Global oil and natural gas demand is forecast to remain tight in the months ahead, but Devon Energy Corp. is holding the line on its Lower 48 production and instead rewarding shareholders.

The Oklahoma City-based independent, whose portfolio is concentrated in some of the richest oil and natural gas basins of the country, plans to maintain production in 2022 at 570,000-600,000 boe/d, CEO Rick Muncrief said during the recent third quarter conference call. 

“Looking ahead to the remainder of this year and into 2022, we will continue to prioritize free cash flow over volume growth,” Muncrief said. “With our operations successfully scaled to generate strong cash flow growth, we have no intention of pursuing production growth until it is clear that market fundamentals have sustainably recovered, and worldwide spare oil capacity is effectively absorbed.” 

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The preliminary plan is to maintain production flat or below 2021 levels. Production in 3Q2021 averaged 608,000 boe/d, exceeding guidance by 5%.

Looking for ‘Sustainable’ Demand-Side Recovery

The free cash flow (FCF) instead would be used to increase dividends by 71% and strengthen the balance sheet. A $1 billion share buyback program also has been launched.

“As we have stated many times in the past, we have no intention of adding incremental barrels into the market until demand-side fundamentals sustainably recover,” Muncrief said. Devon also wants it to be “evident” that spare oil capacity from the Organization of the Petroleum of Exporting Countries and its allies “is effectively absorbed by the world markets.”

There is concern about inflation heading into 2022, COO Clay Gaspar said during the call. 

Devon is “focused on staying out ahead of the inflationary pressures that are impacting not just our industry, but all aspects of the broader society,” Gaspar said. 

“The supply chain team is working hard to anticipate issues, mitigate bottlenecks and work with the asset teams to adjust plans to optimize our cost structure and future capital activity.”

With operating efficiency gains and improved economies of scale, Devon expects to fund its 2022 program at a West Texas Intermediate oil breakeven of around $30/bbl. 

“The key takeaway here is that 2022 is shaping up to be an excellent year for Devon shareholders,” said Muncrief.

How Much Did Permian Production Increase?

During 3Q2021, the Permian Basin’s Delaware formation carried production growth, with rising oil, natural gas liquids (NGL) and natural gas. Oil production rose year/year to 213,000 b/d from 77,000 b/d, with NGLs at 100 b/d from 38 b/d. Natural gas output increased to 578 MMcf/d from 239 MMcf/d.

Growth in the Delaware was driven by turning 52 wells to sales across the 400,000 net acres in New Mexico and West Texas.

Devon’s other operating areas, including the Anadarko, Powder River and Williston basins, along with the Eagle Ford Shale, showed mixed production results from a year ago.

Anadarko oil output fell to 14,000 b/d from 19,000 b/d, with NGLs at 25,000 b/d versus year-ago volumes of 30,000 b/d. Gas production declined to 219 MMcf/d from 242 MMcf/d. During 3Q2021, two drilling rigs were working in the basin, supported by a $100 million drilling carry with Dow Inc.

While the Permian Delaware remains the growth engine, “the strength of natural gas and NGL pricing and the performance we’re seeing in the Anadarko Basin will likely command relatively more capital than it did in ‘21,” Gaspar said.

In the Eagle Ford, where 19 wells were brought online in 3Q2021, oil production fell year/year to 20,000 b/d from 22,000 b/d. NGL output was flat at 11,000 b/d, and gas output dipped to 67 MMcf/d from 73 MMcf/d. 

Powder River oil production declined to 14,000 b/d from 21,000 b/d, while NGLs were flat at 3,000 b/d and gas production fell to 19 MMcf/d from 23 MMcf/d. Two wells ramped up in Converse County, WY. 

The Williston assets, acquired in 3Q2020, had oil output of 39,000 b/d, with NGLs at 9,000 b/d and gas production of 59 MMcf/d.

Devon exited the quarter running 16 operated drilling rigs and five completion crews, with 80% of the activity concentrated in the Permian Delaware.

Including hedging, Devon fetched a realized oil price of $57.59/bbl, with $2.77/Mcf for natural gas and $30.80/bbl for NGLs. In 3Q2020, realized oil prices averaged $38.21, with gas at $1.48 and NGLs at $12.06.

For the final three months of 2021, production is forecast to average 583,000-601,000 boe/d, or around 7,000 boe/d lower than 3Q2021 production at the top end of the guidance.

Net earnings rose in 3Q2021 to $838 million ($1.24/share) from year-ago losses of $92 million (minus 25 cents). Revenue increased to $3.5 billion from $1.1 billion. Operating cash flow jumped 46% to $1.6 billion in the third quarter. Free cash flow reached $1.1 billion, an eight-fold increase from the end of 2020 —  and the highest quarterly amount in company history. 

The board approved a fixed-plus-variable dividend of 84 cents/share, which is up 71% from the previous payout.