. You've been early to it, and I think you're really changing the perception of what the business model can look like. So congratulations on that. Thanks.

Thanks, Doug. I appreciate it.

I appreciate it.

Hi, good morning, everyone. Thanks for taking our questions.

Absolutely. Good morning, Jeanine, and thanks for sending the picture. Congratulations on the young one.

Thank you. She's adorable. And thanks for looking. Maybe just following up on Arun and Doug's questions on the buyback. Can you just address how you specifically determine the size and the timeframe of the authorization? Should we think about you revisiting either the buyback or the percent variable payout once you get through a good portion of that billion-dollar gross debt reduction, or are those decisions independent? I know you just mentioned that the 50% is prudent at this time. You have to see how the business performs and it sounds like maybe in a couple of quarters you might revisit that, but just maybe dig in a little bit deeper on that, on how it relates to the debt reduction.

Yes, that's correct, Jeanine. Thanks for the question. As I mentioned earlier, the first thing we would likely consider adding to our framework is an increase in the fixed dividend. We will definitely reassess whether to expand the share repurchase program beyond a billion dollars as we progress through next year. If we reach the end of the year and our cash accumulation surpasses our expectations, we might consider a special dividend and would certainly reevaluate the 50% threshold for the variable dividend. However, I want to emphasize that we see real value in maintaining that framework consistently. Generally, we will make minor adjustments in some of the other areas we’ve discussed. All of these considerations will be debated with our Board as the year unfolds. In terms of determining the size, it simply came from looking ahead at our projections utilizing what we believe is a rational and normalized pricing outlook, and $1 billion seemed appropriate. Nevertheless, as I mentioned earlier, we will reassess that as we move forward and observe how it proceeds, and there is certainly the possibility to increase that amount with the Board's approval.

Sounds great. Maybe my second question is on the '22 budget. So we know there's a few moving pieces in the midstream side and the other buckets as well. Are there any opportunities that you can walk us through on the midstream and the other bucket side and how those should trend year-over-year now that the integration of WPX is complete? And I think on the upstream side, $1.9 to $2.2 billion forecast, is there anything else there other than inflation that is driving the range, for example, anything on efficiencies or anything macro-related?

Thanks for the question, Jeanine. It's Clay. Regarding the E&P segment specifically, we appreciate that our team is becoming more efficient. There are definitely opportunities ahead, though we are facing significant inflationary headwinds in our industry. We have not accounted for being able to fully offset inflation; we anticipate it to be over 10%, around 10% to 15%, in our E&P operations. Additionally, in the midstream and other expenditures, including corporate capital and ESG initiatives, we are planning to invest more this year, likely around $200 million, which might be the peak for us. I don't expect this level of spending annually, but we see opportunities to make substantial progress in enhancing our infrastructure. This will help us operate more effectively, especially concerning environmental considerations. This should give you an insight into our thoughts, and we'll continue to refine our approach as we seek board approval, providing more details in our next meeting with you.

Thank you very much.

Thanks.

Good morning, guys.

Hey, John.

Just kind of a follow-up on Jeanine's question. So you have mentioned that the drilling efficiencies that you all done a remarkable job on that have compressed cycle times, has been pulling forward activity. I'm curious on the 2022 preliminary plan. Does that assume that you all have a static rig and frac crews relative to the 16 rigs frac crews you have currently or does that assume potentially doing more with less next year?

I would say, John, it's directionally the same. We consider it flat activity. You know how it works; depending on working interest and other factors, rigs will come and go. We're always upgrading fleets, and contracts come and go as well. But directionally, we are flat and consistent in our operations. I can tell you that this consistency is part of our inflationary hedge. As we look to our suppliers and aim for alignment with these important partners, they want to know that we will be very consistent in our operations. Throughout the fourth quarter of this year, we are not unusually dropping rigs or trying to disrupt the system as we move into next year. This level of consistency helps us significantly both internally and externally.

Great. And just my follow-up question, the terrific results on the Boundary Raider project and just I guess any additional color there in terms of repeatability and running around that area, any sort of rate through than anything you did on the completion design or anything else that you might be able to take to some of the other areas?

We are at a stage where many small improvements are making a significant difference. Every new pad we drill continues to enhance our operations. We are reducing time and achieving modest percentage increases in efficiency that cumulatively have a meaningful impact. In this case, we are fortunate to have excellent geology, which benefits our business. Across the board, I see these efficiency gains manifesting. Some capital expenditures we encountered in the third quarter, which will carry into the fourth quarter, reflect efficiencies from both drilling and completion processes. This has led to a slight accumulation of capital. As we plan for 2022, we have not factored in further efficiency gains, and we've recognized significant inflation risks, which we believe is a wise approach.

Thanks. Appreciate it. Congratulations on a nice quarter.

Thanks, John.

Good morning everyone. I don't want to be unclear, but the topic of shareholder returns is certainly relevant these days. Rick, I remember our conversation several months ago when you mentioned that the one variable dividend might not have been appropriately recognized. With several dividends now implemented, I'm curious if you feel all stakeholders have been fairly compensated. If not, would you consider adjusting the formula or making changes moving forward?

Neil, I believe we have started to see some rewards. If you had asked Scott Coody about the increasing number of inbound calls from various generalist investors, including those he has never interacted with before, that would be very encouraging. It seems we are beginning to recognize the value of our variable dividend. Reflecting on our earlier discussion, there was a sense of waiting and observing. At that time, we discussed how yield investors often focus on fixed dividends without considering variable or special ones. Now, we’ve witnessed a change in our shareholder base and the calls we receive indicate that we are gaining recognition for the strength of our variable dividend. I believe that when our shareholders receive the $0.84 per share dividend at the end of the year, it will be positively received. We are just beginning to realize the potential here.

No, I agree. It's good to hear because you guys have certainly been a leader in all this. And then my follow-up is maybe for you or Clay. You can't help but notice when you guys start the presentation on the slides, on Slide 4, having 5 distinct great areas, and Clay mentioned how strictly they compete for capital. So with that said, would you consider on some of those areas that maybe won't make it in your vote to the top line, would you fund those, bring somebody else in as a partner, somebody else to fund those that way, or would you more likely think about letting some of those assets go?

As we stated on several occasions, all five of our assets play a very key role in our going-forward strategy. You bring up something, could you bring in a partner? Yeah, absolutely. That's always something you can do. And the returns that they would get would be quite honestly phenomenal and the preference we would get would be phenomenal I think. So that's always an opportunity. We just wanted to do the right thing for the long-term success of the company. I can tell you that we'll continue in all of our basins to find more and more creative ideas on the resource. This is the subsurface. So I think as we get into it, a little next year or two, we'll always have those opportunities, and we'll evaluate them as they come along. But our phone does ring and so it is something that we contemplate on. Clay, you may want to comment on that.

Thanks Rick. And Neil you know as well, right? We are business folks and we really look for value creation opportunities, and sometimes that comes in the name of buying assets or selling assets, or doing creative structures. All of that's always on the table. We have to be very creative. What I like, something we've highlighted this quarter is our joint venture with Dow. That's a perfect alignment. We had a resource that we knew was not going to compete on a heads-up basis. We also had a little bit of a stagnant time, so we knew that there could be a little bit of kind of startup friction. We brought in a partner. They love it. It is a home run for Dow. It is a home run for us. And as we cycle through this, we're both winning and it's a great thing for the shareholders because ultimately that asset is being converted into value. So we love those kinds of deals. Both legacy organizations have a very creative bend to them, and so I think that carries through to us going forward, so I look forward to more creative opportunities ahead.

Neal, I'll add one more thing to that point that Clay just made. And I think that if you look at the legacy of Devon, it's the company that people want to work with. And so case in point is the Dow partnership, that's the second one. The first one was launched back in the Barnett days. So once you prove that you're a viable partner and that you can make people some money, they will come back. I'd like to add that.

In great detail. Thanks guys.

Thank you and congratulations on the quarter. I want to briefly discuss 2020. Could you provide some perspective on the size of the non-operated portion of that budget, particularly in the Permian Basin and Oklahoma? What is your current non-operated spending?

So Scott, speaking of partnerships, we have a partnership in the Delaware where we have a partner that we have prescribed agreement in place where we can offload some of the non-op, mainly because a non-op is very hard to budget for. And speaking from our own prior experience, when you bust the budget and it's on somebody else's fourth quarter activity, it can be a little bit frustrating. So again, we have a creative structure in place, very beneficial to us, very beneficial to our partner that acts as a little bit of a shock absorber. So as we think about opportunities in other areas, and as commodity prices increase, and we see some non-op partners lean into it a little bit, we'll consider those options. But I think it's probably $50 to $100 million around the company is probably in the right ballpark.

Got it. Makes quite a lot of sense. And obviously, you guys’ operational performance has been outstanding and it's just not the last quarter too, it's been for quite some time. And when you think about managing growth based on the oil macro right now, if you're in a position where you are outperforming next year, with a plan B to taper activity to stay within a flattish growth outlook, or would you drop CapEx a little bit to stay flatter?

I understand your point, and I acknowledge that it is always a challenge. As we improve and become more efficient, the acceleration leads us to approach the upper limit of our capital range. This is what we are currently experiencing in the third and fourth quarters of this year, and I hope we continue to encounter this situation. I want to assure you that we will make a strong effort to adhere to the upper end of that range, and if needed, we would reduce our activities to ensure we remain within it. This is not something we take lightly, as it can be very disruptive to both internal and external operations. Therefore, we do not treat operational adjustments lightly. We intend to uphold this plan consistently. Additionally, at times, we may explore other creative solutions to ensure we meet our capital guidance while maintaining the exceptional consistency we have achieved.

Got it. I appreciate that. And one really quick one for Jeff. Jeff, you mentioned the tax attributes of around $3 billion and that seems to hold off through 2022. Is it fair to assume at strip, like sometimes in mid-2023, a lot of that is utilized?

Yeah, that's right. And just to be clear, in 2022, at the current strip prices, we would expect to pay some cash taxes and that's the assumptions we outlined on the slide deck. But certainly as you move into 2023, if we maintain this price level through this next year, you're absolutely going to be in a cash tax position and you'll see that current tax ratio move higher.

Okay. High-class problem. Thanks guys.

Morning all. Maybe a question for Clay. Just on the PRB, was curious if you can give us an update on your learning, some of the delineation in the Niobrara, and what you would need to see from either a well productivity perspective or from a cost perspective to feed that asset more capital over the medium-term.

This is an area that doesn't often get a lot of attention, so I appreciate the question and the opportunity to discuss it. We have a significant oil resource in place, and there's no doubt about that. Historically, exploration is about determining if there is oil available. We're beyond that stage now; we're focused on how to develop this resource in a way that is economically viable within our portfolio. That presents a challenge, especially since our current economic returns don't compete with those in the Delaware Basin, which is indeed a tough area to compete against. Earlier this year, we drilled a couple of 3-mile laterals that have performed very well. We appreciate the strong returns they provide and their competitive economics. We see a lot of potential for consistency in our results. Looking back at how we approached the Anadarko Basin, if we find that we are not competitive in our Basin, we need to think creatively about how to generate value for shareholders from this asset within our portfolio. There are various ways to achieve this. We are certainly observing and learning from other industry players active in the Basin and are open to partnerships with them. Bringing in external funding is also a possibility. Our focus must remain on enhancing the reliability and predictability of our outcomes, which will empower us to negotiate the best options for maximizing value.

Perfect and then, just maybe a follow-up question on assets specific capital allocation. You have some absolutely phenomenal results around the acreage in Lea and Eddy County, and then some of the State line acreage from WPX. Just curious how Felix stacks up today? What you learned from your updated development program there and how we should think about the return profile of that position in the Southern Delaware Basin versus your more northerly acreage.

Yeah. Good question. As we draw the circles, we have some development that's in what we call the monument draw, which is mostly Felix. The stuff was kind of in between state line and the eastern most side of the basin. That pad recently came on during the third quarter. Big development, I think 10 or 12 wells, outstanding results, so we're excited about that. Clearly as you move further east, things just get more challenging, the steering gets a little more difficult, the economics get a little bit more difficult and again, in this super competitive portfolio that we have, it's just the eastern most stuff is not commanding the most capital today. So as we look at the depth of inventory in Lea and Eddy, and really loving counties, that's where the lion's share of our capital activity will be.

Looks like we are at the end of our time slot today. We really appreciate everyone's interest in Devon and I know we didn't get to everyone in the queue today. So if you have any further follow-up questions, please don't hesitate to reach out to the Investor Relations team at any time. Thank you. Have a good day.