Devon Energy Corporation (NYSE:DVN) Mergers & Aquisitions Conference Call July 8, 2024 8:30 AM ET
Company Participants
Scott Coody – Vice President of Investor Relations
Rick Muncrief – President and Chief Executive Officer
Clay Gaspar – Executive Vice President and Chief Operating Officer
Jeff Ritenour – Executive Vice President and Chief Financial Officer
David Harris – Executive Vice President and Chief Corporate Development Officer
Conference Call Participants
Nitin Kumar – Mizuho Securities
Neal Dingmann – Truist Securities
Kevin MacCurdy – Pickering Energy Partners
Charles Meade – Johnson Rice
Betty Jiang – Barclays
Kalei Akamine – Bank of America Merrill Lynch
Scott Hanold – RBC
David Deckelbaum – TD Securities
Atidrip Modak – Goldman Sachs
Paul Cheng – Scotiabank
Matthew Portillo – TPH
Operator
Welcome to Devon Energy’s Conference Call. At this time, all participants are in listen-only mode. This call is being recorded.
I would now like to turn the call over to Mr. Scott Coody, Vice President of Investor Relations for Devon Energy. Sir, you may begin.
Scott Coody
Thank you, operator, and welcome, everyone, to our conference call to discuss Devon’s acquisition of Grayson Mill Energy in the Williston Basin. And joining me on the call today are Rick Muncrief, our President and CEO; Clay Gaspar, our Chief Operating Officer; Jeff Ritenour, our Chief Financial Officer; David Harris, our Chief Corporate Development Officer, and a few other members of our senior management team.
The press release and slides for today’s announcement can be found on our homepage of the website. We will reference slide numbers throughout our call this morning to help everyone stay on track. Please take note of the advisory language regarding forward-looking statements in the press release issued this morning.
Comments on the call today will include plans, forecasts, and estimates that are forward-looking statements under US Securities Laws. These comments are subject to assumptions, risks, and uncertainties that could cause actual results to differ from the forward-looking statements. Please refer to the information on the Safe Harbor slide in the presentation as well, and the additional information contained in our SEC filings. Today’s call will be 30 minutes.
At this point, I will turn the call over to Devon’s President and CEO, Rick Muncrief, for an overview of the transaction and then we’ll open the call to Q&A.
Rick Muncrief
Thank you, Scott. Welcome, everyone, and thank you for joining us this morning. We’re excited to share our thoughts on today’s announcement to acquire Grayson Mill Energy and look forward to addressing your questions shortly.
Now for Devon, the Grayson Mill business is an excellent addition to our portfolio, fitting perfectly within our broader strategic framework to accumulate resource and grow our oil-weighted production in the best parts of the top US shale plays.
This transaction is also transformational for our operating scale in the Williston Basin and captures a meaningful runway of inventory that allows us to efficiently maintain high-margin production from this world-class oil basin for many years to come.
In addition to the strong industrial logic of the deal, the acquisition advances our financial strategy by delivering double-digit accretion to free cash flow that is immediately a flow through to shareholders in the form of higher cash distributions.
Now turning to Slide 3. We have worked exceptionally hard through the year to assemble an asset portfolio that resides in the very best-positioned plays on the US cost curve. We believe being a low-cost oil-weighted producer with quality inventory is critical for our long-term success.
Now as I’ve stated earlier, the Grayson Mill transaction is a great fit. Within this philosophy, that opportunistically adds a 100,000 BOE per day oil resource to our portfolio that substantially enhances the overall scale and scope of our upstream operations.
Pro forma for the transaction, Devon will be one of the largest oil producers in the US with average daily oil rates estimated at around 375,000 barrels of oil per day with total volumes reaching 765,000 BOE per day.
Now as you can see on Slide 4, we have a history of growing oil production. With this transaction, we have now more than doubled our oil volume since 2020 through a combination of accretive acquisitions and organic growth. We expect this trend to continue.
Now turning to the asset-level detail on Slide 5, it is easy to see that this acquisition is a great fit, adjacent to our acreage footprint and transformational to the size of our entire Williston Basin position. This transaction secures a premier leasehold position of 307,000 net acres, positioning Devon as one of the largest operators in the play now with over 430,000 net acres.
The acquired business is expected to triple our in-basin production to roughly 150,000 BOE per day with oil reaching almost 60% of the product mix. With enhanced scale in the basin, we expect to realize up to $50 million in annual average cost-savings from operating efficiencies and marketing synergies.
Now moving to Slide 6. The Grayson Mill assets also expand our inventory runway in the play to about 10 years at the current pace of development. The acquisition adds 500 gross locations consisting of a mix of two-mile and three-mile lateral opportunities along with 300 high-quality refrac candidates.
Importantly, this resource effectively competes for capital within our diversified asset portfolio, allowing us to efficiently sustain our oil production in the Williston for many years. There is plenty of upside here as well.
And I’ve been working to Williston for 40 years now, and I can tell you that there is still a lot of oil to be recovered in this basin, whether it be through improved completion designs, tighter spacing, refracs, EOR, or additional exploration and development. There will be many innovations that promise to sustain the Williston Basin as one of the top three oil fields in the United States.
Turning briefly to Slide 7, and with this inventory depth we now have, it’s also important to highlight that both companies have a track record of delivering industry-leading well productivity. The data illustrated on the slide clearly demonstrates that the average well performance over the past few years for both Devon and Grayson Mill consistently surpassed that of our leading competitors.
Now turning to Slide 8, another key point to be made is that the overall economics of the assets are bolstered by the ownership of an integrated midstream business that generates more than $125 million of EBITDA annually. This midstream infrastructure consists of an extensive network of gathering systems, disposal wells, and crude storage terminals.
This midstream advantage drives peer-leading operating margins in the basin and provides us with the marketing optionality to capture higher oil pricing through access points to multiple end-uses markets.
Now moving to Slides 9 and 10, this high-margin asset combined with an attractive purchase price delivers double-digit accretion to our free cash flow outlook on a pro forma basis. Due to our increased free cash flow capabilities, I’m excited this morning to announce that we are increasing our share repurchase authorization by 67% to a total of $5 billion.
This increased authorization provides us ample runway to opportunistically repurchase our stock and bolster our per-share growth trajectory over the next few years. We also believe that the abundant free cash flow from this acquisition will be additive to our dividend payout in 2025 and beyond. In addition to a higher cash return profile, we plan to earmark up to 30% of our annual free cash to reduce $2.5 billion of debt over the next 24 months or so.
So, in summary, on Slide 11, I want to emphasize that the go-forward Devon possesses all the necessary attributes to continue to deliver outsized returns versus the broader market. With the AI and tech mania that is as a way of capturing all the headlines these days, I think it’s important to remind investors that Devon has delivered the fifth best total shareholder return of any company in the S&P 500 since 2020, outpacing the index average by a significant margin.
The bottom line is that with the right strategy, the right people, the right assets, and the right financial framework, we will continue to deliver this outperformance for shareholders. The Grayson Mill acquisition only amplifies these inherent advantages and our team is energized and ready to roll with this great addition to our multi-basin portfolio.
I think it’s also appropriate this time to congratulate the entire Grayson Mill team on a successful outcome for they and their sponsors, EnCap. They’ve worked hard on building this company over the past number of years. Nice job.
And with that, I’ll now turn the call back over to Scott for Q&A.
Scott Coody
Thanks, Rick. We will now open the call to Q&A. For today’s call, please limit yourself to one question. This allows us to get to more of your questions on the call today. And with that, operator, we’ll take our first question.
Question-and-Answer Session
Operator
Thank you. Our first question is from the line of Nitin Kumar of Mizuho. Nitin, your line is now open. Please go ahead.
Nitin Kumar
Good morning, Rick and team, and thanks for taking my question. I just want to — looking at the Slide 5, and the map, this acreage is a little bit further away from some of your legacy assets in the basin. So, I just want to understand what are the differences in geology and in terms of just the asset base? And are there any differences that you’ve noted so far in your work that could either help or hinder your execution on the asset?
Rick Muncrief
Yes, Nitin, that’s a great question. Thanks for joining us today. I think as you see, Eastern part of the Basin historically has had — and this is East of the Nesson anticline that runs through there, historically, especially on the Fort Berthold Indian Reservations has some just phenomenal rock. As you go to the West, you’ve seen lighter development. The rock is just a little bit tighter, but it really sets up well for exactly what you’ve seen that development taking place over there. I’m going to have Clay weigh in here as well, but we’re excited, especially with changing the orientation and going from the two-mile to three-mile laterals has truly been a game changer. And I think you’re seeing it in the results. So, we feel very, very confident and we love this acreage position.
Clay Gaspar
Yeah, Nitin, this is Clay. Just to reiterate a couple of points. I mean, the biggest difference, number one, is on versus off the reservation. That is a material change for us to have that optionality, I think gives us a lot of flexibility in our own operations. Certainly, this adds to the significant scale of the Williston Basin. Oily inventory is very precious and we don’t take — ever take that for granted. But as you move West, it opens up some interesting opportunities. This is kind of the product necessity is the mother of all invention kind of thing, where three-mile laterals, as that technology is really evolved, this area is really opened up and really lit up with kind of excitement. Rick also mentioned the completions technology. As we continue to fine-tune that, this area continues to pay really nice dividends and we’re excited to have it in our portfolio.
Operator
Thank you. Our next question today is from the line of Neal Dingmann of Truist. Neal, please go ahead. Your line is open.
Neal Dingmann
Good morning, guys. Congrats on the deal. Rick and Clay, my question is, I know, cognizant of not having the guidance out there yet, until the deal closes, but historically at least the last several quarters, about 75% of your activity has been Delaware-based and you mentioned three rigs will likely be running on the new property. Will that — can you talk about maybe allocation on will that come then and you’ll have a little bit lighter activity in the Delaware as a result of that? I’m just trying to get a sense of pro forma this deal, how we might see activity between the Delaware and this sort of shakeout.
Clay Gaspar
Hey, Neal, it’s Clay. Thanks for the question. Yes, I would say, it’s certainly too early to talk specifics on 2025. That guidance will be coming in the coming months. But what I can say is definitively, this doesn’t impact our activity level in the Delaware Basin. That should be kind of the first call on capital, pretty consistent there. Really pleased with that economics, have a great runway there. With this — think of this acquisition as really enhancing the multi-basin business that we have, really supplementing where we needed to in the Williston. And I think it adds just really great opportunity set, not just in this year, but in several years to come.
Neal Dingmann
Makes sense. Thanks, Clay.
Clay Gaspar
Sure, Neal.
Operator
Our next question today is from the line of Kevin MacCurdy, apologies, Kevin MacCurdy of Pickering Energy Systems. Kevin, your line will be open now if you’d like to proceed.
Kevin MacCurdy
Good morning. I wonder if you guys can provide a little bit more color on the $50 million of synergies. What costs have you identified and are the marketing synergies related to the midstream ownership? Thank you.
Clay Gaspar
Thanks, Kevin. This is Clay again. This is not your classic G&A synergies that some publicly traded combinations yield. We’re thinking much more along the lines of kind of operational synergies. The efficiency of scale inside the basin is critical. That opens up lots of things that we can do with our rigs, with our frac fleets. Even from our marketing and supply chain side, that scale is quite valuable. I think that easily checks the box. But you also mentioned the marketing. I think as we start thinking about the infrastructure that comes with this asset provides a lot of value. As we all know, you can’t produce the water, you can’t get rid of the water efficiently, boy, it really encumbers your business. The oil infrastructure, the gas infrastructure, all of that really adds value and provides us upside from where we sit today. So, excited about that. There’ll certainly be other synergies along the way, but I think the $50 million is just a pretty conservative placeholder that we want to plug in.
Operator
Thank you. Our next question is from the line of Charles Meade of Johnson Rice. Charles, please go ahead. Your line is open.
Charles Meade
Good morning, Rick and Clay, and the rest of the Devon team there. I wanted to go back to the midstream question and I’m really trying to understand the cash flows there and how we should ascribe value there. The $125 million is that just on the Grayson Mill assets or is that on the combined asset base? And related to that, are those — is that EBITDA kind of a intercompany EBITDA or are there third-party volumes that contribute to that?
Jeff Ritenour
Yes, Charles, this is Jeff. You nailed it. That’s exactly right. It’s just related to the Grayson Mill asset, the business that we’re acquiring and it is effectively — the $125 million of EBITDA that we’ve assumed and included in the materials is effectively intercompany. There is some third-party working interest owner EBITDA included in there, but it’s very negligible. It’s really driving the higher realizations that we’re seeing across this business.
Charles Meade
Got it. And then so if we were to think about it that way, Jeff, what — I think you have some material on this, but what is the — can you quantify that higher realizations on the Grayson Mill assets versus, say, legacy Devon or a basin standard?
Jeff Ritenour
Yes, Charles. I think we’ve got a slide in the material, you’ll actually see kind of on a relative basis across the basin, you can see that the infrastructure that’s included in this business that we’re acquiring effectively provides anywhere from a $3 to $5 uplift in our realizations, which really sets the — you can see kind of in the bar chart, I think, it’s Slide 7 in our materials, you can see the improvement that we get as a result of that.
Operator
Thank you. Our next question today is from the line of Betty Jiang of Barclays. Betty, please go ahead. Your line is now open.
Betty Jiang
Good morning. Thank you for taking my question. So I wanted to ask about the inventory number that was highlighted in Slide 6. Could you just provide a bit more context around that up to 10 years of inventory? Does that include refracs? And then how to think about the spread of those locations across the acreage between say that Central McKenzie, Mountrail County versus the Western Extension Area? Thanks.
Scott Coody
Hey, Betty, this is Scott. You were cutting out a bit. I heard Slide 6, I heard inventory. So, I’ll just turn it over to the team here with regards to just maybe an overview of the locations that we have, the 800 opportunities that we’ve identified, and maybe what that’s composed of. Clay?
Clay Gaspar
Yes, Betty, I hope this is your question. So, we’ve identified 800 conservatively, 800 opportunities, 500 of those are new wells. We also have some refrac inventory. That’s one thing as you — uniquely, as you move West, we think there’s more refrac potential than we have seen and we’ve benefited from on the East side of the basin. So, we’re excited about that. Think of that refrac as kind of supplementing the base. What we’re really focused on is the additional 500 wells of inventory. I think you might have asked about spacing. There’s certainly as you move further West, the Three Forks kind of pitches out about halfway through this 300,000 acres. So, the West side is really dominated by the Bakken. As you move on the East half of this, there’s some Bakken and there’s some Three Forks potential. Anyway, I hope that answers your question. Sorry, we couldn’t quite hear you.
Operator
Thank you. Our next question is from the line Kalei Akamine of Bank of America Merrill Lynch. Please go ahead. Your line is open. Our next question is from the line of Kalei Akamine of Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Kalei Akamine
Sorry, I was on mute. My question goes to the cost structure of the acquired asset. Can you just give us a sense of how the operating expense and the logistics costs compared to legacy Devon?
David Harris
Yeah, this is David Harris. From an operating cost standpoint, we expect this asset to be pretty well in line with the legacy work we’ve done on our position.
Operator
Thank you. And our next question today is from the line of Scott Hanold of RBC. Please go ahead. Your line is now open.
Scott Hanold
Yes. Thanks. On the 500 new drilling locations, it looks like you all used $80 as the price to assess that at. But what does that look like at, say, more a mid-cycle price, $60 or $65? And if you could also quantify like what percentage of those wells or what the count is Bakken versus Three Forks? I know you mentioned there’s some of each, but if you can quantify that, that’d be great.
Clay Gaspar
Yes. I believe the percentage is about 80% Bakken, about 20% Three Forks. We used a $75 price deck to kind of analyze those returns. You can see the slide that shares the returns relative to our existing Williston Basin inventory. And what you can see there is the colors really dispersed nicely all the way from the front to 10-plus years of inventory. So, excited about this opportunity set. I think we’ll continue to add value not just today, but in years to come.
Operator
Great. Thank you. Our next question is from the line of David Deckelbaum of TD Securities. Please go ahead. Your line is open.
David Deckelbaum
Thanks for taking my question. I’m curious just as you think about the pro forma now, you’re tripling your production in the Basin, do you foresee sort of maintaining this 150 level or is there an inherent step-down just given the fact that Grayson was growing over the last couple of years.
Rick Muncrief
[indiscernible] Our plan right now is to maintain 150,000 BOE per day level for the foreseeable future.
David Deckelbaum
Thanks Rick.
Operator
Thank you. Our next question today is from the line of Ati Modak of Goldman Sachs. Please go ahead. Your line is now open.
Atidrip Modak
Hi. Good morning, team. Thank you for taking the question. So, just curious if you have any lessons from RimRock, for instance, that you could try and draw parallels to and maybe give us a comparison on how this asset compares to what you’re doing there and improvement potential.
Jeff Ritenour
Hey, Ati, this is Jeff. We’re having trouble hearing you guys. If you could try to maybe speak directly into the phone, maybe that will help, but it seems to be breaking up a little bit.
Atidrip Modak
Yes. Sorry, hopefully this is better. I was just trying to figure if you have any lessons from the RimRock assets that you could maybe draw parallels to or help us understand the relative positioning and quality in these assets.
Clay Gaspar
Yes. Hey, thanks for the question. I got you that time. That really helped. First of all, this is a significantly different asset than RimRock in lots of regards from scale to position to maturity of that asset. But look, this is a humbling business. And I think the way that — the thing that gets me most excited or I really think about going forward is our learning mentality inside of Devon. We’ve taken some lessons. We’ve really learned from missteps that we had in that last deal. I think this is — we are much better-positioned on not just the asset, but the team on both sides. And then as well as the transition program that we have. Significantly, different set of circumstances today. We’re really excited about where we’re at. Also, on the transition, we’re going to be bringing over their employees. And so with, I think that and some very tactical things we’re going to be doing, I think will ensure a much smoother transition along. And excited about — one other thing, Rick mentioned in his comments, the great work that the Grayson Mill’s team has done. I just wanted to reiterate that. This is a very impressive accumulation of assets that they’ve put together. They’ve executed on it exceptionally well and we look forward to learning from them and sharing some of our best practices well along the way.
Atidrip Modak
Thank you.
Operator
Thank you. [Operator Instructions] And our next question is from the line of Paul Cheng of Scotiabank. Please go ahead. Your line is open.
Paul Cheng
Thank you. Maybe this is for Clay. If I look at Grayson Mill’s website, there you’re talking about 2023 [indiscernible].
Scott Coody
Hey Paul, This is Scott. You are cutting out. Can you try to speak a little bit louder for us so we can hear your question? Thank you.
Paul Cheng
Sure. Sorry, can you hear me okay now?
Scott Coody
Much better. Thank you.
Paul Cheng
Okay. If I look at Grayson Mill’s website, their production in 2023 is 123,000 BOE per day and they expect 2024 at 125,000. And you gentlemen in the presentation saying that you expect it to sustain at 100,000 barrels per day going forward. So that’s a pretty substantial job. What’s causing that job and that why we are not sustaining at their current production level? Thank you.
Jeff Ritenour
Paul, I think we got you on that. Thanks for speaking up a little bit. I think to reiterate your question, you said historically, they’ve posted numbers closer to 120,000 or 125,000 barrels of oil equivalent a day. Look, I think what we’ve guided to is an expectation for 2025, around 100,000 barrels a day. We feel like that’s a great model for us as we roll forward. Certainly, in the coming months, we throw everything into the hopper. We evaluate everything. Once we have certainty on close, and then we have a really intense capital fight and look for the best opportunities to fund and has that — all that yields will turn out to be what the resulting production will be. But I think 100,000 is what we’re guiding to give you a good idea and the economics look good, the funding of the project looks really strong in that. Is there upside? Of course, there’s always upside, but we feel like we feel real good about where we’re at on the guide today.
Operator
Thank you. And our next question is from the line of Matthew Portillo of TPH. Please go ahead. Your line is now open.
Matthew Portillo
Good morning, all. Can you hear me okay?
Clay Gaspar
We sure can.
Rick Muncrief
Thanks, Matt.
Matthew Portillo
Perfect. Just a follow-up question on the lateral mix. Can you provide any additional color on the mix between the two-mile and three-mile laterals on those 500 gross locations? And then as a second part to that question, are you considering any changes to the spacing design or is that pretty much fixed at this point?
Scott Coody
Yes. Matt, this is Scott. I’ll take the lateral length. About 40% of the locations that we’ve identified are three-mile laterals. The rest are two-mile laterals.
Rick Muncrief
Yes. I believe, this is Rick, on the spacing, we’ll see over time. The bottom line is, team has done a really good job. We are going to follow their development procedure. We don’t see any flaws with that. I can tell you, there was an earlier question with the RimRock acquisition earlier. This was that, I can tell you, we debated that with that team even prior to the transaction. And so, we feel really, really good about where we’re at right now. So, we’ll see over time and it will vary with geology. And a lot of times, quite honestly, we’ve talked about this on a lot of calls, spacing sometimes depends on commodity price as well. And so weaker prices, you move it out, you tighten it up in times when you have much stronger commodity prices. But I think right now, fundamentally, we’ll just stick to the profile they have right now.
Scott Coody
All right. It looks like we’ve made it through the queue of questions for today. I appreciate your interest in Devon. If you have any other questions, feel free to follow-up with the Investor Relations team at any point today. We’ll be around all day. Once again, thank you for your time today.
Operator
This concludes today’s conference call. Thank you all for joining. You may now disconnect your lines.
