Devon Energy Corporation (DVN) Earnings Call Transcript & Summary

Welcome to Devon Energy's conference call. [Operator Instructions] This call is being recorded. I would now like to turn the call over to Mr. Scott Coody, Vice President of Investor Relations for Devon Energy. Sir, you may begin.

Thank you, operator, and welcome, everyone, to our conference call to discuss Devon's acquisition of Grayson Mill Energy in the Williston Basin. And 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; David Harris, our Chief Corporate Development Officer; and a few other members of our senior management team. The press release and slides for today's announcement can be found on our home page of the website. We will reference slide numbers throughout our call this morning to help everyone stay on track. Please take note of the advisory language regarding the forward-looking statements in the press release issued this morning. Comments on the call today will include plans, forecasts and estimates that are forward-looking statements under U.S. securities law. These comments are subject to assumptions, risks and uncertainties that could cause actual results to differ from the forward-looking statements. Please refer to the information on the safe harbor slide in the presentation as well and the additional information contained in our SEC filings. Today's call will be 30 minutes. At this point, I will turn the call over to Devon's President and CEO, Rick Muncrief, for an overview of the transaction, and then we'll open the call to Q&A.

Thank you, Scott. Welcome, everyone, and thank you for joining us this morning. We're excited to share our thoughts on today's announcement to acquire Grayson Mill Energy and look forward to addressing your questions shortly. Now for Devon, the Grayson Mill business is an excellent addition to our portfolio, fitting perfectly within our broader strategic framework to accumulate resource and grow our oil-weighted production in the best parts of the top U.S. shale plays. This transaction is also transformational for our operating scale in the Williston Basin and captures a meaningful runway of inventory that allows us to efficiently maintain high-margin production from this world-class oil basin for many years to come. In addition to the strong industrial logic of the deal, the acquisition advances our financial strategy by delivering double-digit accretion to free cash flow, that is immediately a flow through to shareholders in the form of higher gas distributions. Now turning to Slide 3. We have worked exceptionally hard through the year to assemble an asset portfolio that resides in the very best positioned place on the U.S. cost curve. We believe being a low-cost oil-weighted producer with quality inventory is critical for our long-term success. As I've stated earlier, the Grayson Mill transaction is a great fit. Within this philosophy that opportunistically adds 100,000 BOE per day oil resource to our portfolio that substantially enhances the overall scale and scope of our upstream operations. Pro forma for the transaction, Devon will be one of the largest oil producers in the U.S. with average daily oil rates estimated at around 375,000 barrels of oil per day, with total volumes reaching 765,000 BOE per day. Now as you can see on Slide 4, we have a history of growing oil production. With this transaction, we have now more than doubled our oil volumes since 2020 through a combination of accretive acquisitions and organic growth. We expect this trend to continue. Now turning to the asset level detail on Slide 5. It is easy to see that this acquisition is a great fit adjacent to our acreage footprint and transformational to the size of our entire Williston Basin position. This transaction secures a premier leasehold position of 307,000 net acres, positioning Devon as one of the largest operators in the play, now with over 430,000 net acres. The acquired business is expected to triple our in-basin production to roughly 150,000 BOE per day, with oil reaching almost 60% of the product mix. With enhanced scale in the basin, we expect to realize up to $50 million in annual average cost savings from operating efficiencies and marketing synergies. Now moving to Slide 6. The Grayson Mill assets also expand our inventory runway in the play for about 10 years at the current pace of development. The acquisition adds 500 gross locations, consisting of a mix of 2-mile and 3-mile lateral opportunities along with 300 high-quality refrac candidates. Importantly, this resource effectively competes for capital within our diversified asset portfolio, allowing us to efficiently sustain our oil production in the Williston for many years. There is plenty of upside here as well. And I've been working to Williston for 40 years now, and I can tell you that there is still a lot of oil to be recovered in this basin, whether it be through improved completion designs, tighter spacing, refracs, EOR or additional exploration and development. There will be many innovations that promise to sustain the Williston Basin as one of the top three oil fields in the United States. Turning briefly to Slide 7. And with this inventory depth we now have, it's also important to highlight that both companies have a track record of delivering industry-leading well productivity. The data illustrated on the slide clearly demonstrates that the average well performance over the past few years for both Devon and Grayson Mill consistently surpassed that of our leading competitors. Now turning to Slide 8. Another key point to be made is that the overall economics of the assets are bolstered by the ownership of the integrated midstream business that generates more than $125 million of EBITDA annually. This midstream infrastructure consists of an extensive network of gathering systems, disposal wells and crude storage terminals. This midstream advantage drives peer-leading operating margins in the basin and provides us with the marketing optionality to capture higher oil pricing through access points to multiple end user markets. Now moving to Slides 9 and 10. This high-margin asset, combined with an attractive purchase price, delivers double-digit accretion to our free cash flow outlook on a pro forma basis. Due to our increased free cash flow capabilities, I'm excited this morning to announce that we are increasing our share repurchase authorization by 67% to a total of $5 billion. This increased authorization provides us ample runway to opportunistically repurchase our stock and bolster our per share growth trajectory over the next few years. We also believe that the abundant free cash flow from this acquisition will be additive to our dividend payout in 2025 and beyond. In addition to a higher cash return profile, we plan to earmark up to 30% of our annual free cash to reduce $2.5 billion of debt over the next 24 months or so. So in summary, on Slide 11, I want to emphasize that the go-forward Devon possesses all the necessary attributes to continue to deliver outsized returns versus the broader market. With the AI and Tech Mania that is as a way of capturing all the headlines these days, I think it's important to remind investors that Devon has delivered the fifth best total shareholder return of any company in the S&P 500 since 2020, outpacing the index average by a significant margin. The bottom line is that with the right strategy, the right people, the right assets and the right financial framework, we will continue to deliver this outperformance for shareholders. The Grayson Mill acquisition only amplifies these inherent advantages, and our team is energized and ready to roll with this great addition to our multi-basin portfolio. I think it's also appropriate this time to congratulate the entire Grayson Mill team on a successful outcome [ for they ] and their sponsors NCAP. They've worked hard on building this company over the past number of years. Nice job. And with that, I'll now turn the call back over to Scott for Q&A.

[Operator Instructions] And with that, operator, we'll take our first question.

Our first question is from the line of Nitin Kumar of Mizuho.

I just want to -- looking at the Slide 5 and the math, this acreage is a little bit further away from some of your legacy assets in the basin. So I just want to understand what are the differences in geology in terms of just the asset base? And are there any differences that you've noted so far in your work that could help or hinder your execution on the asset?

Yes, Nitin, great question. Thanks for joining us today. I think as you see, Eastern part of the basin historically has had -- and this is east of the Nesson anticline that runs through there, historically, especially on the Fort Berthold Indian reservations has some just phenomenal rock. As you go to the west, you've seen lighter development. The rock is just a little bit tighter, but it really sets up well for exactly what you've seen that development taking place over there. I'm going to have Clay weigh in here as well, but we're excited, especially with changing the orientation and going from the 2 miles or 3-mile laterals has truly been a game-changer. And I think you're seeing it in the results. So we feel very, very confident and we love this acreage position.

Yes. Nitin, this is Clay. Just to reiterate a couple of points. I mean, a number of -- the biggest difference, number one, is on versus off the reservation. That is a material change for us to have that optionality. I think gives us a lot of flexibility in our own operations. Certainly, this adds to the significant scale of the Williston Basin. Oily inventory is very precious, and we don't take ever take that for granted. But as you move West, it opens up some interesting opportunities. This is kind of the product necessity is the mother of all invention kind of thing where 3-mile laterals, as that technology has really evolved, this area has really opened up and really lit up with kind of excitement. Rick also mentioned the completions technology. As we continue to fine tune that, this area continues to pay really nice dividends, and we're excited to have it in our portfolio.

Our next question today is from the line of Neal Dingmann of Truist.

Congrats on the deal. Rick and Clay, my question is, I know cognizant of not having the guidance out there yet until the deal closes, but historically, at least the last several quarters, about 75% of your activity has been Delaware based. And you mentioned 3 rigs will likely be running on the new property. Will that -- could you talk about maybe allocation on -- will that come then and you have a little bit lighter activity in the Delaware as a result of that? I'm just trying to get a sense of pro forma this deal, how we might see activity between the Delaware and this sort of shakeout.

Neal, it's Clay. Thanks for the question. Yes, I would say it's certainly too early to talk specifics on 2025. That guidance will be coming in the coming months. But what I can say is, definitively, this doesn't impact our activity level in the Delaware Basin. That should be kind of the first call on capital pretty consistent there. Really pleased with that economics, have a great runway there. What this -- think of this acquisition is really enhancing the multi-basin business that we have, really supplementing where we needed to in the Williston, and I think it adds really great opportunity set, not just in this year, but in several years to come.

Our next question today is from the line of Kevin MacCurdy of Pickering Energy Systems.

I wonder if you guys could provide a little bit more color on the $50 million of synergies. What costs have you identified? And are the marketing synergies related to the midstream ownership?

Thanks, Kevin. This is Clay again. This is not your classic G&A synergies that some publicly traded combinations yield. We're thinking much more along the lines of kind of operational synergies. The efficiency of scale inside the basin is critical. That opens up lots of things that we can do with our rigs, with our frac fleets, even from our marketing and supply chain side, that scale is quite valuable. I think that easily checks the box. But you also mentioned the marketing. I think as we start thinking about the infrastructure that comes with this asset provides a lot of value as we all know. You can't produce the water, you can't get rid of the water efficiently, boy, really encumbers your business. The oil infrastructure, the gas infrastructure, all of that, really adds value and provides us upside from where we sit today. So excited about that. There'll certainly be other synergies along the way. But I think the $50 million is just a pretty conservative placeholder that we want to plug in.

Our next question is from the line of Charles Meade of Johnson Rice.

I wanted to go back to the midstream question, and I'm really trying to understand the cash flows there and how we should ascribe value there. The $125 million, is that just on the Grayson Mill assets? Or is that on the combined asset base? And related to that, are those -- is that EBITDA kind of intercompany EBITDA? Or are there third-party volumes that contribute to that?

Yes, Charles, this is Jeff. You nailed it. That's exactly right. It's just related to the Grayson Mill asset business that we're acquiring. And it is effectively the $125 million of EBITDA that we've assumed and included in the materials is effectively intercompany. There is some third-party working interest owner EBITDA included in there, but it's very negligible. It's really driving the higher realizations that we're seeing across this business.

Got it. Got it. And then -- so if we were to think about it that way, Jeff, what -- I think you have some material on this, but what is the -- can you quantify that higher realizations on the Grayson Mill assets versus, say, legacy Devon or a basin standard?

Yes, Charles, I think we've got a slide in the material. You'll actually see kind of on a relative basis across the basin. You can see that the infrastructure that's included in this business that we're acquiring effectively provides anywhere from $3 to $5 uplift in our realizations, which really sets the -- you can see it kind of in the bar chart, I think it's Slide 7 in our materials, you can see the improvement that we get as a result of that.

Our next question today is from the line of Betty Jiang of Barclays.

So I wanted to ask about the inventory number highlighted in Slide 6. Could you just provide a bit more context around that up to 10 years of inventory? Does that include refracs? And then how to think about the spread of those locations across the acreage between, say, that Central McKenzie Montreal County versus the Western extension area?

Betty, this is Scott. You were cutting out a bit. I heard Slide 6. I heard inventory. So I'll just turn it over to the team here with regards to just maybe an overview of the locations that we have, the 800 opportunities that we've identified and maybe what that's composed of.

Yes, Betty, I hope it's your question. So we've identified 800 -- conservatively, 800 opportunities, 500 of those are new wells. We also have some refrac inventory. That's one thing as uniquely as you move West, we think there's more refrac potential than we have seen and we benefited from on the East side of the basin. So we're excited about that. Think of that refrac as kind of supplementing the base. Where really focused on is the additional 500 wells of inventory. I think you might have asked about spacing. There's certainly, as you move further West, the Three Forks kind of pinches out about halfway through this 300,000 acres. So the West side is really dominated by the Bakken. As you move on the East half of this, there's some Bakken and there's some Three Forks potential. Anyway, I hope that answers your question. Sorry, we couldn't quite hear you.

Our next question is from the line of Kalei Akamine of Bank of America Merrill Lynch.

Sorry, I was on mute. My question goes to the cost structure of the acquired assets. Can you just give us a sense of how the operating expense and the logistics costs compare to legacy Devon?