Devon Energy Corp (DVN) — Q3 2025 Earnings Call Transcript

Good morning, and thank you for joining us on the call today. Last night, we issued Devon's third quarter earnings release and presentation materials. Throughout the call today, we will make references to these materials to support prepared remarks. The release and slides can be found in the Investors section of the Devon website. Joining me on the call today are Clay Gaspar, Chief Executive Officer; Jeff Ritenour, Chief Financial Officer; John Raines, SVP, Asset Management; Tom Hellman, SVP E&P Operations; and Trey Lowe, SVP and Chief Technology Officer. As a reminder, this call will include forward-looking statements as defined under U.S. securities laws. These statements involve risks and uncertainties that may cause actual results to differ materially from our forecast. Please refer to the cautionary language and risk factors provided in our SEC filings and earnings materials. With that, I'll turn the call over to Clay.

Thank you, Chris. Good morning, everyone, and thank you for joining us. Let's begin with Slide 2. With outstanding execution and innovation from every part of our organization, Devon delivered another outstanding quarter. I'm proud of our team's performance. We exceeded the midpoint of guidance on every key metric, including production, operating costs, and capital. These results mark our strongest performance of the year, highlighting the exceptional quality of our assets and our unwavering commitment to operational efficiency and cost control. Building on this performance, we continue to advance our business optimization plan, firmly on track to generate an incremental $1 billion of annual pretax free cash flow. As we enter the fourth quarter, we have already achieved more than 60% of our target, underscoring both the effectiveness and urgency of our approach. These initiatives go beyond cost reductions. They are fundamentally reshaping our business by enhancing margins and boosting capital efficiency across our portfolio. The output of these compounding efforts shows up in our strong preliminary outlook for 2026, which Jeff will discuss in more detail. Despite persistent macro headwinds, these achievements directly contributed to our resilient free cash flow as we returned over $400 million to shareholders in the quarter and retired $485 million of debt, demonstrating our focus on delivering meaningful value to our shareholders. Beyond business optimization, we continue to unlock significant value throughout our portfolio. While getting into the details on a later slide, our teams have capitalized on a multitude of opportunities to drive additional value for the organization. Collectively, these achievements reinforce Devon's momentum and position us exceptionally well for the remainder of 2025 and into 2026. Let's flip to Slide 4 and take a deeper look at the quarter. Our relentless focus on production optimization continues to drive our outperformance. With oil production exceeding the midpoint of guidance by 3,000 barrels per day, the outstanding efforts of our teams to reduce artificial lift failure rates and improve workover efficiencies resulted in a 5% reduction in operating costs compared to the start of the year. Additionally, effective cost management drove our capital investment 10% below the first half run rate. These accomplishments, combined with other ongoing initiatives, led to robust free cash flow of $820 million in the third quarter and enabled us to deliver substantial cash returns to our shareholders. Moving to Slide 5. Our consistent track record of disciplined execution and tireless pursuit of capital efficiency is evident. Quarter after quarter, we drive meaningful improvements to our outlook. This momentum is reflected in our updated guidance, where we've raised our full year production expectations every quarter this year while reducing capital by $400 million since our preliminary guidance. These are not isolated wins. They result directly from our steadfast commitment to operational excellence, our culture of continuous improvement, and a rapid adoption of leading-edge technologies across our portfolio. Now looking at Slide 6. This continuous improvement is also resulting in top-tier performance versus our competitors. Our well productivity stands in the upper echelon of our peers, reflecting the strength of our asset portfolio and the execution of our teams across every basin. On the right-hand side, our disciplined approach to capital allocation is evident in our industry-leading capital efficiency, setting us apart in a highly competitive space. These achievements highlight the power of our advantaged portfolio and the rigor of our capital allocation process and the ability of our people to drive superior results. And with our extensive inventory, we are well positioned to continue this strong performance moving forward. Turning to our business optimization initiative highlighted on Slide 7. Our teams are outperforming expectations and delivering results well ahead of schedule. We have already captured more than 60% of our ambitious $1 billion target. When we originally launched this initiative, our focus for year-end 2025 was $300 million in value uplift. As shown on the left side of the slide, we are on pace to double that milestone this year alone. This exceptional progress is highlighted this quarter by our significant progress in capital efficiency and production optimization on the right side, and we are fully confident in our ability to deliver these substantial cash flow improvements as we advance towards 2026. Driving this rapid progress is our outstanding execution. With greater visibility and confidence in our 2025 full year production volumes, we anticipate a sustainable increase in free cash flow of $150 million resulting from an incremental 20,000 BOE per day above our initial baseline when this initiative began. This reflects further acceleration from our outlook from last quarter, highlighting the urgency of our efforts. When we announced the plan in April, we recognized that the market wouldn't immediately price the aspirational $1 billion of incremental free cash flow in our share price. We knew we would have to earn it. While the plan is still in flight, I'm encouraged that Devon's stock is starting to feel a bit of relative appreciation to our peers. That said, I believe that we have much more ground to gain, and I look forward to earning that value in time. Slide 8 showcases key examples of the initiatives our teams are pursuing to meet targets in each category. These represent some of the most impactful efforts currently underway. As our teams proactively implement these initiatives, we remain confident in our ability to achieve our targets and maintain clear line of sight to our objective. Turning to Slide 9. I'd like to highlight several portfolio optimization actions we've taken this year, which are delivering an uplift of over $1 billion to enterprise NAV. Importantly, these gains are in addition to the improvements through our ongoing business optimization initiatives. Early in the year, we signed an agreement to dissolve our joint venture in the Eagle Ford, giving us control of our development and the ability to reduce well costs and significantly enhance returns. In Q2, we completed the sale of the Matterhorn Pipeline and subsequently acquired the remaining interest in Cotton Draw Midstream. Last quarter, we executed 2 strategic gas marketing agreements that expanded our natural gas sales portfolio into premium markets. In Q3, we acquired approximately 60 net locations in New Mexico for $170 million, increasing our runway of high-return opportunities in Delaware. And finally, we've benefited from the Water Bridge IPO, which now provides a public marker for our investment valued at greater than $400 million. These actions showcase our team's initiative and strategic thinking to create shareholder value. As we execute our business plan, we will seek further opportunities to optimize capital allocation, efficiency, costs, and asset mix. We remain committed to continuous improvement, innovation, and technological leadership, taking decisive steps to strengthen our operations and deliver strong shareholder returns. With that, I'll hand the call over to Jeff.

Thanks, Clay. Turning to Slide 10. Devon delivered another quarter of strong financial results. In the third quarter, we generated operating cash flow of $1.7 billion. After funding capital requirements, free cash flow totaled $820 million. This robust free cash flow generation enabled us to return significant value to shareholders, including $151 million in dividends and $250 million in share repurchases. We remain committed to our capital allocation framework, balancing high-return investments with substantial cash returns to shareholders. Moving to Slide 11. Devon's financial strength and liquidity continue to set us apart. We ended the quarter with $4.3 billion in total liquidity, including $1.3 billion in cash. Our net debt-to-EBITDA ratio remains low at 0.9x, underscoring our commitment to a strong balance sheet. As part of our disciplined capital return framework, we accelerated the retirement of $485 million in debt this quarter, completing the repayment ahead of schedule and generating approximately $30 million in annual interest savings. With this action, we've now achieved nearly $1 billion towards our $2.5 billion debt reduction target. Looking ahead, our next maturity is our $1 billion term loan due in September of 2026. We remain focused on executing our debt reduction strategy and maintaining the financial flexibility that supports Devon's value-enhancing growth. Beyond debt reduction, we also used cash on hand to acquire all outstanding non-controlling interest in Cotton Draw Midstream, saving $50 million in annual distributions and securing additional resources in the Delaware, as Clay mentioned earlier. These timely transactions reinforce the value of maintaining an investment-grade balance sheet and ample liquidity. As we approach 2026, we're determined to accelerate our operational momentum, prioritizing per share growth, maximizing free cash flow, and making targeted reinvestments for sustained success. Slide 12 highlights the key attributes supporting our strong preliminary outlook for 2026. Given ongoing commodity price volatility, we're taking a disciplined approach to capital planning. We intend to maintain consistent activity levels to keep production around 845,000 BOE per day, with oil production at approximately 388,000 barrels per day. With macroeconomic uncertainty and an appearance of a well-supplied oil market, we do not plan to add incremental barrels to the market at this time. To support this production profile in 2026, we anticipate capital investment of $3.5 billion to $3.7 billion, a reduction of $500 million compared to our maintenance capital levels just 1 year ago. Importantly, we can fund this program below $45 WTI, including the dividend, providing significant flexibility. This disciplined plan positions us to generate strong free cash flow at current prices and deliver a free cash flow yield that exceeds the broader market. Regarding free cash flow allocation, our financial framework provides flexibility to deliver market-leading cash returns to shareholders and achieve our debt reduction objectives. We'll continue to target share repurchases of $200 million to $300 million per quarter, and we'll retain free cash flow beyond share repurchases on the balance sheet to efficiently reduce net leverage. Complete 2026 guidance will be provided on our February call after the budget is finalized with our Board. In summary, Devon had all the key attributes to thrive in today's environment and create value well into the future. Our high-quality portfolio provides a solid foundation while our disciplined strategy keeps us focused on growing per share value and generating free cash flow. With a strong balance sheet, we are positioned to deliver lasting value and confidently navigate whatever the market brings. With that, I'll now turn the call back over to Chris for Q&A.

Thanks, Jeff. We'll now open the call to questions. Operator, please take our first question.

Yes. Thanks so much for the visibility as we look into 2026. And I think the capital efficiency and the cost savings is really starting to materialize, including in the guidance. So maybe that's where we start off, which is where we are in the business optimization program and the $1 billion. You gave us a little bit of color on Slide 8, but kind of unpack what's left to do in the journey. And if you end up surprising to the upside relative to the initial guide, where could that be?

Yes, Neil, I appreciate it. This is Clay. We're incredibly proud. This was a big, hairy, audacious goal. When Jeff and I started first contemplating, one, what was the metric we wanted to focus on, and that was sustainable free cash flow, and then how audacious should it be and what kind of time frame should we put it around? I can tell you there was a tremendous amount of discomfort around the organization and just amongst Jeff and I on how do we get there from here. But what we knew, I mean, deep in our soul was that you get the flywheel starting to turn, and there's so much that continues to come our way. Right now, we have over 80 parallel work streams on different ideas. So the progress that we've made essentially in 1/3 of the time to accomplish 60% of the results, I can tell you, I'm even more encouraged about what this leads to. The most important measure of success will be locking these earnings in and building into the culture of the organization, benchmarking, hunger for more creative ways of creating value. And like I said, there is much more to come from this. Trey, you may jump in and just throw a couple of pieces of color of ideas that you have.

Absolutely, Neil. Thank you for the question. As Clay mentioned, we have 80 work streams currently in progress. The early results are evident, particularly on the capital side of our business related to drilling completions operations. Over the last four to five months, we have seen a significant influx of new ideas from our production department, and these are beginning to reflect in our forecasts moving forward. One example I shared in the last quarter was our commitment to automating processes and leveraging our technology to reduce downtime. We've made substantial progress on this front in the past three months and have scaled these efforts across the organization. We are now transitioning to the next phase, which involves integrating more AI to analyze faults and identify their causes. We anticipate seeing over $10 million from this work stream by 2026, and, as Clay mentioned, this will have a lasting impact on our base production. We’re excited about the future and driven by our employees' desire to harness technology. Almost all of our office-based employees are currently utilizing AI to enhance productivity. We are on the brink of what we refer to as Wave 2, with Wave 3 focused on integrating AI into our work processes. There is significant momentum and enthusiasm within the organization as we continue to progress, and everything is looking promising.

I appreciate the insights, everyone. As you begin planning the capital expenditure budget for 2026, I'm sure you have considered various product lines in the services sector. Could you discuss how you are trying to differentiate between structural cost improvements, as mentioned in your response to the previous question, and cyclical factors? Additionally, please share your observations on the current service environment, specifically which product lines are experiencing deflation and which cost items are remaining stable or facing inflation.

Neil, we feel really good about our positioning ahead of what could be a really challenging 2026. We look like the market is exceptionally well supplied, maybe potentially oversupplied. And so as a kid that grew up on the Gulf Coast, we know how to prepare for a hurricane. And when the storms come and you make sure you got your balance sheet right, you got your operations really buckled down. You got the teams focused on the right things, and then that helps drive through those troubling times. So when I think about what could come from 2026 and how we think about this preliminary guide, we've taken out any assumptions of inflation or deflation, really kind of timestamp where we're at today. We don't know where commodity prices are going to go in subsequent activities and therefore, subsequent deflation. So just consider that flat to where we're at today, and then we're prepared for whatever comes our way from a macro standpoint.

I was wondering if you could maybe elaborate on what you're doing to kind of manage your base production. You highlighted in the release that it's leading to maybe 20 MBOE per day of production uplift and a pretty meaningful improvement in cash flow from those efforts. And maybe talk about your views on the sustainability as we think about go forward 2026 beyond.

Thanks for the question, Arun. I believe it's important to take some time on this topic, and I appreciate your perspective. It's fairly straightforward to calculate savings in this area, but quantifying the gains is more challenging. From the start, we've been clear that this isn't merely a cost-cutting initiative; it's aimed at enhancing value, which should be reflected on both sides of the equation. What you're referring to is more about enhancing value. Honestly, it’s difficult to measure the theoretical downtime we might have experienced and the incremental gains from our efforts, but that’s the purpose of this initiative. We aim to establish credibility while acknowledging that it’s tough to pinpoint exact figures. I'll ask John to elaborate on some of the measures we’re using to assess and quantify this, as well as the results we've been seeing.

Yes, Arun. I appreciate the question. I think Clay hit it well. When you look at the full year, we've had a really strong production beat. And the first thing I would say on that is when you look at that production beat and you break it down, we certainly beat on our wedge. We've had some outperformance on our wells. We've had a little bit of acceleration. But overall, the biggest part of that production beat comes from our base, and we feel that, that's very measurable. Now we've got, and I think Clay said earlier, over 80 work streams on our business optimization. We've got a ton of these that go towards the base. I'm going to talk about a few that I think have contributed the most this year. We've got a combination of technology and good blocking and tackling. I'll start with a project that I'm very proud of that we've deployed in the Delaware Basin. Really, this deploys some next-generation technology. You've heard me talk about it before. But this is our smart gas lift project in the Delaware Basin. What we're seeking to do here is essentially to deploy AI models that continuously optimize the optimal rate of gas injection for gas lift wells that sit on centralized gas lift systems. This is a project that we piloted back in Q2. And we saw tremendous results here. We saw a 3% to 5% uplift. And we talked about moving to a pilot 2 on that. We saw success that was so good that we've moved essentially into full deployment of that in the Delaware Basin. And we expect to be complete roughly by year-end on that. The beauty of this project is we also have application in the Williston Basin. We have application in the Eagle Ford. And so this is going to be a project that's going to have ongoing sustainable results to our base production, and we're super excited about that. Probably a couple of other projects I'll hit on, and Clay mentioned this in our opening remarks, but we've had a tremendous focus on workover optimization this year. I'd say this year, this really started last year. We're looking at every which way that we can get better on our workover operations from operational efficiency all the way to safety. We took advantage early in the year. We made some changes in the organization to focus on this. We've got leads that work together to look at best practices across our basins. And when you look at what we've done there operationally, we've looked at advanced KPIs to manage our rig fleet. We've looked at design optimization. We've looked at equipment standardization. And really, we've looked at planning optimization. Not only have we been able to pull a ton of cost out of the system, but we've been able to lower the amount of time that we're spending on pad with these workovers. And essentially, what we've seen is we're getting our wells back quicker. And when we try to break down how much base contribution this had or the contribution to the base beat, we think it's over 2,000 barrels a day net production that we're seeing so far this year. And importantly, we think that's sustainable. I think maybe the last example I'll provide, we've had a really tremendous focus on failure rate reduction and optimization. We've had this throughout the portfolio. I'll brag on the Rockies team a little bit here. Over the course of the last 18 months, we really looked at our artificial lift failures. We did some very intensive look backs on that front. We did some proactive redesign there. And when we look back at the reduction in failure rate, we're tracking towards something that's 25%. And so again, that's a good example of a project that takes cost out of the system, but it also increases our uptime pretty significantly. And so a lot of really good projects in the queue like that, but we think these are all importantly, very sustainable to the base production overall.

Maybe you can follow up on this. Your Rockies production has been performing slightly better than we anticipated. In fact, you increased your oil output by 7,000 barrels a day sequentially and your numbers are relatively stable compared to the fourth quarter of 2024. Could you share what factors have contributed to this improvement and how the integration with the Grayson Mill assets is progressing?

Yes, I'll begin with the integration of the Grayson Mill assets. That integration is nearly complete and has gone very well. We've learned a lot in both directions, from midstream to the base operations, and gained valuable insights about the reservoir, well drilling, and completion techniques. The production results have been impressive, particularly on the wedge, where many of our wells are meeting or exceeding expectations. We're pleasantly surprised by the strong production, especially on the western side of the play. Arun, much of what I've mentioned regarding the base is driving our sequential improvement, and the Rockies team has been instrumental in this. The reduction in artificial lift failures has been significant for us in the Rockies, and we've seen the workover rig count decrease notably there, making a substantial contribution to our base production. I'm really proud of their efforts and cannot overstate the importance of this base uplift for us.

Yes. Arun, I just want to jump in on John's comments. As we talk about the workover rigs, especially, a lot of this motivation, I can tell you, was around safety. The workover rigs were something the industry was really struggling with. And with this hyper focus, we found incremental value, cost savings, production efficiency and maybe most importantly, safety improvement as well. So really proud of all the teams that are working on that, and that's been kind of around the industry focus. So great progress on that. Thanks again for the questions, Arun.

I was late last quarter. Clay, my first question is just on M&A. Specifically, I couldn't help but notice. I mean, you guys did a great job on the ground game being active on New Mexico lease sales. So I'm just wondering, with that said, do you all anticipate the ground game such as this, maybe in New Mexico or other states around other plays continue to represent a significant portion of your M&A?

Thank you for the question, Neal. Yes, this is very important to us. We've been working on this quietly through trades, consistently putting in effort that adds significant value. We've had more opportunities with state and upcoming federal lease sales, and we are eager to participate. We will evaluate it just like any other incremental investments, but we are genuinely excited about this prospect and intend to take an active role. We believe we have a strong foundation in the Delaware Basin, which is a great opportunity for us to utilize our skills, momentum, technology, and business optimization. Being present on-site every day enhances our ability to scale effectively. Therefore, we feel confident about being at the forefront of this and have been successful so far.

That's a great point, Clay. I've noticed how much progress you've made in the Delaware, not only with improving well performance but also in identifying additional resources by further developing the area. Given your success, have you considered adjusting your strategy regarding other regions like the Anadarko or PRB where your operations are smaller scale with only one rig? It seems investors might not fully appreciate your potential. Have you thought about selling some assets and reinvesting more into the Delaware Basin where you see significant growth opportunities?

Yes, Neal, we constantly evaluate these matters. Our Board emphasizes the importance of considering all possible options. This means we will not remain in these five basins as they are indefinitely. We must assess the right opportunities based on market demands and identify ways to continue scaling and growing to ensure a sustainable, value-creating business in the future. Looking at our 50-plus year history, we have reinvented ourselves multiple times in this challenging industry. We will continue to remain objective about what this could mean moving forward. Regular discussions with our Board about the importance of long-term shareholder value are integral to our operations.

Clay, I wonder if I could come back to the business optimization for a second. I think I've maybe been confused about something, and I'm looking for some clarity. You have some of the legacy midstream contracts rolling off. But my understanding is it's beyond the timeline of the $1 billion target. So I'm thinking EnLink specifically. So can you tell us what's included in the remaining $400 million? And it sounds like there might be an upside case for that based on some of these longer-dated contracts. Sorry if I'm getting that wrong.

No, I think you're exactly right, Doug. I think there is upside. One of the things that we debated early, I can tell you the original construction from the team that was presented to Jeff and I as we were thinking about what could this look like? It was actually a 3-year look, and that includes some other things that we know we're going to have in kind of year 3 of this opportunity. I can tell you there's additional wins in years 3, 4, 5 and for the foreseeable future. We've really focused on '25 and '26 wins. And as you pointed out, there are some really material specifically in the gas contract world that comes out further than that. I'll ask Jeff to dig into some of those opportunities.

Yes, Doug, just to be clear, so in the business optimization guidance that we rolled out to get to the $1 billion of free cash flow starting in January of 2027. The bulk of that, that relates to the commercial opportunities is what we talked about in the previous quarters, which is reduced fees on gathering, processing, transportation, and fractionation. Most of that's on gas and NGLs, specific to the Delaware Basin. So the lion's share and bulk of that really resides in the Delaware. That's where you're going to get this incremental uplift, if you will, of the commercial opportunities that we highlighted specific to the $1 billion. As Clay just said, beyond 2027 and beyond, there'll be other opportunities across our portfolio where we could see some incremental benefit. But in the $1 billion, the real driver of that is what we're seeing in the Delaware specific to our gas and NGL contracts.

That's very helpful. I guess it would be a bit of a stretch to ask you to quantify the upside at this point, but maybe that's for another call. My follow-up is a little self-serving, I'm afraid. And I just want to make sure I'm not misinterpreting or overstating this. But if I look back to the legacy commitment from when you were still COO, Clay, you used to talk about 70% of your free cash flow coming back to shareholders. It seems that your presentation deck has adjusted that a little bit to now include debt reduction in your shareholder returns. Is that the right interpretation? Because obviously, we're big fans of that. I just wanted to clarify with you if that's how you're thinking about it.

I appreciate that. I believe it's essential to consider how we return value to shareholders. With the possibility of a turbulent year in 2026, we need to focus on our debt, debt structure, and how we capitalize the company, ensuring we are prepared for whatever may come. We had the chance to reduce our debt by $485 million, which we see as a way to return cash to shareholders. We included this in our recent illustration. I want to express my gratitude for your ongoing support for debt reduction. This is a challenging business, and we believe that being ready for difficulties can create real opportunities. I think Devon is well-positioned to transform future challenges into value-creating opportunities rather than merely adopting a defensive stance.

Sounds like an M&A question, Clay, but I'll leave it there.

Thank you, Doug. Appreciate it.

I want to come back to the production optimization bucket. great gains there. I think the bulk of that effort hits production and therefore, a reduction in your maintenance CapEx needs. I think there's also an LOE benefit as well. How does that split? And we see your LOE rolling lower. How should we think about the LOE cost in '26?

Yes, Scott, that's a great question. This manifests in a few different categories, including cost reductions. As you mentioned, we've seen a significant improvement in LOE quarter-over-quarter, and we will continue to see benefits there. It also appears in the maintenance capital, as we are drilling fewer wells. Our current plan involves drilling 20 fewer wells this year due to these benefits, effectively reducing the burden of maintenance capital and, as a side benefit, extending the lifespan of our high-quality portfolio. I might ask John if he has anything else to add to that.

Yes, you are correct. Our production optimization target includes a portion related to LOE, a portion that corresponds to production uplift, and a small part related to reducing capital in the system. Currently, we consider the $150 million as primarily reflecting the production uplift. Over the year, we've made progress with LOE. If you compare Q1 to the figures we disclosed, LOE combined with GPT is around $6.50 per barrel. This quarter, it's just above $6.10 per barrel, marking a 6% improvement year-over-year. LOE tends to be stable and shows delayed reactions. As we move into 2026, we anticipate continued reductions in LOE, and you'll see increased contributions from LOE within production optimization. For now, we are accounting for the base uplift I mentioned earlier.

I appreciate that color. And with the efforts reducing your well count how do we think about the TIL count that's embedded in your '26 preliminary guide here?

Yes, I believe we are certainly considering how we can become more efficient in our execution of drilling, completion, and facility construction, as well as how effective those completions are in their contributions. Currently, we are focused on our base oil production and the lower maintenance capital is reflected in our preliminary $3.6 billion guidance, which is a significant improvement from our guidance a year ago for 2025. We are making substantial progress, and it is apparent in our numbers. I remain optimistic about the work we are doing and the team's great efforts, which will continue to be reflected in the results over time.

But should we think about the '25 TIL count kind of less 20 as a starting point for '26? Is that fair?

Look, I don't know if we want to get into details of that. But here's what I would tell you is take the preliminary guide, start with the numbers that we're guiding on 2025 as of today. And I think that's a good kind of relative application and allocation. Again, we've mentioned no additional deflation is baked in. So I think that's a good starting point for assumptions. And then obviously, when we come back to you early in the year with firm guidance, we'll have a lot more details to share with you then.

There has been significant interest in the Anadarko, particularly regarding M&A in that region. Considering your location in Oklahoma, what are your thoughts on the interest in that basin? What do you believe is contributing to this renewed interest? Also, does this level of interest prompt you to reevaluate Anadarko's role in your portfolio?

Yes, in response to the first question, it's clear that we are focused on gas and have a favorable position. We don't face congestion like in Waha, which gives us some structural advantages in the Mid-Continent and the Anadarko Basin that we are currently benefitting from. We are aware of these advantages and take pride in them. As I mentioned earlier, we continuously evaluate everything. Our Board is very curious and thoughtful about how to create long-term value for our shareholders. We consider our portfolio carefully, always ensuring we are replenishing it with both quantity and quality to maintain a solid 10-year outlook. All these factors are taken into account. As market dynamics shift and we recognize new opportunities, we are open to exploring them, though I don’t have further details to provide at this time. Thank you for your question.

Got you. And then as a follow-up, I really like the details on Slide 9. I think that highlights the value creation that you've had that doesn't always kind of show up in the production numbers. I guess a question on Waterbridge. Is there any operational reasons that you would keep that equity interest?

Yes, Kevin, I would likely categorize it similarly. We have pursued many deals that are related to our core business. Take Matterhorn, for instance, where we seized that opportunity. The crucial aspect of Matterhorn was ensuring we had gas takeaway from the basin. This was fundamentally important to us. By underwriting that project, we made certain the pipeline was constructed. We hold a significant stake in it and have maintained our volume on that line. Additionally, we gained from an equity position, yielding a very substantial return that we take pride in. However, our primary goal was to ensure the pipeline was built and that we had access to market our gas. In the case of Waterbridge, our main aim is to think strategically about a super system, which involved reserving space. This approach is quite proactive within our industry. John can provide further details when I pass it over to him. Fundamentally, it was vital for us to secure our water needs in the Delaware Basin, and through this partnership, we have achieved that. As a valuable byproduct, we also hold a significant ownership in a publicly traded company that has performed very well. We are not obligated to retain it, but it remains a great investment for us. We don't feel pressured to sell in that situation, so it provides us with options. This is part of what we have in our organization, and we regularly assess it along with our other portfolio items in discussions with our Board. John, do you have anything else to add?

Clay, I think you covered it really well. I would say the relationship there remains very important to us. Operationally, we work with those guys every day. We've got a very multifaceted water management effort in the Delaware Basin. That's both to manage cost but manage future risk associated with water. I've talked about this before on our calls, but our first call on water is always to go to recycle. We've got a big recycle operation in the basin. In New Mexico, we've got a large water midstream presence. We probably don't talk about this enough. That gives us a lot of flexibility there. We've got a lot of strategic offloads. Many of those offloads are WaterBridge. And then when you get into Texas, we really leverage our WaterBridge relationship to give us diversity of options across the play there. So we feel really good about how that's working operationally.

I want to start with the Wolfcamp B drilling program for this year, and maybe this one is for John. So production in the Delaware has been holding up quite well this year. Can you kind of compare how the Wolfcamp B results are comparing to your expectations? And then for 2026, do you anticipate this zone comprising a similar proportion of the program?

Kalei, appreciate the questions. I would say Wolfcamp B is performing very well relative to our expectations for the year. You probably heard me mention this on the last call. When you look at 2025, we've got a very diversified program as far as the zones that we're targeting for the full year. We're looking at about 30% Wolfcamp B or deep Wolfcamp, about 30% Upper Wolfcamp, about 30% Bone Spring and the remainder in the Avalon. What you're really seeing, you're going to see some volatility in terms of zone mix each quarter. A lot of our Wolfcamp B wells have come on in the first quarter and really the first half of the year. So we've had a little bit of a run at seeing how those wells are performing. And generally speaking, I'd say they're mostly meeting our expectations with quite a few of those wells beating our expectations. What I think you can expect from us going forward for 2026, it's too early to get in and talk specifically about zone mix throughout the year. But I think Clay said earlier, you can expect some stability, some consistency in how we're thinking about our overall Delaware program. And as we've shifted more into this multi-zone co-development, from a well productivity standpoint, we took that trade-off to go a little bit lower this year in exchange for better NPV overall and for a longer inventory runway. But I think you can expect that well productivity to be very consistent going forward for the next couple of years.

Yes. And if I could add, I'm going to ask Tom just to add a little bit more about our D&C efficiency that we continue to see in the Delaware Basin. I mean, I think it's very important as we think about all of these additional zones. The Wolfcamp B is just a touch deeper. But as we start expanding to the geographic edges and up and down the zone, so to speak, that efficiency really contributes as well. So Tom, just maybe a little bit on how we're thinking about on the efficiency gains there.

Yes, Clay. It's been quite fascinating this year. We've been focusing on benchmarking in the Delaware Basin and utilizing AI tools alongside that. We have AI tools that assist us with the latest approaches, allowing us to analyze drilling parameters that enhance our ability to drill more quickly on current wells. We're also employing AI tools to help us trip faster, drill curves more efficiently, and run casing quicker, all about 30% faster. Each improvement saves us millions of dollars. Additionally, in the Delaware Basin, we've achieved a new record of approximately 1,800 feet per day, which compares very favorably to our fastest competitors. So, Clay, things are looking very promising, and I believe that the AI tools and benchmarking are proving to be very beneficial for us.

That's awesome. I appreciate that detailed answer. My follow-up is on the lease sales. So yesterday, that sale was a state sale, but this presidential administration has put federal lease sales back on the table, and they should occur with a pretty steady cadence. How are you guys thinking about those? And do you anticipate that being a part of your cash allocation priorities for '26?

Yes, that's a great question. I believe we can compete exceptionally well in this area. We have an established presence, strong organizational momentum, and efficiencies in development and construction. Our infrastructure, including Water Bridge, along with our relationships with gas midstream partners, positions us favorably. Additionally, our team is skilled in business optimization and technology, which enhances our competitive edge. We're excited about the opportunities created by the Bureau of Land Management and the upcoming lease sales. We definitely want to be part of the process, just like we did in the last lease sale, while ensuring we create full-cycle value from these opportunities. We're also focused on our ground strategy, including trades, small acquisitions, and leasing in various basins. We see significant potential emerging in the Delaware area, and we're eager to pursue it.

Yes. Thank you for your interest in Devon today. If there are any further questions, please reach out to the Investor Relations team. Have a good day. Thanks.