Devon Energy Corp (DVN) — Q1 2022 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 updated outlook. Throughout the call today, we will make references to the earnings presentation to support prepared remarks, and these slides can be found on our website. Also joining me on the call today are Rick 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 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. As we all know, it's been an extraordinary time in the world, including energy markets over the past few months. While no one could have accurately predicted the timing or the wide-ranging impact of the recent geopolitical events, I can assure you that our team at Devon deeply understands the importance of our role in providing energy security to the U.S. We take pride in providing our great nation, a reliable, safe and cost-advantaged source of energy. The first quarter operational results are yet another example of the resolve and dedication to our mission here at Devon. Our people overcame multiple bouts of extreme winter weather and fought through the challenges of a tight supply chain to not only meet but exceed oil production targets for the quarter. We were also able to keep inflation in check and deliver these volumes in a cost-effective way. This type of tough and resilient performance defines us, and I want to congratulate the entire Devon team for getting the job done the right way amid very challenging conditions. Now turning to Slide 5. The first key message I want to convey is that the execution of our disciplined operating plan resulted in yet another quarter of impressive financial results. This was highlighted by Devon's earnings and cash flow growing at healthy double-digit rates compared to last quarter. Our capital was in line with our plan and our free cash flow increased 18% over the prior period. We grew our quarterly dividend to a new record high payout of $1.27 per share. Our buyback program further amplified per share growth and our rock-solid investment-grade balance sheet continued to strengthen. These results demonstrate the power of our disciplined business model, our focus on growing cash margins, and the benefits of our differentiated cash return framework. On Slide 6, my second key message today is that we are staying true to the game plan we laid out earlier this year and are well on our way to achieving our capital objectives for 2022. With our budgeted activity, Devon is one of the most active operators in the U.S. with 19 operated rigs running, and our team is working hard to maximize production. As I touched on earlier, in the first quarter, we delivered more volumes to the market than projected in our plan, and strong execution positions us to produce 570,000 to 600,000 BOE per day for the full year of 2022. This level of output makes us one of the largest producers in the U.S., and we're laser-focused on reliably delivering these essential barrels to the market in a capital-efficient manner. Now looking beyond the current year, I want to emphasize there's no real change in how we'll manage our business. To ensure we are excellent stewards of capital, we believe that fairly consistent activity through the cycle is the best pathway to optimize efficiencies and returns. To execute on this foundational principle, our disciplined strategy moderates Devon's production growth from zero up to as much as 5% in any given year. Today's heightened pricing from recent geopolitical events does not impact our capital allocation strategy. I assure you that we will continue to be thoughtful and closely evaluate how the geopolitical landscape influences market fundamentals. Even with today's higher prices, we must consider the continued steep backwardation in strip pricing, the ongoing supply chain challenges, and the economic uncertainty resulting from the crisis in Ukraine. The third key point I want to make today is that our financially driven strategy is designed to reward shareholders with higher cash returns in this constructive price environment. This is demonstrated on Slide 8 with the attractive yield of Devon's fixed plus variable dividend policy compared to other segments of the equity market. In fact, at today's pricing, our yield is six times higher than the average company represented in the S&P 500 Index. With this market-leading dividend payout, we have seen tremendous benefits to our shareholder base over the past several quarters by attracting dividend-oriented funds, value investors, pensions, family offices, retail investors, and we're even beginning to see evidence of growth investors. Furthermore, we've seen a significant change in the culture of our employees who all own our stock and look forward to that quarterly dividend check just as much as you do. Another way we're returning cash to shareholders is by repurchasing our stock. As you can see on Slide 9, since we commenced the program last November, we have executed $891 million of share repurchases. This activity has reduced our outstanding share count by 3% at a cost basis that is about 25% below current trading levels. With the Board expanding our share repurchase program by 25%, up to $2 billion, we can be active buyers of our stock throughout the rest of this year. We will be thoughtful, disciplined, and convicted with this buyback activity, but I assure you that we will take full advantage of any pullbacks and look for opportunities, especially to buy dips. At current levels, we feel that we are fundamentally undervalued and are at the start of a multiple expansion for our equity that should translate into true value creation for shareholders. Turning to Slide 11, my final key message for you today is that we expect the strong financial and operational performance we've been delivering to be sustainable for years to come. My confidence comes from the quality of our asset portfolio, the depth of our inventory, the diversity of our product mix, and the talented team we've assembled. These competitive advantages are further reinforced by our unwavering commitment to capital discipline through the cycle, the transparent cash return framework we've instituted, and the rock-solid balance sheet we possess. Now importantly, the market agrees with this view and has been rewarding us with an increasing share price for the advantageous trades over the past year. However, with many investors possibly new to our story, we believe it is still very early in this structural bull market. Devon's strong stock performance over the past year is largely a bounce back from the generational lows we experienced during the COVID crisis. This is evidenced by energy's weighting in the S&P 500 Index of only 4% compared to the long-term average of closer to 10%. We believe our attractive return profile and valuation compared to the broader market will be another catalyst for our share price appreciation as more investors discover Devon's unique investment proposition. Furthermore, with our geographic and commodity mix diversity, we have the ability to benefit on all fronts. And with that, I will now turn the call over to Clay to cover our operational highlights for the past quarter. Clay?

Thanks, Rick, and thanks to those listening in on our call today. As you can see from the results we issued last night, our team delivered another round of impressive operating results. I want to stress to you that I don't take these regular accomplishments for granted nor should it diminish the valiant work that the team does to make these consistent deliveries look easy. This is a technically challenging business that continues to get harder every day. I believe that our recipe for today's success will continue to deliver in the future. The foundation of that operational success is built on a high-quality portfolio. That foundation is brought to life by incredibly thoughtful and hardworking people. And that team is guided by a business model that provides a steady course for them to drive their efforts towards. Once again, this quarter, strong well productivity across the portfolio drove production to exceed the midpoint of the first-quarter guidance, while steady operational improvements allowed us to mitigate additional inflationary pressure and keep our cost structure in line with the full-year plan. This comprehensive execution across all phases of our operations allowed the higher commodity prices to pass directly through our field-level margins and generate the highest level of cash flow for Devon in nearly a decade. Now let's turn to Slide 13, where we can discuss our franchise growth asset in the Delaware Basin. In the first quarter, net production from the Delaware increased 27% on a year-over-year basis. This volume growth was driven by 52 high-impact wells brought online that were diversified across targets in the Avalon, Bone Spring, and Wolfcamp formations. In aggregate, these wells achieved average 30-day rates of 2,800 BOE per day with an average oil cut of over 60%. At an average completed well cost of around $7.5 million per well, the overall returns from this program are outstanding, with many of these wells on track to pay out in less than a year at today's strip pricing. Turning to Slide 14, another highlight associated with the Delaware activity was the improvement in operational efficiencies and margin expansion we delivered in the quarter. Beginning with the graph on the left, we continue to achieve efficiency gains across each phase of our operations. In fact, in the most recent quarter, our drilled and completed feet per day metrics improved to 85% and 135% respectively from just a few years ago. A great example of this progress is that our team drilled our fastest well ever in the basin during the quarter with a spud to rig release time of only 9 days. By comparison, during the 2015 acquisition that brought WPX into the basin, spud to rig release times were greater than 40 days. Completion efficiencies also steadily advanced with our best results occurring in the Upper Wolfcamp development that reached a record high pace of 2,400 completed feet per day. These accomplishments clearly demonstrate the great work our team, along with our service company partners, have done to drive improvements across the entire planning and execution of our resource. Directing your attention to the right side of the slide, we also effectively controlled lease operating expenses in the quarter by keeping our per unit LOE costs essentially flat on a year-over-year basis. Our consistent operating plan, leverage of technology, enhanced purchasing power, and relentless focus on margin allows us to manage and offset rising costs and maximize the value of this production in this inflationary environment. As you can see, this strong cost performance resulted in significant margin expansion compared to both the previous quarter and on a year-over-year basis. As I look ahead to maintain this high performance level, a top priority for us is to continue to stay ahead of inflationary pressure and supply chain disruptions. As the market has tightened, we’re experiencing substantial cost increases in raw materials, continued labor shortages, and uncommon scarcity across numerous products and services. We combat these challenges with thoughtful upfront planning, technology, consistent activity levels, and through the bulk purchasing power we possess due to our operating scale. Our effectiveness thus far is evidenced by our first-quarter upstream capital spending coming in at only 24% of our full-year guidance. As I look forward to the rest of the year, I have confidence in our team's processes to mitigate our exposure to supply chain disruptions and uncontrollable inflation. We will continue to watch this closely, but if these trends continue, our capital spend could gravitate towards the top half of our guidance range for the year. Turning to Slide 16, a catalyst that will help us combat the higher cost environment is the recent commencement of a company-owned sand mine on the surface acreage we own in Loving County. This mobile sand mine is the first of its kind in the Delaware Basin and is expected to supply up to 25% of our sand requirements in the basin this year. In addition to providing a certainty of supply, this mine could save us up to $200,000 per well relative to the rising spot prices we are experiencing across the basin as activity picks up and sand supply tightens. Equally important, this mine also has significant environmental and safety benefits due to the need for fewer trucks on the road. It eliminates the combustion-related emissions associated with hauling the sand that occurs in normal mining processes. Finally, controlling this critical baseline of supply in this market is incredibly valuable to operational certainty. This creative solution to the current supply chain crunch is another benefit resulting from our investment in the purchase of 15,000 acres of service land in the Stateline field in 2018. With the early success of this project, we are excited about the potential to expand this concept to other areas of our portfolio with opportunities already identified in both Anadarko and the Powder River Basins. This innovative approach to sourcing sand for our completion operations serves as another example of our team’s drive for continuous improvement. Moving to Slide 17. While the Delaware Basin is clearly the growth engine for Devon, we also have several high-quality assets in the top U.S. resource plays. The teams that support these assets are doing an incredible job of working to drive capital efficiencies, optimize base production, keep operating costs low, and steadily improve our environmental footprint. As you can see by the slide, by executing at an extremely high level on these critical objectives, these assets are on pace to grow cash flow by about 20% this year to around $2.5 billion at today’s pricing. I’m proud of what these assets are delivering, and I appreciate the team’s hard work and efforts that go into fulfilling this important role within our portfolio. And with that, I'll turn the call over to Jeff for a financial review. Jeff?

Thanks, Clay. I’ll spend my time today covering the key drivers of our strong financial results for the quarter, and I’ll also provide some insights into our outlook for the rest of the year. Beginning with production, our total volumes in the first quarter averaged 575,000 BOE per day. This performance exceeded the midpoint of our guidance due to another strong quarter of well productivity in the Delaware Basin. We expect first-quarter production to be our lowest production quarter of the year due to winter weather downtime that reduced volumes by 15,000 BOE per day. With these curtailments back online and more than 80 development wells scheduled to initiate first production, we expect Devon’s volumes to increase by around 3% to nearly 600,000 BOE per day in the upcoming quarter. Moving to expenses, our largest field-level cost category, lease operating and transportation costs totaled $7.44 per BOE in the quarter. This strong cost performance was 3% below guidance expectations and allowed us to hold our per unit costs essentially flat versus the year-ago quarter. Although we are experiencing moderate pricing pressure across several service and supply cost categories, our team’s proactive planning and thoughtful cost management have mitigated these inflation pressures year-to-date. Overall, this strong cost performance, coupled with our exposure to higher-value production, expanded Devon’s field-level cash margin by 17% quarter-over-quarter to nearly $50 per BOE. We also continue to control corporate costs. In aggregate, G&A and financing costs declined 13% year-over-year due to merger-related synergies and the company’s ongoing debt reduction program. These structural improvements will help our margins remain resilient to inflationary pressures as we progress through the year. Current tax, adjusted for non-recurring items, was 6% during the first quarter. Given the higher commodity prices we are experiencing, we now expect this to approach 10% for the full year. Cutting to the bottom line, Devon’s core earnings increased for the seventh quarter in a row to $1.88 per share. A key contributor to this growth is lower depreciation rates driven by our capital efficiency improvements over the past several years. This level of earnings momentum translated into operating cash flow of $1.8 billion in the fourth quarter. After funding our disciplined maintenance capital program, we generated $1.3 billion of free cash flow, which is the highest level of free cash flow Devon has ever delivered in a quarter. With this increasing amount of free cash flow, our top priority is to accelerate the return of capital to shareholders. As we’ve communicated in the past, the first call on our excess cash is the funding of our fixed plus variable dividend. Based on our strong first-quarter financial performance, we increased our dividend payout by 27% to $1.27 per share. This distribution will be paid at the end of June and includes a $0.11 per share benefit from the divestiture contingency payments received earlier in the quarter. Another critical use for our free cash is the execution of our ongoing share repurchase program. Year-to-date, we’ve bought back another $302 million of stock. As Rick touched on earlier, since we initiated the program last November, we’ve retired over 19 million shares, driving growth on a per-share basis by 3%. With the Board expanding our share repurchase program to $2 billion, we now have just over $1 billion remaining on this authorization and expect to continue to opportunistically buy back stock as we progress through the year. We have also returned value to shareholders through our efforts to improve the balance sheet. In the first quarter, our cash balances increased by more than $350 million to a total of $2.6 billion. With this substantial liquidity and our strong cash flow generating capabilities, we expect Devon’s leverage profile to push towards a zero net debt balance by year-end. Even with this advantaged financial position, we are not done making improvements. The next step in our debt reduction plan is to fully retire the $390 million of 2027 notes that become callable in October of this year. We will have the opportunity to retire another $600 million of debt in 2023 with the call of our 2028 notes in June, followed by the maturity of another note in August. Lastly, I want to highlight the outstanding returns on capital employed that we’re generating. Based on our outlook for the remainder of the year, I expect our return on capital employed to exceed 40% in 2022. This return profile places us in the upper echelon of the broader market today, providing further evidence that our disciplined cash return strategy is working and delivering differentiated results. With that, I’ll now turn the call back to Rick for some closing comments.

Thank you, Jeff. Great job. I’d like to close today by reiterating a few things. Number one, the execution of our strategy is delivering impressive financial results you’ve just heard about. Number two, there’s no change in our disciplined game plan in 2022. Number three, we are rewarding shareholders with record-high cash payouts. And number four, we’re confident we can continually and sustainably deliver this kind of performance for years to come. Lastly, I’d like to reiterate once again, how proud I am of this team, the results they are delivering, and the reliable energy we provide our great nation. The energy crisis we’re experiencing in certain regions across the globe is a stark reminder of how critical it is for the U.S. to have a clear and consistent energy policy to ensure our nation’s security and global leadership. Oil and natural gas will remain core sources of energy for decades to come, and this needs to be acknowledged and accepted in any energy transition policy discussions. This transition is not an event in time but rather a multi-decade endeavor that will require enormous amounts of energy from all available sources to meet the world’s growing demand. Energy policy matters, and if we misstep, physics and economics will defeat platitudes and untethered ideologies over time. At Devon, we’re committed to doing our part by showing up to work every day to responsibly produce low-cost, clean, and reliable energy. We’re also dedicated to bettering the communities in which we live and work by supporting investments in public education, healthcare, infrastructure, and by providing high-paying jobs to American families. I will now turn the call back to Scott for Q&A. Thank you.

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

Yes, good morning. My first question is just on cash return. The updated outlook is for dividends at $4.75 per share on Slide 7. And you highlighted two potential uses of cash, which would be the balance sheet to $1 billion over the next couple of years and then, call it, just over $1 billion left on the buyback authorization. So Rick or Jeff, what – given how you outlined maybe up to around $400 million in cash return through debt reduction this year, is it fair to say that there is enough cash to deliver on the full buyback this year?

Hi, Arun. This is Jeff. Yes, the short answer is absolutely, yes. And so as you know well, we continue to evaluate each quarter the financial framework that we've laid out to the Street and obviously discussed it in great detail with our Board. Our first priority is always to make sure we feel comfortable with the leverage on the balance sheet. We're in great shape there. As I mentioned in my prepared remarks, we've got $400 million we'll take out later this year and then another $600 million into next year. Beyond that, if you look in 2024 and 2025, we'll have the option to take down another $1.5 billion of debt if we so choose. Right now, given the strength we have with the balance sheet, we're really focused on delivering on that fixed-variable dividend commitment we’ve made. Beyond that, we're incredibly excited to buy back our shares given the current level that we see and how we're trading not just versus our peers but versus the broader market. We think there is a real opportunity to create some value by buying back our shares. So you’ll see us continue to lean into that as we work our way through the year and hopefully our track record is a good indicator of our behavior, which is each quarter we've continually added to that and our capacity to go after that.

Great. And just my follow-up, we have seen over the last week or so, a couple of Permian gas takeaway projects being announced; KMI has gone open season on the pipeline and Whistler reached FID yesterday, I believe. I was wondering if you could talk about what type of dilutions Devon has in mind in terms of mitigating the risk of gas takeaway challenges next year, just given production growth in the basin.

Yes. You bet, Arun. I think you and I discussed this question on the last quarterly call as well. Just as a reminder, with our current production setup in the Delaware, about 50% of our current production has firm takeaway that we own and control to move those volumes out of the Delaware Basin to the Gulf Coast. With the remaining 50%, about half of that we actually sell to counterparties on term sale deals that also have firm takeaway capacity from the basin, and then the remaining 25% of our production today sits in-basin. So that's the current construct. We share the concern that the broader market has around takeaway for gas out of the basin as we move into 2023 and 2024. We are actively evaluating different opportunities to move more of our gas out of basin if the value proposition makes sense going forward. From a price standpoint, again, 50% of that production is getting Gulf Coast pricing. The other 50% we’ve been managing through our hedging program. Our hedging disclosure outlines that we have a significant amount of our production, sitting in-basin, hedged for this year and well into 2023.

Thanks, Jeff.

Good morning, guys. First, Rick, just a question for you on investor recognition. Specifically, I remember talking to you about how you seem to suggest you guys are now being rewarded for the outsized dividends. I'm just wondering, given how well the stock has performed particularly well in the last 18 months, I know you're number one in the S&P last year. What other areas do you think that you and Clay would talk about as areas where you still think investors might not fully appreciate or appropriately reward you yet?

Well, I still think – we’ve been rewarded to some degree with our dividend framework, that strategy and the execution of that. I believe that investors will continue to reward us for the predictability and transparency of what we're doing. I still think fundamentally that when you look at – I mentioned this in our prepared remarks that we're fundamentally undervalued when you start looking at the multiples and the returns people will get from us over the next several years. I think this needs to change fundamentally with everyone regarding what our expectations are when we consider our multiples relative to virtually any other sector in the broader market. We’re just a great setup. You heard Clay give you some ideas and real examples of what we're doing from a creativity standpoint, addressing supply chain issues. You've heard Jeff talk about some things we've done on the gas takeaway. Many of these challenges, we always foresee that we will be a step ahead of our competition and not just the competition, but also the issues that come our way that could be problematic for us. I think all we need to do is just keep being ourselves, keep delivering, and being transparent, and I think it’s all going to work out just fine. Clay, do you want to add anything else?

Yes. Neal, I would just add to that. I think what is undervalued in the story is the repeatability. This is not just a one-quarter splash. I think the business model, the depth of our portfolio, the quality of our portfolio and how that aligns with that business model to create sustainable returns to the shareholder in a tangible way will eventually be recognized. I remember a little over a year ago as we issued our first variable dividend, there was a very positive reaction, but I think the consensus was, yes, give us a few quarters of repeatability and then we will be able to draw a line through the data points. I think now that line has been pretty established. And the remaining question is how far can we extrapolate that line? What we're continuing to show from our portfolio as we talk more about our ability to deliver in various phases of the cycle, I think that repeatability and longevity will soon come to be valued as well.

Yes, I agree, guys. I don't think your low-cost capital is even being considered as well. But lastly, just on the second question, could you talk about maybe asset allocation specifically? Clay, you talked about the repeatability. I'm just wondering, given the entire move of the natural gas strip, any consideration of allocating more towards Anadarko? Or still is that just not competing in again? I know how good the Permian returns are. So again, it's a nice sort of challenge to have. I'm just wondering how any outlook in that over there?

Yes. Thanks for bringing it up. I'm a big fan of Mid-Con and what the team there is doing. I think we are really significantly moving the derisking of that program, and I think we'll continue to see dollars going to it in a very material way as they are this year. I don't see wholesale changes moving away from the Delaware. We have an incredible depth of inventory there, and that will always shake out at the high end. We stress-test the portfolio in a number of different ways. We move gas relative to oil, and what happens is you may reallocate inside the Delaware, but it continues to drive most of that investment, ballpark 70% to the Delaware Basin. Remember, we have some deeper gas options inside the Delaware that we barely have scratched the surface on. So there's a lot of significant upside around the portfolio, but I don't see a wholesale change from us being a predominantly Delaware Basin-focused organization.

Well said. Thanks, guys.

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

Good morning, Jeanine.

Maybe just following up on some of the other questions on natural gas. We've heard a lot of talk recently about the role of U.S. natural gas in the global market. You've got 560 million a day coming out of the Permian, which is a good amount. You mentioned that you had 50% of that going to the Gulf Coast and FTE. There's additional FTE that's getting announced. How are you seeing Devon's potential participation in the global gas market? We know it's not a short-term call, especially given LNG export capacity. But your Permian has got a long runway of inventory. We've heard from a peer this morning that the economics don't really look too good for LNG right now. I’m just wondering how you're thinking about that for Devon?

Hi, Jeanine. This is Jeff. Yes, thanks for the question. Yes, absolutely. You nailed it and highlighted that we've got a significant portfolio of gas, obviously, just under a Bcf a day. So it’s something we think a lot about. We do believe there will be opportunities to capture a better realized price for our gas longer term, given the LNG dynamic. That's something that we are actively evaluating and thinking about. I don't have anything to announce today, but it's certainly something you'll hear more from us as we get further into those opportunities and determine what makes the most sense.

Okay, great. And then maybe our follow-up is on the balance sheet. Jeff, you mentioned getting to zero net debt by year-end if prices hold, but you're also not done paying off some debt early in 2022 and 2023. It's been pretty obvious over the past couple of years that a strong balance sheet is a strategic advantage. So is getting to net cash something that you're comfortable with maybe down the line? We have you actually getting there closer to the end of 2024, even with a healthy variable and buyback program. Is net cash something you're comfortable with? Is that ultimately a goal? Or do you think it’s really too inefficient a use of the balance sheet? Thank you.

Yes, you bet, Jeanine. No. I mean, fundamentally, we want to get more and more cash back to shareholders. I think we've been pretty clear on that with our framework and finding ways to do that, creative ways to do that from quarter to quarter. That will certainly continue to be our mantra. Sitting on cash is probably not the most productive thing we could do. So we're always actively evaluating different opportunities and debating those with the Board as to how to get more of that cash back to our shareholders. I think you'll continue to see our framework evolve over time and be consistent with what we've outlined in the past.

Great, thank you.

Good morning, everyone.

Good morning, John.

The first question, we've been hearing everyone talk about this earnings season, the supply chain issues that everybody is dealing with and the tightness on the service side of things. And I'm just curious if this has caused any sort of changes in the way that you all go about securing raw materials, maybe having to plan further in advance. And with the service side of things, is there any willingness to look at longer-term contracts, maybe compared to how you would have in the past, given the steady state level of activity that may not be as sensitive to commodity swings that we might have experienced in the past?

Hi, John. It's Clay. Thanks for the question. Yes, the answer is we do need to think about things differently. I can think of a number of modifications to our normal course. The first one that comes to mind is I love innovation. I love change. I love what's next, what's the 1.1, what's the 1.2. If that 1.2 is working, how do we get to 1.3? What we've talked about internally here is the necessity of being more sticky in our designs. As we think about facilities design is a perfect example; we may have that great next idea, but in this environment, we need to be a little more proactive with our designs. Working with our supply chain, telegraphing not just the normal 3 months or 6 months lead times but pushing that to 9 and 12 months. In this part of the supply chain, this hyper-concern about supply chain has dialed everything up to 11 about how we think about these things. So we're trying to protect downside while ensuring things stay on track.

That's great. Thanks, Clay. And if I could just follow up on the operational side, it was nice to see the sand mine come online this quarter. You mentioned that there are opportunities to duplicate that in the Anadarko and the Powder. I'd be interested in the timing on those two fronts, and as well as if there's an appetite to expand the Delaware sand mine above and beyond what it's doing now, supplying 25% of your needs there?

Yes. Thanks for the question. This is just an example project of many things we have under the radar that we're working on to take more control and ensure we have a baseload of supply. Sand is one of those things that nobody worries about until it becomes an issue and then it’s a major issue. Owning the surface as we did while keeping an eye on the horizon, what everyone else is doing, we saw an opportunity. We're still working through this, so it's a little early to talk about significant expansion, but I’m really pleased about this project. As we talk about other basins, it's different in each basin. It's a unique situation for us to own so much surface in one of our biggest fields. In other areas, we will consider partnering with landowners or even sand contractors to ensure we have sufficient supply near our operations.

Thanks, Clay. I appreciate your responses.

Good morning all. Thanks for taking my questions. The first one might be for Rick. Rick, you've been able to pull together a very impressive portfolio through M&A transactions at the right time through the cycles over the last couple of years. And I was just curious how you feel about the current M&A market from a bid-ask spread perspective and how that might compare to continuing to return capital via buybacks to shareholders here?

Yes. Good question, Matt. We talk about this all the time, and certainly, Devon will always be a company that stays in the know regarding what’s in the market. It doesn’t mean we’ll participate, but I can assure you we’ll have some kind of idea of valuations. From our standpoint, nothing really changes. We’ve always had a high bar for asset purchases or timing, even of sales. Our number one priority is returning cash back to shareholders and really excited about our outlook. That’s why we’re so constructive on our share repurchase program to be honest with you. We just think we’re fundamentally undervalued. This makes potential acquisitions more challenging because it simply has to be accretive and make sense for us. Nothing has really changed from what you’ve seen over the last several years.

Perfect. And then as a follow-up just on natural gas again. You obviously have the Dow JV, which has been a home run for both parties and juices the return profile for the Anadarko development program. Just curious more broadly speaking, is there an opportunity to potentially form similar JVs going forward to pull forward some of your gassy inventory and take advantage of the current improvement in the forward curve for both natural gas and NGLs?

Yes. That's a good question. And it's always something we could do, Matt, but I can tell you the Dow JV is a nice setup for us. You mentioned the NGL exposure being tremendous in the Anadarko, and Clay talks about how the team is getting more confident in those returns that are absolutely phenomenal on a promoted basis. When you start thinking about JVs and other areas where we have exposure to gas, the first place we have to focus on gas would be the Permian. I don’t see us having a strong appetite to do a lot of gas JVs there right now. It just doesn’t seem like it makes sense for us. I think we’ll continue to focus on developing the high liquids where you’re at 50%, 60% crude oil plus the NGL; that’s where you’re going to get some real margins and boost your returns. For us right now, we’ve got a great setup. I don’t see us moving into another gassy base and establishing a JV there. I think we’ll stick with what we have right now.

Thank you.

Thank you. Good morning, everybody.

Hi, Doug.

If I may, one on inventory and Jeff, I got a good morning. One on inventory and Jeff, I got to talk about the variable. So I’ll do that second if you don’t mind. In your remarks, I think you talked about how you have deeper gas opportunities in the current inventory. On Slide 20, you show 2,500—sorry, 4,000 locations in the current inventory and up to another 2,500. My question is presumably that includes the gas sensitivity. How does Devon avoid being a third smaller in five years from now on this inventory deck?

Hey, Doug, it’s Clay. So there are a couple of things happening in the inventory. Remember, we try to show this slide to give confidence regarding the next running decade. If I had to update the slide today, I’d say I feel confident in our one-decade ability to deliver very high returns at a very competitive cost structure. That slide is based on a $3 and $55 world. Certainly, as the commodity price increases, the whole quantification of those opportunities improves. We’re still looking at deeper horizons as an example in the Wolfcamp in the Permian being added to that inventory, and some additions that we didn’t even consider in the upside. I expect as we move through the years, this will be a rolling 10-year outlook. We’ll look to augment as we go. Our land team is continuing to do a great job with trades that bolster these numbers. Of course, we also have little exploration under positions that can add to our portfolio. So it’s a moving target, and commodity price helps but we’re not just relying on it to add to quantity and quality of inventory.

So just a clarification, Clay. The 2,500 additional is the impact of the higher commodity deck. Are you suggesting there's upside to the 6,500?

Yes, there is additional upside.

Okay. Thank you. My follow-up, Rick, is probably for you or for Jeff. But there's been much comment around you thinking your stock is undervalued. You’re getting a lot of help from gas today, obviously, and there are other things going on, but the whole sector. Your share price is pretty much flat since the oil price spike started at the beginning of March. The renewable dividend – or the variable dividend will be paid out on June 30. So that's coming off your balance sheet, which is net negative for your equity, and you increased it by 25%, but your variable dividend is even more than that. How does the commentary around how cheap our stock is jibe with the continued commitment for an outsized variable distribution, which erodes your equity value as opposed to really stepping into the buyback program?

I think it's something that investors grapple with, and we’ve debated this over the last 12-15 months. Is it either/or? Most investors we spoke with provided very candid feedback that they preferred that return of cash today rather than share repurchase. As we've gotten into it, I can tell you we've become more convinced. We continue to discuss this internally and with our Board. We believe strongly share repurchases make sense for us. We believe the fundamentals support us, and that is why we’re excited about our share repurchase program. We are fundamentally undervalued, and this gives us the conviction to go out and buy back stock. So we’re going to stick with our multi-pronged attack, and I believe that's the best course as a management team.

I appreciate the answer, Rick. I guess what I’m saying is I think we prefer to see more of the permanence than the transitory stuff. But I will say one last thing. I think we're all going to be calling you on platitudes and untethered ideologies. I love that expression. Thank you so much.

Thanks. Thank you, Doug. Take care. Talk soon.

Good morning, Rick, Clay, and Jeff, and the rest of the Devon folks on the call.

Hi, Charles.

My first question, this would be for you, perhaps for Clay. Thank you. Could you contrast for us the different ways you may be experiencing inflation across the Rockies, Mid-Con, Permian, and Gulf Coast? And maybe offer a thought or two on what bottleneck may be yet to emerge for you guys?

Clay, you want to answer that?

Sure. Happy to. Yes, inflation is a holistic term for us. It’s about supply chain and importantly it’s about people; and any one of those can manifest as a headwind in our operations. So, thinking about supply chain, let’s start with inflation just as rising prices — that’s actually one component of inflation that’s easier to manage. The harder part is time – if you’re reaching for that, your favorite supplier, and they’re no longer available, that’s hard to manage. We mitigate these risks as much as we can. We’ve also built a little more inventory, both on our own ticket and with our suppliers, so we stay ahead. We’re monitoring everything very closely.

I see that we’re at the top of the hour. We appreciate everyone’s interest in Devon today. If you have further questions, please don’t hesitate to reach out to the Investor Relations team at any time. Thank you and have a good day.