The seed of a no-premium merger between Devon Energy Corp. and WPX Energy Inc. was first planted in the spring of 2019 when the two CEOs, Dave Hager and Rick Muncrief, respectively, met to discuss the benefits of a possible combination. At that time, the E&P investor base had soured on the sector and wanted to see more scale, and the two leaders imagined the synergies and investment-grade status a combo might create.
But it wasn’t until the summer of 2020, during the depths of the global demand downturn, that the Oklahoma City and Tulsa-based producers came together again to discuss a merger of equals. On Jan. 7, 2021, the two became one. Hager took the role of executive chairman, and Muncrief as president and CEO.
The amalgamation propelled Devon to the top tier of oil and gas producers. The new Devon portfolio features assets in five basins—the Permian’s Delaware, Anadarko, Powder River, Williston and Eagle Ford Shale. The deal, however, doubled its footprint in the Delaware, its crown jewel, where it now holds some 400,000 net acres.
In the evolution to transition from a growth-oriented company to a cash-return model, Devon guided that it would reinvest no more than 70% to 80% of free cash flow and cap organic growth at 5% annually. In February, the company added a variable dividend on top of its existing base dividend—the first E&P to do so—which adjusts up or down quarterly depending on free cash flow generation.
Muncrief, a petroleum engineering graduate from Oklahoma State University, takes the helm of Devon as the company celebrates its 50th anniversary this year. He first joined WPX Energy when The Williams Cos. spun off its E&P assets in 2014, and led operations for Continental Resources Inc. before that. His storied resume includes stops at ConocoPhillips Co., Burlington Resources Inc., Quest Midstream, Meridian Oil and El Paso Corp. Oil and Gas Investor recently visited with Muncrief on the company strategy going forward.
Investor: How does the merger make Devon a stronger company?
Muncrief: No. 1, I think there was some prevailing thought out there that Devon, on a standalone basis, was too leveraged to federal lands. Coming from the WPX side, we were a little more confident that it was not going to be the draconian world which some people felt it might be in the event of a change of administration, which ultimately happened.
For WPX, there were some real benefits with scale and getting deeper inventory. We loved the Devon assets. The Stateline area that we had plus the Lea and Eddy County, N.M., assets of Devon were just a wonderful fit.
Devon also had a couple of asset sales and was sitting on about $2 billion of cash and did not have any callable debt. WPX had some cash but also had some callable debt. As one company, we’ve been able to retire $1.2 billion of debt this year, many years in advance, and on very attractive terms. That’s something that neither company could have done on a standalone basis.
We identified nearly $600 million of annual synergies. When we announced the transaction, the combined market cap was $6 billion, so nearly 10% of the entire market cap was annual savings. That’s just an incredible amount of synergies. You don’t see that very often. Since that time, our equity has outperformed virtually everyone in the last 12 months. Some of that’s certainly driven by commodity prices, but more than that, I think people see the strategic rationale behind the merger.
It’s been very well accepted.
Investor: Both companies individually were strong financially and industry leaders. Why did you feel compelled to combine at this time?
Muncrief: Investor sentiment had really turned against Devon because of the federal lands issue. Investors weren’t paying attention. All they were thinking about were the negative things that could potentially happen with a change of administration. They were selling Devon on the news, and Devon stock was underperforming when it shouldn’t have been.
From my perspective, the Devon story was being missed. I’ve lived half my life in the state of New Mexico and just had a confidence at that point in time that it was not going to be as bad as people feared. And that provided an opportunity for WPX shareholders. We felt it was a great opportunity to put the companies together and help de-risk the Devon story and prove the sentiment wrong. And that is exactly what’s played out.
That’s why we moved on it.
Investor: What about Devon’s motivation?
Muncrief: Devon’s motivation was to get more on the Texas side, which has no federal lands. I think Devon had an appreciation for the WPX assets. You basically double your acreage, double your inventory by joining with WPX and de-risking in some people’s eyes. That’s why Devon was motivated to do this.
And when you can save $600 million a year, that’s a really strong incentive. That’s a lot of money, I don’t care who you are. And so it was a win-win.
Investor: Are rulings on federal lands having any current impact on your program?
Muncrief: It’s going well now. There was a pause on new permits being issued that took 60 days, and there was a moratorium put on any new leasing. But the reality is that when the merger closed, we had approximately 500 permits approved on federal lands already, so Devon was in phenomenal shape. Once the pause was lifted, then it’s back to business as usual with active development. Over time, I truly expect to see more oversight, more enforcement potentially, to active development on federal lands.
Investor: What factor did gaining scale have in considering a merger?
Muncrief: It was a strong consideration. Advantages come with scale just on a unit cost perspective. On a unit basis of production, your costs are going down. The fact that we’re now running 16 rigs instead of eight, our ability to negotiate goods and services is better.
Investor: Were investors demanding more scale in your market cap?
Muncrief: With some investors that’s correct. Back in 2020, there were some pretty tough days out there in the markets for energy. A lot of people said, well, if it’s below a $5 billion market cap or $10 billion, we just aren’t going to look at companies of that size. Devon had a market cap of $3.4 billion, and WPX was $2.6 billion. The day we announced the transaction we were $6 billion in market cap, and today we’re at $20 billion. So we’re not getting that kind of concern. That’s where the scale of the two together really helped.
Investor: Does Devon now have the scale it needs, or is there more room to run with additional acquisitions in the future?
Muncrief: We owe it to the investors to be thoughtful and deliberate. If there is a deal out there that makes sense, then you execute on that. But we want to keep a strong balance sheet and liquidity. It has to be accretive be cause we have a great outlook now with just our company since the merger. We’ve got a game plan that we’ve laid out to the market, and if we can find something that fits within that framework, then it might be something we act on. We will continue to have a high bar.
Investor: What is Devon’s strategy going forward?
Muncrief: We’ve capped organic growth through the drill bit at 5%. We’re going to focus more on giving cash back to shareholders. That’s why not only have we paid a fixed dividend for 28 years, we’re now paying a variable dividend. We were the first company to implement one and we did it earlier this year. We’ve already paid two dividend payments, and we’re going to pay our third at the end of September. So it’s a cash-return model. It’s something investors had been asking for, for quite some time, and we’re pleased to be the first to implement it.
Investor: Under what scenario might you consider growing production again, or is that not in the foreseeable future?
Muncrief: You’d have to have some faith in the forward curve, and right now we’re very backwardated, which says that there’s plenty of barrels out in the market. We’re producing about 600,000 barrels of oil a day equivalent, and about 300,000 barrels a day of that is oil. If you take the majors out, just looking in the Lower 48, we’re the fifth largest oil producer in the country. That’s impressive. And so for us, at least as we think about this year and next year, let’s just keep our production flat, and focus on cash flow per share growth.
Investor: With the new cash-return model, are you seeing new investors come in as a result?
Muncrief: Our share price is obviously up. Everybody can check that. Our equity price is up three times from the day we announced (the merger). A tremendous success for shareholders.
What some people aren’t aware of is our shareholder base. We’ve really attracted much stronger, I’d say longer-term investors. Some may not have been in the energy investing circle for a while, but now they’re sitting on the sideline, and they’re ready to get back in. We also are getting calls from the generalists, family shops, those that we haven’t heard from in years. And we’re absolutely getting a lot of new calls from fresh faces new to the industry. We’re very encouraged.
Investor: As the first to deliver a fixed-plusvariable dividend, do you think that is a defining factor in attracting investors back into the stock? Or is it just a commodity process right now?
Muncrief: Realistically it’s probably both, but there are a lot of investors out there that have seen this amazing growth in sectors like technology or healthcare. Some of these firms are trading at ridiculous levels compared to their earnings. And yet energy is trading at the lowest multiple of any sector. We see more discipline being deployed. And companies can talk about being disciplined, but once they start paying dividends and that cash is coming to you, you can’t ignore that.
Investors sitting on cash get a little bit of interest down at the bank, but compared to the yields we’re talking about, it pales in comparison. So that’s why we’re getting, I think, a lot of calls from new investors. And I’m very, very encouraged by that. We just need more companies to implement that and we need to stay disciplined as an industry. I believe the investment community is going to rediscover energy.
Investor: How does your dividend yield compare to the S&P 500?
Muncrief: Our base dividend is competitive with the S&P, and then there is the variable dividend on top of that. We’re paying, in some cases, nearly 8% total yield, so three or four times what the S&P 500 is doing. We’re paying among the highest in the S&P 500. By 2022, my goodness, the cash flow we’re spinning off is amazing. That’s assuming strip pricing—you don’t have to have some real high oil price. We’re very competitive.
We’re about 50% hedged for this year and only 20% hedged for 2022. As crude oil prices are recovering, on a go-forward basis, our cash flows will continue to get even stronger because those hedges were put on during some pretty gloomy days.
Investor: If you’re 20% hedged in 2022, is your balance sheet in a position that could withstand another drop in commodity prices were it to happen? Do you feel like you’re in a good place to not hedge?
Muncrief: We’re in a good spot. We’re projecting we’ll be at one turn (debt-to-EBITDA) or slightly less as we exit 2021, and into 2022, we’re in a solid place. Cash flows are strong, balance sheet is strong (and) we don’t have any near-term maturities for several years. That’s what gives us the confidence to pay this nice dividend. Even though we’re paying a big, nice dividend, we’re still building the cash balance. We could not have done it to the degree we have without the merger. We’re just stronger together than either one of us would’ve been individually.
Investor: Is Devon primarily a Delaware Basin story presently?
Muncrief: We currently operate in five basins, but 80% of our capital is going to the Delaware Basin. Approximately two thirds of our production comes from the Delaware Basin. So in a lot of ways, we’re predominantly a Delaware Basin company.
We have a breakeven cost of about $32 a barrel driven by phenomenal acreage in that Stateline area both on the New Mexico side and the Texas side. The quality of that acreage is allowing us to reinvest at these lower rates and still keep our production flat while not putting additional new barrels into the market.
We have nice core positions in these other basins. Some of these have longer-term upside, and others are just a little more mature and spin off some really nice free cash flow. And so, at present, all five of our basins are playing a key role.
Investor: What kind of returns are you getting in the Delaware, and how does that compare to other areas of the portfolio?
Muncrief: Wells in the Delaware are very much in excess of a 100% rate of return at the well level. We have some individual wells that are over 200% that will pay out in less than six months. We’ve had some that have had 30-day IPs over 3,000 barrels equivalent per day, and a handful that have been in the 5,000 boe per day range. These are really, really strong wells.
In the other basins, we have some of those opportunities, but the inventory is not as deep.
Investor: What did you find at your Yukon Gold pilot? Why is this significant?
Muncrief: The exciting thing about Yukon Gold, or a number of these other pads, is we’ve opened up a new perspective horizon. Historically, a lot of really good production on the New Mexico side came from the Second and Third Bone Spring primarily and on the Texas side from the Wolfcamp and some Bone Spring. We started comparing notes and on the Texas side, we’re seeing additional Bone Spring, and on the New Mexico side we’re seeing a Wolfcamp development.
Breaking it down even further, we’re seeing more distinct landing intervals within the Bone Spring and the Wolfcamp. There are just simply more individual landing intervals, more target horizons, to produce from. Yukon Gold is just one of several pads we’ve brought on that are really exciting.
The other thing is around the efficiencies. We’ve been able to knock these breakeven costs down as we’re drilling more and more of the longer laterals. And not just the 2-mile laterals; we’re drilling quite a few 3-mile laterals now in some of the very best rock there is. Some of that Lea and Eddy County acreage is just really, really incredible geology.
“When you can save $600 million a year, that’s a really strong incentive. That’s a lot of money, I don’t care who you are.”
Investor: Beyond the Delaware, how are you allocating capital and rigs?
Muncrief: Down in the Eagle Ford, we have a 50:50 joint venture with BP (Plc). We have two rigs operated by BP, but they are getting some capital. Oklahoma, here in the Midcontinent and primarily in the STACK area, we have a joint venture with Dow Chemical. They contribute quite a bit to the funding of that. We’re running two rigs there and that’s working out real well.
We currently have one rig running up in the Powder River Basin of Wyoming, and at the current time, we really don’t have anything running in the Bakken. It is generating quite a bit of cash flow, and we’ll probably resume drilling up there around the first of the year.
So we’re putting capital in all five of our basins. It’s just that the Delaware is getting the lion’s share of it. The Delaware is hard to compete with for capital. It’s going to continue to be the workhorse in our portfolio. I don’t see that changing anytime in the near future.
Investor: Are any of these divestiture candidates?
Muncrief: We’ll continue to evaluate our portfolio, but in some areas we need to try new things. For instance, in the Powder River Basin we will be drilling some 3-mile laterals in the Niobrara. We think at some point in time, some of these actions we take will be game changers. If not, then we have to step back and look at how it fits in the portfolio. But nothing is imminent right now for divestitures.
Investor: Is Devon pursuing exploration opportunities outside of its featured portfolio?
Muncrief: We’re really not focused on that. Our exploration today is on existing acreage. So some of these new horizons I talked about are drilling longer laterals to see if you can make something even more economic. That’s the type of exploration we’re doing today.
Investor: Do you field an exploration team any longer?
Muncrief: We have some folks that still have those capabilities. We still have the core competency if we decided that we really needed to launch new exploration projects. Many of these folks have worked all over the world, so we’ve got a lot of horsepower here in the organization. But right now, we really don’t see that.
Investor: How important is basin or commodity diversity to you?
Muncrief: You can be too diverse from a geographic perspective, so that’s why we like the five basins we’re in. I think that’s plenty.
Commodity diversity is important, but I’ll say this: We just think oil is going to drive cash operating margins for quite some time. We like being in that 50% or higher range. On the commodity value curve, oil is top then natural gas liquids then residue natural gas. We have exposure to all three and don’t see that changing.
Investor: In your quarterly conference call, you sounded excited about NGL and gas prices.
Muncrief: It’s almost a bonus. NGL prices have really rallied. The outlook is quite strong and especially for propane and butane. If you budget $2.50 a Mcf, and you wake up and you’re at $4, that’s not a bad thing. But the fact is, between crude oil and natural gas liquids, they typically provide plus or minus 90% of our revenues.
Investor: What are Devon’s goals pertaining to ESG?
Muncrief: We’ve laid out some shorter term, mid-range and longer-term environmental goals focusing on reducing Scope 1 and 2 emissions. We’re committing to taking a leadership role by targeting to reduce greenhouse-gas emissions intensity by 50% by 2030 and achieving net-zero emissions for Scope 1 and 2 by 2050. A critically important component of this carbon reduction strategy is to improve our methane emissions intensity by 65% by 2030 from a baseline of 2019.
Investor: How are you addressing emissions at the field level?
Muncrief: We’re making changes to some of our facility designs, and we’re going to watch the performance over time. We’re excited about some of the impacts we’ve seen thus far.
We are trying some new technologies. We have several pilots which are doing real-time monitoring at the well level. It’s a technology that we invested in with a few other companies, and we’re putting it to work. We’re excited about it.
And we’re doing third-party surveillance with flyovers. We look at it as another set of eyes to help us run our business better. We’re not averse to engaging, learning and responding when those things happen in the real world. You have to be responsive.
Are we monitoring 8,000 wells in real time now? No, we’re not there yet. It’s very early stages, but that’s what we strive to do.
We’re putting our first solar farm out in the Permian in our Stateline area. We’ll kick that off in the next couple of months. It’s going to support some of our lease operations where we’ve had reliability issues with power. We own 15,000 surface acres, and we’re going to take a portion of that and have our first solar installation.
Investor: Do you think emissions monitoring or broader ESG goals are becoming a de facto requirement for accessing capital?
Muncrief: I think it will be a requirement for capital to flow to our industry. And there’s going to be a recognition that there has to be some capital spend. Sometimes people want improvement with very little or no capital but, over time, it will require more capital to be deployed.
This entire ESG movement is interesting. Banks are weighing in, investors are weighing in, law firms are weighing in (and) regulatory agencies are weighing in. But at the end of the day, we all must step up and write the checks for additional costs, which then flow through to consumers and investors.
We welcome change, but we try to be very pragmatic in our approach. Although we’re very proud of what we’ve done for the world as an industry, we have an opportunity to do even better. One of those things is we can lower our emissions. It’s just going to take time. And unless you can demonstrate over time you’re doing that responsibly, I think capital is going to get tight. I really do.
Investor: What is your viewpoint of the energy transition movement and of long-term demand?
Muncrief: The energy transition movement is quite strong right now. There’s a lot of interest in it. But for now, oil and gas is going to be needed for a long time, and the amount of oil and natural gas that it’s going to take to underpin an energy transition, if you really think about it, is staggering. The installation of wind generators, solar panels, getting hydrogen to where it could potentially be a dependable economic source of energy—it’s just going to take staggering amounts of hydrocarbons.
I think the energy transition, in a lot of ways, is already underway. To what degree and how much it can be scaled in the next five, 10, 20 years, I think still remains to be seen. So for us, let’s continue to deliver what the market demands day in and day out while finding ways to lower emissions.
Investor: Would you consider adding non-hydrocarbon business lines?
Muncrief: We’re exploring the realities of that. So, for instance, what are the true economics of that? We’re looking at a lot of things and we’re trying to be very pragmatic and thoughtful about it. We’ve got a core group that is doing some work in that arena. We’re evaluating some pretty interesting things, but it’s not something that I expect us to be devoting a ton of capital to in the near term. Over time, maybe we’ll have more capital to deploy in the energy transition. It’s still in its early stages. We’ll see.
Investor: What might some of those nonhydrocarbon business lines be?
Muncrief: We’re looking at things like carbon capture. We’re looking at truly understanding the hydrogen story and what that is going to take and the realities of economics around that. We actually have some joint ventures and memorandums of understanding that we’ve executed with different companies just to do some joint exploration. That doesn’t mean we’re always investing money, but we’re certainly studying it.
At this point in time, one of the questions in my mind remains scalability. When you start thinking about the energy transition, and what it’s going to take, any of us can have a small pilot project at work, but can you truly scale? What’s it going to take for the rare earth minerals? What is it going to take for infrastructure, for pipelines? So there is still lots to understand.
“We’re committing to taking a leadership role by targeting to reduce greenhouse-gas emissions intensity by 50% by 2030 and achieving net-zero emissions for Scope 1 and 2 by 2050.”
Investor: What do you think the oil and gas landscape will look like in 2050, which is a target date for net zero in a lot of people’s minds?
Muncrief: I still think in 2050, people are going to be stunned at the amount of oil that is still required. Let’s face it, you’ve still got developing countries—the greater Asian region—which has driven a lot of our growth in the last 15 or 20 years. They’re going to want to not only compete, but they want to compete and win in the global economy. I think they’re going to need oil and gas to help underpin that growth in a lot of ways. They’ll be transitioning to some other alternative energy sources, but I think oil and gas by 2050 is still going to be a big piece of the energy picture.
Investor: How are you positioning Devon, then, for the next decade and beyond?
Muncrief: The best thing you can do is be prudent, keep a strong balance sheet and strong cash flows, continue to evolve and learn how to be even more efficient.
How do you be optimistic and know what those new opportunities could be? It could be in our traditional oil and gas, or it could be in energy transition opportunities. So I just want the company to be strong and nimble, to evolve and continue to get better. Whatever the market is demanding from us, we will evolve and respond to that market. We’ll deliver whatever society needs.
This year was the 50th anniversary of Devon, and so it’s a great time to think about the next 50 years and what that could be. If you’re the CEO at this amazing point in time, you step back and you really think about the future and what some of the bottlenecks, the impediments could be, and contemplate what an energy transition could be and maybe what it won’t be.
It’s really an exciting time to be in oil and gas.
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