Devon Energy Corporation (DVN) Earnings Call Transcript & Summary

Welcome to Devon Energy's Second Quarter 2026 Conference Call. [Operator Instructions] This call is being recorded. After today's prepared remarks, we will host a question-and-answer session. I'd now like to turn the call over to Mr. Dan Guffey, Dan, you may begin.

Good morning, and thank you for joining us on the call today. Last night, we issued Devon's Second Quarter 2026 earnings release and presentation materials. Throughout the call today, we will make reference 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, our President and Chief Executive Officer; Shane Young, our Executive Vice President and Chief Financial Officer; and other members of the executive management team. 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. Also, please note Devon's second quarter results reflect legacy Devon operations for the full quarter plus Coterra beginning on May 7. With that, I'll turn the call over to Clay.

Thank you, Dan, and good morning, everyone. This morning, I'm excited to discuss our strong 2Q execution, the company's differentiated technology platform, assets and operational prowess and the significant progress we've made in just under 100 days since the close of our merger with Coterra. But first, let's turn to Slide 2 of our investor deck we published yesterday. I want to start with who Devon is, an operations-focused technology forward energy powerhouse. This description is supported by three attributes that defines Devon. First, everything is anchored around the company's culture of excellence. Second, technology is a genuine competitive advantage. And third, we have key investment differentiators in inventory, cost of supply and financial discipline. You will hear more about these themes throughout today's call. Now let's turn to Slide 3. The merger closed on May 7, just 94 days after announcement with both legacy companies having recent integration experience, the combination has gone even better than we planned. I'm happy to report to you that I am very confident in our ability to deliver the $1 billion synergy target with more than 350 synergy initiatives already identified and taking shape. Along the way, we enhanced our Permian inventory through a once-in-a-generation federal lease sale and at the same time, we strengthened our balance sheet with debt retirement. Just as importantly, none of that activity distracted us from the day job. We outperformed our second quarter guidance across the key value drivers, and that execution translated into a $1.7 billion adjusted free cash flow. When I step back and look at what the Devon team accomplished in such a compressed time line, I couldn't be more proud. Slide 4, put those first 100 days on a time line. I want to pause here because the pace tells you something about who we are and what you can expect from Devon. It started on day 1 when we closed the merger with 95% of our core IT systems and processes already decided. We raised the dividend 33% and we put the $8 billion buyback program to work. Importantly, we immediately kicked off a comprehensive portfolio review underscored by our commitment to maximizing short-, medium- and long-term shareholder value. Less than 2 weeks later, we captured value through our success in the Permian lease sale. By week 5, we had issued combined guidance that was better than the sum of the stand-alone plans. And by week 6, we finalized the new org structure for all of the office-based employees. From there, we closed out the quarter with a strong operational beat, and we have completed our $1.25 billion debt reduction target for 2026. Moving with speed and intention is not only a slogan, it's how Devon operates. With that foundation set, let's get to the results on Slide 5. Strong well performance allowed us to deliver oil production 2% above the midpoint of our guide and the total production reached the very top end of our guidance. On the spending side, capital came in 2% below the guide as we continue to capture drilling and completion efficiencies through our advanced technology and focused execution. Put those together, our reinvestment rate improved to 43% of cash flow, well below the mid-50s over the past 2 years. All of that translated into $1.7 billion of adjusted free cash flow in the quarter, a powerful demonstration of what this platform can generate. I want to emphasize that these results are not just isolated wins, it's a direct outcome of the focus and the commitment of our teams to deliver world-class operational execution. Now zooming in on the Permian. Let me spend a few minutes on Slide 6 and in Mexico federal lease sale because I know it generated a lot of discussion and because the more you understand this transaction, the more you will appreciate the value we captured in this unique opportunity, adding 400 top-tier locations in the heart of the basin. Let's start with the acquisition cost. The headline was $6.5 million per location, but let's make sure we understand the uniqueness of these locations. These federal leases with a 12.5% royalty, roughly half of the typical royalty burden of state and private acreage. That increased royalty ownership alone is worth about $2.5 million per location, which takes the effective cost of roughly $4 million per premium location. It is also important to understand the auction mechanics. The process was an ascending auction bid, think eBay, where the winning price was exactly $1 per acre higher than the second place bid through market price discovery. When you hear comparisons of price per location to negotiated private equity transaction, remember, those are a bit apples and oranges. The nature of private equity companies encourage them to partially develop the best opportunities first to build production, cherry picking the best opportunities takes them out of the inventory list but also can have a material impact to the remaining locations. In the federal lease sale these tracks were completely undeveloped from grass to granted, ensuring that we have the opportunity optimally and most economically develop the resource. As I will talk about on the next slide, our industry-leading D&C performance leverages the value of this acreage. The adjacency of the existing footprint enables longer laterals and our significant water, gas gathering and electrical infrastructure means lower cost and higher margins on production. We are already filing permits, and this acreage will play a meaningful role in our 2027 program. I would love to tell you that we'll be able to do this kind of transaction again. But the fact is that this is the last Delaware Basin federal lease sale of this scale. As you've seen us increasingly do over the past few years, expect us to continue to strengthen our existing acreage footprint through highly accretive ground game focused on trades and small accretive bolt-ons. Of course, the reason that acreage is worth more in our hands than anyone else's is that we have a home field advantage, and that's displayed on Slide 7. Our well productivity is top tier and our drilling and completion cost per foot are among the lowest in the basin. In addition, our inventory is the deep -- one of the deepest in the Delaware with a substantial base of low breakeven locations now including roughly 400 we just added. Productivity, cost and depth of inventory, that combination is what underwrites differentiated capital efficiency and free cash flow. The same set of capabilities is exactly what gives us confidence in the integration, which brings me to Slide 8 and synergies. We remain firmly on track to deliver at least $1 billion of annual synergy targets by year-end 2027 and our confidence is higher today than the day we announced the deal with more than 350 initiatives now underway across three roughly equal buckets. On capital optimization, we're lowering D&C costs through well design and supply chain scale while reallocating 2027 capital to its most efficient use. On the margin -- on the operating margins, we are consolidating field operations, leveraging combined infrastructure and improving GP&T and revenue deducts. On the corporate costs, we're eliminating redundancies and lowering our cost of capital, which ties all three together is really technology. I believe technology is the most important competitive advantage for Devon. So let's turn to Slide 9, where technology is driving real-time performance improvements today. Four quick examples. First, closed-loop AI is something that we've talked about the last few quarters and the value to Devon is growing. With our AI-enabled system now autonomously optimizing 1,000 wells real-time 24 hours a day. The ability to immediately respond to constantly changing well conditions keeps the production on the efficient frontier and we have a clear path to broad deployment around the company. This is improving production trends and provides a path to lowering our corporate decline rate. Second, AI is driving our subsurface advancement with a proprietary model integrating basin-wide data to predict well performance and optimized spacing and frac design with the aim of maximizing the value of every development. This enables our ability to scenario plan and reoptimize around the what-ifs of well cost, completion design improvements and even commodity price scenarios. Third, our Surfactant tests are promising. The completion phase of surfactant chemistry is enhancing our well recovery. Our first 10 trial wells across six different landing zones delivered clear uplift versus offset controls, and we are increasing our test to more than 50 wells this year. And fourth, real-time analytics processes live D&C data to avoid costly failures and benchmark every operation against best-in-class performance. Devon is a technology-forward company that has seen significant benefits, and we remain on the cutting edge as we blend the best practices of both organizations. Technology is a key value compounder. This is the operational story, a differentiated portfolio run with discipline, getting better through technology. To take you through what all that means financially, I'll hand the call over to our CFO, Shane. Shane, welcome to your first Devon earnings call. The floor is yours.

Thank you, Clay, and good morning, everyone. It's a privilege to be speaking with you on my first earnings call as CFO of Devon Energy. I couldn't be more excited about the future of our company and the opportunities that lie ahead for the company and our owners. Clay just walked you through the operational story. So let me take it up on Slide 10 with the scorecard. In summary, during the quarter, we beat guidance on every single measure. Oil production of 503,000 barrels per day came in 1.6% above the midpoint. Total production of 1.36 million barrels of oil equivalent per day reached the top end of guidance. Total operating costs, including GP&T, of $8.23 per BOE were 2% better than the midpoint and capital of $1.3 billion was 2.4% favorable to the midpoint of the guidance as well. Our strong first half performance gives us increased confidence in our full year outlook and has allowed us to tighten our production guidance ranges for 2026. So what does that performance mean for shareholders? Turning to Slide 11. In the second quarter, really the last 7 weeks of the second quarter, we returned over $1 billion through a combination of dividends, buybacks and debt reduction. Let me break that down. It starts with a sustainable dividend growth and we paid a quarterly dividend of $0.32 per share, up 33% from the first quarter. That totals $366 million of dividends paid during the second quarter. By keeping our dividend well within our target range of 10% to 15% of discretionary cash flow, we protect our intention to consistently grow the dividend on an annual cadence. Next comes the disciplined buyback. I with repurchases suspended until the merger closed, we resumed buying quickly after post closing and retired 4.3 million shares in the last 7 weeks of the quarter. We continue to be active in the market in the third quarter and the remaining billion of repurchase authorization will be deployed through a dynamic blend of systematic and opportunistic repurchases going forward. Underpinning it all is the fortress balance sheet supported by a BBB+ credit rating. During the quarter, we retired $250 million of senior notes, $250 million of our term loan and completed the Coterra bond exchange. Furthermore, in July, we retired the remaining $750 million of our term loan, which was scheduled to mature during the third quarter. Having completed these actions, I'm pleased to announce that we have met our 2026 debt reduction target through our existing maturities in the quarter. After delivering these returns and strengthening our Delaware inventory through the New Mexico lease sale, we ended the quarter with a strong liquidity position of $4 billion, including $1 billion of cash on hand. From here, our debt target of approximately $9 billion of total debt by year-end 2027 is achievable largely with maturities which occur during 2027, this will position Devon with a leverage ratio at or below 1x through the commodity cycle and will allow us to be opportunistic and countercyclical in our returns program in times of commodity softness. Looking ahead, Slide 12 shows why the cash flow engine keeps running through the second half on a fully combined basis. On a 20:1 value adjusted basis, our implied second half capital efficiency is 24% better than our peer average, which puts us among the most efficient producers in the industry. We see that dynamic continuing to improve into the future. That efficiency compared with a disciplined reinvestment rate means the back half of 2026 should generate substantial free cash flow and support a robust shareholder return program. As synergies layer in through 2027, we expect that advantage to strengthen. Importantly, we see the second half of 2026 is at or above the guidance we set just 60 days ago. That outlook is reflected on our guidance on Slide 13. As I said on the scorecard, our first half gives us increased confidence in the full year plan. including a tightening of the oil range to 495,000 to 505,000 barrels per day. Total volumes of roughly 1.4 million barrels of oil equivalent per day and total capital of $4.8 billion to $5 billion. Within that full year, the third quarter steps up meaningfully as our front-loaded capital program turns into production, and we record a full quarter of combined results. We expect oil volumes of 550,000 to 560,000 barrels of oil per day during the third quarter, setting up nice momentum heading into the fourth quarter, which I expect to be at similar or higher oil production levels as compared to the third quarter. We also expect total volumes of 1.66 million to 1.69 million barrels of oil equivalent per day in the third quarter and total capital of $1.4 billion to $1.5 billion. which should be our highest capital quarter of 2026 and simply reflects a full quarter of combined activity and the timing of some capital that shifted from the second quarter. As a result of normal ebbs and flows in the business cadence, we expect capital spending to move down in the fourth quarter, driven by less activity at a number of our business units, including the Marcellus, the Anadarko and the [ Powder ]. We're successfully executing on our 2026 plan and look forward to sharing our initial 2027 views in November. Let me end where Clay began, because everything you've heard today ties back to a simple disciplined model, a premier Permian-anchored portfolio, top-tier capital efficiency, a fortress balance sheet and return framework that delivers cash to shareholders through the cycle. With that, I'll turn it to Clay for closing comments before Q&A.

Thanks, Shane. That disciplined model extends to the portfolio itself. Our comprehensive portfolio review is well underway with a single objective, maximizing total shareholder value. It's a top organizational priority and we're moving with speed and intention to enhance the value of our company by leveraging our differentiated skill set, a hot market for quality assets and keeping an eye on the future value creation opportunities. We are evaluating every asset through a consistent framework of capital efficiency, the scale and durability of free cash flow and strategic fit. As I said previously, I expect this exercise to be measured in months, not years, and we're making significant progress with an update expected this fall. That said, I don't think of this as a onetime event. After this initial reset related to the merger, the evolution of our asset base and taking advantage of market opportunities has been a longtime part of Devon's culture and will continue to be a critical deal. Given the confidence in commercially sensitive nature of this work, as much as I would love to, we will not comment on specific rumors today. But the takeaway is simple. Every asset has to earn its place in the portfolio, and we are working to maximize the short-, mid- and long-term value for our shareholders. When I sum it all up, we believe Devon is a catalyst-rich story. We will deliver quickly against our synergy targets, updating you quarter-by-quarter, making fast progress on our portfolio review and execution rolling out a capital-efficient 2027 plan, leaning in to repurchase the shares and enhancing our advantaged balance sheet. That is a differentiated investment proposition, and this team intends to prove it. Lastly, I wanted to say thank you to the Devon team. Integration is not easy, but every employee continues to exemplify our core values of integrity, courage, relationships and results. He merged two proud companies in record time without missing a beat in the field. This is the quarter is your proof. To everyone at Devon, the legacy Devon and legacy Coterra like, thank you. The best is ahead of us. With that, operator, I'll take our first question. We kindly ask that each caller limit themselves to one question so we can get more questions on the call.

[Operator Instructions] Your first question comes from the line of Arun Jayaram with JPMorgan.

I will bite my tongue and I won't ask you about specific assets or market rumors for assets under your portfolio review, but what I do think will be helpful to the market is you to perhaps provide the criteria that you and the Board and management team are utilizing to identify which assets you view as core to Devon's go-forward portfolio, how does commodity mix between oil gas NGLs fit into that as well as tax implications?

Yes. And of course, all of that list is on the list and several things as well. When we think about it -- I think about it kind of through three lenses. First, what's the value of the asset to Devon. How do we think about the inventory? How do we think about our ability to extract value? What's that kind of core base hold position? And then secondly, you'd be very observed in the market. There's no doubt about it. There's some really interested -- hotly interested parties in buying quality assets and we don't want to miss any of those opportunities. So the second view is what's the market value of the asset, and then third, I think it's an important consideration around the strategic fit. How does this asset fit in and enhance what really is a Permian-centric core business? How does it enhance that above and beyond the incredible qualities that we have on our core piece of business. So combine that with the specifics around inventory and capital efficiency and competition for capital, all of those things that you mentioned, do play a role in that evaluation.

Your next question comes from Neil Mehta with Goldman Sachs.

What your perspective on the federal lease sales. That was a very helpful commentary. Slide 6 that kind of walked us through sort of the royalty benefits and maybe while it's not as high as it optically looked. But how do you think about how you want to approach this acreage? Is this something that gets pulled forward in terms of the timing of how you prosecute it and maybe spend a little bit more time if you can talking about getting the market comfortable with the investment you made here.

Yes. Well, first of all, thanks for the acknowledgment. And what I'll tell you, there's a lot to brag on about the team, but we're not perfect. And I can tell you we didn't communicate that effectively enough on the rollout. So this is kind of our second attempt. Obviously, there's a whole lot to be proud of on the execution of that. 13 days post close. I was so incredibly excited to get to the finish line and successfully so. We forgot to really kind of nail the communications piece. So look, we learn every single day we improve to get -- we intend to get better every single day. And this is a better, more fulsome story. Certainly, that royalty piece, the undrilled nature of this acreage, the mechanics behind this bidding process, unlike some of the golf sealed bid processes, just it truly exhibits the market price reality. And then it's in our backyard. We're incredibly proud of the operational prowess, the infrastructure that we have the extended laterals, the footprint that we have, and that's why we are incredibly proud to be the rightful owners of this. Now that it's in-house, it has to compete like everything else. The good news is, as you can see from the graphic depicted on the slide, it stacks up at the top of the list. This is our Delaware Basin potential depicted on the left side of that slide, Slide 6. And you can see where the red bars line up. And it's very much top quartile, even top decile centric. What that means is we're full speed ahead, getting the permits, getting this in the queue, and we'll be executing, as I mentioned in the prepared remarks, very substantially in the 2027 program.

Our next question comes from Betty Zhang with Barclays.

My question is on Slide 7 and just on the Delaware well cost. What's good out? Is that now you're already at $800 per foot, and that is ahead of some of the additional synergies that you're expecting to capture. So if I could ask like -- where do you see an aspirational target of how that well cost could trend over time? And would you are working on to lower it? What's your confidence level? Just -- and also just given the suite of technologies that you're seeing out there, how low could that go over time?

It's a fun topic because there's a lot going on there. I'll hand it over to [ Blake ] and get his perspective on this opportunity from a synergy standpoint, but also as the D&C executive leading that effort.

Yes. Thanks, Clay. I appreciate the question, Betty, because there's a ton of work that goes into just a number on a slide. If you don't mind, I'll give you a little deeper dive into some of the synergies we're already seeing. You can imagine it's been a ton of work, bringing these two words together, but it's also been really exciting, and we're gaining a lot of momentum. Our teams are finally getting to look under each others hood. And we've been operating across the lease line from each other for a long time, and it's leading to a lot of great gains. One of the first things we did is we immediately centralized our D&C teams post-merger, and that's already paid a bunch of dividends. The first one I would point to is on the supply chain side. Devon has a fully integrated supply chain team that can bundle or debundle services almost in real time to optimize whatever the current market presents to us. We brought that flexibility to the merger, particularly with our new scale and also with the legacy Coterra operation, which was more of a bundled model, they've been able to find a lot of value there. The second piece is just sharing best practices and techniques. They like to say there's no secrets in the oilfield, but I can tell you, every good operator has for you. And our teams have got to share some secrets. Devon figured out a really clever way to make some frac more efficient. We've been able to extrapolate that quickly across the whole platform. So you'll see the number of simul-frac wells going up in our program whereas on the Coterra side, has been a lot of time and energy on long laterals, complex wellbores, 4 and 5-mile wells, 4-mile U turns in the Permian. All that knowledge is being applied, and you'll see our average lateral lengths start going out through time. And then the last one, which is really exciting. Clay hit on this earlier is the -- Devon's really invested a lot of time and energy and AI. And for me, this is nowhere more evident than in the D&C, the way I would explain it is Devon builds a best of the best performance curve with a micrometer. . Every minute, every day across every rig, every crew, every well, every basin, constantly searching for best of the best performance and benchmarking against it. and these AI tools are just coming these massive data sets, looking for the gaps, they highlight the gaps, they elevate the gaps and the team at tax it. It's a gap fill a gap, improve performance, reduce cost all day, every day. That's what the teams live and breathe in. It's been really fun to bring that into the Coterra operations that we've now combined. So these are some of the big synergies we're already realizing. I can tell you only some of this is in that $800 per foot that we put out, that represents wells coming online between now and the end of the year. So you can think of that as a 9- to 12-month trailing cost structure behind those numbers. The synergies I talked about plus many more are not in that number. And as we look ahead to 2027, we're really excited to deliver an even more aggressive cost structure.

Your next question comes from Gabe Daoud with Truist. Apologies. Your next question actually comes from Neal Dingmann with William Blair.

What 100 days has been for you, I want to say congrats. Clay, maybe I'll just take another shot. My question is maybe looking at the portfolio review a different way. Well, I know you certainly don't want to get into the asset specifics. Are you able to say, is there any time frame you all are targeting for this process, given certainly the market appears to be highly a seller's market today. There's no doubt about that. And I assume that bids always have a shelf life. So I'm just wondering, is there any sort of time frame around this?

Yes, absolutely. As I mentioned in the prepared remarks, we're exceptionally aware of the market. And I would tell you, every asset has a slightly different market. But one advantage of announcing across-the-board effort like this is there is no shortage of incoming phone calls. And so every intentional buyer, every JV partner, every bank, everything that you can conceptually think of is certainly coming our way. And so that -- as you know from the first 100 days and the message here is we're not letting any grass grow under our feet. We are moving aggressively, but also thoroughly. I think the only thing more important than speed is making sure that we're making the right decision. And that is an absolute first priority is doing the right thing first. Secondly, with a speed intentionality and making sure that we're not slowing anything down. So I have a full -- the organization is coming together exceptionally well. the executive team, the alignment there is going exceptionally well. And I feel like I have the full backing of the Board on however we want to move forward. And I can tell you, it's moving forward quite well, we just want to avoid the trap of commenting on rumor du jour. And so we will effectively stop it there.

Your next question comes from Doug Leggate with Wolfe.

Clay or I guess it's probably directed to you clear rather than Shane, when you think about the use of free cash flow, you've laid out the story about the $9 billion of debt and so on. I think now, obviously, where I stand on this. But I'm particularly interested in what you do with the proceeds of any asset sales, does that go into a formula like buyback return of cash? Or does asset sale proceeds get treated differently than operating cash flow if and when they come.

Shane, why don't you take a shot.

Yes, I don't want to do that. Great question, Doug, and really appreciate it. So Look, and I'm sure you're referring to this anyway, but that is net proceeds. Obviously, the first call we've got on any proceeds from any asset sales would be to fulfill our obligations to the government pay the tax bite from that. So that would come off the top. On the net proceeds, I think the next question we ask ourselves is what cash flow and credit capacity has been pulled out of the system. And therefore, if we're targeting somewhere around $9 billion of debt by year-end 2027, does that target move based on sort of the new complex or complexion of the portfolio going forward and it may. So we'll figure out what the right sort of next target could be, both in terms of a leverage reduction and/or adding to the balance sheet. And then I think the third piece is the one that you're -- I think we're highly focused on in terms of formulaic on that is how to buybacks play a piece of that. And I said, look, it's going to be very situational specific. What size asset, what size proceeds, et cetera. And there's an array from on the one side of it, you could see this sort of supplementing an opportunistic buyback plan on another size of proceeds. You could see it maybe stacking onto the base dividend for some period of time, 2 quarters, 4 quarters, 6 quarters to buy back or if we're if it's a very large proceeds asset sale, you could see an accelerated buyback program being a part of the mix there. But that's something that is not formulaic at this point. It's something that's subject to conversation with Clay and the team and certainly with the Board in terms of getting alignment on that. But I think that whole suite is available, but it's going to be dependent on what the size of the net proceeds after sort of taking care of the obligations associated with that sale would be.

Yes. Here's what I would just add to it, Doug. I think this is -- obviously, what an incredible opportunity for us to figure out how do we return shareholders the best. Certainly, we've made significant progress with the opportunities near term on paying down debt. We like the way our balance sheet looks. We've got a little bit more work to do, but that will come in time. I don't feel a tremendous pressure. This is certainly a question, and I know you have a firm opinion on this. This is a question and a real active debate amongst our best and most informed shareholders, and we get varying opinions. When I think about kind of a nominal sale. And I think about throwing that additional proceeds on to the significant free cash flow that we generate organically as a company. I think about all three options, essentially stacking a little bit of cash, paying down additional debt and then more aggressively going back and buying more shares. I think I have to be on the table. As I look at our share price today, I think -- can't help but think about what a compelling buyback opportunity that is. And certainly, as I think about the balance of the year, having checked the debt goal for the year, I think you'll see us differentially move towards buybacks.

I appreciate the answer, fellas. I might not always agree with it, but I appreciate the answer.

Yes. I appreciate that, Doug. And like I said, respect your opinion and like I said, this is one that we actively debate. This is an imprecise science, and we've got a lot of smart people that offer different views on this. So thanks for your perspective. Always appreciate it.

Your next question comes from John Freeman with Raymond James. .

Clay, you've previously called the $1 billion sort of synergy target sort of more the floor and not the ceiling. And in the presentation, you did a great job of kind of elaborating and providing a lot more detail on all the various initiatives that are underway, how you're using technology and I'm just trying to get, I guess, a little better understanding of what's sort of embedded in the $1 billion target versus what would potentially serve as upside to things like the surfactant test, the autonomous artificial lift, like, are those sort of included in the $1 billion? Is that additional upside? Just any additional color, Clay, you could provide on that.