Devon Energy may be one of the few U.S. independents that could pull off a merger during the depths of the pandemic and emerge not only bigger, but also better.
Two years after announcing its merger plans with WPX Energy, Devon’s coupling of disciplined growth with a profound – and ongoing – return of cash to shareholders has positioned the Oklahoma E&P to lead the industry and the S&P 500 this year.
Devon’s Chief Development Officer David Harris spoke with Hart Energy at the A&D Strategies and Opportunities Conference 2022 on Oct. 26 in Dallas.
Jordan Blum: The WPX deal was transformational for Devon. How is that combination working? How is the integration going? We're a little over a year and a half in now.
David Harris (00:37): Well, Jordan, thanks for having us at the conference today, and it's great to be with you. The merger with WPX has gone great. You combined two companies of similar sizes with similar values and culture, both Oklahoma-based companies. We announced that during the depths of the pandemic, which was certainly a challenging time for all of us in September of 2020 closed in early 2021 with most of the integration work really being completed by the middle of the year. Since then, the businesses performed at a really high level. We were the highest performing stock in the S&P 500, and we've been a leader in the industry with our new discipline growth business model and our return of capital strategy that we've employed that our shareholders have been very supportive of.
JB: And the markets seem to be responding very well. How does that $50 billion market cap feel?
DH (1:31): Well, I think as we highlighted in our last quarter earnings presentation, we've returned more capital to shareholders or to the benefit of shareholders this year than the combined market caps of the company when the merger was announced. And so certainly we've had some benefit from commodity prices moving higher as we've come out of the pandemic. And economies have reopened. So the timing has been good, but it's created a lot of excitement and enthusiasm and momentum within the building to continue to continue to perform at a really high level.
JB: Now, Devon could have taken it easy and really just focused on integration, but y'all have been really busy. Since then, you've had the Rim Rock deals and most recently Valis Energy. Can you take me through that decision making process, how the sausage gets made?
DH (2:21): Absolutely, Jordan. Well, it starts with the strategy that we've laid out that I just alluded to. It's really a discipline growth model where we're looking at production growth more like 0%-5% really with more of a focus in growing our per share metrics, maintaining a really solid balance sheet reducing our reinvestment rates, and then returning much of that excess free cash flow to shareholders in various ways. So just like we've been a leader in the establishment of that business model and trying to reestablish credibility with our shareholders, we've now been a leader in incorporating potential acquisitions into that model. And so we really found unique opportunities that fit our business well that check all of the boxes in terms of the value creation for our shareholders, but also the fit within our business and that are gonna allow us to continue to, to further in advance that model that we've laid out.
JB: Most recent deal making has been Permian centric and some investors like that one basin focus, but Devon Energy is diversifying with the growth and the Williston Basin and the Eagle Ford Shale. How is that approach going?
DH (3:34): So both Devon and WPX had always been multi basin companies, and that that sort of portfolio diversity, both geographic and product mix, is something that we think is really important. Scale matters as we've moved into this new era of unconventional development and we believe having really high quality low break even assets in the premiere basins around the country is an important part of that. And so the Williston and the Eagle Ford are both important basins to Devon. They both have been key to our success over a long period of time, and we see great futures for both of those areas within our portfolio. And so we're not we're not just a one basin company. And frankly, we think being able to go evaluate opportunities and places outside the Permian has given us the opportunity to find some unique value creation opportunities for our shareholders.
JB: Great. Can you touch just briefly on the strengths of the Williston and Eagle Ford acreages as well?
DH (4:35): Well, both of them are oil weighted assets, and that's where across our portfolio we see our best ability to drive our margins on a per unit basis. And so that's something that we find very attractive. Both asset footprints are directly adjacent to where we currently operate. So we have a high degree of confidence that we'll be able to execute at a high level and bring the sort of synergies to those assets that you would expect from having greater scale and a bigger footprint.
JB: There's been a lot of valuation disagreements of that have gotten in the way of deal making. Can you tell me how Devon Energy has been able to get those deals done, get them past the finish line?
DH (5:14): Well, for the last several years, we've all been dealing with an unprecedented level of uncertainty and volatility, and unfortunately it feels like that may continue on for some period of time. One of the things that we've really tried to focus on as we've looked to incorporate acquisitions within the discipline business model that we've laid out is where are there opportunities to find win-wins with our counterparties? That hasn't always been the case in deal making and in previous eras of the unconventional revolution. But to be able to do all cash transactions that both parties are very happy about against the kind of uncertainty that we're experiencing has been really unique and something we're really proud of.
JB: Great. And now with that, we're getting these deals done, I mean, how, how is the ramp up and activity going?
DH (6:01): Well that's the key to the business model is there's really not a big ramp up an activity. And in previous times, you would've acquired an asset and looked to materially accelerate the development of that asset to try to pull net asset value forward. We're largely gonna bring these assets in and continue on at a relatively steady state sort of development pace. And so, we've seen oil prices everywhere from $45 when we closed the, the merger in early 2021 to around $120 this year. And all throughout those swings, we've really stuck to the plan and maintained a really steady and consistent level of activity.
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