Devon

Devon executives mentioned “capital discipline,” focusing their resources on “margin enhancement”

Devon’s CEO touted the company’s “unyielding commitment to capital discipline, and the groundbreaking deployment of our industry-leading cash return business model.”“Rick Muncrief — President and Chief Executive Officer: Thank you, Scott. It’s great to be here this morning. We appreciate everyone taking the time to join us on the call today. For Devon Energy, 2021, as a transformational year that can best be defined by our willingness to be a first mover and pursue bold strategic consolidation. Our operational excellence and unyielding commitment to capital discipline, and the groundbreaking deployment of our industry-leading cash return business model, underpinned by our fixed plus variable dividend.” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

Devon’s CEO: “These margin expansion efforts, combined with a disciplined capital allocation framework that prioritize value over volumes, resulted in Devon generating the highest level of free cash flow in our prestigious 50-year history.” “Rick Muncrief — President and Chief Executive Officer: These margin expansion efforts, combined with a disciplined capital allocation framework that prioritize value over volumes, resulted in Devon generating the highest level of free cash flow in our prestigious 50-year history. With this powerful stream of free cash flow, we delivered on exactly what our shareholder-friendly business model was designed for, and that is to leave the industry in cash returns.” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

A Devon executive said “while 2021 was a record-setting year for Devon, the setup for 2022 is even better,” noting that they could sustain current production if prices reached as low $30 a barrel. “Now turning to slide six, while 2021 was a record-setting year for Devon, the setup for 2022 is even better. With the operational momentum we’ve established, we have designed a capital program to efficiently sustain production at a ultra-low WTI breakeven funding level of around $30 a barrel. Combined with the full benefit of merger-related costs synergies and a vastly improved hedge book, we’re positioned to deliver free cash flow growth of more than 70% compared to 2021. As you can see on the graph, the strong outlook translates into a free cash flow yield of 14%, assuming an $85 WTI price Play will run through the details of our operating plan later but simply put, we expect 2022 to be another great year for Devon. Turning your attention to slide seven, with this significant stream of free cash flow, the top priority for our free cash flow is the funding of our fixed plus variable dividend.” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

Devon executives said the company used profits to expand buybacks and dividend 

Devon’s CFO bragged about the company’s dividend, saying “This payout represents the highest quarterly payout in Devon’s history.”“Jeff Ritenour — Chief Financial Officer: As Rick covered earlier, in conjunction with our earnings report, we announced a fixed plus variable dividend of $1 per share that is payable in March and includes the benefit of our 45% raise to the fixed dividend. This payout represents the highest quarterly payout in Devon’s history. Another avenue that we’re returning cash to shareholders through is the execution of our share repurchase program. Since we initiated the program in November, we’re off to a great start by repurchasing $14 million shares at a total cost of $589 million.” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

Devon’s CEO: “we felt like the clear thing for us to do is to double down on our share repurchases.” “Rick Muncrief — President and Chief Executive Officer: Well, that’s always an interesting question. And today, once again, I’ll go back to the curve. If you’re a seller, I mean, you’re wanting to sell at today’s prices. If you’re a buyer, you have to honor that curve. And that’s it’s kind of an interesting time. So that’s why as we talked here among this management team and with our board, we felt like the clear thing for us to do is to double down on our share repurchases. As we think about assets, it might be out in the market. Gosh, we just don’t see anything that really competes with what we have. And so that’s why we’ve doubled down on it.” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

Devon executives said the company was no longer seeking to expand production

Devon’s CEO said the company was not focused on increasing production: “we’ve been so focused on remaining very, very disciplined, keeping our budget volumes flat, operating in a maintenance capital standpoint. I think that’s the right till we get some real clear indication otherwise.” “Rick Muncrief — President and Chief Executive Officer So that’s why we’ve been so focused on remaining very, very disciplined, keeping our budget volumes flat, operating in a maintenance capital standpoint. I think that’s the right till we get some real clear indication this otherwise. So, Clay, you may add anything to that.” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

Devon’s COO: “remember that we are growing in the Permian, at the same time, we’re keeping our overall production flat.” Clay Gaspar — Chief Operating Officer: Yeah, appreciate that. What I was just going to add, I remember that we are growing in the Permian, at the same time, we’re keeping our overall production flat. And I think it’s kind of, you have to watch the headlines and what’s the overall trend? I believe that’s the right mix for us with our assets, with our portfolio. Specific to Permian growth, because that’s definitely the hot basin.” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

Devon’s CFO said the company had “fundamentally changed” from the time when “we were spending all of our cash flow in an attempt to grow at a double-digit type rate.” “Jeff Ritenour — Chief Financial Officer: “Yeah, thanks, Paul. Great question and I would tell you really no material change to our philosophy from what we talked about on the last call back in the fall. Just to give you a little bit of a foundation for where we sit today, we’re roughly about 25% hedged on oil, and about 30%, 35% percent on gas. We think that’s an appropriate level given our financial strength and the margin of safety that we have on with our low reinvestment rate of our kind of our base business model, so you’ve heard me talk about that in the past. The thing that’s fundamentally changed in our business versus 2, 3, 4 years ago, is in the past we were spending all of our cash flow in an attempt to grow at a double-digit type rate, which was competitive with the broader sector. Today, with the lower reinvestment ratio and the steady-state level of activity, it just creates a margin of safety for us in our business to where even if prices pull back, it doesn’t alter our activity.” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

A Wall Street Analyst praised Devon’s CEO for promising to limit production growth

A Wall Street Analyst asked if the company would remain committed to “sub 5% oil growth if commodity prices stay at today’s levels into 2023 and beyond?” “Nittin Kumar — Wells Fargo Securities — Analyst: Hi. Good morning, Rick, and congrats on the successful quarter. You’ve come a long way since the merger as you said in your prepared remarks, but you’re generating about $60 per barrel in free cash. Given your breakevens, you’ve talked about a market-leading yield for income investors. Imagine wellhead economics are pretty attractive to raise prices. So the question I have is, how committed are you to sub 5% oil growth if commodity prices stay at today’s levels into 2023 and beyond? And maybe when do you think you have the license to grow again? (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

Devon’s CEO: “the 5% that we laid out at the time of the announcement of the merger, that still holds, that’s the max.” “Rick Muncrief — President and Chief Executive Officer: Well, that’s a good question. I think that and what I would just point to is and I try to articulate this, pretty routinely, is if we do put a lot of we would do put a lot of faith into the shape of the curve, and sometimes you can debate where the absolute points on a curve are. But when you see such steep backwardation, and you start thinking about trying to add activity, by the time you bring old barrels on, I mean, let’s face it, it is going to be a while down the road. So we think for us, the 5% that we laid out at the time of the announcement of the merger, that still holds, that’s the max. And we really, to be honest with you, there’s so much uncertainty, probably as you look out in the outer years, I think for us, look, we’ll stick to our knitting and maintain that makes that 5%” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)

The analyst responded: “Great, I think that’s the answer most people want to hear.” “Nittin Kumar — Wells Fargo Securities — Analyst: Great, I think that’s the answer most people want to hear.” (Devon Energy Q4 2021 Earnings Call, 12/31/2021)