Devon Energy Corporation

Welcome to Devon Energy's third quarter 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 Goody, 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 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 Rittenour, 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. We appreciate everyone taking the time to join us today. For Devon, the third quarter was another high-quality performance that demonstrated the flexibility of our strategy to create value in multiple ways. The team's disciplined execution of our operating plan advanced earnings and cash flow by healthy double-digit rates on a year-over-year basis. Free cash flow was boltered by capital efficiencies and effective supply chain management that drove capital spending below forecast. We rewarded shareholders with cash returns in the form of both dividends and buybacks that increased by nearly double over the past year. And we strengthen our asset portfolio by closing on two highly accretive bolt-on transactions that add to our ability to deliver sustainable long-term results. All in all, another great quarter of executing on our discipline strategy. For my remaining comments today, I want to focus on the strategic moves we've taken recently to improve our business and the positive impact these actions have on our fourth quarter and our 2023 outlook. Turning to slide four, We have worked hard through the years to assemble an asset portfolio that resides in the very best position place on the US cost curve. Being a low-cost producer with quality inventory is critical to our long-term success. And over the past few months, we've taken steps to opportunistically improve our asset portfolio. These bolt-on acquisitions were underpinned by exceptionally strong industrial logic that advance both the financial and operational tenets of our strategic plan. First and foremost, from a financial perspective, the transactions represent a value-oriented consolidation of resource in the economic core of these respective basins, resulting in immediate financial accretion. The acquired assets were funded entirely from cash on hand and purchased at levels as low as two times cash flow and possess free cash flow yields ranging up to 30%, at strip pricing. Furthermore, the addition of this incremental wedge of free cash flow also allows us to accelerate the return of cash to our shareholders through higher dividends and positions us to further compound per share growth through our ongoing stock buyback program. From an operations standpoint, these transactions fit like a glove within our existing asset portfolio and provide us improved economies of scale in the core of these respective plays. The direct adjacency of the acquired acreage also offers strong operational synergies and provides a meaningful runway of high quality inventory that immediately competes for capital within our portfolio. Importantly, this resource capture allows us to sustain a high margin production from these assets for many years to come and does not require us to accelerate drilling activity across other parts of the portfolio to maintain our overall productive capacity. Altogether, I could not be more pleased with these tuck-in acquisitions as they successfully demonstrate another pathway that our business can create immediate value for shareholders. However, I do want to be clear that deals such as these that check every box are exceptionally rare. We will always look for smart ways to strengthen our portfolio, but you should be confident in our disciplined approach that focuses on quality assets, adjacency to our operations, and immediate for share accretion. On slide five, in addition to enhancing our asset portfolio, we have also taken important steps to maximize realized pricing for our products. With our marketing strategy, we are focused on securing multiple low-cost transportation options in each basin we operate with balanced exposure to domestic and international markets. By controlling firm capacity from the wellhead to the key demand centers, We've been able to steadily improve our price realization over the past few years. This progress is evidenced by the record oil realization we achieved in the third quarter that reached 101% of the WTI benchmark. A key contributor to this strong performance was the 20% equity interest in Pinnock's oil export terminal that we've accumulated over the past year. This investment in Penn Oak provides us 90,000 barrels per day of export capacity in Corpus Christi, offering valuable access to premium Brent-linked pricing that led to an uplift of more than $3 per barrel on these exports. We've also taken steps to secure additional pricing diversification for our natural gas portfolio by recently entering an LNG export partnership with Delphin Midstream. Once again, this arrangement will provide us with 150,000 MMBTU per day of direct exposure to international gas pricing, such as the lucrative TTF or JKM markets. However, I want to be clear, this is a capital-light approach to attain LNG exposure, and our investment in Delfin, which is spread over this year and next, is very minor and will have a negligible impact to our capital outlook. A final investment decision for Delfin's floating LNG vessel is expected to be made in the coming months, and we anticipate the facility will be operational within four years of this decision. Now, turning to slide seven, with the positive tailwinds that come from our accretive bolt-on acquisitions, Devon's upcoming fourth quarter is set to be a strong one. As you can see on the left, we're planning on delivering a high single-digit growth rate in production per share. Capital will be higher in the fourth quarter, but our discipline reinvestment rates remains at very low levels. Approximately two-thirds of the increased capital spending compared to the previous quarter is driven by our recent bolt-on acquisitions. The remaining third of the increase is a combination of higher service costs as contracts refresh, a bit more operated activity than previously planned helps our operational flexibility as we head into 2023, and we have seen an uptick in non-operated activity. Overall, it will be another great quarter for us, as we expect to deliver free cash flow growth of more than 25% on a year-over-year basis. At today's pricing, this outlook translates into a compelling free cash flow yield of 11%, or nearly three times what the S&P 500 Index offers investors. With this excess cash flow, there's no change to our cash return playbook. It will be more of the same. As you can see on slides nine and 10, we will continue to accelerate the return of capital to shareholders through our market-leading dividend, which is one of the top yielding equities in the S&P 500, and we remain active buyers of our stock when the market presents us opportunities. This operational and financial momentum will also carry into 2023. I will hold off on detailed line item guidance today since we're still integrating the recent acquisitions of Rimrock and Validus into our capital allocation process. However, I can confidently say that our Delaware asset will continue to be the focal point of our capital program, and we're focused on designing a plan with consistent activity levels that delivers the right balance between returns, capital efficiencies, and free cash flow. With the benefit of acquisitions, we do expect to grow production in 2023. However, compared to fourth quarter exit rates, our volumes in the upcoming year are likely to be in the bottom half of our targeted growth range of 0% to 5%. The capital activity levels required to sustain production at these levels will be similar to the program we're deploying in the fourth quarter of this year. Although we could pull back on less efficient rigs, when considering the incremental activity we've recently added in the Delaware. We still expect to experience some additional upward pressure on cost as contracts refresh, especially in the second half year, but price discovery is still ongoing and very sensitive to industry activity levels and commodity pricing. We will provide official guidance in February, but I'm confident that 2023 is going to be another great year for Devon as we are well positioned to generate substantial free cash flow and execute on all facets of our cash return model. With that, I will now turn the call over to Clay to cover our operational highlights.