Devon Energy Corp (DVN) — Q2 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. It's great to be here this morning, and we appreciate everyone taking the time to join us on the call today. By all measures, the second quarter was another excellent performance for Devon as our business continued to strengthen and build momentum. Our quarterly results were highlighted by our Delaware-focused operating plan that delivered production above our guidance expectations. Capital was below budget, margins expanded and we paid record high cash payouts to shareholders. We also took important steps to strengthen the quality and depth of our asset portfolio. All in all, it was another quarter of systemic and systematic execution across the tenets of our cash return business model that shareholders have become accustomed to. To begin with, I'd like to turn your attention to Slide 3 and 4, which describes who we are. We are a financially disciplined company delivering high returns on invested capital, attractive per share growth and large cash returns to shareholders. While our disciplined capital allocation framework on Slide 3 is foundational to Devon's financial success, I want to highlight that another critical competitive advantage contributing to our strong results is the depth and quality of our asset portfolio. As you can see on Slide 4, with Devon's portfolio anchored by our world-class Delaware Basin asset, we possess a long duration resource base that is high graded to the very best plays on the U.S. cost curve. Furthermore, with this low-cost asset portfolio, we also have diversified exposure across both oil and liquids-rich gas opportunities, affording us the flexibility to pursue the highest returns and netbacks through the commodity cycle. While this premier multi-basin portfolio positions us to deliver strong capital efficiency and repeatable results for the foreseeable future, we are not complacent and are always looking for smart ways to strengthen our asset base. And this is exactly what we accomplished with our recent acquisition of RimRock's assets in the Williston Basin along with a series of high-impact acreage trades in the Delaware that optimize our leasehold for future development. Clay will cover these transactions in greater detail later in the call. However, I do want to emphasize that these portfolio additions are highly complementary to our existing acreage footprint. They tactically unlock quality inventory in the core of the play and the immediate financial accretions from these transactions allow us to further step up the return of cash to shareholders. Now moving to Slide 5. The key message here is very simple. The combination of our strategy, our asset base and execution has resulted in an impressive track record of value creation for our shareholders. Since we unveiled the industry's very first cash return framework, upon the WPX merger in late 2020, we have consistently delivered on our strategy to return increasing amounts of cash to shareholders while steadily improving our investment-grade financial strength. As you can see on the chart, since the closing of the merger, we have cumulatively returned $6.2 billion of value to shareholders in only 18 months. For perspective, this value exceeds more than 100% of the combined market capitalization of the 2 companies at the time of the merger announcement, unbelievable. Jumping ahead to Slide 7. With a strong operational performance achieved year-to-date, we are raising guidance expectations for the full year of 2022. As you can see on the top left, a key contributor to this improved outlook is our 2022 production targets increased by 3% to a range of 600,000 to 610,000 BOE per day. These higher volume expectations are due to better-than-expected well performance year-to-date and the positive impact from our recent bolt-on acquisition in the Williston Basin. After accounting for the benefits of our share repurchase program, this outlook puts us on track to deliver a very healthy production per share growth rate of 8% this year. We are also adjusting our upstream capital to a range of $2.2 billion to $2.4 billion versus our prior guidance of approximately $2.1 billion. This updated guidance incorporates $100 million of incremental capital from the Williston acquisition and includes additional inflationary cost pressures associated with this higher commodity price environment. Overall, at current pricing, this updated outlook is resulting in a 25% plus improvement in free cash flow generation compared to the assumptions that underpinned our original budget expectations. The key takeaway here is that our low-cost asset base is capturing the benefits of higher commodity prices and winning the battle against inflationary pressures. Now on Slide 8. I want to briefly showcase how our improved 2022 outlook translates into a compelling free cash flow yield. To demonstrate this point, we've included a simple comparison of our estimated free cash flow yield in 2022 compared to other common equity benchmarks in the financial markets. As you can see from the 2 charts at today's pricing, Devon's attractive free cash flow yield of 16% is up to 4 times higher than the broader market. I expect this valuation gap, which is at historically wide levels to correct as investors rediscover highly profitable and value-oriented names like Devon. Now going to Slide 9. With this powerful stream of free cash flow, our priorities remain unchanged, which means the first call on our free cash flow is the funding of our fixed plus variable dividend. With this predictive and formulaic framework, we are on track to pay out around $5 per share this year, which is at a yield of more than 8%, placing Devon as one of the highest-yielding stocks in the entire U.S. market. However, I want to be quick to add that we are not just a high-yielding dividend story. We're also bolstering our per share growth by opportunistically repurchasing our stock. With the share repurchase program, we are on track to retire up to 6% of our outstanding shares at what we believe to be trading at a substantial discount to our intrinsic value. As you can see on the right, even with a large cash payout, we still have excess cash flow left over to further strengthen our investment-grade balance sheet. This balanced and transparent capital allocation framework provides us multiple avenues to create value for our shareholders through the cycle. And finally, on Slide 14, I want to end my remarks with a few thoughts on what you can expect from Devon as we plan for the upcoming year. While it is still a bit too premature to provide formal production and capital targets for 2023, I can tell you that there will be no shift to our strategy. We will continue to prioritize free cash flow and per share financial growth, not the pursuit of top line volume growth. We are designing to plan that pursues steady and consistent activity levels to optimize supply chain cost and certainty of execution in this exceptionally tight market. And finally, with our low breakeven funding levels, we remain well positioned to navigate the recent market volatility and build upon our track record of delivering outsized cash returns. And with that, I will turn the call over to Clay to cover our operational highlights for this most recent quarter.

Thanks, Rick, and good morning, everyone. As I reflect back, not just on the quarter, but the last 18 months since we've closed our merger, I'm very proud of what we've accomplished. Last year at this time, we were well past the hard work of organizational design answering the who, but still very deep into the systems process and culture building that's incredibly important to answering the how of running the company. In some ways, we're rebuilding the engine while we ran the race. This year, we're continuing with the never-ending challenge of improving systems, processes and culture, but we're also keenly focused on external factors like inflation and supply chain uncertainty. While these challenges are real and something we dedicate a lot of attention to, I'm also fully confident in our team's ability to once again differentiate Devon from the pack and execute at an exceptionally high level. The second quarter results are a perfect example of this product related to this focus. As a summary of the operating results displayed on Slide 16, which showcases our solid production beat, better-than-forecasted capital efficiency and the expansion of our per unit margins to the highest level in more than a decade. I know it can be a bit mind numbing when the team makes these results look as easy as they have. But listen, every well in the portfolio, averaged 30-day IP for the entire company of 2,900 BOE per day, $60-plus field level margins and a reinvestment rate of 22% are incredibly impressive when you put them into historical context. The perpetually strong results that we've delivered since the merger between WPX and Devon is simply an outflow of 3 key factors: the high-caliber assets, our talented organization, and a disciplined investment framework that is designed to optimize returns and per share financial growth throughout the cycle. These key factors are held together by a steady strategic vision and a culture that exemplifies our corporate values. I want to congratulate the entire team for the special results that we're creating together. And I'm confident we will build upon these accomplishments as we progress through the balance of the year and beyond. Now turning to Slide 17. Our Delaware Basin asset was the exceptional capital-efficient growth engine that drove Devon's operational outperformance in the second quarter. The net production from the Delaware continued to increase rapidly, growing 22% on a year-over-year basis. This high margin growth was driven by 52 wells brought online that were diversified across our acreage footprint in New Mexico and the Texas Stateline area. Looking at the project-level detail, the top thematic takeaways were the consistent execution and outstanding well production achieved across the development programs. A great example of this theme was the prolific results we achieved in our Todd area in Eddy County, where we developed a highly charged thick team of Upper Wolfcamp. The initial 30-day rates from this 12-well Wolfcamp-oriented development average 4,500 BOEs per well, with per well recoveries on track to exceed 1.5 million barrels of oil equivalent. With the strong upfront recoveries we're experiencing, coupled with the favorable commodity price environment, this package of wells is on track to pay out in less than 6 months. Next, I want to cover the multi-zone development success we had in the Potato Basin where our recent activity successfully codeveloped 3 different landing zones: The Third Bone Spring, the XY sands and the Upper Wolfcamp. The initial 30-day rates from the Mr. Potato Head project averaged 3,100 BOE per day and given how the shallower drilling depths in this portion of the play, our D&C costs came in as low as $6.7 million per well. As we look to allocate capital for '23 and beyond, this positive result will serve as another valuable data point to optimize future development activity and further deepen our conviction of the resource opportunity in the Potato Basin area. And lastly, on this slide, we also brought several high-return pads online in the Stateline area. Adding to our long-term track record of success in this prolific tranche of acreage, our recent capital activity was highlighted by the CBR 8 and 9 pads that outperformed our pre-drill expectations by as much as 20% with the top well achieving 30-day rates as high as 4,300 BOE per day. In addition to these great wells, another impactful event for us this quarter was a recent trade completed that added to our acreage position in the Stateline area. Turning to Slide 18. You can see a zoomed-in map of this critical 3,000-acre trade that we completed in the Delaware Basin Stateline field. You've heard me on prior quarters brag about the incredible results the team creates with these land trades. We typically execute dozens of trades every year in the company, and so far we have executed several trades bringing in around 7,000 net acres to the Delaware. The trade we're highlighting today significantly enhances our Wolfcamp potential in the Stateline area and unlocks more than 200 extended reach drilling locations that were previously constrained to 1-mile developments. This is the economic core of the play and is further enhanced with Devon's significant surface ownership, company-owned wet sand line water recycling and disposal infrastructure and the midstream JV with Howard Energy. Each of these levers creates incremental margin to Devon that other operators would not benefit from. Also importantly, this transaction allowed us to trade out of acreage that was either not scalable to Devon or had lower priority within our capital allocation framework. With this high grading of acreage and the capital efficiencies that come with us, we expect a net present value uplift to Devon of more than $200 million on a time 0 evaluation. And importantly, when we consider how these projects are getting pushed to the front of the development list, the uplift is over $350 million of present value. Moving to Slide 19. Another area we enhanced the depth and quality of our drilling inventory was in the Williston Basin. In June, we announced the bolt-on acquisition of RimRock's assets in Dunn County at a highly accretive valuation of around 2x cash flow. This acquisition adds a contiguous position of 38,000 net acres, directly offsetting the overlapping Devon's existing leasehold. This consolidates Tier 1 acreage on the Fort Berthold Indian reservation, where we have an exceptional competency from not only the technical perspective but also the strong relationships with the tribe and with the community. With completion activity lined up for the second half of the year, we expect production from the acquired assets to exit the year around 20,000 BOE per day, increasing our pro forma production in the Williston to around 65,000 BOE per day. This acquisition also adds more than 100 highly economic undrilled locations, positioning our Williston assets to maintain this level of high-margin production and strong free cash flow for years to come. Our Williston team continues to perform at an exceptionally high level, and I'm thrilled to reload their opportunity set for continued great results. And finally, on Slide 20, I'd like to call out the importance of our free cash flow-generating assets that are also continuing success and sustainability of our business model. These assets may not capture as many headlines as the Delaware Basin, but I'm proud of the strong execution and consistent operating results that these teams have delivered to fulfill this critical role within our corporate strategy. As you can see by the slide, driving capital efficiencies, optimizing base production and keeping operating costs low, these high-quality assets are on pace to grow cash flow by about 40% this year to greater than $3 billion at today's commodity price. With our completion activity ramping up across each one of these plays in the second half of the year, I look forward to providing another very solid update on our November call. And with that, I'll turn the call over to Jeff for the financial review.

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 second quarter averaged 616,000 BOE per day, exceeding the midpoint of our guidance by 4%. This production beat was across all products due to another strong quarter of well productivity in the Delaware Basin. As Rick touched on earlier, with our performance to date, we now expect our volumes for the full year 2022 to be around 300 basis points ahead of our original budgeted expectations. For the second half of the year, we expect the strongest oil growth to occur in the fourth quarter driven by the timing of completion activity. Moving to expenses. Our lease operating and GP&T costs were $7.71 per BOE. This result was slightly elevated compared to our forecast due to higher workover activity and moderate pricing pressures across several service and supply cost categories. Overall, our exposure to higher value production, coupled with a well cost structure, expanded Devon's field level cash margin to $60.12 per BOE, a 22% increase from last quarter. Cutting to the bottom line, our core earnings increased for the 8th quarter in a row to $2.59 per share. This level of earnings momentum translated into operating cash flow of $2.7 billion in the second quarter. After funding our capital program, we generated $2.1 billion of free cash flow in the quarter. This result represents the highest free cash flow generation Devon has ever delivered in a quarter and is a powerful example of the financial results our cash returns business model can deliver. The top priority for our free cash flow is the funding of our dividend and in conjunction with our earnings report, we announced a record high fixed plus variable dividend of $1.55 per share that is payable at the end of September. This payout represents a 22% increase from last quarter and includes the benefit of a 13% raise to the fixed dividend that was announced with our recent Williston Basin acquisition. In addition to the strong dividend payout, Devon also repurchased $324 million of stock in the second quarter. Since we initiated the program last November, we've retired nearly 24 million shares, lowering our outstanding share count by 4%. We continue to believe the double-digit free cash flow yield of our equity offers a unique buying opportunity for us. We also took steps to further strengthen our financial position in the quarter with cash balances increasing by $832 million to a total of $3.5 billion. With this increased liquidity, Devon exited the quarter with a low net debt-to-EBITDA ratio of 0.4x. And lastly, I want to briefly highlight that our disciplined strategy and execution are resulting in excellent returns on capital employed. Based on our performance year-to-date and our outlook for the remainder of the year, I expect our return on capital employed to exceed 40% in 2022. This outstanding return profile, combined with our cash return framework, further reinforces the unique investment opportunity Devon offers versus other opportunities in the market today. 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 4 key messages from our call: Number one, Devon is a premier energy company, and the team is proving this quarter after quarter with our outstanding operational results and record-setting financial performance. Number two, the momentum of our business has established is resulting in an improved outlook, manifesting in higher per share growth and cash payouts for the owners of our company. Number three, we've taken steps to opportunistically capture resources, strengthening the quality and depth of our portfolio while ensuring the long-term sustainability of our model. Number four, lastly, as we begin our planning processes for 2023, I can assure you there is no change to our strategy. We're driven by per share value accretion, not the pursuit of volumes. I will now turn the call back over to Scott for Q&A.

Thanks, Rick. We'll now open the call to Q&A. With that, operator, we'll take our first question.

Our first question is on discipline. You mentioned that you mark-to-market the 2022 CapEx budget for inflation, presumably based on recent conversations with your providers. And I guess, how have those conversations really shaped your updated view on '23? And what we're getting at is you could pretty easily argue that returns being as high as they are, that inflation would have to get pretty high to make returns unattractive. And it's pretty clear how the market defines discipline on the production growth side. But how do you define discipline on the cost side?

Jeanine, this is Clay. I'll take this one. The strategy remains the same. We do have categories of the strategy related to growth. The 0% to 5% is kind of one of the metrics. But if you refer back to Slide 3, we also focus a lot on free cash flow. On Slide 16, we talk about some of the margins. And so now that the focus is not just on how much capital we are spending or how much production we are making. It's the flow-through result. And so while we're really excited about the margins today, and we're really excited about the 22% reinvestment rate, we have a stated goal to be somewhere below 70% on that reinvestment rate. So there's a lot of flexibility built in that allows us to continue the strategy even with the headwinds of the very real inflation we're seeing today.

Okay. Great. And then maybe moving to cash returns. There's been a lot of talk on buybacks this morning. For the past 2 quarters, Devon has increased the buyback authorization by about the amount of share buybacks that you did during that quarter. This quarter, the Board kept the authorization flat at $2 billion. And so we're just wondering, is there anything in particular that's driving you to treat the authorization differently this quarter than prior quarters?

Yes, Jeanine, this is Jeff. Thanks for the question. Yes, the biggest thing that happened for us here at the quarter was we were blacked out for the bulk of the second quarter as it relates to our share repurchase program, given the RimRock transaction that we've talked about. So we didn't quite get as much done as we would have liked, and that left us with just over $800 million of authorization still available to us. And so we felt like we've got plenty to go execute on here over the next quarter in the back half of this year. And of course, if we make as much progress on that front as we hope to here in the near term, we'll absolutely go back to our Board and reload that authorization to accomplish more share repurchase. It's a critical component of our cash return strategy. And as Clay mentioned, we're very much focused on per share growth on all line items.

My first question is if we look at first half activity, perhaps for Clay. You guys tried to sell 131 wells, about 80%, a little bit over 100 in the Delaware Basin. We are seeing a little bit more spud activity or drilling activity in some of your other basins. So I was wondering if you could give us a sense for the 3Q TILs of 100, maybe a little bit of help on the mix on a basin level, just broad mix?

Yes, Arun, thank you for your question. Our focus will still primarily be on the Delaware Basin. We have some promising work planned in other basins as well. For the third quarter, I would estimate that about 55% of our activity will be in the Delaware Basin, with additional wells coming from other areas. The productivity in the Delaware Basin will also enhance our turn-in-line numbers, leading to greater productivity and contributions. We've received numerous inquiries regarding our capital flow throughout the year. Our activity is indeed more concentrated in the later part of the year, as we will be bringing more wells online, but we also experience fluctuations related to our working interests that impact our capital flows.

Great. That's helpful. And maybe one for Rick. Rick, you guys announced a couple of things on portfolio renewal over the last quarter, RimRock plus some of the acreage trades in the Delaware. I was wondering if you view kind of RimRock as a one-off just opportunistic? Or is this part of a broader strategy, call it these niche acquisitions to address portfolio renewal?

That's a great question, Arun. We hear it often. Our response has been quite consistent over the last few years. We will always seek unique opportunities like the RimRock deal and the acreage trade Clay mentioned. We'll continue to look for such chances. I find it appealing to buy something at double its cash flow today, particularly if it aligns with our strategic vision and has solid industrial logic. I don't see us becoming frequent purchasers; I often hear that term, but we will always be on the lookout for ways to enhance our asset base and build Devon for the long term. Earlier this year, we celebrated our 50th anniversary, and we focus on long-term growth. This isn't just a theoretical discussion; we are genuinely dedicated to that goal.

Rick, I wonder if I could ask you or maybe, Jeff, about the second half CapEx run rate. Obviously, RimRock is part of that, but there's also some midstream spending in there. How should we think about the 2023 implications of the second half of '22? Can we kind of annualize that and get a handle as to what we think CapEx might look like next year?

Yes. I'd say this, Doug, as we said in our prepared comments, it's a little early for us to give you granular detail. We're going to continue to stick with our strategy of maintenance-type spending level. You talked about the midstream asset spending, we do have some expansion. We have the joint venture. We're going to be building our third train. That JV is going very, very well. We've got the 400 million a day cryo plant is full, and so we'll be working with our partners there to expand that to handle our gas production there. But still too early for us to be laying out any 2023 numbers. And I don't know if Clay or Jeff want to weigh in on that, but that's kind of where we're at right now.

Okay. Rick, I guess my follow-up would be on gas. You guys are the economics of your portfolio, obviously, has got a lot of variability in it. depending on what the gas deck is, and obviously, it looks to us at least that the outlook for U.S. gas has been reset some here, maybe to some kind of a new normal. I'm just wondering if you could talk then about capital allocation across the portfolio. And obviously, what I've got in mind is in Mid-Con, in particular.

Yes, Doug, that's a great question. We often hear it. I can tell you that with gas prices at $1, I think people pay more attention to us now compared to when prices were at $3.50, especially regarding the diversity of our portfolio. For us, I don’t anticipate major changes in our capital program allocation since we have a substantial amount of gas production in our Delaware Basin, yielding excellent returns. We currently have four rigs operating in the Anadarko Basin and are also seeing strong returns there. We plan to conduct some additional assessment work and explore some ideas we have, so we'll approach this carefully. It's a valuable asset with a solid acreage position and a strong joint venture partner in Dow. The joint venture is progressing well, generating great returns for us. We will remain thoughtful and measured in our approach, so I don't expect significant changes in our capital allocation mix.

Yes. My first question is about your perspective on intrinsic value. Can you explain how you determine Devon's intrinsic value? How aggressive are you planning to be with stock buybacks? Additionally, it would be interesting to know your thoughts on the 50% variable dividend payout ratio and whether there is potential to raise it. Or is the ongoing strategy primarily focused on maintaining flexibility for buybacks and possibly pursuing additional M&A activities?

Yes, Scott, this is Jeff. Thanks for the question. Maybe I'll hit the second part first, which is we're big believers in all of the above. So the framework that we've laid out provides an opportunity for a fixed plus variable dividend and then the share repurchases, as you mentioned. We think all of those are critical components to deliver on the business and operating in the financial model that we've laid out. Feel really good about that. Don't expect to see that change from us in the near term. We feel really good about the 50% threshold level for the variable dividend. As you point out, it provides us flexibility to bring cash back to the balance sheet for, obviously, any debt repurchases that we want to do, which we've mapped some of that out here over the last couple of calls. We've got $1 billion, we think we can do over the next 2 years, which is important to us to maintain our financial strength on the balance sheet. And then on top of that, we can execute on our share repurchase initiative. So to your first question around intrinsic value and how we kind of think about the share repurchase, we're just like you guys, we've got 3, 4, 5, 10 different models that we look at when we evaluate our core business, running sensitivities operationally and financially, different price decks, different discount rates and how we think about calculating that intrinsic value. We also do a lot of market comparisons, right, from a multiple standpoint and otherwise. Bottom line is when we put all that together, any which way we cut it, we think our shares are an outstanding value right now and have been for some time. When you look at the business model that we've rolled out and the outputs that we're generating case in point, the second quarter result. It's pretty clear to us that folks ought to be buying our equity, and that's exactly what we're going to be doing going forward. So as I mentioned earlier, we've got over $800 million to go execute remaining on the current authorization and expect to approach the Board later this year for additional upside.

That's great information. My follow-up question is about the opportunistic activity you mentioned, specifically regarding the bolt-ons and RimRock. You referred to it as portfolio renewal. Can you explain how you differentiate between portfolio renewal and acquisition for scaling? Do you think Devon is at the right scale to operate efficiently, or are there still benefits to acquiring assets for renewal rather than purely for scaling to achieve better cost efficiency per unit?

I believe we will continue to encounter opportunities that we need to carefully consider. First is the need to renew our inventory. We drill around 300 to 400 wells each year, so despite having a substantial inventory, our industry must continuously renew it through exploration or transactions. This will consistently be part of our strategy. Additionally, there are other factors to consider. Clay referred to acreage trades that allow us to drill more extensive 2-mile laterals instead of 1-mile ones, which significantly boosts our returns. We have a strong team focused on land and business development, exploring various opportunities, but we maintain a high standard for these prospects. We can uphold this standard due to our current inventory. While we may not always define it as a core part of our strategy, I do believe opportunities that are beneficial for us will present themselves.

Guys, and I'll refrain for sure returns to Devon, you guys are going to continue paying out. But Rick, my question is rather more on overall strategy, specifically, are there macro drivers or maybe even change in large investor sentiment that would have you all consider potentially more growth, let's say, next year, coupled with this large shareholder return?

The shareholders we engage with continue to provide feedback similar to our own, focusing on a per share approach. When we discuss growth, it is in terms of per share growth. Unless we hear from a significant number of shareholders who express strong discontent with our large dividends and share repurchase program and request a return to a growth model, I see no reason to change our strategy. We have not significantly altered our strategy since we announced the merger in September 2020, nearly two years ago. We’ve been consistent in our approach. A few quarters back, we discussed increasing our fixed dividend and adding a share repurchase option, which reinforced our cash return model. As commodity prices improved, we found these options really resonated with our shareholders, as we were able to deliver across all fronts. Thus, to radically change our strategy now seems highly unlikely, and we are not receiving feedback from our investors to suggest such a shift.

Yes. No, I agree. That definitely long shot today. And then second question, maybe for Clay on Delaware activity specifically, could you address the current and future federal permits, of course, in the New Mexico area, and I'm just wondering, will these permits or potentially just in the entire play lease expirations cause you to reallocate more activity into either Southern Living or Wingfield counties than you currently have?

Thank you for the question, Neil. When it comes to federal land, it's similar to working in international projects. There are certain regulations we must follow, and while there are many advantages, there are also challenges. Specifically regarding federal lands, it's important to adopt a long-term perspective on our programs. We need to plan at least two years in advance for rights of way, tie-ins, and contingencies; that's our approach. I'm pleased to share that we still have over 600 permits in the pipeline, which provides us with ample runway. We are collaborating closely with the local BLM office, which is becoming more familiar with our requests. They are dedicated professionals who aim to fulfill their roles effectively, and we strive to support their efforts to assist us. Overall, we feel optimistic about our progress. Of course, changes can arise, and we will respond accordingly. However, it's crucial to maintain a long-term vision and a strategic roadmap that keeps us ahead. As Rick pointed out earlier, having a diverse portfolio with assets in Texas and other regions enhances our overall strategy. Right now, we are directing a significant portion of our capital towards the Northern Delaware due to the impressive returns we are experiencing there.

The Delaware well results continue to look quite good, but it is interesting that the lateral lengths are a good bit shorter through the first half of the year than what we've seen the prior couple of years. And obviously, you all highlighted the Stateline acreage trade that you all did, which caught up a good bit of the acreage highlighted to do some more extended reach laterals and, I guess, I'm just trying to get a sense of kind of, I guess, a, what has kind of driven kind of the first half activity to be maybe on the shorter side on the laterals. Again, good results, but the laterals being a good bit shorter than what we've been accustomed to and maybe how to think about that going forward if we'll kind of move back toward that 10,000 type lateral length or better?

Yes, John, thank you for the question. We always aim to drill long laterals, which can be 2 to 3 miles today. We have developed strong expertise in various basins, particularly in North Dakota and across the Delaware Basin, for drilling 3-mile laterals. When land conditions permit, we often choose that option first. In more mature developments, we generally set the pace early on for 2-mile laterals. Once established, it’s challenging to shift back to 3 miles. The recent trade we executed was crucial, allowing us to move from 1 mile to 2 miles, which we considered very important. We’ve been limiting development in nine drilling spacing units by avoiding 1-mile drilling to prepare for this transaction. Therefore, you'll see us continue to pursue 2 and 3-mile laterals, though there may be some 7,500-foot laterals out of necessity and the occasional 1-mile as well. In the second quarter, we achieved 9,100 feet, which is slightly shorter than the 9,700 to 10,000 feet we’ve seen in previous quarters. I wouldn’t view this as a statistical anomaly; it simply reflects the mix of actual 3-mile versus 7,500-foot laterals during that quarter. We consistently strive to maximize length while maintaining high capital efficiency.

And then a follow-up question for me. In the past, you've talked about one of the things that you have used to try and combat cost inflation as sort of your size and kind of consistent activity levels in terms of being able to look out and maybe layer in some longer-term sort of contracts for both materials and services. And I'm just curious if we could get some feel for kind of what the environment is at the moment in terms of service providers' kind of willingness to offer longer-term contracts through 2023 or if it's just too cost prohibitive to kind of do that at this point?

Yes, John, I appreciate you raising the question because if it was important last year, it's even more crucial this year. I would highlight a transaction like RimRock as one of the factors that helped us complete that deal. Working in a challenging environment like North Dakota, managing various services is a significant challenge. Even securing basic casing design and necessary equipment is quite difficult. This situation allowed us to enter the market with scale and a higher level of execution certainty, helping us overcome obstacles. We have been attempting to acquire this particular business for several years, and I believe that contributed to our success. As I mentioned, it's incredibly important. We're proud of our business model, and its consistency is beneficial as we engage with our service company partners. They frequently emphasize two key points: scale and consistency. Regarding your question about longer-term contracting, there’s always interest from us and the service providers, but it largely depends on the gap between our expectations and theirs. We have our perspective on future service costs, and aligning those views is essential. We strive to maintain a balance between longer-term contracts and mid- and short-term arrangements to remain active in the market.

And Rick, the first question is for you on the macro. You've had a really good call better than most on the oil macro with the bullish view that you laid out earlier this year on one of the calls. We're going into an OPEC meeting tomorrow. I'd just love to hear your perspective on the moving pieces then being the demand outlook, U.S. production decline rates in non-OPEC and obviously, OPEC behavior. How do you think about the moving pieces as we look forward and the sustainability of this up cycle?

Yes, Neil, that's a great question. We believe that fundamentally, OPEC's decisions will be important, and they may mitigate some concerns about a potential recession that could slightly affect demand. However, I don't think any impact will be significant. If they increase their production, I expect it won't be substantial because they are likely considering a lot of data like we all are. They will probably proceed cautiously. OPEC members will likely face challenges in meeting their quotas, as has been well noted. We anticipate a slight increase in production from Saudi Arabia and perhaps the UAE, but it shouldn’t be overly strong. There is ongoing discipline, and while we do see some growth in the lower 48, it remains a disciplined approach. As for China, I believe we will eventually see an increase in demand as they continue to reopen. Overall, demand will likely remain strong. We anticipate some demand growth until prices reach around $120 for WTI. Initially, we thought that would happen, but the market corrected, which could have been due to various factors. We remain optimistic about the commodity price environment, both in crude and gas. I’ve been somewhat surprised that gas hasn’t declined more sharply; however, we’ve discussed within our team that being short on gas in this environment is not advisable. There are many factors at play, such as extreme weather or geopolitical issues, that make being short on gas a risky position for governments, utilities, and society as a whole. We remain very positive in our outlook. We’re also pleased with our operational execution and are effectively managing our supply chain. We’ve made significant strides in marketing on both the gas and crude sides to ensure reliable flows to the market. Overall, we are confident in the demand outlook for both oil and gas.

That's really helpful perspective. If I could dive a little deeper into the U.S. production profile, that's one of the great debates in the oil markets right now is where we are in terms of productivity of U.S. shale and whether the U.S. oil assets are maturing at which point we're moving more to maintenance mode versus growth mode. You have a unique perspective because you operate in so many different basins. I would love your perspective on whether we should be thinking of the U.S. as more of a mature base and as opposed to a growth base, which again would support the more constructive macro view.

Yes. Let’s start with crude. We are seeing various estimates, and we tend to be a bit more cautious than some of these predictions regarding growth in the latter half of 2022. In other words, we are not as optimistic about U.S. growth as others might be for this period. There are several reasons for this perspective. When we look at the maturation of the lower 48 plays, particularly in areas like the Bakken and the Eagle Ford, we notice that while volumes are stable, significant growth is elusive. We did observe a brief increase in the Eagle Ford, but it has since declined. Both basins seem likely to face challenges in achieving substantial growth. Regarding plays like the DJ and the Anadarko, we are monitoring the DJ but are not directly involved. In the Anadarko, we may see some growth in gas production, but overall, it is likely to be moderate. Ultimately, the attention turns to the Permian, which appears to be the only basin poised for significant growth. However, even in the Permian, we expect to encounter effects from supply chain challenges and similar issues. Private operators have largely spurred growth over the past year, but this growth might slow down. While some growth will certainly continue, it may not meet the levels some have projected. We will have to observe how it unfolds.

Perhaps a question for Clay about the delineation in the Permian. You've had some impressive results in the Bone Spring. I was interested in how your perspective on that play has changed as you work the asset in both New Mexico and at the Stateline and what that might imply for inventory expansion in the future.

Thank you for the question, Matt. You may have noticed in the slide that we emphasized some of the results. In New Mexico, we saw significant activity in the Wolfcamp, which has typically been viewed as a secondary area compared to the Bone Spring that has been more dominant in recent years. In Texas, we discussed the Bone Spring, which historically has been secondary to Wolfcamp. The results we are seeing are exceptional, giving us confidence that the productivity of Wolfcamp and Delaware is consistent across this region of the Delaware Basin. The key challenge is determining the best approach regarding spacing, staggering, and sequencing, and our team is making excellent progress on that front. This collaboration between two strong teams that have tackled this problem separately is one of the hidden advantages, allowing them to share insights and effectively identify the optimal solutions. While we may not have all the answers, we are much more advanced now in our understanding compared to just a year or two ago, and this contributes significantly to our understanding of the portfolio and the impressive results we are achieving today.

Great. And then just as a quick follow-up. Last quarter, you highlighted the potential savings from vertical integration on your sand mine expansion in the Permian. I was just curious if you could give us updated thoughts on potentially expanding this operation beyond the Permian and additional mines that might be able to be developed going forward to continue to lower your cost on development.

Yes, we're certainly looking at it. When a slide like that makes the deck, you can bet around the company, everybody wants some of that. And so it's been a lot of fun to see the excitement and the kind of creativity around the organization. What I'll tell you is we have a really unique position in the Delaware, one it starts with the geology in this case, the surface geology, but also the ownership, also the logistics. And so those holes have to line up for us to be able to execute on this. I would say I'm cautiously optimistic at this point of being able to expand, not just in the Delaware, but to other basins and use some of the same techniques. We're learning a lot, but it's been a real home run to our operations. As I mentioned, this trade, the wet sand mine that we have up and running even further enhances the already incredible economics that we're producing. So that leveraging of the margin is, especially in place like Stateline, is just pretty phenomenal. So happy to see more of it in due time.

My question is now that you've closed on the RimRock acquisition. I'm curious what you're seeing on costs compared to your legacy acreage and any opportunities for further efficiencies.

Thanks, Kevin. I would say it's really pretty early. We are just taking over some of the operations now. Best thing to do is a whole lot of consistency to make sure we don't have any of the wheels fall off in the process. But there's certainly techniques. I would say, generally speaking, completion designs are roughly similar. I think we'll see some tweaking. I think certainly, our supply chain efforts will help right away in kind of the next round of wells. But I want to be real clear. We are also taking this opportunity to learn. We can learn from everybody, RimRock is fighting a good fight just as everyone else in our industry is doing. And so every time we either look at one of these deals or when we were able to actually consummate a deal, we take it as an opportunity to step up our own game as well. And there's things mainly on the facility side, some nuggets that we've already picked up, and we're exporting to the rest of the basin from this transaction.

Great. And as a follow-up, any color that you can give us on the comment of steady and consistent activity levels next year and maybe how production could trend from your 4Q exit rate at a steady and consistent level?

Yes, I would just mention that we're sticking to the same strategy, which is between 0% to 5%. As we move away from the lower end of that growth range, it takes time to see progress. Currently, we're positioned at the lower end of the 0% to 5% spectrum. Throughout our quarters, there will be fluctuations with some being a bit higher and others a bit lower, but overall, if you look at the bigger picture, we are aligned with our strategy, and we intend for that to continue into 2023.

It seems we have reached the end of our time together today. We appreciate everyone's interest in Devon. If there are any questions we didn't cover, please feel free to contact the Investor Relations team at any time. Thank you, and have a great day.