Devon Energy Corp Earnings - Q1 2025 Analysis
Positives
- Devon Energy Corp delivered a strong Q1, driven by operational excellence and financial discipline.
- The company hit the upper end of its target buyback range for Q1, spending $301 million on share repurchases, and bringing the total value of its buyback program to $3.6 billion.
- The company's FCF generation was underpinned by oil production that exceeded the top end of guidance, driven by the excellent operating performance, improving gas revenues, and disciplined capital investment.
- The company is targeting $300 million of improvements by year-end 2026.
- The company's cash balances increased by $388 million in Q1, reaching $1.2 billion.
Q&A Highlights - Q1 2025
Analyst asked about the lower GP&T rates in the Delaware Basin and their impact on the company's overall GP&T cost per unit.
Jeffrey Ritenour explained that the lower GP&T rates in the Delaware Basin are specific to the company's NGL business and are due to legacy contracts that were previously at $1.50 in NIM, but are now half of that. The company has already locked up and captured $200 million of the cost savings, and is working on an additional $50 million to $100 million over the course of the year. The impact on the company's financials will be seen in two ways: lower GP&T costs and better realizations for the company.
Analyst asked about the adoption of new technology and how it differs from the company's peers.
Clay Gaspar explained that the company has promoted its Chief Technology Officer to the executive committee, and has made a substantial investment in industrial systems, sensors, and physics-based models and algorithms in real-time across all of its wells. The company is also using AI to boost productivity by up to 15% to 30% on projects, and is empowering a group of individuals who are already aligned to using these tools.
Analyst asked about the Delaware Basin and how the company's production optimization program is progressing.
John Raines explained that the company brought on several gross wells in the Delaware Basin, but had a lower working interest in Q1, resulting in fewer net wells. The cadence of the wells was later in the quarter, resulting in less production contribution. However, the company is pleased with the well productivity, especially early time, and is meeting or exceeding expectations with its major programs.
Analyst asked about the possibility of increasing buybacks or utilizing free cash flow opportunistically.
Jeffrey Ritenour, CEO of Devon Energy, responded that the company has a consistent approach to buybacks, which is to repurchase shares in the range of $200 million to $300 million each quarter, with a fixed dividend and a commitment to grow it annually. The company plans to use any incremental free cash flow to bolster its liquidity and pay down debt over time.
Analyst asked about opportunities to remove fixed costs on the gathering and transportation side, particularly in the Delaware, and whether this could be a good use of the Matterhorn proceeds.
Clay Gaspar, CFO of Devon Energy, responded that the company is objective about the value of midstream assets and sometimes it makes sense to own them and sometimes it doesn't. The company has been exploring all avenues to create incremental value for its shareholders, and this includes both adding more interest in midstream assets and liquidating them. The Matterhorn proceeds are not part of the business optimization proceeds and will go straight to the balance sheet to preserve liquidity for future use.
Analyst asked about the company's reinvestment rate and how important it is when creating budgets.
The company's reinvestment rate is a consideration, but it's not the sole focus when creating budgets. The company aims to drill the best wells from the available opportunities and tweaks on completion, design, and productivity can also accrue to that. The reinvestment rate is not the singular thing the company focuses on when allocating capital.
Analyst asked about the potential for maintenance CapEx to come down over the next couple of years due to efficiency gains, production optimization, and leading-edge cost deflation in the market.
The company acknowledged the many moving parts, including commodity price, inflation, and deflation. The company's goal is to update investors on a quarterly basis to separate the moving parts and provide clarity. The company's commitment is to provide information on deflationary benefits that will accrue to free cash flow and the bottom line, separate from business development. The company expects to achieve a maintenance number of $3.4 billion to $3.45 billion by 2027, after executing on the business optimization plan, which is focused on driving the breakeven lower in the business. The company is excited about the potential side benefits, such as extending the portfolio runway and accruing value through production or lower cost structure.
Analyst asked about Devon Energy's plan for slowing down operations in certain basins, particularly the Powder River Basin, and how it will impact their ability to grow in 2026.
Clay M. Gaspar, CEO of Devon Energy, explained that the company is evaluating its options and has a lot of flexibility in terms of how they allocate their capital. They are not burdened by long-term rig contracts or minimum volume commitments, and are focused on driving value through objective analysis. They are not sacrificing 2026's productivity and are continuing to invest in maintenance capital and efficiency improvements. The company expects to get to 11 rigs by the end of the year, which will result in faster drilling and increased productivity.
Analyst asked about the company's approach to shifting activity towards or away from certain areas based on commodity prices.
The company is agnostic about where it creates value, but it takes into account the commodity mix and the inflation or deflation present in different basins. The company has seen various commodity price scenarios in the last 24 months, including front month, contango, and backwardation, and has refused to chase false positives. The company is currently on high alert regarding commodity price, as there is a lot of stickiness and a compounding effect of the headwinds.
Analyst asked about the elevated capital in the Powder River Basin this year and whether it's a lever that the company could pull down into 2026 to improve its corporate capital efficiency until the macro environment improves.
The company's Powder River Basin program is entirely focused on the Niobrara, and it's in the early innings of the play, with significant upside potential. The company is working on appraisal work to improve the productivity of wells and driving down costs, with a line of sight to $11 million and below per well. The company is committed to its strategic objectives and will continue to work towards driving efficiencies and reducing costs.
