Devon Energy Corporation

Welcome to Devins Energy's first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. This call is being recorded. I would now like to turn the call over to Mr. Scott Coote, Vice President of Investor Relations, so you may begin.

Good morning, and thank you to everyone for joining us on the call today. Last night, we issued an earnings release and presentation that covers our results for the quarter and updated outlook for the year. Throughout the call today, we will make references to our first quarter earnings presentation to support our prepared remarks. And these slides can be found on our website at devinenergy.com. Also joining me on the call today are Dave Hager, our president and CEO, David Harris, our executive vice president of exploration and production, Jeff Rittenhour, our chief financial officer, and a few other members of our senior management team. 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 our actual results to differ from our forward-looking statements. Please take note of the cautionary language and the risk factors provided in our SEC filings and earnings materials. With that, I'll turn the call over to Dave.

Thank you, Scott, and good morning. It is my sincerest hope that everyone listening today is staying safe and in good health. As you all know, since our last earnings call, it's been an extraordinary time in the energy markets. with an unprecedented demand shock related to COVID-19 resulting in a rapid and historic decline in oil pricing. While no one could have accurately predicted timing or wide range impact of this pandemic to the global economy or our industry, I am confident that Devon has entered this period of volatility with an extremely firm foundation. Our combination of strong liquidity, low financial leverage, High-graded portfolio and top-tier operating capabilities leave us well-positioned to effectively navigate through these challenging times. Adding to these competitive advantages is our talented team here at Devon, and I want to take a moment to recognize all of our employees for their hard work and dedication during this period of dislocation due to COVID-19. Their focus on safely executing our business plan and protecting shareholder value during this unprecedented time led to another quarter of outstanding operational results. The results for the first quarter were highlighted by capital expenditures coming in 12% below midpoint expectations, higher oil production than our previous guidance, our cost savings initiatives continue to trend ahead of plan, and we generated free cash flow in the quarter. All in all, we are executing at a very high level, and I want to thank our employees for their commitment to excellence. The rest of my prepared remarks today will cover a handful of key messages that provide insight into our approach to managing the business through these turbulent times. Then I'll turn the call over to Q&A, where we'll answer as many of your questions as possible. The first key message I want to convey today is that we have the financial strength to withstand an extended downturn. As you can see on slide three of our earnings presentation, Devon had $4.7 billion of liquidity consisting of $1.7 billion of cash and $3 billion of undrawn capacity on our credit facility at the end of the quarter. In addition to our substantial cash balances, Devon's liquidity is further enhanced by our senior unsecured credit facility, which is not mature until the end of 2024. This facility contains only one material financial covenant, a debt-to-capitalization ratio below 65%, and at quarter end, this ratio was less than 20%. The facility is fully committed to us, and we are not subject to semiannual redeterminations. And lastly, a key event that will be additive to our liquidity over the remainder of 2020 is our recently amended agreement to sell to Barnett Shale. Under the revised terms, we agreed to sell our Barnett Shale assets for up to $830 million of total proceeds, consisting of $570 million in cash at closing, and contingent payments of up to $260 million. This agreement includes this $170 million deposit, which we received in April, and we are on track to close the transaction by year end. Also adding to Devin's financial margin of safety is our low leverage with no outstanding debt obligations into the end of 2025. On the right-hand side of slide three, you can see that our near-term debt maturity runway is best in class within our peer group, with nearly six years of time until our first tranche of debt comes due. This is a critical competitive advantage in this period of extreme commodity price volatility. The second key message I want everyone to understand is that Devon is committed to living within cash flow. Our top priority in this environment is to protect our financial strength. And to do that, we have taken decisive actions to protect our revenue and align our business with industry conditions by aggressively reducing capital and operating costs. Looking specifically at revenue, Devon's disciplined hedging program has protected approximately 90% of our expected oil production for the remainder of 2020 at an average WTI floor price of $42 per barrel. We have also taken steps to protect about half of our expected oil volumes for the first half of 2021 at prices that are nearly $40 per barrel. Additionally, to further protect against the risk of widening in-basin differentials, we've utilized regional basis swaths to lock in pricing for the vast majority of our Eagleford and Delaware basin oil volumes for the remainder of the year. In aggregate, the estimated market value of our go-forward derivative position is roughly $750 million, a substantial contributor to our cash flow in 2020. On the cost front, the most significant changes we have made to date are related to the reduction of our capital activity levels. With our revised capital plan, we have limited our spending outlook to $1 billion in 2020, a decline of 45% compared to our original budget. As outlined on slide 7, we have elected to continue to invest and preserve operational continuity in the Delaware Basin to generate the necessary cash flow to effectively operate our business, while suspending all capital activity in the Anadarko, Eagleford, and Powder River Plays until market conditions improve. While we believe this is a prudent program for the current environment, given the uncertainty regarding the depth and duration of this pricing downturn, I do want to highlight that we have tremendous flexibility with our go-forward capital plans. We have minimal long-term contract commitments. Our opportunity set consists of only short-cycle onshore projects, and we have no significant lease expiration issues. With these characteristics, we are fully capable and willing to swiftly adjust activity levels as market conditions evolve. In addition to the capital reductions, we're also improving our cash flow by targeting approximately $250 million in cash cost reduction by year end. This cost reduction plan includes a range of actions to lower field-level operating expenses and to continue to optimize the organization's overhead. This includes an expected 40% reduction in cash compensation for our executive management team year over year. I want to reinforce that while we have a clear line of sight on these $250 million of cost savings, we are not done. There are several initiatives underway that will further trim our cost structure, and I expect to provide updates on these initiatives in future calls. To summarize, on slide 12, you can see the cash flow impact of the swift and decisive changes we have made year to date. Our hedging program and intense focus on costs have positioned us to fully fund our capital requirements and dividend while generating net cash inflows at a price deck of $20 WTI for the remainder of the year. The next topic I want to touch on is our plan to dynamically manage production as storage levels become constrained and regional pricing weakens. With today's challenged commodity price backdrop, we are being mindful not to accelerate valuable production into these weak markets. To combat these conditions, our first course of action is to reduce our current completion activity levels by approximately 65% to the first quarter. This decision to limit the wells we bring online will position us with a duck backlog of nearly 100 wells company-wide at year end. And for those wells that we have brought online recently, we restricted the flow rates to ensure that we do not deliver flush production into these tough markets. Next, with regards to our base production profile, the operating teams have performed a detailed analysis to identify uneconomic wells at various price levels across our portfolio. The decision to shut in or curtail production from existing wells is generally made when the variable cost to operate the well exceeds its expected revenue. While this is the primary decision point, other factors may influence this decision as well, such as leasehold considerations, mechanical risks, and involuntary third-party constraints. We plan to approach these curtailment decisions on a month-to-month basis. But for the second quarter, we expect to defer roughly 10,000 barrels per day of oil across our portfolio. Of this amount, only 20% is driven by the shut-in of production. The vast majority of curtailments are related to the restricted flowback of higher-rate wells and the deferral of bringing a few new wells online in the second quarter. The minimal shut-in activity reflects the quality of our assets and the good work our team has done to place volumes. First, we have no pricing exposure to West Texas Light, Clearbrook, the North Slope, Canadian Bitumen, or many other well-known pricing hubs that have recently experienced exceptionally weak prices. Furthermore, in key plays like the Eagleford and Powder River Basin, We correctly anticipated that there would be weak regional pricing, and our marketing team took early and decisive action to lock in our revenue at pricing above variable costs in May and June. Taking all these factors together, our production operations are well positioned to be resilient in the face of these challenging conditions. Looking ahead, the next key message I want to emphasize is our ability to capitalize on the recovery when industry conditions normalize. The decision to exit our heavy oil position in Canada, sell the Barnett shale, and monetize our controlling stake in Inlink Midstream have helped set the foundation for the advantage position we operate from today. These bold moves have dramatically improved our financial strength, asset quality, and competitive position on the marginal cost curve. Devon's go-forward portfolio now consists of only large, contiguous, stacked pay acreage positions and the best parts of the best plays in the U.S. Importantly, within this portfolio, Devon has established a track record of operational excellence that is supported by consistent capital efficiency gains. A great example of this efficiency is on slide 17. which highlights our Wolf Camp program, where the majority of our capital is invested in 2020. Our drill and completion costs in the first quarter improved by 42% to $705 per foot. To better appreciate this success, I encourage everyone to compare this top-tier result to our peers in the Delaware Basin. These Wolf Camp improvements are underpinned by steadily improving cycle times and optimized completion designs. We have expectations for these efficiencies to continue throughout the remainder of 2020 and into 2021. These efficiency gains have allowed us to preserve operational continuity even as we limit capital investment. As you can see on slide eight, assuming no curtailment beyond the middle part of the year, we expect our oil production profile to be nearly flat compared to the average of 2019. and we are in a good position to stabilize production in 2021. This production resiliency is a testament to the quality of our go-forward asset base and showcases the efficiencies that are driving our capital requirements lower. Currently, we are estimating that maintenance capital, which is the amount of investment required to keep our production flat, will be around $1.25 billion, a 10% improvement from a year ago. With additional savings we expect from ongoing improvement in operations as well as shower-based declines, we are projecting our maintenance capital to improve to around $1.1 billion by 2021. Importantly, this improvement in maintenance capital does not assume a drawdown of our duct inventory, which we expect to be around 100 wells by year-end. With this low maintenance capital, we are able to quickly and efficiently stem declines, and we are positioned to maintain our 2020 XR rate oil production into 2021 should market conditions incentivize us to invest at maintenance capital levels. And my final key message for today is that Devon has the right business model to maximize value for our shareholders over the long term. Admittedly, It is challenging not to get caught up in the present with today's extreme bear market conditions, but we know from experience that today's oversupply will ultimately be absorbed. When industry conditions normalize, it is our strong belief that the industry's historic approach of creating value by prioritizing production or NAV growth will not be acceptable to investors. It is not a viable strategy to reinvest all cash flow, have high leverage, and count on OPEC curtailments to be successful. To win in the next phase of the energy cycle, we are convinced that a more balanced operating model that prioritizes additional upfront cash returns for shareholders is required. With this financially driven model, you must moderate capital investment to deliver free cash flow yields that compete for investment with other sectors in the broader markets, have the ability to deliver margin expansion through operational scale and a leaner corporate structure, prioritize returning more cash directly to shareholders in the form of dividends or supplemental distributions in time of windfall pricing, And a successful E&P company going forward must maintain extremely low levels of leverage and not be dependent on capital markets for liquidity or funding. This critical shift in philosophy will result in a much greater margin of safety, which we all believe is needed. This balanced operating model is not new to Devon, and we have been an industry leader in this movement. Since 2018, we have deployed nearly 70% of our cash inflows towards shareholder-friendly actions, such as debt reduction, dividends, and buybacks. And when industry conditions normalize, Debit is one of the very few E&P companies that will have the capabilities to deliver on this progressive cash return business model. And with that, I'll turn the call back over to Scott for Q&A.