Devon Energy Corp (DVN) — Q1 2023 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 first quarter and our outlook for the remainder of 2023. 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 US Securities Law. These comments are subject to assumptions, risks and uncertainties that could cause actual results to differ materially 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 a pleasure to be here this morning. We appreciate everyone taking the time to join us. For today's discussion, I'll be focusing on three key topics that I believe are most important to our shareholders at this point. First, I plan to cover our solid first quarter execution. Second, I will run through the steps we've taken to bolster the return of capital to shareholders. And third, I plan to share insights on how our business is positioned to effectively control costs and gain momentum throughout the rest of the year. So to start off, let's turn to our first-quarter results on slide 6, where we had several key highlights. First, total oil production exceeded our midpoint guidance at 320,000 barrels per day, representing a growth rate of 11% compared to the year ago period. This level of oil production was the highest in our company's 52-year history. Our strong well productivity in the Delaware Basin was once again a key contributor to this result, and our recently acquired assets, the Eagle Ford and Williston Basin also provided us higher volumes in the quarter. Clay will touch on our well productivity in greater detail later in the call, but I do want to highlight that the average well placed online in the quarter is on track to recover more than one million barrels of oil equivalent. These strong recoveries are right in line with our historic trends over the past few years, demonstrating the quality, depth and ability to deliver sustainable results across our resource base. Another notable achievement from the first quarter was our team's effective cost management. This was demonstrated by capital expenditures being in line with expectations and operating costs coming in better than our guidance by a few percent. I'll cover this topic in greater detail later in the call with our outlook, but this positive start to the year puts us in a great position to potentially spend fewer dollars in 2023 to achieve our capital objectives for the year. With our first quarter capital activity, we limited reinvestment rates to prudent levels resulting in over $665 million of free cash flow. This marks the 11th quarter in a row our business has generated free cash flow, with oil prices over this time ranging from as low as $40 a barrel to as high as $120 a barrel. This is a great example of Devon's ability to generate meaningful amounts of cash flow - free cash flow across a variety of market conditions, further showcasing the durability of our strategic plan to create value through the cycle and deliver returns on capital employed that compete with any sector in the S&P 500. With this free cash flow, we continue to reward shareholders through our cash return framework, which was well balanced between dividends and stock buybacks in the most recent quarter. As shown on slide 7, the total cash payout from the shareholder-friendly initiatives reached an annualized rate of around a 12% yield in the first quarter, which significantly exceeds the available opportunities in other sectors of the market. Nearly half of this payout was derived from our distinctive fixed plus variable dividend framework. This consistent formulaic approach, which began almost three years ago, has allowed Devon to offer one of the highest yields in the entire S&P 500 since its groundbreaking implementation. Now turning to slide 9. In addition to our strong dividend payout, we continue to see attractive value in repurchasing our shares, which we believe trade at a significant discount to our intrinsic value. To capitalize on this compelling opportunity, we made substantial progress advancing our buyback program by repurchasing $692 million of shares year-to-date. In addition to our corporate buyback activity, multiple members of our management team, myself included, have also demonstrated their conviction in Devon's value proposition by purchasing stock in the open market over the past few months. With our Board of Directors approving the upsizing of the capacity of our repurchase program by 50%, up to $3 billion, the company is well equipped to be active buyers of our stock over the course of the year. Now moving to slide 11. Looking to the remainder of 2023, there is no change to our disciplined operating plan we laid out for you earlier this year. Now that our Delaware infrastructure is fully operational and actively ramping to place more wells online, we expect our production to grow over the remainder of the year. This momentum places us right on track to average just over 650,000 BOE per day this year, which translates into a healthy production per share growth of approximately 9% on a year-over-year basis. With capital, we've not made any revisions to our outlook of $3.6 billion to $3.8 billion for the year. As a reminder, this capital for cash assumes a low-single-digit inflation rate compared to our 2022 exit rate. However, in the first quarter, we did experience service price stability for the first time in many quarters, and we began to see signs of increased availability of goods and services due to an overall slowdown in industry activity. If these trends continue, we see potential for downward pressure on service costs later this year and into 2024. With much of our contract book shifting towards shorter duration agreements, we're now well positioned to work with our service partners for better terms as more frequent contract refreshment occurs over the next several quarters. Lastly, on slide 12, I believe this chart does a good job of summarizing the competitiveness of our outlook in 2023. With the plan we've laid out, we continue to possess one of the most capital-efficient programs in the entire industry that is self-funded at a $40 WTI oil price. With this disciplined plan, Devon is well-positioned to continue to generate significant free cash flow and execute all aspects of our cash return model, making 2023 another successful year for us. Now with that, I will now turn the call over to Clay to cover our operational highlights.

Thank you, Rick, and good morning, everyone. As Rick touched on earlier, our team did a great job of meeting the first quarter operational targets through solid well productivity, effective cost management and the steady progression of upcoming development projects that will benefit us over the coming quarters. Remember, we're focused not just on delivering the numbers for this quarter and year, but also derisking opportunities for the coming years and also investing in R&D that will create value throughout the coming decade. We're making great progress on all three fronts. This positive start to the year put us in a great position to continue to build momentum throughout the course of the year and achieve our corporate objectives for 2023. A significant contributor to the success in this quarter was our franchise asset in the Delaware Basin. As you can see on slide 15, roughly 60% of our capital was deployed to this prolific basin, allowing us to run a consistent program of 16 rigs and four frac crews in the quarter. With this level of drilling and completion activity, we brought online 42 new wells in the quarter, with the majority of this activity targeting high-impact intervals in the Upper Wolfcamp. This focused development program resulted in another quarter of volume growth year-over-year, with oil representing 51% of the product mix. While we had great productivity across our acreage position, our performance during the quarter was headlined by our Exotic Cat Raider project. This 6-well pad located in Lea County, New Mexico, targeted a highly productive area with 3-mile laterals in the Upper Wolfcamp. Individual wells at Exotic Cat flowed at rates over 7,200 BOE per day and well recoveries from this pad are on track to exceed two million barrels of oil equivalent. The flow rate from this activity ranks among the very best projects Devon has ever brought online in the basin. And lastly, on this slide, another key event for us during the quarter was the resumption of operations at our Stateline eight compressor station. This was possible thanks to the team's timely efforts in securing replacement equipment and the personnel to safely repair this critical facility. Although this repair work did temporarily limit our production in this part of the field during the quarter, we are confident that we resolved this issue and we do not expect any further disruptions of this nature. Furthermore, we also commenced operations at our Stateline 10 compressor station, providing us another 90 million cubic feet of throughput and even more flexibility in the region going forward. Turning to slide 16. As I look ahead to the remainder of the year, our Delaware asset is well positioned to build upon the solid results we achieved in the first quarter. Overall, with the 200 wells that we plan to bring online this year in the Delaware, we expect well productivity to be very consistent with the high-quality wells we brought online over the past few years. And for context, as shown on the chart to the right, this level of well productivity would not only position Devon among the top operators in this world-class basin, but would also surpass the performance of other top shale plays in the US by a noteworthy margin. This impressive well performance, coupled with a long runway, a high-value inventory, further underscores the competitive advantage and the sustainability of our resource base in the Delaware Basin. Turning to slide 17. Another asset, I'd like to spend some time on today is the Eagle Ford, which is our second-highest funded asset in 2023. Over the past few years, we've taken the disciplined and scientific approach to refine the next phase of development in this prolific field through thoughtful and measured appraisal work. The momentum generated from these learnings is evident in our current capital program, where we are pursuing tighter infill spacing and have an active refrac program, with the goal to efficiently sustain a steady production profile and harvest significant free cash flow. This year, we plan to spud over 90 wells, with the majority of this drilling focused on redeveloping acreage with much tighter spacing than originally conceived when we first entered the play a decade ago. We attributed this infill opportunity to high reservoir pressure, a fractured network that heals quickly and low but consistent permeability. This unique combination allows us to pursue significantly tighter spacing, with redevelopment activity targeting 16 to 20 wells per unit across multiple landing zones in the Eagle Ford. In addition to the benefit of oil-weighted recoveries that are projected to exceed 0.5 million barrels per well, our ability to leverage this existing infrastructure in the play also bolsters the returns. These unique and favorable reservoir characteristics in the Eagle Ford provides us with many years of highly competitive drilling inventory. The team has also made steady progress on our refrac program in the Eagle Ford, achieving consistent, successful returns in restimulating the productivity of older wells. To date, we have roughly 30 refracs online that have successfully accessed untapped resources, resulting in an immediate uplift to the well productivity that has expanded per well reserves by more than 50%. In 2023, we plan to execute around 10 refracs and we've identified several hundred high-return candidates across the field to pursue in the future. While we have made significant progress on improving recoveries through infill spacing and refracs, we believe there's still meaningful resource upside in this play. A catalyst to help us accelerate our learnings in this area is our Zgabay pilot in DeWitt County, which is supported by a grant from the US Department of Energy. The objective of this grant is to fund a field study and create an underground laboratory to improve the effectiveness of shale recoveries by testing new monitoring techniques for both initial stimulation and production as well as collecting critical data to enhance recoveries via refracking and EOR. While we're still in the early stages of gathering and interpreting the data from this project, we have already incorporated learnings into our day-to-day operations. These learnings will enable us to optimize recovery of resources, not only in the Eagle Ford but across our broader footprint in the US. I expect to have more positive updates on this topic in the future. And finally, on slide 18, I'm also excited to talk about the positive results we're seeing delivered on other key assets across our portfolio. As you can see on the graphic to the right, over the past year, we've done some good work to opportunistically build up operating scale in these areas and increase production by 9%. The main factors that drove this growth were our Dow JV partnership, which helped us regain operational momentum in the Anadarko Basin; the RimRock acquisition in the Williston; and the quality assessment work we've done in the Niobrara oil play in the Powder River Basin. That has helped us build for the future. In addition to solid production growth, this diversified group of assets is on pace to generate a meaningful tranche of cash flow that we can deploy to other key strategic priorities such as the return of capital to shareholders. I appreciate the team's hard work and the effort that goes into delivering near-term free cash flow and also derisking valuable future inventory. With that, I'll turn the call over to Jeff for a financial review.

Thanks, Clay. I'll spend my time today covering the key drivers of our first quarter financial results, 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 641,000 BOE per day. This performance exceeded the midpoint of our guidance for the quarter due to better-than-forecasted well performance across our asset portfolio. Looking ahead, our second quarter completion activity is weighted towards the back half of the period. As a result, we expect volumes to be relatively flat in the second quarter as compared to the first. However, given the cadence of activity, we do expect to build momentum throughout the second quarter, setting up the third quarter to be the highest production quarter for the year. On the capital front, we invested $988 million in the first quarter, which was in line with expectations. Looking ahead to the second quarter, we expect capital spending to remain essentially flat versus the prior period. As a reminder, we do expect to spend more capital in the first half of the year given the timing of completions in the Delaware Basin. This higher level investment in the first half of 2023 sets up Devon for a stronger production profile in the second half of the year. Moving to expenses. We did a good job controlling costs in the quarter with several of our expense categories coming in better than forecast. Looking ahead, as Rick touched on earlier, we're seeing cost pressures plateauing across our business, and with a solid start to the year, we feel very comfortable with our full year guidance ranges for operating cost and corporate expense. Jumping to income tax. After adjusting for non-recurring items, cash taxes were 11% during the first quarter. This better-than-expected result was driven by an R&D tax credit that was taken in the quarter. Looking ahead, we expect our cash tax rate to step up to around 15% for the remainder of the year. Cutting to the bottom line, Devon's core earnings totaled $952 million or $1.46 per share. This level of earnings translated into operating cash flow of $1.7 billion. After funding our disciplined maintenance capital program, we generated $665 million of free cash flow in the quarter. With this free cash flow, our top priority was to accelerate the return of capital to shareholders. As we 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 declared a dividend of $0.72 per share. This distribution will be paid at the end of June and once again includes an $0.11 per share benefit from the divestiture contingency payments received earlier in the quarter. Another highlight for the quarter was the continued execution of our ongoing share repurchase program. We remain confident in the intrinsic value of our equity as evidenced by the repurchase of $692 million of our stock so far in 2023. With the Board expanding our share repurchase program to $3 billion, which is equivalent to 9% of our outstanding share count, we have plenty of runway to compound per share growth as we work our way through the year. Moving to the balance sheet, we exited the quarter with $3.9 billion of liquidity, consisting of $887 million of cash on hand and $3 billion of undrawn capacity on our unsecured credit facility. With this strong liquidity, Devon exited the quarter with a low net-to-debt EBITDA ratio of 0.6 times, well below our mid-cycle leverage target of one times or less. Looking ahead, we plan to further improve our balance sheet by retiring additional debt as maturities come due. Our next debt maturity comes due in August of this year, totaling $242 million. We'll have additional opportunities to pare down our debt with maturities coming due in 2024 and 2025 as well. As I look ahead, I'm confident that our financial framework provides us the necessary flexibility to effectively manage through the unpredictable fluctuations of commodity prices, while optimizing value creation for our shareholders. With the business plan designed to generate substantial amounts of free cash flow, we'll look to grow our fixed dividend over time, pay out as much as 50% of our excess cash flow via a variable dividend, opportunistically buy back shares and take additional steps to improve our financial strength. Furthermore, we possess the flexibility within this framework to lean into any one of these options to maximize results for shareholders. We believe this balanced and transparent approach is differentiated versus peers. 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 key messages. Number one, our team did a superb job of meeting the operational targets we set out for ourselves in the first quarter through solid well productivity and effective cost management. Number two, our disciplined execution resulted in another strong financial performance for the company. This is evidenced by the attractive per share growth we're delivering, substantial cash returns realized by investors and the high returns seen on invested capital. Number three, with a solid start to the year, we're now on track to achieve all of our capital objectives in 2023. Inflation is showing signs of plateauing, and our business is well positioned to build momentum and generate substantial free cash flow as we progress through the year. Number four, and lastly, we have the resource depth, execution capabilities, financial strength and disciplined business model to continue to deliver sustainable results through the cycle where a premier energy company is also perfectly positioned to benefit from this multiyear upcycle. And with that, I'll 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 today on the call. With that, operator, we'll take our first question.

Yes, thank you so much. Appreciate the time. Rick, you alluded in your comments that you might be tracking towards the lower end of the guidance as it relates to CapEx and costs. Can you talk about that? And is that a function of any early signs of cost service cost deflation as well?

Well, Neil, I think we're watching a lot of things. We have seen a softening in the market, but I think as we've laid out in our guidance, there's really no change. We'll see how it plays out through the year, but as I alluded to and then Clay had in his prepared remarks, we are seeing some softening and we'll just see on how that plays out. But I do see right now, no change.

And then the follow-up is just around the Q2 guide, obviously strong Q1 results. Q2 oil guide was a little bit below consensus. Is that just timing of completion and activity? And just anything you could say around the cadence of volumes over the course of the year?

Yes. It is strictly time. And I'll have Clay weigh in, also for more color, Neil.

Yes. Neil, just think of the - our band, as we try and pursue flat production, is somewhere in that 320, maybe 330 right - or excuse me 320 to 330, excuse me, that band in there. And I think the second quarter is going to be on the low end as we expect that third quarter to be on the high end of that range. But no, our original guide, that's still very much intact and we feel good about it. As you start really dialing in, I mean, the plus or minus 1% of our numbers, it's definitely affected by timing. You bring that big pad on early in the quarter, later in the quarter. We've got some other things going. We're a little front-end loaded on the capital with that fourth frac crew. So you'll see that kind of peel off. That affects kind of the very tail end of the year, but we'll see the biggest quarter of the year in the third quarter.

Make a lot of sense. Thank you guys.

Thanks, Neil.

Yes. Good morning. Clay, maybe for you. I was wondering if you could provide some thoughts on the integration of the RimRock and the latest assets. We've seen production maybe down a little bit since on a premier former basis versus when you announced the deals, but I'm wondering if you could talk about how those assets are performing relative to your expectations?

Sure, Arun. Thank you for the question. I'll broaden my response a bit since we handled the RimRock and Validus integrations closely together. From an integration perspective, both have gone exceptionally well. We learned valuable lessons from RimRock that we immediately applied to Validus, and we are always striving for improvement. Specifically concerning Validus, we have uncovered additional upside that we didn’t anticipate at the time of acquisition. On the RimRock side, particularly in the Williston area and Northern US, we've faced some extremely cold weather, which has certainly impacted us. Additionally, as we recover from that, there’s a high demand for workover rigs, leading to some backlog issues. We've also seen increased offset fracturing activity, which has caused us to shut in some wells, affecting operations. One thing we've learned about the Williston wells is that some exhibit complex depletion characteristics, with parts of the lateral experiencing greater depletion. This presents challenges in cleaning the wells and providing the appropriate artificial lift. However, we've made significant progress in these areas and are quite excited about the upcoming wells that will come online. Despite these challenges causing us to underperform slightly in the second quarter compared to expectations, I'm optimistic as we see improvements already starting in the second quarter. This asset remains a crucial component of Devon’s portfolio.

Great. And my follow-up, Clay, it sounds like the team is working on some R&D efforts to unlock inventories. So I was wondering if you could maybe detail what exactly you're testing and perhaps some opportunities to grow your inventory base?

There is a lot happening within the company, and much of it is still in the early stages. While we aren't sharing too much just yet, one project we are discussing is the Zgabay project in South Texas, which is funded by the Department of Energy. We've communicated extensively about this project across various industry forums. So far, we've had significant success with completion design, refracking, and gathering initial insights on enhanced oil recovery. This is all very encouraging, and we've already started applying some of this information. The refracking activity shows promise, particularly as it relates to the unique characteristics of the Eagle Ford reservoir. It tends to keep the original completions close to the wellbore, allowing us to strategically add more wells in this area. This approach has not been as effective in other basins. We’re also learning how to better implement these techniques, which has led to substantial advantages. Overall, this represents a strong potential inventory for us, most of which exceeds what we initially anticipated with the Validus acquisition.

Thank you.

Good morning, everyone. Thank you for the time. My first question is about shareholder returns, specifically for Rick. Are there certain levels at which you would continue to significantly increase buybacks based on mid-cycle price assumptions? Additionally, if you continue to have successful divestitures like you have had, will those proceeds go toward incremental variable dividends?

Yeah, Neal, this is Jeff. Thanks for the question. You can expect to see more of the same from us regarding our approach. As you mentioned, when we identify opportunities to buy back shares, particularly when the valuation seems misaligned with our assessment of intrinsic value, we are ready to act. This was evident in the first quarter after our February call, when we noticed that our stock was trading negatively compared to peers. We took decisive action and repurchased shares significantly. We believe this exemplifies the strength and flexibility of our model, allowing us to utilize our cash resources to capitalize on such opportunities. Moving forward, if we observe our stock trading below intrinsic value relative to the group, you can expect us to engage in our share repurchase program. Our primary goal remains to maintain and grow the fixed dividend, which we intend to continue, while also introducing a variable dividend where up to 50% of our free cash flow in any quarter will be allocated. We think this balance and flexibility in our model have benefited us greatly over the last three years, and we anticipate that it will continue into the future.

Yes, that's great. You all stepping into that. And then secondly, my question probably, Clay, for you or Rick on the Delaware infrastructure. Rick, it sounded like you were confident you all have the needed infrastructure now in place to handle the growth. The remainder of the year, I'm just wondering if you all could talk about now, maybe what the buildouts look like or what type of growth that infrastructure now can handle in the coming quarters. It looks like - sounds like, it's where you want it to be.

Yes, thanks, Neil. We are really confident in our infrastructure recovery and managing downtime, and importantly, we are staying proactive. Our team responsible for the build-out is performing excellently. We also have strong relationships with third-party providers, which allows us to plan effectively for the future, looking one to three years ahead. With our current inventory and execution capabilities, we can collaborate with partners to strategize for the ongoing infrastructure growth that the Permian will require year after year. Overall, everything is progressing very well.

No, I appreciate that. Thank you, Rick.

Good morning. Thanks a lot. Looking at the success of the three-milers you did on those six Wolfcamp wells, do you have a sense of how much of your acreage, what percent maybe of those undeveloped locations would be candidates for those three-mile developments in the Delaware?

John, I will wing it a little bit. I think it's about 20% this year that we're going to be drilling the three-mile laterals. It's always a little bit in flux. We're always trying to trade the opportunities. I can tell you, we feel very confident in the returns of the two-mile laterals. That's kind of our go-to with most of our acreages set up. I think it's just really where we see those opportunities to turn a one mile into a two or turn a few ones into a three, those turn into really phenomenal economics. So what I would say is operationally, we're very comfortable drilling three-mile laterals today. I think we've got that recipe down. So operationally, it's not a challenge. It's strictly just looking at the land and where is it set up for 2s and where is it set up for 3s.

Great, and then just my follow-up question. I just want to make sure that in the filings, I'm kind of interpreting this correctly. So the contingency payments, the remaining $130 million you got from Barnett. At the current strip, should I assume you get the remaining $65 million in 1Q '24, the other $65 million in 1Q '25 at the current strip?

Yes, John. You're correct. Regarding the contingency payments, they fluctuate with the prices of commodities, specifically oil and gas. With oil priced at $65, which is above our current price, we anticipate receiving about $20 million. For gas, the price is tiered from $2.75 to $3.50, and the potential earnings can range from $20 million to $45 million, depending on the gas price. Given the current market conditions, which I believe is in the mid-$3 range, you could expect an additional $25 million to $35 million on top of the oil payment.

That’s great. Thanks a lot guys. Appreciate it.

Thanks for taking my questions today guys. Just wanted to follow up on some of the thoughts around the buybacks in the first quarter and using the cash balance opportunistically. Does that in any way sort of inform your view on how you're looking at further consolidation this year? Obviously, Devon was a pretty active participant last year, but are the opportunities that you're seeing in the A&D market just sort of less robust than what you would have seen last year relative to the on value of your own stock?

Dave, that’s a good question. When we completed the two transactions last year, we discussed the metrics we used for those packages, and Clay has mentioned the additional potential we've observed, especially in the Eagle Ford. We feel very positive about those acquisitions. The market has also rebounded, and expectations are now somewhat higher. We will consider the current packages available, but we set a high standard. I doubt we'll be very active in the existing packages on the market right now. We will see how this all develops, but again, we have a high standard, and if a package aligns with our strategy, it’s something we might explore.

Yes. Excellent question, I love talking about it. This was a project that I think was originally conceived in West Texas. That project ended up falling through and through some great work of our team here being very heads up, say, hey, we've got an opportunity where we can do some of those same things in the Eagle Ford. We've got the right set up, the geology operations, and it was taken up. So we did a lot of very interesting work. We took a horizontal core to really understand that fracture network. I talked about these fractures healing up and what that means to that stimulated rock volume, and ultimately, our depletion zone that we're seeing on any individual wellbore. So we were able to see where do those fractures kind of breakthrough, where do we actually have proppant, and therefore, where do we think we're actually seeing some of the depletion. We've used that information in our stimulation design, knowing what the original recipe was, kind of how do we alter that. And then, as we go back into these re-fracs, as you can imagine, it's a mechanical complicated activity. You have to go in and run a liner and then ultimately, you're trying to stimulate new rock. And so with this information, we've been able to leverage that science and go in and really, we believe, stimulate new and incremental rock and really up the reserves, the recoveries from these original well-bores. That's all been not just scientifically exciting; in practice, seeing the returns and seeing that value come through. When we look at EOR, this project is really about injecting natural gas and a huff-and-puff kind of model. That's still an early project, understanding how that works. We have a lot of monitoring subsurface from gauges to fiber optics and really watching for what are we influencing from that injection and how ultimately we were covering more rock. So there's a lot of good information out there. The team has done a phenomenal job at presenting at various technical conferences. So if you're interested, there's lots of great intel out there to dig further into.

Thanks Clay and thanks for your time guys.

Good morning all.

Hi Matt.

Just to start out, as we look across the portfolio, it's nice to have a diversified asset. Curious, as you guys look at the returns by basin and with the volatility in the commodity strip, how you're thinking about capital allocation to some of the basins like the Anadarko in particular, given low natural gas and NGL prices as well as some downside volatility to crude oil as we progress through the year?

Hey Matt, this is Clay. Great question. Over the last year, we've tested various commodity price scenarios, including high and low oil prices and fluctuating gas prices. Our sophisticated model has been utilized to analyze when we should significantly change our capital allocation. Interestingly, in all the scenarios we ran, even with gas-levered opportunities, the analysis still pointed us towards focusing on oil, particularly in the Permian and the Delaware Basin, which continue to attract our capital first. Our understanding of regions like the Eagle Ford has improved, and with the Validus acquisition, it's demanding more investment, as I mentioned. As we evaluate the gas sector, areas like the Anadarko have certainly faced more stress. However, a significant portion of our investment is in the Dow joint venture, which involves gas condensate, yielding substantial condensate from those wells and supporting strong economics even in the current commodity price environment. We are continuously monitoring and reassessing our strategy. This is not a one-time annual process; we review it monthly, stress test our options, and make minor adjustments as needed. We plan to pull a few wells from the system this year and replace them with new opportunities that arise. Our approach is fluid and adaptable. I can assure you that our program remains consistent and strong, even with today's commodity prices and service costs, because we believe service costs are still disconnected from current commodity prices.

Great and then, Clay, maybe as a follow-up for one of the longer-dated resource basins in your portfolio. Just curious your updated thoughts on the Powder? I know it's not overly active this year, but you'll continue to progress the Niobrara in particular. Kind of curious how you've seen results so far and how maybe the costs are stacking up there as well?

Matt, great question. I love talking about the Powder because it is kind of behind-the-scenes. It is something that I'm really, really proud of the work that the team has done. On the front end of the challenge is de-risking the productivity. Making sure that when we drill a well, wherever we are in the basin, that we have a good understanding of what it can deliver. The second order is how do we get the cost structure down, so that we generate the right competitive return? I can tell you on the former, we've made tremendous progress, and that's really exciting. To me, that's the - if you don't have good rock, you can't do anything about that. We've got good rock. We've been able to improve the productivity, prove that up time and time again. On the well cost, to me, that surface considerations that we can always improve on. Have a tremendous confidence in the team to be able to drive those costs down in time. And so that is something we're now working on to ultimately get to a place of more competitive and sustainable returns. But we've got a ton of inventory there. It is very oil prone, and that will certainly have its day in the sun in the coming years. So really great progress from the team there.

Thank you.

Thanks, sir.

Yes, thanks. Hey, Jeff, I was just kind of curious. When you step back and look at the balance sheet, I mean, you've got about $800 million, $900 million of cash. I know you talked about the debt coming due, you want to take down later this year. But as you start thinking about the quantum of incremental buybacks, do you all just really focus on what is left in free cash flow, or is there some optionality to utilize the cash balance? And any color on kind of working cap per - cash needs per working capital too would be helpful.

Yes. You bet, Scott. It's a good question and one we've been thinking a lot about. If you think about our cash balance, what you heard me say historically, it's somewhere between $500 million to $1 billion cash balance on the balance sheet. It's kind of what we try to optimize for and work towards. You've seen us kind of hover around that level, certainly over the last several quarters. Moving forward, we're going to stay focused on the financial model that we've been pursuing for the last three years, with 50% going to the variable and then 50% accruing back to the balance sheet. We feel really comfortable with our leverage position where it is today. Obviously, we've got a target out there of kind of one times net debt to EBITDA. We're significantly below that currently. We certainly would flex up and back and forth depending on the market conditions and that, again, is what we think is the real beauty of our model, which it provides us the flexibility as we did this last quarter to utilize free cash flow generated, whether it's the current quarter or previous quarters, and then push that back into a buyback program, right? So obviously, over this last quarter, we chose to pull down the cash balance. That's certainly something we might do in the future as well, depending on the market conditions that we see. And really, it's the real benefit of the flexibility of the model that we've rolled out, which allows us along with the strength of our balance sheet to really step in and take advantage of opportunities. Whether it be acquisitions that we saw obviously last year or the stock buyback opportunity that we saw here in the first quarter.

Thanks for the detailed answer. This question is for Clay. Considering the tighter spacing in the Eagle Ford, the industry has seen cycles of tightening and widening, particularly in both the Permian and Eagle Ford. It seems there’s a tendency to revert to wider spacing when oil prices drop. Can you discuss the durability of this tighter spacing if oil prices decrease? Do you anticipate maintaining it, or is it just a strategy based on the current oil price environment?

It's a great observation because our industry has experienced all aspects of this. While we generally see tighter spacing as the right strategy in most areas, we prefer to ensure robust returns and the ability to endure declines in commodity prices. This approach has proven beneficial repeatedly. In the Eagle Ford, particularly considering its maturation, we are focused on efficiently extracting the remaining resources. The work we conducted at Zgabay is a key highlight. By thoroughly examining the rock and understanding the wellbore drainage downhole, we gain valuable insights instead of just relying on tighter spacing without evidence. We will proceed with caution. We are very pleased with our results so far, but we will keep a close eye on service costs and commodity prices, always remaining open to adapting our strategy.

Fair enough. Thank you.

Thanks. Good morning everyone. Thanks for taking my questions. Rick, it's not so long ago that Devon was not only the best performing stock in the sector over an extended period, but the best performing stock the S&P 500. I think it was most of 2021, if I recollect. I'm wondering, given that one could argue the market has, therefore, recognized the value of what the combined company is and benchmarking the free cash flow capacity with some additional tax headwinds perhaps going ahead, I'm wondering how you would characterize your value proposition today? What do you think you need to do to break out beyond just a call on the commodity?

Yes, Doug, it's important for this management team to execute effectively and maintain confidence in our strategy. We have valuable assets, and while we've experienced some volatility, it reflects the strong performance we had a few years ago, which is well-documented. During periods when execution appears soft or impacted our numbers, I believe we may have overreacted somewhat. However, this situation positions us well for our share repurchase program, as we believe our shares are under considerable pressure, presenting a valuable opportunity for us and our shareholders. Ultimately, we have the assets and inventory, and we’re making significant advancements, as you’ve heard from Clay regarding our technological developments. We’re leading the industry in some areas, and we will continue to push forward. We need to remain focused and confident in our plan and keep executing, and I believe things will turn out well for us.

Okay. I know it's a tricky one to answer, and I appreciate your perspective. My follow-up is on the 0% to 5% growth. Not target necessarily, but outcome that you laid out at the time of the merger. Obviously, the incremental bolt-ons have got you there this year. What about the go forward? And I'm thinking what would the capital budget have to look like to support that? And do you think 12 years of inventory, is enough to support that kind of go-forward visibility?

Yes. First, regarding the 12 years of inventory, it's important to acknowledge that this figure doesn't account for the additional inventory likely to transition to the near-term category. Therefore, I consider our inventory closer to a 20-year supply. When evaluating our entire asset base and the initiatives we're pursuing, it’s clear that we need to focus on our long-term strategy. We've indicated a growth range of 0% to 5% since the merger and have remained committed to that. So far, there hasn’t been a pressing need to reach that 5% growth. Our priority has been to enhance our performance on a per share basis. Looking at recent transactions and share buybacks, we consistently hear from our largest shareholders that our focus should remain on those per share growth metrics as we build for the future.

I like shared comment. Thanks so much, Rick.

Okay. Thank you.

Hi, good morning everyone. I want to address the topic of the variable dividend and buyback. Rick, you mentioned the importance of focusing on per share metrics. In that context, do you think the buyback is a better option for returning cash to shareholders compared to the variable dividend? Also, after more than two years, have we evaluated whether the company has been adequately rewarded for the variable dividend, especially considering the already high yield?

Yes, Paul, this is Jeff. Again, Paul, and we talked about this a lot with you in the past. With us, it's all of the above. So we've delivered on a sustainable fixed dividend which we're growing over time. We've got the framework that allows for the variable dividend up to 50% and then stock buybacks on top of that. We're not biased to one or the other. Over the long term, we think that balanced approach makes the most sense. Certainly, as Rick mentioned earlier, to the extent that we see an opportunity to jump in and buy back our shares when we see a dislocation versus intrinsic value, we're going to do that, and that has the opportunity to accrete per share growth for us over time. But at the end of the day, it's about total shareholder return, right? It's not just the dividend, it's not just the buyback, it's not just the stock price; it's that total shareholder return. And we think over the longer term, this model and this balanced approach will deliver the best results. And I'll point out over the last two years, we're the number one company as it relates to total shareholder return and that includes the last several quarters. So we feel pretty confident in our game plan. We're going to keep our head down and execute and deliver on that game plan. And we think when we wake up many, many years from now, we will have delivered a great result for shareholders.

Yes. Excellent point. Thank you for bringing it up. The most beautiful inventory is always that which is most efficiently attaining, right? So, therefore, we make the very best decisions around how do you get those wells down the set of wellbore management in a very efficient manner. And I think we've learned that a lot around what's required to get the most value with the tail end. To me, listen, all those put it together. We make the best decisions based on performance, not gut feel or anything else.

Okay. The second question is probably for Clay. I think you answered the earlier question saying that 20% of the Delaware Basin well to be drilled this year will be three miles. If we look at your risk inventory of 4,500, do you have a rough estimate of what percentage of that number just on the three miles? Thank you.

Hey Paul, I'm going to fuzzy that number. On the 20%, reminder, that's a rough number for this year and probably a little bit rougher. But I would say directionally, it's probably about the same, maybe a little bit lighter to that number as I think forward on the inventory. Remember, a lot of this happens, kind of evolves in our land shop as they make trades and kind of extend that runway a little bit, so it's a pretty healthy number. Our standard is two miles. Again, the returns on two-mile laterals in the Delaware Basin are phenomenal. And so we don't need that three-mile to make the numbers work. But when it comes our way, it sure is a nice thing. And once again, I feel very confident in our operational ability to execute on three-mile laterals. That's become a fairly standard fare for the team in the Delaware. Yes, we've drilled three-mile wells in multiple basins. And certainly, the Niobrara and the Powder is kind of built on a three-mile concept. We've drilled at least 20 years, 30 wells, three-mile wells in the Williston, so this is something that we feel very confident in our ability to execute on. And again, most of our performance, most of our wells we execute on are actually about two-mile laterals in general, and that's become kind of our standard. But where the opportunity presents, we feel very comfortable in executing three-mile laterals.

All right. Thank you. Thank you.

Thank you.

Yes. Thanks. Good morning.

Good morning.

I'd like to come back to a couple of maybe the more operational questions. Your comments earlier about where you're seeing inflation, maybe get an idea of how sort of the, let's call it, disinflation maybe at this point would flow through? Where you're seeing it? Where we should expect to see maybe the bigger benefits?

Yes, Roger, this is Clay. In the past couple of earnings calls, I have discussed the tone of the conversation as it seems to be the best indicator of pricing trends. It has shifted from a very aggressive stance of insisting on our prices to a more friendly approach where we express our desire to collaborate, but we are firm on pricing. Currently, we are receiving many inbound calls and have a good availability of equipment. Although we are trying hard to maintain our pricing, some areas are beginning to decline, indicating deflation in certain categories. The most notable change is in pipe, which is starting to show movement in the latter half of the year. We've also observed minor price decreases in smaller categories. Just to remind everyone, we based our 2023 plans on last quarter's numbers and applied a single-digit inflation estimate. We are still aligned with that plan. Additionally, we have contracts from two to three years ago maturing this year that will help counterbalance some of the losses in the deflationary category. Overall, conditions have stabilized, and we are seeing some progress in select areas. The enhanced equipment and crew availability have greatly improved our operations, enabling us to drill and complete wells more efficiently.

Okay. So we should expect not just a decline in cost, but you would expect also an improvement in productivity as you high-grade across the board?

Yeah, we're definitely seeing some of that. We see some of that in the second quarter already, activity being pulled forward. And these are just a few days at a time, but that's one of the things we're seeing from a capital standpoint in the second quarter.

Okay, great. And then my follow-up question is on the refrac wells. I know it's early days in this, but I was just curious, is there a type of well or a vintage of well that works best? And then going back to a question earlier about where you should put your money in terms of the returns. I'm guessing oil over gas. But just as a broad comment, how does the return on a refrac compare to the returns on new drilling, your capital program as currently laid out?

I believe you're considering the right factors when identifying the best candidates. Ideally, we would like to work with high-quality rock that hasn't been fully utilized, possibly from an older design with a larger final string, like a 5.5-inch casing string, allowing us to seal it off and reperforate for restimulation. That represents our optimal scenario, but we've also tested beyond that. We've explored options for modern completions and even in less-than-ideal rock, and we've observed positive results there. It's similar to any portfolio where the top candidates may compete directly with new wells, while we also evaluate several mid-tier opportunities. We may find small adjustments in the stimulation design could elevate some of these into the best category, as we've seen with several cases early on. Although it's still in the early stages, we're quite satisfied with the progress. Importantly, the land, surface facility, and infrastructure are all already established, which enhances our returns in terms of immediacy and capital efficiency.

Appreciate it. Thank you.

Thanks Roger.

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