Q3 2024 Earnings Summary
- Devon Energy expects record oil volumes in 2025, averaging around 380,000 barrels per day, reflecting nearly 5% higher production than previously communicated due to the Grayson Mill acquisition and operational momentum.
- The company generated $786 million in free cash flow in Q3 and plans to allocate up to 70% of free cash flow to shareholder payouts, focusing on share repurchases and growing the fixed dividend.
- Operational efficiencies and breakthroughs in well productivity, especially in the Delaware Basin, are leading to enhanced production and capital efficiency, with potential for more upside beyond the current guidance.
- High debt levels: Devon Energy has a significant debt of $8 billion in a backward-dated oil curve, raising concerns about the company's focus on debt reduction versus returning cash to shareholders amid oil price uncertainty.
- Limited cost reduction opportunities: The company anticipates that operating expenses, specifically LOE and GPT costs, will remain consistent with the fourth quarter guide, indicating limited potential for cost savings going forward.
- Uncertainties in operational efficiencies: Devon acknowledges that future productivity gains are not fully incorporated into forecasts due to challenges such as limited opportunities for larger-scale projects and a lack of undeveloped areas to drive efficiency gains.
| Metric | YoY Change | Reason |
|---|---|---|
Gas Revenue | -74% YoY | Significantly lower realized gas prices compared to the prior year, partly offset by hedge settlements. This was driven by a softening Henry Hub index and weaker pricing fundamentals. |
NGL Revenue | +9% YoY | Higher production volumes (particularly in the Delaware Basin) outweighed the moderate decrease in NGL realized prices, resulting in an overall year-over-year revenue increase. |
Net Income | +792% YoY | A combination of improved commodity hedge valuations, higher operating efficiencies, and favorable one-time items contributed to the substantial net income surge compared to the prior year’s lower baseline. |
EPS (Diluted) | -9% YoY | Despite stronger net income, increased share count and certain non-cash charges (e.g., equity compensation) diluted the per-share figure, causing EPS to decline relative to the prior year. |
D&A | +22% YoY | Higher production volumes and the addition of new wells increased the depletion rate, leading to a higher overall DD&A expense versus the prior year. |
Interest Expense | +9% YoY | Higher prevailing interest rates and minor adjustments to debt structure pushed financing costs above the previous year, leading to a modest increase in interest expense. |
Capital Expenditures | ($877) million vs $353 million in Q3 2023 | Heavier investments in drilling and completion activities, particularly in core assets like the Delaware Basin, escalated capital outlays compared to the prior period, reflecting Devon’s focus on growth projects and facility expansions. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Total Production | FY 2025 | no prior guidance | 800,000 BOE per day | no prior guidance |
Oil Production | FY 2025 | no prior guidance | 380,000 barrels per day | no prior guidance |
Capital Expenditures | FY 2025 | no prior guidance | $4.0B – $4.2B | no prior guidance |
Free Cash Flow Allocation | FY 2025 | no prior guidance | Up to 70% of FCF; $200M–$300M share buybacks | no prior guidance |
Debt Reduction | FY 2025 | $2.5B program | $2.5B program | no change |
Williston Basin Production | FY 2025 | no prior guidance | 100,000 BOE per day | no prior guidance |
Delaware Basin Capital Allocation | FY 2025 | no prior guidance | Decreasing from 60% to 50% of portfolio | no prior guidance |
Rig Activity | FY 2025 | no prior guidance | Reducing from 16 rigs to 14 rigs | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Capital Expenditures (CapEx) | Q3 2024 | Approximately $900 million | -$877 million | Met |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Operational and drilling efficiency improvements | Discussed double-digit efficiency improvements each quarter, driven by downhole sensing, completion optimization, and cycle-time reductions. | Achieved a 14% drilling efficiency gain, with 12% completion gains via simul-frac and plans to maintain output with fewer rigs. | Consistent theme with continued optimization and positive sentiment. |
Long-term inventory runway supporting production growth | Consistently touted multi-year inventory. Delaware Basin and Williston Basin singled out for deep resource potential. Grayson Mill added significant runway. | Reinforced 10-year inventory runway, highlighting front five years as highly derisked and back five as innovation upside. | Ongoing positive emphasis, central to future growth. |
Balancing capital allocation across returns & debt | Strategy of combining buybacks and fixed + variable dividends continued, with a low leverage target (around 0.6–0.7x net debt-to-EBITDA). Focus on flexibility to pivot as market conditions change. | Prioritized share repurchases (over $200M–$300M/quarter) while targeting $2.5B in debt reduction; aims to return up to 70% of FCF to shareholders. | Stable strategy balancing both priorities; sentiment remains constructive. |
Shift in outlook on the Grayson Mill acquisition | No new material shift mentioned in Q2, Q1, Q4 2023; prior calls highlighted confidence in long-term value and synergy with core assets. | Acknowledged lower deal value at closing ($4.6–$4.7B vs. $5B), but no regrets. Deal structure (2/3 debt, 1/3 equity) and long-term Bakken upside cited as positives. | New commentary on adjusted deal value; sentiment remains positive. |
Discontinuation of facility retrofit discussions | Q4 2023 included remarks about retrofitting facilities to remain ahead of regulations. No mention of discontinuation in Q2 or Q1. | No mention of discontinuation regarding emissions retrofit this quarter. | No new updates; no evidence of discontinuation in Q3. |
No longer highlighting LNG market expansion plans | Ongoing interest in LNG previously noted in Q1 2024 (talks with Delfin). No specific mention in Q2 or Q4 2023 about discontinuing. | No mention of stepping back from LNG discussions in Q3. | Still quiet; no explicit pullback from LNG. |
Reduced rig count while maintaining production | Addressed in prior quarters: modest rig count adjustments while preserving output, emphasizing efficiency gains and flexible scheduling. | Reduced from 16 to 15 rigs, with plans to go to 14 in 2025, leveraging a 14% efficiency gain. | Continuing approach showing bullish operational efficiency. |
Uncertainty about future production & capex | Similar caution in prior calls, citing commodity volatility and the need for flexible guidance. | Provided preliminary 2025 forecast (5% higher than earlier views) but will finalize in Feb 2025; capital plan at $4.0–$4.2B with room to adapt for market volatility. | Recurring caution with moderate optimism; focus on adaptability. |
Sustainability of well productivity gains | Repeated theme across periods, with productivity outperformance driving near-term gains and infrastructure improvements supporting sustainability. | Continued 20% uplift in Delaware Basin well results; remain optimistic but note natural inventory quality degradation over time. | Positive emphasis on sustaining gains, tempered by long-term depletion concerns. |
Potential impact from 10-year inventory in multiple basins | Recurrent highlight: 10-year (or multi-decade) runway in Delaware, Williston, Eagle Ford. Central to long-term production growth. | Cited multi-basin resource with front five years heavily derisked; potential for deeper zones and further expansions beyond 10 years. | Core bullish factor for Devon’s future scale and stability. |
Evolving sentiment on debt reduction vs. buybacks | Strong bias toward buybacks, seeing share price as undervalued. Also continuing to methodically retire debt. | Remains tilted to share buybacks, with incremental debt paydown as maturities approach. Confident balance sheet reduces urgency to retire all debt quickly. | Increasing comfort with balanced approach; buybacks still favored. |
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Return of Capital Strategy
Q: What's your approach to dividends and buybacks?
A: Our first priority is the fixed dividend, which we expect to grow next year. We're leaning into share repurchases, believing there's great value in our equity today. With the pullback in commodity prices, we're eliminating the variable dividend for the near term and focusing on share buybacks and increasing the fixed dividend. We plan to return 70% of free cash flow to shareholders, with $200–$300 million of buybacks each quarter. -
M&A Strategy
Q: Will you pursue transformational deals or bolt-ons?
A: We'll continue to evaluate opportunities that could make us a stronger company. While we often pass on deals, we remain open to bolt-on acquisitions like Grayson Mill, which worked well for us. We'll pursue a combination of organic growth and strategic acquisitions, whether small tuck-ins or assets like Grayson Mill. -
Grayson Mill Acquisition
Q: How is Grayson Mill impacting your operations?
A: We've identified synergies that we're confident will exceed our initial expectations. Instant wins include infrastructure improvements, capital program efficiencies, and inventory optimization. The integration with Grayson Mill enhances our ability to extend inventory life and improve capital efficiency, particularly in the Bakken. -
2025 Guidance
Q: What's the outlook for production in 2025?
A: We're maintaining a soft guide for 2025 and will provide more detail in February. We have many options across our deep portfolio, and our multi-basin strategy gives us flexibility. With the larger Williston footprint from Grayson Mill, the Delaware Basin's share will shift from 60% to 50% of our production. -
Well Productivity Improvements
Q: What's driving the uptick in well productivity?
A: Breakthroughs in well placement, completion design, and sequencing have led to significant outperformance. We're seeing phenomenal results from deeper and shallower benches, and there's more upside ahead. Our focus on multi-zone developments and innovations is enhancing productivity and capital efficiency. -
Balance Sheet Management
Q: How are you addressing debt reduction?
A: We plan to reduce debt by $2.5 billion over the next 2 to 3 years. We'll take out maturities as they come due, including $485 million next fall and our term loan in 2026. We feel good about our financial flexibility to achieve this while delivering competitive cash returns to shareholders. -
Permian Gas Realizations
Q: What's the impact of Matterhorn on gas pricing?
A: With Matterhorn online and flowing 2 Bcf/day, we expect pricing to improve once maintenance on other pipelines clears up. About 90% of our molecules now flow away from Waha to the Gulf Coast. We've taken steps to protect against potential backups at Katy by moving capacity to the Louisiana LNG hub. -
Cost Efficiencies
Q: Can you reduce operating costs further?
A: Our fourth-quarter guidance is a good starting point, and we'll continue to refine and look for efficiencies. Completion efficiencies and drilling improvements have reduced costs per well. We're always open to innovative technologies like e-frac but remain objective about their economic benefits. -
Inventory Life
Q: How long is your inventory runway?
A: We feel confident in a 10-year runway in all five of our basins. The front five years are derisked with strong continuity, and we continue to innovate to extend the back five years. We're exploring deeper and shallower benches, as well as adjacencies, to expand our inventory. -
Potential JV Plans
Q: Are you considering power or nuclear JVs?
A: Yes, we've been engaged in discussions with utilities and power entities. We're exploring creative ways to connect our resources, like natural gas, with the demand for electricity in areas like the Delaware Basin. This could help address electricity costs and scarcity while improving gas realizations. -
Grayson Mill Midstream Assets
Q: Will you divest Grayson's midstream assets?
A: We're more likely to keep these assets, as they've contributed to higher margins and lower operating costs. They are critical in maximizing value from mature assets and extending inventory in the Williston Basin. However, we're objective about all assets and will consider divestitures when appropriate. -
Project Size and Efficiency
Q: Will you pursue more large-scale projects?
A: Where applicable, we'll tend toward larger pad developments, as they provide efficiencies and enhance productivity. The CBR project is an example of how larger projects can exceed expectations. However, opportunities for such large-scale projects are limited due to existing developments. -
Capital Allocation to Other Assets
Q: What's the plan for Eagle Ford, Anadarko, PRB?
A: Directionally, our capital allocation will remain similar, with adjustments for the increased Williston footprint. The Delaware Basin's share will decrease from about 60% to 50%. Otherwise, we plan to maintain our focus across our diverse portfolio.
Research analysts covering DEVON ENERGY CORP/DE.