Devon Energy Corporation

Welcome to the Devon Energy's third quarter earnings conference call. At this time, all participants are in the 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. Sir, 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 cover our results for the quarter and our forward-looking outlook. Throughout the call today, we will make references to our earnings presentation to support our prepared remarks, and these slides can be found on our website. Also joining me on the call today are Rick Moncrief, our president and CEO, Clay Gaspar, our chief operating officer, Jeff Rittenhour, our chief financial officer, and a few members of our senior management team. Comments 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 our forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials. With that, I'll turn the call over to Rick.

Thank you, Scott. It's great to be here this morning. We appreciate everyone taking the time to join us on the call today. Devin's third quarter results were outstanding, once again showcasing the power of our Delaware focused asset portfolio, and the benefits of our financially driven business model. Our team's unwavering focus on operations excellence has established impressive momentum that has allowed us to capture efficiencies, accelerate free cash flow, reduce leverage, and return a market-leading amount of cash to shareholders. Simply put, we are delivering on exactly what our shareholder-friendly business model was designed for and that is to lead the energy industry in capital discipline and cash returns. Now moving to slide four, while our strategy is a clear differentiator for Devon, the success of this approach is underpinned by our high-quality asset portfolio that is headlined by our world-class acreage position in the Delaware Basin. With this advantaged portfolio, we possess a multi-decade resource opportunity in the best position plays on the U.S. cost curve. And with this sustainable resource base, we are positioned to win multiple ways with our balanced commodity exposure. While our production is leveraged to oil, nearly half our volumes come from natural gas and NGLs, providing us with meaningful revenue exposure to each of these valuable products. This balance and diversification are critically important to Devon's long-term success. As you can see on slide five, the strength of our operations and the financial benefits of our strategy were on full display with our third quarter results. This is evidenced by several noteworthy accomplishments, including we completed another batch of excellent wells in Delaware Basin that drove volumes 5% above our guidance. We maintained our capital allocation in a very disciplined way by limiting our reinvestment rates to only 30% over cash flow. We are continuing to capture synergies and drive per-unit costs lower. We are also achieving a more than eight-fold increase in our free cash flow. We are increasing our fixed and variable dividend payout by 71 percent. We are improving our financial strength by reducing net debt 16 percent in the quarter. It was another tremendous quarter for Devon, and I especially want to congratulate our employees and our investors for these special results. Now moving to slide six, while 2021 is wrapping up to be a great year for Devon, the investment thesis only gets stronger as I look ahead to next year. Although we're still working to finalize the details of our 2022 plan, I want to emphasize that our strategic framework remains unchanged. and we will continue to prioritize free cash flow generation over the pursuit of volume growth. As we have stated many times in the past, we have no intention of adding incremental barrels into the market until demand-side fundamentals sustainably recover and it becomes evident that OPEC Plus spare oil capacity is effectively absorbed by the world markets. With this disciplined approach and to sustain our production profile in 2022, We are directionally planning on an upstream capital program in the range of $1.9 to $2.2 billion. Importantly, with our operating efficiency gains and improved economies of scale, we can fund this program at a WTI breakeven price of around $30. This low breakeven funding level is a testament to the great work the team has done over the past few years to streamline our cost structure and optimize our capital efficiency. Being positioned as a low-cost producer provides us with a wide margin of safety to continue to execute on all facets of our cash return model. With our 2022 outlook, Devon will have one of the most advantaged cash flow growth outlooks in the industry. At today's prices, with a full benefit of the merger synergies and an improved hedge book, we're positioned for cash flow growth of more than 40% compared to 2021. As you can see on the graph, this strong outlook translates into a free cash flow yield of 18% at an $80 WTI price. The key takeaway here is that 2022 is shaping up to be an excellent year for Devon shareholders. Now, jumping ahead to slide eight, the top priority of our free cash flow is the funding of our fixed plus variable dividend. This unique dividend policy is specifically designed for our commodity-driven businesses and provides us the flexibility to return more cash to shareholders than virtually any other opportunity in the markets today. Now to demonstrate this point, we've included a simple comparison of our estimated dividend yield in 2022 based on our preliminary guidance. As you can see, Devon's implied dividend is not only more than double that of the energy sector, but this yield is vastly superior to every sector in the S&P 500 index. In fact, At today's pricing, Devon's yield is more than seven times higher than the average company that is represented in the S&P 500 index. Now, that's truly something to think about in the yield-starved world we currently live in. Moving on to slide nine, with our improving free cash flow outlook and strong financial position, I'm excited to announce the next step in our cash return strategy with the authorization of a $1 billion share repurchase program. This program is equivalent to approximately 4% of Devon's current market capitalization and is authorized through year-end 2022. Jeff will cover this topic in greater detail later in the call, but this opportunistic buyback is a great complement to our dividend strategy and provides us with another capital allocation tool to enhance per share results for shareholders. Skipping ahead to slide 11 and to close out my presentation, prepared remarks, I want to summarize Devin's unique investment proposition through three simple charts. Beginning on the far left chart, our business is positioned to generate cash flow growth of more than 40% in 2022, which is vastly superior to most other opportunities in the market. As you can see in the middle chart, this strong growth translates into an 18% free cash flow yield that will be deployed to dividends, buybacks, and the continued improvement of our balance sheet. And lastly, on the far right chart, even with all these outstanding financial attributes, we still trade at a very attractive valuation, especially compared to the broader market indices. We believe this to be another catalyst for our share price appreciation as more and more investors discover Devon's unique investment proposition. And with that, I'll turn the call over to Clay to cover some of the great operational results we delivered in the third quarter. Clay?