OKLAHOMA CITY Aug 5, 2015 (Thomson StreetEvents) -- Edited Transcript of Devon Energy Corp earnings conference call or presentation Wednesday, August 5, 2015 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Howard Thill Devon Energy Corporation - SVP of Communications & IR * Dave Hager Devon Energy Corporation - President & CEO * Tony Vaughn Devon Energy Corporation - EVP of E&P * Tom Mitchell Devon Energy Corporation - EVP & CFO * Darryl Smette Devon Energy Corporation - EVP of Marketing, Facilities, Pipeline, & Supply Chain ================================================================================ Conference Call Participants ================================================================================ * Evan Calio Morgan Stanley - Analyst * Ed Westlake Credit Suisse - Analyst * David Cameron Wells Fargo Securities - Analyst * Michael Rowe Tudor, Pickering, Holt - Analyst * Subash Chandra Guggenheim Security - Analyst * Ryan Todd Deutsche Bank - Analyst * Sameer Uplenchwar GMP Securities - Analyst * Scott Hanold RBC Capital Markets - Analyst * Doug Leggate BofA Merrill Lynch - Analyst * John Herrlin Societe Generale - Analyst * David Heineken Heineken Energy Advisory - Analyst * Megan Repine FBR Capital Markets - Analyst * Brian Singer Goldman Sachs - Analyst * Phillip Jungwirth BMO Capital Markets - Analyst * James Sullivan Alembic Global Advisors - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to Devon Energy's second quarter 2015 earnings conference call. (Operator Instructions) This call is being recorded. At this time, I would like to turn the call over to Mr. Howard Thill, Senior Vice President of Communications and Investor Relations. Sir, you may begin. -------------------------------------------------------------------------------- Howard Thill, Devon Energy Corporation - SVP of Communications & IR [2] -------------------------------------------------------------------------------- Thank you, Michelle, and good morning, everyone. I hope you've all had a chance to review our operations report and management commentary at devonenergy.com, as today's call will largely consist of questions and answers. Also on the call today are Dave Hager, President and CEO; Tony Vaughn, Executive Vice President of E&P; Tom Mitchell, Executive Vice President and Chief Financial Officer, and a few other members of our senior management team. Finally, I would remind you that comments and answers to questions on this call will contain plans, forecasts, expectations, and estimates, which are forward-looking statements under US Securities Law. These comments and answers are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. These statements are not guarantees of future performance. For a review of risk factors relating to these estimates, see our 2014 Form 10-K and subsequent 10-Q filings. With that, I'll turn the call over to Dave Hager. -------------------------------------------------------------------------------- Dave Hager, Devon Energy Corporation - President & CEO [3] -------------------------------------------------------------------------------- Thank you, Howard, and welcome, everyone. The second quarter saw Devon deliver another high quality performance. Continuing a trend that has generated top quartile results for our shareholders for the past several quarters. Before we jump into the Q&A, I would like to highlight a few key messages I would hope you would take away from our earnings materials. First, as many of you know, I assumed the role of President and CEO August 1, and I want to be clear. The overall strategy that has led to Devon's recent out performance remains unchanged. We will continue to operate in North America's best resource plays, deliver superior execution, and maintain a high degree of financial strength. As you can see from our second quarter results, Devon's premier asset portfolio continues to achieve significant operational improvements. Our three most active plays, the Delaware Basin, Eagle Ford, and the Anadarko basin all delivered outstanding well performance that exceeded type curve expectations, with substantially lower well costs and reduced operating expenses. We expect this outstanding operational performance to continue. Our technical teams are laser focused on getting the most out of our advantaged asset base with superior execution. This unwavering pursuit of excellence means we will continue to improve drilling times, maximize value per well with industry-leading completion designs, and optimized base production with best-in-class field operations. Importantly, we are keenly focused on maintaining our strong balance sheet. And we have the flexibility in our capital programs through scalable operations, minimal exposure to long-term service contracts, no long-term project commitments, and negligible lease hold expiration issues to do just that. Additionally, our advantaged capital structure is enhanced with the unique optionality EnLink provides, with distributions approaching $300 million annually and the potential for drop-down proceeds. Given these benefits, we believe that in the current commodity price and service cost environment, we can deliver growing oil production in 2016 compared to 2015 exit rates, while spending within total cash inflows. So in summary, we are pleased with the way Devon is positioned to successfully weather the current environment and prosper in the future. Undoubtedly, in the E&P business, you need great assets, outstanding operations, and a strong balance sheet to deliver sustainable long-term growth and differentiating returns for investors. With Devon, you have all three of these winning qualities. With that, I will turn the call back to Howard for Q&A. -------------------------------------------------------------------------------- Howard Thill, Devon Energy Corporation - SVP of Communications & IR [4] -------------------------------------------------------------------------------- Thanks, Dave. To ensure that we get as many people on the call as possible, we would ask that you please limit yourself to one question with an associated follow-up. And with enough time at the end, you can reprompt, and we'll take additional questions from the participants. So Michelle, with that, we're ready to take the first question. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Evan Calio from Morgan Stanley. Your line is open. -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [2] -------------------------------------------------------------------------------- Good morning, guys. Another strong operations update today. First -- -------------------------------------------------------------------------------- Dave Hager, Devon Energy Corporation - President & CEO [3] -------------------------------------------------------------------------------- Thanks, Evan. -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [4] -------------------------------------------------------------------------------- You've reiterated your full-year crude production and outlook, but there are a few moving pieces. And I guess first, what drove the decision to dial back the Eagle Ford, given what must be strong economics at the strip? And what would you and your partner need to see to either complete some of these DUCs you're building or add rigs there? I have a follow-up, please. -------------------------------------------------------------------------------- Dave Hager, Devon Energy Corporation - President & CEO [5] -------------------------------------------------------------------------------- Evan, this is Dave. I'll take a stab at that. Tony may want to add some things to it. Directionally, first -- well, first off, our well performance is just outstanding. We continue to see outstanding well performance on the capital program, and outstanding economics on that program. If you'll remember back at the end of 2014, we had temporarily increased from five to nine completion crews. And we jointly agreed with BHP that that was a temporary measure to draw down the inventory. And then after that point, we would reduce the completion crews. And certainly in the current commodity price environment and with some drawdown in inventory, we felt that was appropriate. So directionally, we have a great partnership with BHP. We discuss a lot of things technically. They might have reduced the completion crews and they had the ability to do that the way our agreements are written, that they might of reduced the completion crews a little bit further than we have, taking it down to one crew. Directionally, we agreed with the reduction. But they were trying to manage their total cash flows as a company when making that, along with making a little bit of a call, I believe, on commodity prices. And so that was really the decision that was made. It had nothing to do with the quality of the opportunity, the well results are absolutely outstanding, and I think we'll continue to see adjustments in our rig activity and the completion of crews in the future. So, Tony, do you want to add anything to that? -------------------------------------------------------------------------------- Tony Vaughn, Devon Energy Corporation - EVP of E&P [6] -------------------------------------------------------------------------------- I would -- I think you summed it up very well, Dave. I think the one thing I would add is just the more our technical team has an opportunity to look at additional data through the work that we're doing in both Lavaca county and DeWitt county, both in the upper and the lower Eagle Ford. We continue to grow the resource base. So our expectations of the property are essentially growing. The wells, as you can see from our quarter-to-quarter reports, are just as prolific. In fact, if you look at all the public data, you're going to find that the BHP Devon combination is really delivering the best-in-class well results that we have in the industry right now. So I think it's all about pace of activity. And Dave summarized pretty well that we just dropped that pace down, and we'll continue to hover at the five or six drilling rigs for this point, and probably running from about one to three frac crews as we go forward. So that's just the overall plan that we'll have for the second half of the year. -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [7] -------------------------------------------------------------------------------- Great. Thanks. And if I could, on the second question. You guys have reported another round of efficiencies achieved in the second quarter, 10% to 20% compared to the first quarter. Oilfield service prices appear to be coming down faster than you planned at the start of the year. So can you talk about what's happening to the resulting savings? Does your reiteration of upstream CapEx and increased DUCs tell us there might be downside to that full year CapEx, or how you're thinking about that relationship? Thanks. -------------------------------------------------------------------------------- Dave Hager, Devon Energy Corporation - President & CEO [8] -------------------------------------------------------------------------------- Well I would say the bigger impact, Evan, we don't see a lot of variation in what the CapEx will be for the remainder of this year. I think the bigger impact will be as we have a full year of those cost savings and then 2016, what benefit that's going to provide to us. And so you look at that and you -- the CapEx savings we're going to have from the cost reductions. Then there are some other factors also. That if you look at our -- we can take the spending down in Canada probably by around $500 million or so. We will not have any activity essentially probably next year in our -- in the Miss -- or the southern Miss, midland basin, Wolfcamp, some other plays. We had great economics, because we are essentially being carried on a large amount of the well costs. But once we're beyond the carry, we won't have any money we'll be spending there. So you put all that together and where we have an E&P capital spend this year $of 4 billion or a little bit over. I tried to make the comment there in my opening remarks that you could see that with the current strip, that the cash flow that would be generated by that plus the anticipated cash flow from the EnLink dropdowns, that we are confident we will be able to grow our oil production in 2016. And that's obviously the vast majority of the margin that we generate as a Company. So there are a lot of positive factors working that we're going to be able to significantly reduce the capital requirements. I know there's some concern out there that when our hedges roll off, what impact is that going to have on the Company. And we are trying to address that with you and give you some directional things to think about there that we have confidence we can continue to grow our oil production, even when these hedges roll off because of the factors I mentioned. -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [9] -------------------------------------------------------------------------------- That's real helpful, guys. Thank you. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Your next question comes from Ed Westlake from Credit Suisse. Your line is open. -------------------------------------------------------------------------------- Ed Westlake, Credit Suisse - Analyst [11] -------------------------------------------------------------------------------- Yes, and I'm just following on from Evan's question. Some growth at the script, but if you truly wanted to -- if commodity prices were awful to maintenance levels, can you give us a sense next year of what that would be? Have you done that calculation? Well, we have all the flexibility. It depends on the definition of awful, I guess you would say. Because we obviously calculate our cash flows at all sorts of various commodity prices, including those below which we're currently seeing on the strip. I think the key thing is, we have all the flexibility in the world to adjust our capital however we want. Because essentially, all of our acreage is held by production. We have no long-term projects we're committed to, no deep water, no international, no heavy oil projects we're further committed at this point. We're just wrapping up Jackfish 3, and we don't have very many long-term rig commitments. So we can adjust our capital spending. And I think when you look at the combination that Devon provides of tremendous capital flexibility, some of the premier assets in North America, strong balance sheet, and the strong execution that we're consistently demonstrating every quarter. I think it's a unique combination in the industry. Totally separate question then, just on the Delaware. Obviously, with the new completions and the high profit modes, you're increasing the IPs very strongly. You've also got a whole lot of downspacing that you have to do, testing different layers within each of the different zones. So appreciate it's a little bit early, but the EUR feels like it should be rising. Is that an expectation that we should have, given the performance that you have across the basin thus far, particularly in the basin? -------------------------------------------------------------------------------- Dave Hager, Devon Energy Corporation - President & CEO [12] -------------------------------------------------------------------------------- Ed, I think the EURs are increasing as we continue to develop. And we're doing a lot of work in the southern portion of Lee and Eddy county, which is really I think some of the best inventory we have in our portfolio. You're starting to see those characterized on the IPs, and we continue to really outperform on those type wells that we deliver. So we really have got a great understanding now, I believe, of the relationship between frac design and size. Not that we're done with improving the recipe, but we've got a great relationship between the frac design, the resulting IPs, EURs, and most importantly, the returns. And that's really why we are moving our completion designs back to about the 1,500 to 2,000-pound per foot range, because it affords us the most improved rate of returns. Also, our work in the Northern portion of Lee and Eddy county, we're derisking and really trying to set up some development work that will be ready for us in 2016. We're starting to improve that design for those fracs, and on a well-by-well basis, that's continuing to improve as well. So I think what the group is doing right now is we have a pretty good understanding about profit loads and what that does to our completions, but we're not done. We're still trying to improve upon our frac fluids, the spacing lengths and the clusters, and all of the various things that go into a frac design. So we'll continue to see I think EURs improve and returns improve. -------------------------------------------------------------------------------- Ed Westlake, Credit Suisse - Analyst [13] -------------------------------------------------------------------------------- Thanks very much. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- Your next question comes from David Cameron from Wells Fargo. Your line is open. -------------------------------------------------------------------------------- David Cameron, Wells Fargo Securities - Analyst [15] -------------------------------------------------------------------------------- Thank you. Good morning. Congrats on another good quarter. So thinking about 2016, I'm going to go back to that. Obviously, this isn't a revelation that the street [bear] cases says your guys aren't going to be able to grow as fast in 2016 some of your peers. One, I guess how would you address that? And two, you talked about being able to grow within cash flow. What type of limits -- or maybe better, what type of goal post or framework are you thinking about yourselves and at the Board level as far as how you want to look at 2016 given where the strip's at right now? -------------------------------------------------------------------------------- Evan Calio, Morgan Stanley - Analyst [16] -------------------------------------------------------------------------------- Well we have always thought that it was important to have a strong balance sheet. And we're going to continue to believe that that is important, and certainly in these times of uncertain commodity prices. So directionally, we tend to think of our capital spending has to be within the total cash inflows that we anticipate for the Company. So that would be both our operational cash flow, plus any EnLink distributions and any dropdown proceeds from EnLink. Such as the access pipeline, or the other new, the NGPL line that we highlighted in the operations report. So that's directionally where we start off the discussion. We obviously will then look at the programs, and see if there's any reason to deviate in a positive or a negative way from that. And we have the flexibility to do that, given our strong balance sheet. But that's the starting point of the discussion. And I think it's important to remember that we did -- our growth rate may not be quite as high next year. But remember, we enjoyed great benefits of this in 2015 that others didn't, so we're starting from a much larger base. Don't forget that. -------------------------------------------------------------------------------- David Cameron, Wells Fargo Securities - Analyst [17] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Dave Hager, Devon Energy Corporation - President & CEO [18] -------------------------------------------------------------------------------- The absolute base is higher because we have had such tremendous growth in 2015. So when you're looking at a two-year rate, you may get a little different answer. -------------------------------------------------------------------------------- David Cameron, Wells Fargo Securities - Analyst [19] -------------------------------------------------------------------------------- No, and I'm with you on that. And as far as balance sheet metrics, and I talked a little bit with Howard about this last night. But are you guys thinking -- is there debt to cap, self-imposed debt to cap? I know in the past you've gotten, I think the word Howard used was antsy when you started getting into the high 30%s, low 40%s. I know you said within cash flow, but I'm just trying to think of different scenarios under different pricing scenarios. -------------------------------------------------------------------------------- Dave Hager, Devon Energy Corporation - President & CEO [20] -------------------------------------------------------------------------------- I think Tom Mitchell, our CFO, would probably be the best person to talk about this. Tom? -------------------------------------------------------------------------------- David Cameron, Wells Fargo Securities - Analyst [21] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Tom Mitchell, Devon Energy Corporation - EVP & CFO [22] -------------------------------------------------------------------------------- David, I don't see -- there's a perception that debt level would stay the same, but the metrics would blow out next year. And that's just not really happening with what we're seeing in the cash flows and our ability to manage it. There's no question that it moves up, but we're not alone in that, and we don't disproportionately move up within the peer group, as you go into next year on that metric. So to some degree, there's some misperception. And I would just highlight what Dave mentioned. There's incredible flexibility with our EnLink investment that many don't enjoy right now. So I guess I would leave it at that. -------------------------------------------------------------------------------- David Cameron, Wells Fargo Securities - Analyst [23] -------------------------------------------------------------------------------- Okay. Appreciate the commentary. Thanks. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Your next question comes from Michael Rowe from Tudor Pickering Holt. Your line is open. -------------------------------------------------------------------------------- Michael Rowe, Tudor, Pickering, Holt - Analyst [25] -------------------------------------------------------------------------------- Good morning. I just wanted to get a sense for when you all think that you and BHP will decide on the right level of activity to pursue in 2016 in the Eagle Ford. And I guess just want to understand your level of certainty there, and if the lower activity levels do sustain into 2016. What could that mean for your views on the operated level of activity in the Delaware Basin? -------------------------------------------------------------------------------- Tony Vaughn, Devon Energy Corporation - EVP of E&P [26] -------------------------------------------------------------------------------- Well, this is Tony. I'll just reiterate some of the points that Dave made early on with relationship with BHP. BHP is in the same boat that all of us are in, so they are trying to manage their cash flow as a company. It's difficult for me to project what will happen in 2016, but I think we've got a lot of flexibility there. We've proven that we can operate as much as 15 rigs and 9 frac crews in DeWitt county. And we also can show that the well performance has improved over time, and the resource base is growing. |