The Permian Basin will be the go-to target for Devon Energy Corp. this year, with 80% of this year’s capital budget and nearly all of the rigs directed to the massive formation.
The Oklahoma City-based independent issued its legacy fourth quarter and full-year results last week. Results from WPX Energy Inc., which completed its merger with Devon in early January, were reported separately.
“With the merger of equals between Devon and WPX Energy now finalized, we have an exciting story to share with you about the prospects of our new company,” CEO Rick Muncrief, formerly the chief of WPX, said. “We have definitely timed this merger well, catching the very bottom of the cycle and positioning ourselves to capture the full upside presented by the recent strengthening of macro fundamentals.
“With these more favorable conditions, the team at Devon is not taking anything for granted. We are extremely focused on capturing synergies and executing our strategy. We remain disciplined with our capital program and we are delivering some very positive results well ahead of plan, even with all the disruptions driven by Covid-19, politics and recent winter weather.”
The “recent uptick in commodity prices is certainly a welcome change,” but “Devon will remain extremely disciplined. With our capital program, we have no intention of adding growth projects until demand fundamentals recover and worldwide inventory overhangs clear up.”
Because of the strong operating results in the Permian’s Delaware sub-basin, Devon boosted its full-year 2021 oil production forecast to 280,000-300,000 b/d, versus a preliminary outlook last year of around 280,000 b/d. Upstream capital spending is set at $1.6-1.8 billion, with 30% of the spend in 1Q2021. Reported results will include WPX beginning with 1Q2021 results.
COO Clay Gaspar, who joined Muncrief on the conference call, said the WPX merger had allowed Devon to amass “a dominant position in the Permian Delaware “of 400,000 net acres of stacked pay in the economic core of the basin that accounts for about 60% of our pro forma production. The operating scale of our consolidated Delaware footprint provides a multi-decade inventory of high-return opportunities at our current activity level.”
On a pro forma basis, production from Devon and WPX combined in 4Q2020 averaged 584,000 boe/d, with oil output at 305,000 b/d. Results exceeded guidance by about 5%. During the period Devon’s total output averaged 333,000 boe/d, with WPX averaging 251,000 boe/d.
In the Delaware, where Devon and WPX have combined a substantial leasehold, pro forma production averaged 350,000 boe/d, 52% weighted to oil and 38% higher year/year.
The two companies ran on average 15 operated drilling rigs during 4Q2020 across the 400,000 acres, with about 65% of the activity on public lands.
Devon’s development program across its legacy leasehold in southeastern New Mexico brought 23 wells online in the quarter. Initial production (IP) rates over 30 days averaged 3,200 boe/d, 70% oil. Completed well costs at year’s end averaged around $560/lateral foot, a 40% reduction from 2018.
Devon prepared ahead of time for the Biden administration’s recent directive that paused leasing, permitting and right-of-way approvals for 60 days. While most of the Texas leasehold is on private lands, a lot of the Delaware leasehold is federal land controlled by the Interior Department’s Bureau of Land Management.
“By having a blend of federal, state, and fee lands and positions in both Texas and New Mexico, we are able to leverage the significant economies of scale and at the same time benefit from market diversity and navigate the evolving regulatory climate,” Gaspar said.
“While we fundamentally believe that we will be able to efficiently develop our federal acreage in New Mexico, we have proactively managed this risk by building a deep inventory of around 500 approved drilling permits that cover our planned activity on federal lands for multiple years.
“Our forethought has allowed us to secure the necessary permits, easements and right-of-way required to execute on our near-term capital program with minimal impacts to our day-to-day operations.”
Beyond the 60-day pause, “we will be highly engaged and collaborative with policymakers to ensure we retain the ability to efficiently develop our federal leases and maximize value for all stakeholders involved.”
Devon with the combination controls acreage in the Anadarko, Powder River and Williston basins, as well as the Eagle Ford Shale.
Anadarko production averaged 81,000 boe/d net in 4Q2020. The operations were concentrated on “optimizing base production and reducing controllable downtime across the field.” Devon expects to drill up to 30 wells through its $100 million joint venture drilling carry with Dow Inc.
Production from the Eagle Ford averaged 37,000 boe/d in 4Q2020, even with no drilling and completion activity. A two-rig program is planned this year, and Devon expects to bring online 22 uncompleted wells by the end of June.
Powder River output averaged 22,000 boe/d in the quarter, with most of the capital directed to appraisal and leasehold retention. The company has more than 300,000 net acres in the basin.
In the Williston, production averaged 87,000 boe/d, a 9% increase from 4Q2019. Growth was driven by 20 completed wells, including five that were three-mile laterals.
‘Social License To Operate’
Muncrief took a few minutes to discuss Devon’s environmental, social and governance (ESG) commitments. “We believe that performance in ESG impacts every aspect of our business both operationally and financially, including our social license to operate over the long term,” he said.
“On the environmental front, Devon’s top priorities will be the reduction of greenhouse gas emissions, methane intensity rates and the advancement of water recycling. Once we fully integrate our operations from the merger, a top goal of mine this year is to establish quantitative targets for these environmental priorities.
“In addition to these environmental objectives, we are also sharpening our governance practices, which include initiatives to refine executive compensation to further enhance alignment with our shareholders and advance initiatives to foster inclusion and diversity within our organization. Bottom line is this, we are committed to responsible operations to advance the best interests of all stakeholders.”
Devon reported a net quarterly loss of $102 million (minus 27/share), versus a year-ago loss of $642 million (minus $1.70).
West Texas Intermediate oil prices in 4Q2020 averaged $42.65/bbl, compared with the year-ago average of $57.02. For natural gas, the average price was $2.67/Mcf versus $2.50.
Pro forma operating cash flow for the combined company totaled $773 million in 4Q2020, which funded all capital requirements and generated $263 million of free cash flow.
The board also declared a $128 million variable cash dividend in the amount of 19 cents/share based on the pro forma fourth quarter results. The variable dividend, which Muncrief said was an “industry first,” is in addition to Devon’s previously declared fixed quarterly dividend of 11 cents/share.
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