Devon Energy First Quarter 2021 Results

Rick Muncrief, president and CEO, said: “Devon is a premier energy company that possesses a powerful suite of assets and a disciplined strategy to maximize value for our shareholders. With this advantaged platform, we delivered on exactly what we promised to do in the first quarter by moderating capital investment, capturing cost synergies and returning significant value to shareholders through higher dividends and the aggressive reduction of debt.

“With our business scaled to generate free cash flow, a clear differentiator for Devon is the ability to accelerate cash returns to shareholders through our innovative fixed-plus-variable dividend framework,” said Muncrief. “And based on the strength of our first-quarter results, I am proud to announce a 13 percent increase in our total dividend payout to $0.34 per share.

“Looking ahead to the remainder of the year, we are unwavering in our commitment to capital discipline and will remain focused on the strategic objectives that underpin our cash-return business model,” Muncrief added. “Devon has no intention of allocating capital to growth projects until demand-side fundamentals recover and it becomes evident that OPEC+’s spare oil capacity is effectively absorbed by the world markets.”

Operating Results

First-quarter oil production averaged 268,000 barrels per day, exceeding guidance by 5,000 barrels per day. This performance was driven by the company’s Delaware Basin asset that accounted for 62 percent of total production. Devon estimates that production in the quarter was reduced by 8 percent due to severe winter weather. Production totals also exclude WPX results prior to the merger close date of Jan. 7, 2021, limiting first-quarter production by an incremental 3 percent.

Upstream capital spending was 5 percent below guidance, totaling $447 million in the first quarter. This positive variance was attributable to efficiency gains and the benefits of enhanced operating scale in the Delaware Basin. Devon’s capital activity averaged 18 operated drilling rigs and six completion crews in the quarter, with approximately 80 percent of this investment allocated to the Delaware Basin.

With capital programs focused on developing higher-margin production opportunities, oil and natural gas liquids volumes reached 74 percent of Devon’s product mix in the quarter. This exposure to higher value production expanded the company’s field-level cash margin to $28.95 per Boe, an 88 percent increase year over year.

Corporate costs also declined during the quarter, driven by general and administrative expenses, which declined 30 percent year over year on a pro forma basis.

Asset-Level Highlights

Delaware Basin

Oil production averaged 172,000 barrels per day, a 19 percent increase year-over-year on a pro forma basis. The growth in oil production was driven by 52 wells that commenced first production in the quarter across the company’s acreage position. The completed well costs associated with this development activity improved to a record low of $534 per lateral foot in the quarter, representing a 43 percent reduction compared to 2018.

The top operating highlight from the first quarter was Devon’s Danger Noodle project in Lea County, New Mexico. This development project, targeting multiple intervals in the upper Wolfcamp, achieved average 30-day production rates of 5,100 Boe per day per well (66 percent oil). In addition to strong well productivity, returns at Danger Noodle were enhanced by completed well costs that were more than 20 percent below pre-drill expectations.

Another noteworthy event for Devon was the resumption of approvals for federal drilling permits. Since the Department of Interior’s order to temporarily suspend permitting on federal lands lapsed in late March, the company has secured more than 50 approvals for new drilling permits in Southeast New Mexico. In aggregate, Devon possesses approximately 500 federal drilling permits, representing an inventory of 4 years at the current drilling pace. Overall, only 35 percent of Devon’s 400,000 net acres in the Delaware Basin resides on federal lands.

Production averaged 68,000 Boe per day in the quarter. Devon’s operations were headlined by the commencement of a two-rig drilling program funded by a $100 million drilling carry with Dow. With this drilling joint venture, the company spud 8 wells in the liquids-rich core of the play during the quarter and plans to drill up to 30 wells for the full-year 2021.

Production averaged 61,000 Boe per day, with oil accounting for 72 percent of the product mix. Devon’s operational focus in the quarter was optimizing base production and harvesting free cash flow from this high-margin oil asset. To stabilize production, the company plans to bring online 15 to 20 new wells over the remainder of 2021.

Production averaged 30,000 Boe per day. Devon and its partner resumed capital activity in the quarter by running a two-rig drilling program and a completion crew. With this level of activity, the partnership has reestablished operational continuity and plans to bring online approximately 40 wells throughout the remainder of the year.

Production averaged 23,000 Boe per day, of which 74 percent was oil. Oil production increased by 6 percent versus the fourth quarter of 2020, resulting from 10 new wells that targeted the Parkman and Turner formations. While capital activity will be limited for the remainder of 2021, Devon’s technical teams will focus on advancing their understanding of the emerging Niobrara oil resource opportunity across the company’s 300,000 net acre position in the oil fairway.

Financials

Devon reported net earnings of $213 million, or $0.32 per diluted share, in the first quarter of 2021. Adjusting for items analysts typically exclude from estimates, Devon’s core earnings were $298 million or $0.45 per diluted share.

The company’s operating cash flow totaled $592 million in the first quarter, with EBITDAX reaching $959 million. This level of cash flow funded all capital requirements and generated $260 million of free cash flow after adjusting for cash restructuring charges.

Devon exited the first quarter with $1.9 billion of cash and an undrawn credit facility of $3 billion. Year-to-date, the company has made significant progress on its $1.5 billion debt reduction plan by redeeming $743 million of outstanding debt. The next step in the company’s debt reduction plan is to fully retire its callable $500 million 2026 notes in June.