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Text: Also joining me on the call today are Rick Muncrief, our president and CEO; Clay Gaspar, our chief operating officer; Jeff Ritenour, our chief financial officer and a few other members of our senior management team.
Devon's second quarter can best be defined as one of comprehensive execution across every element of our disciplined strategy that resulted in expanded margins, growth and free cash flow and the return of significant value to our shareholders through higher dividends and the reduction of debt.
Following our transformative merger that closed earlier this year, I'm very pleased with the progress the team has made and our second-quarter results demonstrate the impressive momentum our business has quickly established.
Even today, as we celebrate Devon's 50th anniversary as a company this year, we're only getting started and our talented team is eager, energized and extremely motivated to win.
As investors seek exposure to commodity-oriented names, it is important to recognize that Devon is a premier energy company and a must-own name in this space.
We have the right mix of assets, proven management, financial strength and a shareholder-friendly business model designed to lead the energy industry in capital discipline and dividends.
Now, turning to Slide 4.
The power of Devon's portfolio was showcased by our second-quarter results as we continue to deliver on exactly what we promised to do both operationally and financially.
Efficiencies drove capital spending 9% below guidance.
Strong well productivity resulted in production volumes above our midpoint.
The capture of merger-related synergies drove sharp declines in corporate cost.
These efforts translated into a sixfold increase in free cash flow from just a quarter ago.
And with this excess cash, we increased our dividend payout by 44% and we retired $710 million of low premium debt in the quarter.
Now, Jeff will cover the return of capital to shareholders in more detail later, but investors should take note, this systematic return of value to shareholders is a clear differentiator for Devon.
Now, moving to Slide 5.
While I'm very pleased with the results our team that delivered year-to-date, the setup for the second half of the year is even better with our operations scale that generate increasing amounts of free cash flow.
This improved outlook is summarized in the white box at the top left of this slide.
With the trifecta of an improving production profile, lower capital and reduced corporate cost, Devon is positioned to deliver an annualized free cash flow yield in the second half of the year of approximately 20% at today's pricing.
I believe it is of utmost importance to reiterate that even with this outstanding free cash flow outlook, there is no change to our capital plan this year.
Turning your attention to Slide 7.
Now with this powerful stream of free cash flow, our dividend policy provides us the flexibility to return even more cash to shareholders than any company in the entire S&P 500 Index.
To demonstrate this point, we've included a simple comparison of our annualized dividend yield in the second half of 2021, assuming a 50% variable dividend payout.
Now as you can see, Devon's implied dividend yield is not only best-in-class in the E&P space, but we also possess the top rank yield in the entire S&P 500 Index by a wide margin.
In fact, at today's pricing, our yield is more than seven times higher than the average company that is represented in the S&P 500 Index.
Furthermore, our dividend is comfortably funded within free cash flow and is accompanied by a strong balance sheet that is projected to have a leverage ratio of less than one turn by year-end.
Investors need to take notice, Devon offers a truly unique investment opportunity for the near 0 interest rate world that we live in today.
Now, looking beyond Devon to the broader E&P space, I'm also encouraged this earnings season by the announcement from Pioneer on their variable dividend implementation as well as a growing number of other peers who have elected to prioritize higher dividend payouts.
These disciplined actions will further enhance the investment thesis for our industry, paving the way for higher fund flows as investors rediscover the attractive value proposition of the E&P space.
Now, moving to Slide 10.
While the remainder of 2021 is going to be outstanding for Devon, simply put, the investment thesis only gets stronger as I look ahead to next year.
We should have one of the most advantaged cash flow growth outlooks in the industry as we capture the full benefit of merger-related cost synergies, restructuring expenses roll-off and our hedge book vastly improves.
At today's prices, these structural tailwinds could result in more than $1 billion of incremental cash flow in 2022.
To put it in perspective, this incremental cash flow would represent cash flow per share growth of more than 20% year over year, if you held all other constants -- all other factors constant.
Now while it's still too early to provide formal production and capital targets for next year, there will be no shift to our strategy.
We will continue to execute on our financially driven model that prioritizes free cash flow generation.
Given the transparent framework that underpins our capital allocation, our behavior will be very predictable as we continue to limit reinvestment rates and drive per share growth through margin expansion and cost reductions.
We have no intention of adding incremental barrels into the market until demand side fundamentals sustainably recover and it becomes evident that OPEC+ spare oil capacity is effectively absorbed by the world markets.
The bottom line is we are unwavering in our commitment to lead the industry with disciplined capital allocation and higher dividends.
As Rick touched on from our operations perspective, Devon continues to deliver outstanding results.
Our Q2 results demonstrate the impressive operational momentum we've established in our business, the power of Devon's asset portfolio and the quality of our people delivering these results.
I want to pause and congratulate the entire Devon team for the impressive work of overcoming the challenges of the pandemic and the merger while not only keeping the wheels on but requestioning everything we do and ultimately building better processes along the way.
We've come a long way on building the go-forward strategy, execution plan and culture and I see many more significant wins on the path ahead.
Turning your attention to Slide 12.
My key message here is that we're well on our way to meeting all of our capital objectives for 2021.
At the bottom left of this slide, you can see that my confidence in the '21 program is underpinned by our strong operational accomplishments in the second quarter.
With activity focused on low-risk development, we delivered capital spending results that were 9% below plan, well productivity in the Delaware drove oil volumes above guidance and field level synergies improved operating costs.
While the operating results year-to-date have been great, the remainder of the year looks equally strong, a true test of asset quality, execution and corporate cost structure proves out in sustainably low reinvestment rates, steady production and significant free cash flow.
This is exactly what we're delivering at Devon.
We plan to continue to operate 16 rigs for the balance of the year and deliver approximately 150 new wells to production in the second half of 2021.
During the quarter, our capital program consisted of 13 operated rigs and four dedicated frac crews, resulting in 88 new wells that commenced first production.
This level of capital activity was concentrated around the border of New Mexico and Texas and accounted for roughly 80% of our total companywide capital investment in the quarter.
As a result of this investment, Delaware Basin's high-margin oil production continue to rapidly advance, growing 22% on a year-over-year basis.
While we had great results across our acreage position, a top contributor to the strong volume were several large pads within our Stateline and Cotton Draw areas that accounted for more than 30 new wells in the quarter.
This activity was weighted toward development work in the Upper Wolfcamp, but we also had success co-developing multiple targets in the Bone Spring within our Stateline area.
The initial 30-day rates from activity at Stateline and Cotton Draw average north of 3,300 BOE per day and recoveries are on track to exceed 1.5 million barrels of oil equivalent.
With drilling and completion costs coming in at nearly $1 million below predrill expectations, our rates of return at Cotton Draw and Stateline are projected to approach 200% at today's strip pricing.
While we've all grown weary of quoted well returns, this is the best way that I can provide insight to you on what we're seeing in real time and what will be flowing through the cash flow statements in the coming quarters.
While we lack precision in these early estimates, I can tell you, these are phenomenal investments and will yield significant value to the bottom line of Devon and ultimately, to the shareholders through our cash return model.
And lastly, on this slide, I want to cover the recent Bone Spring appraisal success that we had in the Potato Basin with our three well Yukon Gold project.
Historically, we focused our efforts in the Wolfcamp formation in this region and Yukon was our first operated test of the second Bone Spring interval in this area.
Given the strong results from Yukon plus additional well control from nonoperated activity, this will be a new landing zone that works its way into the Delaware Basin capital allocation mix going forward.
This is another example of how the Delaware Basin continues to give.
This new landing zone required no additional land investment, very little incremental infrastructure and as a result, the well returns have a direct path to the bottom line of Devon.
Moving to Slide 14.
Another highlight associated with the Delaware Basin activity was the improvement in operational efficiencies and the margin expansion we delivered in the quarter.
Beginning on the left-hand side, our D&C costs have improved to $543 per lateral foot in the quarter, a decline of more than 40% from just a few years ago.
To deliver on this positive rate of change, the team achieved record-setting drill times in both Bone Spring and Wolfcamp formations with spud to release times and our best wells improving to less than 12 days.
Our completions work improved to an average of nearly 2,000 feet per day in the quarter.
I want to congratulate the team and I fully expect that these improved cycle times will be a tailwind to our results for the second half of the year.
Shifting to the middle of the slide, we continue to make progress capturing operational cost synergies in the field.
With solid results we delivered in the second quarter, LOE and GP&T costs improved 7% year over year.
To achieve this positive result, we adopted the best and most economic practices from both legacy companies and leveraged our enhanced purchasing power in the Delaware to meaningfully reduce costs associated with several categories, including chemicals, water disposal, compression and contract labor.
Importantly, these results were delivered by doing business in the right way with our strong safety performance in the quarter and combined with company delivered some of the meaningful environmental improvements over a year-over-year basis.
And my final comment on this slide -- on the chart to the far right, the cumulative impact of Devon's strong operational performance resulted in significant margin expansion compared to both last quarter and on a year-over-year basis.
Importantly, our Delaware Basin operations are geared for this trend to continue over the remainder of the year and beyond.
Moving to Slide 15.
While the Delaware Basin is clearly the growth engine of our company, we have several high-quality assets in the oil fairway of the U.S. that generate substantial amounts of free cash flow.
These assets may not capture many headlines but they underpin the success of our sustainable free cash flow-generating strategy.
In the Delaware Basin, cash flow nearly doubled in the quarter on the strength of natural gas and NGLs.
Our Dow joint venture activity is progressing quite well and we're bringing on the first pad of new wells this quarter.
The Williston continues to provide phenomenal returns and at today's pricing, this asset is on track to generate nearly $700 million of free cash flow for the year.
In the Eagle Ford, we have reestablished momentum with 21 wells brought online year-to-date, resulting in second-quarter volumes advancing 20%.
And in the Powder River, we're encouraged with continued industry activity and how -- in evaluating how we create the most value from this asset.
We have a creative and commercially focused team working with this asset, many of which bring fresh set of eyes on how we approach this very substantial oil-rich acreage position.
Overall, another strong quarter of execution and each of these asset teams did a great job delivering within our diversified portfolio.
The team here at Devon takes great personal pride in delivering affordable and reliable energy that powers every other industry out there as well as the incredible quantity and quality of life we appreciate today.
We absolutely believe that in addition to meeting the world's growing energy demand, we must also deliver our products in an environmentally and commercially sustainable way.
As you can see with the goals outlined on this slide, we're committing to taking a leadership role by targeting to reduce greenhouse gas emissions 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 in 2019.
This emissions reduction target involves a range of innovations, including advanced remote leak detection technologies and breakthrough designs like our latest low-e facilities in the Delaware Basin.
We also plan to constructively engage with upstream and downstream partners to improve our environmental performance across the value chain.
While it's a journey, not a destination, environmental excellence is foundational to Devon.
My comments today will be focused on our financial results for the quarter and the next steps in the execution of our financial strategy.
A great place to start today is with a review of Devon's strong financial performance in the second quarter, where we achieved significant growth in both operating cash flow and free cash flow.
Operating cash flow reached $1.1 billion, an 85% increase compared to the first quarter of this year.
This level of cash flow generation comfortably exceeded our capital spending requirements, resulting in free cash flow of $589 million for the quarter.
As described earlier by Rick and Clay, our improving capital efficiency and cost control drove these outstanding results, along with the improved commodity prices realized in the second quarter.
Overall, it was a great quarter for Devon and these results showcased the power of our financially driven business model.
Turning your attention to Slide 6.
With the free cash flow generated in the quarter, we're proud to deliver on our commitment to higher cash returns through our fixed plus variable dividend framework.
Our dividend framework is foundational to our capital allocation process, providing us the flexibility to return cash to shareholders across a variety of market conditions.
With this differentiated framework, we've returned more than $400 million of cash to our shareholders in the first half of the year, which exceeds the entire payout from all of last year.
The second half of this year is shaping up to be even more impressive.
This is evidenced by the announcement last night that our dividend payable on September 30 was raised for the third consecutive quarter to $0.49 per share.
This dividend represents a 44% increase versus last quarter and is more than a fourfold increase compared to the period a year ago.
On Slide 8, in addition to higher dividends, another way we have returned value to shareholders is through our recent efforts to reduce debt and enhance our investment-grade financial strength.
In the second quarter, we retired $710 million of debt, bringing our total debt retired year-to-date to over $1.2 billion.
With this disciplined management of our balance sheet, we're well on our way to reaching our net debt-to-EBITDA leverage target of one turn or less by year-end.
Our low leverage is also complemented by a liquidity position of $4.5 billion and a debt profile with no near-term maturities.
This balance sheet strength is absolutely a competitive advantage for Devon that lowers our cost of capital and optimizes our financial flexibility through the commodity cycle.
Looking ahead to the second half of the year, with the increasing amounts of free cash flow our business is projected to generate, we'll continue to systematically return value to our shareholders through both higher dividend payouts and by further deleveraging our investment-grade balance sheet.
As always, the first call in our free cash flow is to fully fund our fixed dividend of $0.11 per share.
After funding the fixed dividend, up to 50% of the excess free cash flow in any given quarter will be allocated to our variable dividend.
The other half of our excess free cash flow will be allocated to improving our balance sheet and reducing our net debt.
Once we achieve our leverage target later this year, this tranche of excess free cash flow that was previously reserved for balance sheet improvement has the potential to be reallocated to higher dividend payouts or opportunistic share buybacks should our shares remain undervalued relative to peers in the broader market.
So in summary, our financial strategy is working well.
We have excellent liquidity and our business is generating substantial free cash flow.
The go-forward business will have an ultra-low leverage ratio of a turn or less by year-end and we're positioned to substantially grow our dividend payout over the rest of the year.
I would like to close today by reiterating a few key thoughts.
Devon is a premier energy company and we are proving this with our consistent results.
Our unique business model is designed to reward shareholders with higher dividend payouts.
This is resulting in a dividend yield that's the highest in the entire S&P 500 Index.
Our generous payout is funded entirely from free cash flow and backstopped by an investment-grade balance sheet.
And our financial outlook only improves as I look to the remainder of this year and into 2022.
With the increasing amounts of free cash flow generated, we're committed to doing exactly what we promised and that is to lead the industry in capital discipline and dividends.
We'll now open the call to Q&A.
Please limit yourself to one question and follow up.
With that, operator, we'll take our first question.

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fixed-plus-variable dividend increased by 44 percent to $0.49 per share.

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