Devon Energy Corporation (DVN) Earnings Call Transcript & Summary

Good morning. Thanks for joining us today. I am Mike Matus, Citi's energy and materials specialist. I would like to give a big thank you to Devon and Clay Gaspar, COO; and Scott Coody, IR. They have been excellent partners to Citibank over the last 10-or-so years. And hopefully, we can get back to some semblance of normality and kickstart our Oklahoma holiday bus tour at the end of the year. If you have any questions during this conversation, please feel free to e-mail me, mike -- or michael, sorry, michael.matus, M-A-T-U-S @citi.com. Now before we get into Q&A, I'll hand it over to Clay if there's any high-level comments that he wants to discuss just about the story, the integration, or anything he thinks the market is missing. Clay?

Thanks, Mike. Appreciate it, and thanks for the opportunity to speak today. There's so much going on from a macro sense, from the pandemic to the macro environment around energy. But I think the message is clear: energy is still an exceptionally precious resource that every industry relies on. I think we continue to be very thoughtful about our place in that marketplace, our ability to enable all of the other industries to do what they do, and we take that very seriously. Really excited about where we stand today. Post the merger between Devon and WPX, we find ourselves leading our industry in many regards. Some of it's from a financial footprint foundation. Some of it's from an operational standpoint. Some of it's from a quality of assets standpoint. But when you combine that together, I think it puts us in an exceptional position as we look forward over the next 5, 10, even 20 years, so really excited about where we're moving in that regard. Just a quick comment on the merger. We took the -- not the path of least resistance. We took an approach that is in some ways very difficult. We blended the Board. We blended the management team. We blended the organization, operations, processes, tools, applications, in a continuous search for finding the best of. And I can tell you, it's tough, but that's by design. It's short-term pain for long-term wins. And 4 months in, I'm really proud of how far we've come in really building a unified culture, and you see it already manifesting in some of the numbers. And I can assure you, in the coming quarters there's a lot more from there. So anyway, I'll turn it back to you, Michael, and we can get to Q&A.

Just to get -- along those lines of the integration, I mean it's very interesting. Because as an outsider, when both companies merged, I'd say the personas of the management teams were a bit different. But each team had an excellent track record of success in actually beating the targets that they set out to. So that's very interesting that you're bringing up the path. So it seems like you're molding it, a little friction -- not the -- friction for a lack of a better term, but it's going to get you to a better spot. So that was actually one of the questions, so it was great to hear. On the efficiency front, there was a time when it seemed that the market and investor base thought that we could be nearing an end. But listening to EOG and PXD yesterday, that didn't seem to be the case. Can you talk about the trends that you're seeing in the Delaware as it relates to D&C costs on a per lateral foot, and how the merger might actually augment this?

Yes. I think in the backdrop of really the last 5, 7, maybe 10 years for doing what we do, drilling and completing roughly 10,000-foot horizontal wells, hydraulically fracturing as a stimulation technique, and then bringing on predominantly oil wells. And that's the crux of the business we've been in, both from the Devon side and the WPX side, and really where the industry has excelled. And so when you look at kind of the creaming curves, we've all seen the -- here's what we did in 2012 and '15 and '18 and '21, that trajectory will continue. We will continue to be better at extracting the precious resources out of the ground and continuing to drill and complete better wells. There is some point of diminishing return, but we continue to see that trajectory in our own systems and processes. And then the same thing on the cost side: how much lower can you go? You saw again on our earnings release, another record quarter of really driving down the per foot efficiency gains. Certainly, some of that is in the backdrop of lower commodity price. You have some cost advantage in that environment, but so much of it is efficiency gains and operational techniques. Now in that backdrop, that will continue. There's an offset as commodity price increases. Certainly, there's inflationary pressure. That's real and present for everyone involved, and from my friends on the service side, desperately needed, to get back to kind of maybe a little bit more status quo where both sides are a little more profitable in a $65 environment. So we will see that in time. I think the differentiator for WPX-Devon, that merger, is when you're blending those best-of ideas and not just in a friendly competitor-type way, but now we're all on the same family, and really searching through and finding not just the recipe for the stimulation, but the subtleties of how we drill out the plugs? What's the fluids involved? What's the techniques? How do we flow these wells back? What are some of the nuances to the facility design? Each and every one of those are potential wins as we build the recipe for the right combined company. So going back to the inflationary pressure, because I anticipate that's kind of your next line of questions. I think we've seen continued improvement from the fourth quarter. You saw that in our numbers. Again, in our first quarter numbers, we have baked in a roughly ballpark 10% inflation from the beginning of year to end of year. I think we have a pretty good line of sight to that. And I can tell you, a lot of that will be offset by these efficiency gains. And we have some of that baked in, but I think there's more to be gained operationally to offset some of that. For 2000 -- for '22, I think it's a little early to kind of predict what inflation we might see there. I think it's so much about commodity price activity level, as you well know. And we'll see where that is, where that manifests. I can tell you that the things that we're doing right now to mitigate some of those is we're already -- we're working very hard to be that operator of choice for our service companies. And so things along the lines of contracting now, giving them the reliability and the surety of work is hugely beneficial and valuable to our service company partners. And so I think leveraging some of that with the scale and the scope, quality of assets that I talked about before, can get us a long way into a lot of cost mitigation -- cost inflation mitigation.

So just kind of digging a little deeper into the inflation. Yesterday, I forget if it was Baker or Halliburton, they seemed hopeful price, but they weren't going to peg a number or a percent. But one of them did note that they were seeing some price movement in cementing and wireline. You also had [ PPCE ] talking about double-digit cost inflation back into the half end of the year, like you. So I guess if you're talking about rig counts and steel prices surging, the one area that never gets really a lot of talk about, but is the fact that the service companies over the last arguably 4 to 5 years have been underinvesting, whether or not at some point that actually comes home to roost in terms of like supply/demand capacity where actual inflation takes off. Along these lines, are there any emerging technologies or techniques that you're excited about that could offset this inflation when it does arise? I know WPX pre-Devon was -- had different flowback techniques that they were testing, and whether or not that will fit into the future strategies.

Yes. To your first point, I agree with you on the underinvestment. I think about -- still there?

Yes. Sorry.

You're lagging just a little bit. All right. So yes, I would say the underinvestment is real. And I think about it not just from the service sector, but from the E&P side. And so as I think about the E&P underinvestment and the impact of commodity prices going forward, I think that's really an important consideration as we think about trying to project what commodity price might do. Back to your point on inflationary pressures, I think one thing we're doing to -- an additional step we're doing is we're spending a lot of time with our service company partners, really understanding their supply chain, so a couple of steps upstream from where we're at, to make sure that we understand some of the pinches and the pressures that they have and how we can help them mitigate some of those things. You mentioned cement. You mentioned steel. Those are a couple of incredibly important inputs for a lot of our key suppliers, and so making sure that they are being thoughtful about being able to prepurchase and lock some of their supply in. But they can only do that if they have assurance from us that our continuity work will allow them to do so. And so that's something that scale really brings, and I think the new combined Devon can offer, that many of the smaller companies honestly struggle with. We can look out pretty far ahead. And then our service companies can look back directly at us and understand the quality of our inventory, the surety of that work, and then they can help mitigate some of their cost pressures. To the tail end of your question in regards to the technologies involved in some of that mitigation, there are so many things. It's things brought from both legacy companies. And it's small seems -- it may be a valve technology that we're using, or something related kind of in the name of ESG that gives us some efficiency in the facility design. How do we leverage that with costs/benefits? And thinking about how do we build the company we want to build, not just from a cost standpoint, but also the right way to do things, namely in the space of ESG. And so we're seeing a lot of those kind of wins upon wins. You mentioned flowback techniques. There is no singular right answer I can tell you. It's going to be a bespoke solution depending on the formation, maybe even the spacing well to well, that completion design that we put in, facility design, overall economics. And so it's a circular calculation that the team makes to ultimately get to the best value for that pad or for that even kind of sub-region of the field development. So working on those things, exciting prospects and opportunities that we're seeing kind of come to surface on those. But there's a whole lot -- whole another phase that we can talk about another time on specifically around technology. Devon was a couple of steps ahead in regards to some of the machine learning, the AI camera technology, specifically in the production space, what's on location, and how do we instantaneously understand what's going on in that well. Sensor technology is so cheap and abundant today. Devon has done a great job of really leveraging that. And then once you start collecting that data, then these amazing data scientists can start predicting the future. And that's where I think some of the technology advantages and some of the things I'm really excited about, we just didn't have the scale or the years of data collection singularly on the WPX side. That was something that really the Devon side was much more advanced on. I'm really excited about leveraging now the WPX data on top of those already built-in skills.

Great, sounds exciting. Not to put you on the spot in regards to the technologies, and we went through efficiencies. One thing a few years back, I remember some of the companies, your peers, maybe even yourself, used to talk about recovery rates, if you could just increase it by 100, 200 bps, what it would mean to the overall economics. It seems like the industry has gone little silent on that. Is there any kind of update around that? Or anything that you're seeing from -- whether it's the merger or what you had been working on previously?

Yes. So ballpark state-of-the-art resource plays, classic shale reservoirs, are still somewhere in that kind of 8% to 15% recovery factor. And so you think about all of the oil that's trapped in the ground, just recovering 1/8 of that. You think about the leveraging opportunities as we get better on the efficiency curve. A term we use is stimulated rock volume; so around that wellbore, how much of that reservoir rock are you really touching to effectively drain with that wellbore. That's something -- we still got a lot of upside in that space. And so we think a lot about it. I can tell you there's other reservoirs a little bit more classic, maybe a little more sandstone, up in the Williston Basin as an example. The Middle Bakken itself has a much higher recovery factor. The shales on either side have much lower recovery factors. How do we continue to enhance that, the really higher-quality zone, and then make sure we're adequately touching and depleting the zones on either side of it? On the Delaware Basin, it's much more complex. As you know, we have tens of thousands of feet of hydrocarbon column. How do we ultimately develop that? And not just a single landing zone, the landing zone immediately above and below. And how does all of that work together, so that are -- we have a correct depletion strategy, not just for that zone, but again for that hydraulic flow unit?

Great. Now getting back to emerging technologies, efficiencies and the way Devon, WPX has been putting together their different strategy, production strategy. There was one pad that actually stuck out on the last quarter, the Danger Noodle pad in the release. And maybe you can talk about not only how did you get that name, but it seemed to be on the legacy Leonard acreage. And what was unique about that area? And what you did to actually get those stellar results? And it was like 5,100 barrels BOE over 30 days, so it seemed like a pretty strong result.

Yes. I can tell you the Devon side of the house, legacy Devon side of the house is much more creative on naming. There was a snake theme there that kind of took over. So I can't -- I don't know the exact origins, but I've been assured it's in line with the rattlesnake and the raptors and the -- others that are coming our way. So I think that's a good example of why we love the Delaware Basin so much, right? You mentioned we had been targeting one zone, the Wolfcamp. All of a sudden, maybe it's a bailout zone, maybe it's kind of second order, maybe it's something we'll catch down the road. And then you complete it and you have -- bring on wells like this. Just know that that exists throughout this area we're in, why we love the area we are in. From the Texas side, we've probably been more -- much more Wolfcamp developers and now really starting to see the upside in the Bone Spring, which we're exceptionally excited about. Coming from the North and New Mexico side, it's been classic Bone Spring development. And now you're starting to see some of the Wolfcamp, as you just mentioned, come in with these amazing rates. I can tell you, it's all good. And so trying to figure out how do we -- the depletion strategy and not again, not for this DSU, not for this landing zone, but for the kind of the region, maybe the subregion. We think about how do we go in and make sure that we are not leaving stranded assets. We're appropriately drilling the right number of wells, the right spacing, the above, the below, 3 dimensionally going after this, and thinking about it from a surface use standpoint as well. And so all of those things come into play. This is a perfect example of a zone that we had already drilled the primary, the Leonard section. We came back in, this is the XY and the A subsections of the Wolfcamp, landed them. Kind of state of the art, what we're doing on stimulation, nothing out of the ordinary. The facility design probably a little bit bigger than normal, just to be able to handle those rates. But again, nothing quite out of the ordinary from the normal course of evolution that we're going through. It's just exciting wells and what I hope to see a whole lot more of as we continue to develop this amazing resource.

Great. With the WPX merger, can you talk about capital allocation within the Delaware, the splits between New Mexico, Texas? Also maybe touch upon the regulatory backdrop, permitting, inventory of permits, that kind of stuff as well?

Yes. We all benefit from a deep portfolio. And I can't predict the future, but there will be wins in regards to new landing zones. Maybe there's something we're doing in an area that requires a little extra capital investment. And so we can shift capital that direction. I'm thinking of something that's -- maybe there's a surface consideration, a project that we're doing that benefits from differential scale, and we can leverage into that, okay, and take dollars from another part of the basin to do that. And then let's say there's a pinch point. Maybe there's something like we just experienced, where the secretarial order gave us concern about permitting. Hey, we can respond to that. And that was something that was very important from the Devon side to make sure that they had ability to divert capital if something came up. Now clearly, the work ahead of that 60-day pause was exceptionally good. We were prepared for that, managed through that. And I can tell you, as we look at kind of the activity during that period for the balance of '21, because of the work that we did ahead, we were undeterred from the normal course of operations. And as I mentioned on the call, subsequent to that lapse, the March 22 lapse, we've now caught back up on permits and replaced the permits that we drilled really for the first half of the year. So that's been very beneficial. But we all know it's hard to predict the storms that are coming our direction. The one thing we can do is pre-plan ahead, have those mitigation steps in place. And then the quality portfolio to be able to shift and react as opportunities present, I think, is a hallmark of a great company. I would say state-of-the-art today. We don't know yet where the best opportunities are for our differential capital. We're working on that. We're making sure that we're speaking the same language. When we say D&C costs, it's the same as its D&C costs. What is your cost burden? And what are those opportunities? Say, in the world of LOE, maybe there's a water handling technique on one side or the other that could be a $0.50 a barrel kind of benefit. Well, let's make sure that we, one, understand if that's an opportunity for the other side. If so, let's capture it. And if so, let's make sure we bake that into the future economics. And so there's so many of those kind of experiments and trials that are going on right now to understand how do we rightsize the cost structure from both sides, and at the same time, well improvements. We talked earlier about completion design and understanding how do we best stimulate the rock to most effectively create value from this precious resource. I can tell you, that's up in the air right now as well. We're working great ideas from both sides to try and get that optimal strategy. And as you well know, you've been in the business for a while, we're never done, right? There's always a 2.0 and a 3.0 and a 4.0. I've lost count on what number we're at, but it's up there. And in my view, it's -- we're never done. So we're always looking to continue to evolve and improve.

Great, great, great. I guess, again along with allocation lines, how does the Anadarko fit into this? I guess not into the Delaware, but in terms of how you allocate capital beyond the current JV? Is it an area that you actually want to invest more in or maybe even potentially divest?

Yes. One thing I will always do is leave all options on the table. And I think you've covered all of them, from increasing to decreasing scale of the operation. I really love the approach that we have right now. Just on a heads-up basis, from history and from what we know on a risk basis, it just doesn't stack up with the Delaware Basin, okay? Few assets do. So how do we understand what modern completion practices, modern well costs, the best-of approach, what could that mean to that asset? And is it something we want to scale up or scale down? Well, the team did a great job of pulling in Dow Chemical. Dow loves the JV that we have because it scratches a couple of itches that they needed. And at the same time, we're working on promoted dollars. So when you look at the promoted well economics, it stacks up every bit as good as the Delaware basin, okay? And so we're willing to give up some of the upside of the well to promote our returns on those wells so that we can dedicate some dollars to this. In the meanwhile, we're understanding what state-of-the-art completion practices, well costs, really look like. And I can tell you, it's very impressive. We're only on well 6 or so right now. It's a total 133-well package. And I would say by pad 3 or 4, we'll kind of be up to speed on how this is really forming. And it's very easy to do the math to say, okay, on an unpromoted basis, how does this stack up and is this something we would want to invest in on a stand-alone basis? Jury is still out on that. It will take us a little while to figure that out. So the options, in my mind, would be, well, we have partners like Dow that would love to extend the deal that we're doing. Do we continue down this path? Do we honor this agreement and then move forward, maybe on a heads-up basis? Or even what you mentioned, maybe it's an opportunity for us to pull that up, kind of shine that up for a third party that maybe it fits better in their portfolio. So all of those things will be on the table, as they always are in a very objective value-creating organization.

Great. Great. Moving along to returns, free cash flow and all the good stuff, the numbers that are actually shining through on the combined entity that you have now. Is there a scenario where you would actually raise the cap on the 50% excess cash flow to the variable in light of continued strong oil prices and efficiency gains and the like? And then also in that context, what is the rate -- the correct base dividend?

Yes. So it's funny, we were joking at -- last week in the earnings call. In my history before, it was a bad situation when the CFO was kind of the star of the show, right? I mean your debt multiples or credit or something was amiss, and that's why the investors want to talk to the CFO. Jeff was a pretty big star of our last earnings call, and it was great, right? Because we've set the tone on this variable dividend. We have a first mover, a leader mentality on this. I think it's been very well received by the shareholders. And I think it's something that it really fits our industry well. We live in a cyclic industry. We are price takers. We can't do much about that except mitigating hedging in the short term. And so I love the elegance of the solution from a base dividend to a variable dividend. So let me get to your 2 specific questions. The base dividend is designed around kind of a bulletproof strategy. It's kind of a 10% of cash flow on a very -- a mid-cycle price. We're still thinking, look, long term we run that in a $50 to $55 world. It may look conservative today. Tomorrow, it may not. I think that's just, again, a disciplined move on our part. And then the variable dividend is a way for us, in the times like we're seeing right now -- obviously in the first and -- fourth and first quarters we've already paid the dividends -- this is time when we're generating significant free cash flow. What are our options with that cash flow? One, return to shareholders, okay? I think the solution that we have, this elegant variable dividend, is a way to immediately return that to shareholders in a way that they can understand and mostly predict and hopefully value in to our share price. That's the ultimate goal. But we have some very important outs, because we know in a commodity environment, things can change. And we don't want to be tied to a fixed dividend that all of a sudden, we have to cut and then we have to reverse course, lose credibility. So we're trying to be very disciplined in separating the base and the variable, and making sure that investors know this is the way we calculate the variable. It's in the appendix of every slide deck that we do, a very -- it's a simplistic formula. And so that should be a relatively predictable calculation. Now what you asked specifically is what we've articulated is up to 50% of excess free cash flow. So you take free cash flow, obviously you pay -- out of that is your fixed -- or all your costs and all your capital, then you take off your base dividend. And then what's left over, we've coined as excess free cash flow. Up to 50% of that, okay, goes back to shareholders in this variable dividend, assuming that we can check 3 boxes. And there's liquidity and there's kind of cash, and there's a debt number, and then the third one is kind of an outlook on pricing. Obviously, if the pricing has crashed from underneath us, we don't want to be paying a variable dividend. So there's a little bit of flexibility on management's side and the Board's side in those regards. But I can tell you, we're really thoughtful. So far fourth quarter and first quarter, we paid that at a full 50%. Next question obviously goes to why stop at 50%? Why not go up? I would say, man, let's get a few more quarters under our belt, see how this has continued to be received. Our Board obviously has full discretion to do a lot of exciting things as we look at the future of where cash flows project from here in this kind of low to no growth strategy. So in '21, we're holding production flat. Longer term, we've talked about a 0% to 5%. In either of those cases or anywhere in that range, you generate very significant cash flow. And so I would say, much like I talked about before when were talking about assets, everything is on the table. In that spectrum, obviously the base dividend is kind of sacrosanct. Variable dividend is a nice adder to that. We've been working on our debt strategy. By year-end, we'll be at 1 turn net debt to EBITDA below -- or below. And then even things like share buybacks, all of those things will be on the table. And it's kind of a first-things-first approach and making sure that we are kind of working things in the right order. We're not going to do things that are short-term wins and long-term losses. We're very thoughtful about the strategy associated with that. But I'm pretty excited about having the first-world problems of significant amounts of free cash flow to decide how do we return it to shareholders or invest back in the business.

You started to touch on it, and I was going to -- after that question, I was going to continue into the leverage target, sub-1x, which you noted that you are -- it seems that you're very ahead of. And what Devon sees as the correct or the appropriate long-term structure, the balance sheet and the financials and how M&A, dividend, buybacks, all that kind of plays into that.

Yes. I would say all of that's on the table. We've articulated a really -- a very thoughtful and pretty tight strategy for '21 in regards to the dividends, both fixed and variable, driving down the debt metrics to 1x, as you pointed out. We're very confident we'll be there by year-end. Is that a hard line number at 1x? No, not necessarily. Our goal has been below 1x, and that's the direction we're headed. We'll see where that goes in time. Obviously, when you're stacking cash, it's a net debt number, so that cash benefits that number. As maturities allow us to kind of lock in some of that and pay down some debt, we'll do that in time as well. Again, it's opportunistic. We're not going to go in and buy debt that's trading super-high valuations just because we need to get that cash redeployed. We don't have to do that. We have a lot of latitude in that regard and really pleased where we're at.

Good. Great. Moving along to the asset market, PXD actually -- they did 2 transactions, your peer. And they were questioned as to why they did one so close back to back. And they noted that DoublePoint came to the market much earlier than they expected. They had looked at it previously, and they thought it was a year or 2 away coming to the market. So the question is are you seeing more assets becoming available? And if something did, would it be of interest for Devon's and WPX? Or they have more than enough to take care of right now before they look at another asset?

Yes. We're incredibly proud of the assets we have. I think about inventory we have and the kind of the tiers of maybe the next 5 years, ready to drill, high quality, I'd put a bit to it anytime. That next 10 years, super-high confidence that it will be into that first bucket. We're just understanding a little bit more on spacing, and maybe kind of delineating the precision that we need from a risk basis to kind of put it into that first bucket. And then there's kind of beyond the 10-year scale that, man, we have those additional landing targets. We talked about some of those earlier that they're not mature today. But just the way these basins work, especially the Delaware Basin and these "bailout zones," turn into some real premier assets over time. So it's not a question for me on inventory. But at the same time, I know it is the right thing. Financially, it is the right thing for our industry to consolidate. And so as we look for the opportunities to draw in another organization, build in some synergy efficiencies, they don't need 2 of me. They don't need 2 legal teams. They don't need 2 accounting teams. All of those things are just natural synergies that benefit. And then again, that scale and scope really comes in, some of the wins that we're seeing right now in our organization, kind of sharing that with another. There's obvious value creation in that process. Do we have to do it? No. And that's the beauty of being in a position of being able to decide some of these things. You know well from both Devon's history, long history of acquisition and bringing companies in, it's very much part of the organizational history. I would say WPX, pound for pound, was probably the most active E&P company in the last half decade or so, buying and selling, rebuilding the company. So we're very comfortable in that space. But you saw periods, I'll use WPX, my pedigree, where we didn't do anything for 3 years, and there was not a single transaction. I guarantee you, the A&D group wasn't any less busy during that period. They were hunting and working and evaluating and bidding and negotiating and gladly walking away when deals didn't fit. And then all of a sudden, a deal like Felix would come up where the stars aligned. This is something we can knock down and it worked for us. So those are the kind of things we're looking for. We're just as busy as we've ever been. David Harris is leading that organization and doing a phenomenal job thinking big picture about how can this fit, how can this ultimately create value for us. In this world, that consolidation is still being called for, and rightfully so, there's just too many E&P companies out there. So if we can participate in part of that synergistic opportunity, we will. But just know that the bar is exceptionally high.

Good. And I guess we have a couple of minutes left, and any energy discussion without talking about ESG, you alluded to it quickly, wouldn't be I guess a discussion. But I guess just to kick it off, when you're talking to your larger shareholders, how much of a priority is it, the ESG, both the E, the S and the G, to them?

Honestly, when I think about the conversations we have with our largest shareholders, they want to know that we are thinking about it. I don't know that we spend a tremendous amount of our precious maybe 30-minute or hour-long session on ESG. But I can tell you, the only reason we're in the room is because they know that we spend a hell a lot more time outside of that meeting thinking about it. In the new organization, we have a Vice President of ESG, a guy that is just an exceptional thinker, big-picture operations guy by background. And that is his world. And so he interfaces directly with the Board, directly with investors, and is a full-time high level position that's thinking about steering and carving our path forward. And so knowing that it is part of who we are, and it's a part of kind of the license to operate in this space go-forward, we take it very, very seriously. As I think about kind of best-of and wins from companies, Devon was clearly a few years ahead than WPX. I think WPX, we had a -- we were at a point in our organizational health that we could start really investing differentially and thinking much more so about ESG. And so kind of the '19 to '20 time frame, we were ramping up really hard to kind of catch up maybe to the kind of the tailwind of where Devon already was. Devon had that opportunity a couple of years before us. And so I can tell you, we're jumping on to a lot of the Devon kind of mindset and thinking and some technology as well. If you think -- I mentioned earlier about some of the true technology pieces and specifically in the production space. When I say production, that is monitoring wells, sitting on location, looking for that first opportunity, anticipating that there's going to be an issue and being a couple of steps ahead of it. I'm really proud of what we're doing and where that's going in time. I think it's an evolving space. I think some people see it as a challenge to the industry. I see it as an opportunity. I see it that we can differentiate ourselves be really good operators, exceptionally good stewards of capital, and at the same time, have a very well thought out ESG mindset. That's, to me, the right recipe. And going back to the reference of some of our largest shareholders, that's what they want to know. They don't have the time or capacity to dive into the details of every bullet of every subcategory and how we're setting a goal on this piece of it. Just tell me that you're taking this very seriously, and I will trust you that you are. Now let's talk about this variable dividend. And that's -- just like on the operations side. They don't care about your perf diameter or how many shots per foot. You're doing this. You got this, right? Yes, we got this. Okay. Now let's talk about your variable dividend.

Could you envision a time where you use some of the offset acreage for carbon offsets, whether it's solar or wind, to power your operations or even sell back into the grid? We actually -- I think it was EOG that noted they were looking into that yesterday.

We're already doing it. And I can tell you, on smaller scales this has been part of the oil and gas industry. We have -- I don't know how many solar panels we currently have in the organization, but it's tens of thousands, I would solidly say. And every -- think about every remote operation and every little piece of equipment, things, lighting and all that stuff, that runs really well on solar, we've always embraced that. What you're talking about is scaling up to actually run a well pad off a solar array. And I can tell you, we're getting pretty far along in some of those things. Part of David Harris' organization, not just the A&D strategy, is also thinking about new ventures and being very thoughtful once again about the opportunity set that we have in this space. There is differential investor -- investment dollars coming in that want to partner on something like that. Just in the state line area, we own 15,000 surface acres, okay? That was $100 million investment we made a few years ago, knowing that it's going to be potentially the most concentrated development we have in the organization. I guess it actually is. And so thinking about leveraging that surface, not just for roads, for sand, for trucking, for hauling, for wellhead space and facility locations, but also thinking about, man, this is in southeast New Mexico, West Texas, wind blows, sun shines, all those characteristics that you're really looking for to leverage into some of this transitional energy space. So leveraging that we're already significant consumers in the right part of the globe that really benefits from this, it's a natural kind of one-two punch that we already have projects underway to benefit. And I can tell you, it's not just a tip of the hat to ESG. These are legitimate value-creating, efficiency-gaining operations that we can look ourselves in the eye and say, this is good investment of the dollars.

Great. It looks like we're about at the end of our time. But again, Clay, I appreciate it. I hope you have -- wish you success in your further operations and also good meetings ahead for you the rest of the day. So again, thank you, Clay and Scott. And if anybody has any questions further for Clay, please feel free to e-mail us, and we'll get you in contact. And hopefully, we can get that trip again down to Oklahoma. So again, thank you, Clay. Have a great day.

Thanks, Mike. Appreciate it.

Bye.