Devon Energy Corporation

Najeeb, second quarter earnings conference call. At this time, all participants are in listen-only mode. This call is being recorded. I'd now like to turn the call over to Mr. Scott Coody, 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 updated outlook. Throughout the call today, we will make references to the earnings presentation to support 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 other 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, and we appreciate everyone taking the time to join us on the call today. By all measures, the second quarter was another excellent performance. for Devon as our business continued to strengthen and build momentum. Our quarterly results were highlighted by our Delaware-focused operating plan that delivered production above our guidance expectations, capital was below budget, margins expanded, and we paid record high cash payouts to shareholders. We also took important steps to strengthen the quality and depth of our asset portfolio. All in all, it was another quarter of systemic and systematic execution across the tenets of our cash return business model that shareholders have become accustomed to. To begin with, I'd like to turn your attention to slide three and four, which describes who we are. We are a financially disciplined company delivering high returns on invested capital, attractive per share growth, and large cash returns to shareholders. While our disciplined capital allocation framework on slide three is foundational to Devon's financial success, I also want to highlight that another critical competitive advantage contributing to our strong results is the depth and quality of our asset portfolio. As you can see on slide four, with Devon's portfolio anchored by our world-class Delaware Basin asset, we possess a long-duration resource base that is high-graded to the very best plays on the U.S. cost curve. Furthermore, with this low-cost asset portfolio, We also have diversified exposure across both oil and liquids-rich gas opportunities, affording us the flexibility to pursue the highest returns and netbacks through the commodity cycle. While this premier multi-basin portfolio positions us to deliver strong capital efficiency and repeatable results for the foreseeable future, we are not complacent and are always looking for smart ways to strengthen our asset base. And this is exactly what we accomplished with our recent acquisition of Rimrock's assets in the Williston Basin, along with a series of high-impact acreage trades in the Delaware that optimized our leasehold for future development. Clay will cover these transactions in greater detail later in the call. However, I do want to emphasize that these portfolio additions are highly complementary to our existing acreage footprint. They tactically unlock quality inventory in the core of the play, and the immediate financial accretions from these transactions allow us to further step up the return of cash to shareholders. Now, moving to slide five, the key message here is very simple. The combination of our strategy, our asset base, and execution had resulted in an impressive track record of value creation for our shareholders. Since we unveiled the industry's very first cash return framework, Upon the WPX merger in late 2020, we have consistently delivered on our strategy to return increasing amounts of cash to shareholders while steadily improving our investment-grade financial strength. As you can see on the chart, since the closure of the merger, we have cumulatively returned $6.2 billion of value to shareholders in only 18 months. For perspective, this value exceeds more than 100% of the combined market capitalization of the two companies at the time of the merger announcement. Unbelievable. Jumping ahead to slide seven, with a strong operational performance achieved year-to-date, we are raising guidance expectations for the full year of 2022. As you can see on the top left, a key contributor to this improved outlook is our 2022 production targets increased by 3%, to a range of 600,000 to 610,000 BOE per day. These higher volume expectations are due to better than expected well performance year to date and the positive impact from our recent bolt-on acquisition of Williston Basin. After accounting for the benefits of our share repurchase program, this outlook puts us on track to deliver a very healthy production per share growth rate of 8% this year. We're also adjusting our upstream capital to a range of $2.2 to $2.4 billion versus our prior guidance of approximately $2.1 billion. This updated guidance incorporates $100 million of incremental capital from the Williston acquisition and includes additional inflationary cost pressures associated with this higher commodity price environment. Overall, at current pricing, this updated outlook is resulting in a 25% plus improvement in free cash flow generation compared to the assumptions that underpinned our original budget expectations. The key takeaway here is that our low-cost asset base is capturing the benefits of higher commodity prices and winning the battle against inflationary pressures. Now on slide eight, I want to briefly showcase how our improved 2022 outlook translates into a compelling free cash flow yield. To demonstrate this point, We've included a simple comparison of our estimated free cash flow yield in 2022 compared to other common equity benchmarks in the financial markets. As you can see from the two charts at today's pricing, Devon's attractive free cash flow yield of 16% is up to four times higher than the broader market. I expect this valuation gap, which is at historically wide levels, to correct as investors rediscover highly profitable and value-oriented names like Devin. Now going to slide nine, with this powerful stream of free cash flow, our priorities remain unchanged, which means the first call on our free cash flow is the funding of our fixed plus variable dividend. With this predictive and formulaic framework, we are on track to pay out around $5 per share this year, which at a yield of more than 8% places Devon as one of the highest-yielding stocks in the entire U.S. market. However, I want to be quick to add that we are not just a high-yielding dividend story. We're also bolstering our per-share growth by opportunistically repurchasing our stock. With this share repurchase program, we are on track to retire up to 6% of our outstanding shares at what we believe to be trading at a substantial discount to our intrinsic value. As you can see on the right, even with a large cash payout, we still have excess cash flow left over to further strengthen our investment-grade balance sheet. This balanced and transparent capital allocation framework provides us multiple avenues to create value for our shareholders through the cycle. And finally, on slide 14, I want to end my remarks with a few thoughts on what you can expect from Devin as we plan for the upcoming year. While it is still a bit too premature to provide formal production and capital targets for 2023, I can tell you that there will be no shift to our strategy. We will continue to prioritize free cash flow and per share financial growth, not the pursuit of top line volume growth. We are designing a plan that pursues steady and consistent activity levels to optimize supply chain cost and certainty of execution in this exceptionally tight market. And finally, with our low break-even funding levels, we remain well-positioned to navigate the recent market volatility and build upon our track record of delivering outside cash returns. And with that, I will turn the call over to Clay to cover our operational highlights for this most recent quarter.