It’s already completed a big Lower 48 takeover this year, but Devon Energy Corp. isn’t ruling out making a bid on more oil and natural gas assets, the CEO said Wednesday.

Devon Permian

Over the last couple of weeks, rumors have swirled that Royal Dutch Shell plc may sell its Permian Basin portfolio, estimated to be worth up to $10 billion. The potential suitors mentioned include Chevron Corp., ConocoPhillips and Devon. 

There was no mention by Shell executives about a Permian sale during the recent quarterly conference call. Devon CEO Rick Muncrief didn’t take the bait when he was quizzed about it during the 2Q2021 conference call. 

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“Fundamentally, we continue to have a very, very high bar,” Muncrief said. Devon in January completed a mega-merger with the company he formerly helmed, Permian heavyweight WPX Energy Inc. “We’ve got a wonderful company post-merger.

“For us, the way we think about it is that anything we evaluate on buying or selling has got to be accretive,” he said. Any deal has to have “compelling industrial logic. To be clear, it has to fit into the industrial framework to make us even stronger.”

Bottom line, Muncrief said, “anything we consider has got to help us get stronger on our outlook.” Even if volumes are flat, cash flow could still expand if the right acquisition boosts the overall forecast. 

“We’ve got a tremendous inventory, a tremendous business,” he told investors. Regardless of what may transpire on the acquisitions front, “we have set a very, very high bar and we will be very disciplined in whatever we do.”

‘Trifecta’ Of Gains

For the multi-basin independent, the world still turns on the Permian, however. As it celebrates its 50th anniversary as a company, Devon has transformed from a natural gas powerhouse into a Lower 48 liquids boss. 

“The power of Devon’s portfolio was showcased by the second quarter results,” Muncrief said. “We delivered on what we promised to do.”

Promises kept included improving synergies and reducing overhead. In fact, efficiencies drove a reduction in capital spending, which was 9% below guidance, while volumes were above the midpoint. In addition, free cash flow climbed six-fold. 

“We are only getting started,” Muncrief told investors. “The set up for the second half of the year is even better.” Devon has had a “trifecta” of wins, with an “improving production profile, improving efficiencies and improving costs.” 

All of the gains are coming with no changes to the capital spending plan this year. It’s “too early to provide plans for 2022, but there’s no shift to our strategy” even with commodity prices sweeping higher.

“Our behavior is very predictable,” Muncrief said of the management team. There is going to be “limited reinvestment” too. “We have no intention to add incremental barrels to the market until the demand side fundamentals recover.” 

To get those fundamentals in recovery mode, Devon also wants to see the spare oil capacity of the Organization of the Petroleum Exporting Countries and its allies be “effectively absorbed by world markets.”

Delaware Delight

Devon for now is focused on producing better and less carbon-intensive barrels, particularly from the Permian Delaware, where output climbed 22% year/year. 

Lower 48 output overall improved in 2Q2021 from a year ago to 567,000 boe/d from 325,000 boe/d lifted by the WPX reserves. 

Oil production averaged 291,000 b/d, exceeding midpoint guidance by 3,000 b/d and up from 153,000 b/d in 2Q2020. Natural gas liquids (NGL) output climbed to 129,000 b/d from 69,000 b/d. Natural gas production increased in 2Q2021 to 881 MMcf/d from 614 MMcf/d. 

Devon averaged 15 operated drilling rigs and five completion crews across the Lower 48 plays. Capital spending totaled $509 million, 9% under guidance.

The growth in production was driven by the Permian Delaware. Of the 75 gross wells spud during the latest quarter, 55 were in the Delaware sub-basin. 

Delaware output averaged 358,000 boe/d in 2Q2021, 22% higher year/year. Growth came as 88 wells were turned to sales across the 400,000 net acres in New Mexico and Texas. 

Even with higher volumes, field-level operating costs in the Delaware declined 7% year/year to $5.97/boe, with margins of $33.79/boe. 

Devon also has substantial leaseholds in the Eagle Ford Shale, and the Anadarko, Powder River and Williston basins. 

Eagle Ford production averaged 37,000 boe/d in 2Q2021, versus 53,000 boe/d in 2Q2020. Output was up 21% sequentially. Twenty-one wells were turned to sales, with average initial production (IP) rates of 2,300 boe/d. Each completed well cost on average $4.7 million.

In the Anadarko, production averaged 80,000 boe/d, off from 90,000 boe/d in the year-ago quarter. Six legacy Meramec wells were brought online from the inventory of drilled but uncompleted, or DUC wells. The six wells averaged 30-day IP rates of 1,800 boe/d. 

Also in Oklahoma’s Anadarko, Devon is continuing its $100 million joint venture drilling carry with Dow Inc. Sixteen wells were spud in the first half of 2021, and plans are to drill up to 30 total wells this year.

Meanwhile, Powder River output came in at 22,000 boe/d in 2Q2021, down from 24,000 boe/d in 2Q2020. No new wells were brought online. Williston volumes averaged 66,000 boe/d. Devon was not working in the Williston before the WPX merger. 

During the latest quarter, 13 development wells were brought online in the Williston, driving an 8% sequential production increase. 

The plan to year’s end is to run 16 rigs across the Lower 48, with nearly all rigs in the Permian. About 150 wells are set to be tied to production through December, again, mostly in West Texas and New Mexico. 

Devon fetched an average realized oil price including hedges of $50.34/bbl in 2Q2021, compared with $36.50 in the year-ago period. Minus the hedges, prices averaged $63.33/bbl from $21.25. NGLs garnered an average realized price with hedges of $23.64/bbl from $9.40. Excluding hedges, prices averaged $23.89 from $8.89.  

For natural gas, hedged realized prices in 2Q2021 averaged $2.20/Mcf from $1.57 in 2Q2020. Unhedged gas was priced at $2.35/Mcf in 2Q2021 versus year-ago prices of $1.29.

Devon also has established environmental performance targets focused on reducing the carbon intensity of its operations. It is planning to trim greenhouse gas emissions 50% by 2030, with a net-zero emissions target by 2050.

Net earnings totaled $256 million (38 cents/share) in 2Q2021, versus a year-ago loss of $670 million (minus $1.80). Operating cash flow totaled $1.1 billion, an 85% increase year/year.

Cash flow funded all capital requirements and generated $589 million of free cash flow, management noted. 

The board also declared a fixed-plus-variable dividend of 49 cents/share, a 44% increase from the 1Q2021 dividend. The fixed quarterly dividend of 11 cents/share and the variable dividend of 38 cents/share are both payable in September.