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Devon Energy Corp
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Welcome to the Devon Energy 's Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. This call is being recorded. I would now like to turn the call over to Mr. Scott Coody, Vice President of Investor Relations. Sir, you may begin.
Good morning. And thank you to everyone for joining us on the call today. Last night, we issued an earnings release and presentation to cover our results for the quarter and our forward-looking outlook. Throughout the call today, we will make references to our earnings presentation to support our prepared remarks. And these slides can be found on our website. 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 members of our senior management team. Comments today will include plans, forecasts, and estimates that are forward-looking statements under U.S. securities law.
These comments are subject to assumptions, risks, and uncertainties that could cause actual results to differ from our forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials. With that, I'll turn the call over to Rick.
Thank you, Scott. Great to be here this morning. We appreciate everyone taking the time to join us on the call today. Devon's third quarter results were outstanding. Once again, showcasing the power of our Delaware focused asset portfolio and the benefits of a financially driven business model. Our team's unwavering focus on operations excellence has established impressive momentum that has allowed us to capture efficiencies, accelerate free cash flow, reduce leverage, and return a market-leading amount of cash to shareholders. Simply put, we are delivering on exactly what our shareholder-friendly business model was designed for, and that is to lead the energy industry in capital discipline and cash returns.
Now, moving to Slide 4, while our strategy is a clear differentiator for Devon, the success of this approach is underpinned by our high-quality asset portfolio that is headlined by our world-class acreage position in the Delaware Basin. With this advantaged portfolio, we possess a multi-decade resource opportunity in the best position plays on the U.S. cost curve. And with this sustainable resource base, we are positioned to win multiple ways with our balanced commodity exposure. While our production is leveraged to oil, nearly half our volumes come from natural gas and NGLs, providing us with meaningful revenue exposure to each of these valuable products.
This balance and diversification are critically important to Devon's long-term success. As you can see on Slide 5, the strength of our operations and the financial benefits of our strategy were on full display with our third quarter results. This is evidenced by several noteworthy accomplishments, including, we completed another batch of excellent wells in Delaware Basin that drove volumes 5% above our guidance. We maintained our capital allocation in a very disciplined way by limiting a reinvestment rates to only 30% of our cash flow.
We're continuing to capture synergies and drive per unit cost lower. We're also achieving a more than 8-fold increase in our free cash flow. We're increasing our fixed and variable dividend payout by 71%. We're improving our financial strength by reducing net debt 16% in the quarter. Overall, it was another tremendous quarter for Devon and now I especially want to congratulate our employees and our investors for these special results. Now moving to slide 6, while 2021 is wrapping up to be a great year for Devon, the investment thesis only gets stronger as I look ahead to next year. Although we're still working to finalize the details of our 2022 plan, I want to emphasize that our strategic framework remains unchanged and we will continue to prioritize free cash flow generation over the pursuit of volume growth.
As we have stated many times in the past, 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 market. With this disciplined approach and to sustain our production profile in 2022, we are directionally planning on an upstream capital program in the range of $1.9 to $2.2 billion. Importantly, with our operating efficiency gains and improved economies of scale, we can fund this program at a WTI breakeven price of around $3. This low break-even funding level is a testament to the great work the team has done over the past few years to streamline our cost structure and optimize our capital efficiency. Being positioned as a low -- low-cost producer provides us with a wide margin of safety to continue to execute on all facets of our cash return model.
With our 2022 outlook, Devon will have one of the most advantaged cash flow growth outlooks and the industry, At today's prices, with a full benefit of the merger synergies and an improved hedge book, we're positioned for cash flow growth of more than 40% compared to 2021. As you can see on the graph, this strong outlook translates into a free cash flow yield of 18% at an $80 WTI price. The key takeaway here is that 2022 is shaping up to be an excellent year for Devon shareholders. Now jumping ahead to Slide 8, the top priority of our free cash flow is the funding of our fixed plus variable dividend. This unique dividend policy is specifically designed for our commodity driven business and provides us the flexibility to return more cash to shareholders than virtually any other opportunity in the markets today.
To demonstrate this point we've included a simple comparison of our estimated dividend yield in 2022 based on our preliminary guidance. As you can see, Devon 's implied dividend is not only more than double that of the energy sector, but this yield is vastly superior to every sector in the S&P 500 Index. In fact, at today's pricing, Devon's yield is more than 7 times higher than the average Company that is represented in the S&P 500 Index. Now that's truly something to think about in the yield-starred world we currently live in. Moving on to Slide 9, with our improving free cash flow outlook and strong financial position, I'm excited to announce the next step in our cash return strategy with the authorization of $1 billion share repurchase program.
This program is equivalent to approximately 4% of Devon's current market capitalization and is authorized through year-end 2022. Jeff will cover this topic in greater detail later in the call. But this opportunistic buyback is a great complement to our dividend strategy and provides us with another capital allocation tool to enhance per results for shareholders. Now, skipping ahead to Slide 11, and to close out my prepared remarks, I want to summarize Devon 's unique investment proposition through 3 simple charts. Beginning on the far-left chart, our business is positioned to generate cash flow growth of more than 20 -- 40% in 2022, which is vastly superior to most other opportunities in the market.
As you can see in the middle chart, this strong growth translates into 18% free cash flow yield that will be deployed to dividends, buybacks, and the continued improvement of our balance sheet. And lastly, on the far-right chart, even with all these outstanding financial attributes, we would still trade at a very attractive valuation, especially compared to the broader market indices. We believe this to be another catalyst for our share price appreciation as more and more investors discovered Devon's unique investment proposition. And with that, I'll turn the call over to Clay to cover some of the great operational results we delivered in the third quarter, Clay.
Thank you, Rick. Hey, good morning everybody. In summary, Devon's third quarter impressive results were the result of tremendous execution across nearly every aspect of our business. We had wins in environmental and safety performance, operational improvements, continued cultural alignment, strong well productivity, cost control, significant margin expansion, and ultimately excellent returns on the invested capital. This recurring trend of operational excellence, while managing significant organizational change and macro stress has now been established over multiple quarters and is a testament to the Devon employees, in strong leadership throughout the organization.
As I look forward to 22 and beyond, I believe we're positioned to continue delivering, but also takeout take our performance to an even higher level of cohesion and productivity. Providing the energy to fuel today's modern world is critically important work. I'm very proud of what we do and how we do it. As I look forward to Devon's near and long-term goals, I'm confident in our ability to deliver on society's ever-increasing expectations. Let's turn to Slide 13 and we can dig into the Delaware Basin. Devon's operational performance in the quarter was once again driven by our world-class Delaware Basin assets, where roughly 80% of our capital was deployed.
With this capital investment, we continue to maintain steady activity levels by running 13 operated rigs and 4 frac crews, bringing on 52 wells during the quarter. As you can see in the bottom left of this slide, this focused development program translated into another quarter of robust volume growth and our continued cost performance allowed us to capture the full impact of the higher commodity prices. Turning your attention to the map on the right side. Our well productivity across the base and continued to be outstanding in the quarter. With the results headlined by our boundary radar project, Some may recall that this is not the first time we've delivered on impressive results from this well pad.
Back in 2018, our original boundary raider project developed a package of Bone Spring wells that set a record for the highest rate wells ever brought online in the Delaware Basin. Fast-forward to today, this edition of the boundary radar went further down hole to develop an over-pressured section in the Upper Wolf camp. This project also delivered exceptionally high rates with our best well delivering initial 30-day production rates of 7,300 BOE per day, of which more than that -- more than 60% of that was oil. I call that pretty good for a secondary target. Moving a bit east into Leake County, another result for this quarter was our Cobra project, where the team executed on a 3-mile Wolf camp development.
This part outperformed our pre -drill expectations by more than 10% with the top well achieving 30-day rates as high as 6,300 BOE per day. In addition to the strong flow rates, this activity helped us prove the economics of the Wolf camp inventory in the area, further deepening the resource rich opportunity we hold in the Delaware. Turning to Slide 14. With the strong operating results we delivered this quarter, high-margin oil production in the Delaware Basin, continuing to expand and rapidly advance growing 39% year-over-year. Importantly, the returns on invested capital to deliver this growth, were some of the highest I've seen in my career, bolstered by rising strip prices and the capital efficiency improvements we've delivered this year.
These efficiencies are evidenced on the right-hand chart, where our average D&C cost improved to $554 per lateral foot in the third quarter, a decrease of 41% from just a few years ago. While we have likely found the bottom of this cycle earlier this year, the team continues to make operational breakthroughs that have thus far fought back most of the inflationary pressure. We continue to win from a fresh perspective, blending teams, and also still relatively, we're still working to know each other pretty early on. These accomplishments are clearly demonstrated in the great work our team has done to drive improvements across the entire planning and execution of our resource.
To maintain this high level of performance into 2022, we are focused on staying out ahead of the inflationary pressures that are impacting not just our industry, but all aspects of the broader society. While our consistency and scale on Delaware are huge advantage, the supply chain team is working hard to anticipate issues, mitigate bottlenecks, and work with the asset teams to adjust plans to optimize our cost structure and future capital activity. Turning to Slide 15, another asset I'd like to put in the spotlight today is our position in the Anadarko Basin where we have a concentrated 300,000 net acre position and liquids-rich window of the play. As you may know, Rick and I both have a historical tie to this basin, and we're thrilled to get to see the great work that our teams are doing to unlock this value for investors.
A key objective for us this year in the Anadarko Basin is to reestablish operational continuity by leveraging the drilling carry from our joint venture agreement with Dow. By way of background, in late 2019, we formed a partnership with Dow and a promoted deal, where Dow earns half of our our interest on a 133 undrilled locations in exchange for $100 million drilling carry. With the benefits of this drilling carry, we're drilling around 30 wells this year and our initial wells from this activity were brought on during the quarter. The 4-well Miller project is an up spaced Woodford development in Canadian County and is off to a great start with both DNC costs and well productivity outperforming pre -drill expectations. Initial 30-day rates averaged 2700 BOE per day and completed well cost came in under budget at around $8 million per well.
While I'm proud of how well the team hit the ground running as we get our processes lined out and efficiencies dialed in, I foresee material improvements and well costs ahead. The leverage returns from this carried activity will compete effectively for capital with any asset in our portfolio. In fact the strength of natural gas and NGL pricing, the performance we're seeing in the Anadarko Basin will likely command relatively more capital than it did in '21. Moving to slide 16, while the Delaware Basin is clearly the growth engine of our Company, and we're excited about the upside for the Anadarko. We also have several high-quality assets in the oil fairway of the use that generate substantial free cash flow.
While these assets don't typically grab the headlines, their strong performance is essential to the continued success of our strategy. These teams are doing great work to improve our environmental footprint, drive the capital program, optimize base production, and keeping our cost structure low. As an example, Williston will generate over $700 million of 2021 free cash flow. Collectively, these assets are on pace to generate nearly $1.5 billion of free cash flow this year. Lastly, on Slide 17, with our diversified portfolio concentrated in the very best U.S. resource place, we have a deep inventory of opportunities that underpin the long-term sustainability of our business model.
As you may have heard me talk about in prior quarters, we have a brutal capital allocation process in regards to the competitiveness of how we seek the best investment mix for the Company. The first step of this process is to make sure that all the teams are working from the same assumptions and inputs. Since the close of our merger earlier this year, we have undertaken a very disciplined and rigorous approach to characterize risk, force rank, the opportunity set across our portfolio. This inventory disclosure is the result of that detailed subsurface work and evaluation across our portfolio that we converted into a single consolidated platform to ensure consistency.
Turning your attention to the middle bar on the chart. At our pace of activity, we possess more than a decade of low risk and high return inventory of what we believe to be in a mid cycle price deck. As you would expect, about 70% of our inventory resides in the Delaware Basin, providing the depth of inventory to sustain our strong capital efficiency for many years to come. Let me be clear. In this exercise, we are focused on compiling a very important slice of our total inventory. This summary is not meant to convey the full extent of the possible with these incredible resources. These are only operated essentially all along lateral up spaced wells that deliver competitive returns in a $55 oil environment. Moving to the bar on the far right of the chart. We also expect inventory depth to continue to expand as we capture additional efficiencies, optimize spacing, and further delineate the rich geologic columns across our acreage footprint.
Expect -- we expect a significant portion of the upside opportunities to convert into our de -risk inventory over time. Examples this upside include the massive resource potential in the Lower Wolf camp intervals, continual appraisal success in the Powder River Basin, and the significant liquids-rich opportunity we possess in the Anadarko Basin. The bottom line here is that we have an abundance of high economic opportunity to not only sustain, but grow our cash flow per share for many years to come. With that, I'll turn the call over to Jeff for the financial review.
Thanks, Clay. I'd like to spend my time today discussing the substantial progress we've made advancing our financial strategy and highlight the next steps we plan to take to increase cash returns to shareholders. A good place to start is with a review of Devon's financial performance in the third quarter, were Devon's earnings and cash flow per share growth rapidly expanded and comfortably exceeded consensus estimates. Operating cash flow for the third quarter totaled $1.6 billion, an impressive increase of 46% compared to last quarter. This level of cash flow generation comfortably funded our capital spending requirements and generated $1.1 billion of free cash flow in the quarter.
This result represents the highest amount of free cash flow generation Devon has ever delivered in a single quarter and is a powerful example of the financial results our cash return business model can deliver. Turning your attention to Slide 7, with this significant stream of free cash flow, a differentiating component of our financial strategy is our ability and willingness to accelerate the return of cash to shareholders through our fixed plus variable dividend framework. This dividend strategy has been uniquely designed to provide us the flexibility to optimize the return of cash to shareholders across a variety of market conditions through the cycle. Under our framework, we pay a fixed dividend every quarter and evaluate a variable distribution of up to 50% of the remaining free cash flow.
With a strong financial results, we delivered this Quarter, the board approved a 71% increase in our dividend payout versus last Quarter to $0.84 per share. This is the fourth quarter in a row, we have increased the dividend and is by far the highest quarterly dividend payout in Devon's 50-year history. As you can see on the bar chart to the left at current market prices, we expect our dividend growth story to only strengthen in 2022. In fact that today's pricing we are on pace to nearly double dividend next year. Moving to Slide 10, in addition to higher dividends, we've also returned value to shareholders through our efforts to reduce debt and improve our Balance Sheet.
So far this year, we've made significant progress towards this initiative by retiring over $1.2 billion of outstanding notes. In conjunction with this absolute debt reduction, we've also added to our liquidity building a $2.3 billion cash balance at quarter end. With this substantial cash build and reduction in debt, we've reached our net debt to EBITDA leverage target of 1 ton or less. Even with this advantaged balance sheet, we're not done making improvements. We have identified additional opportunities to improve our financial strength by retiring approximately $1.0 billion of premium -- low premium debt in 2022 and 2023. Importantly, Devon has the flexibility to execute on this debt reduction with cash already accumulated on the balance sheet.
And to round out my prepared remarks this morning, I'd like to provide some thoughts on the $1 billion share repurchase program we announced last night. While the top priority for free cash flow remains the funding of our market-leading dividend yield, we believe this buyback authorization provides us another excellent capital allocation tool to enhance per-share results for shareholders. Given the cyclical nature of our business, we'll be very disciplined with this authorization, only transacting when our equity trades at a discounted valuation to historical multiples and the multiple levels of our highest quality peers. We believe the double-digit free cash flow yield our equity delivers, as outlined on Slide 6, represents a unique buying opportunity.
The reduction in outstanding shares further improves our impressive cash flow per share growth and adds to the variable dividend per share for our shareholders. With this -- with these disciplined criteria guiding our decision-making, we'll look to opportunistically repurchase our equity in the open market once our corporate blackout expires later this week. So in summary, our financial strategy is working well. We have excellent liquidity and our business is generating substantial free cash flow. We're positioned to significantly grow our dividend payout over the next year. The go-forward business will have an all-Ultra low leverage ratio of a turnover less. And we'll look to boost per-share results by opportunistically repurchasing our shares. And with that, I'll now turn the call back to Rick for some closing comments.
Thank you, Jeff. Great job. In closing today, I'd like to highlight a few things. Number 1. Devon is meeting the demands of investors with our capital discipline, earnings and cash flow growth, market leading dividend payout, debt reduction, and now a share buyback program, Number 2. Devon is also meeting the demands of the market with our strong oil production results, great exposure to natural gas and NGLs along with our consistent execution, and Number 3. Lastly, Devon is also meeting the demands of society by providing a reliable energy before the pandemic, during the pandemic, and as we emerge from the pandemic.
Our people throughout the 5 states where we operate continue to show up for work and worked safely. We didn't overreact with our capital program during the pandemic like many others did. We actually strengthened the Company with a merger. And finally, we're laser-focused on achieving our stated short-term, mid-term, and long-term ESG targets. We're proud of the work we've done and look forward to continuing meeting the needs of investors, the market, and society for the foreseeable future. Devon is a premier energy Company and we're excited about the value we'll consistently provide to all of our important stakeholders. And with that, I will now turn the call back over to Scott for Q&A.
Thanks, Rick. We'll now open the call to Q&A. Please limit yourself to one question and a follow-up. This allows us to get to more of your questions on the call today. With that Operator, we'll take our first question.
[Operator Instructions]
Your first question comes from the line of Arun Jayaram with JPMorgan Securities.
Good morning team. Rick, I wanted to maybe start off talking about the inventory depths slide that you put out 11-plus years of low-risk development opportunities, 70% in the Delaware Basin. We have seen a couple of large Permian Basin trades with Conoco and Pioneer earlier this year. So I wanted to get your thoughts on how you're thinking about portfolio renewal just given that inventory depth. And perhaps Clay could also comment on the ability of -- to de -risking the wells in that 2,500 well bucket, including that deeper Wolf camp zone.
It's a great question, Arun. And I'll have Clay weigh in and provide some more details. The way we're looking at it is, number 1, as Clay talked about, we did a very comprehensive deep dive. We -- and once again, these numbers are strictly operated, so we have non-operated projects out there that are not in this scale. We wanted to make it really clear that these are operated. We're working to control the drilling completion activities. We also contemplated many of the sections that have been setup as 1-mile laterals are now 2-mile laterals with some of the acreage consolidations that we've seen. And in some cases, where you've got the federal units, especially on the New Mexico side, we've seen now the opportunities to drill more and more of the 3-mile laterals.
And you saw the results we just put up, not only this past quarter, but over the last year or so. So really, really attractive opportunities. I think there's going to continue to be opportunities for us to replenish our inventory there. And one of this, you mentioned a couple of transactions that have taken place in the broader Permian, but specifically in the Delaware side you laid out the Conoco's purchase of the share, because I can tell you Arun that we operate wells that are the Shell ahead, non-operated interest in. We have opportunity to do a lot more trading, and I think optimizing our portfolio. That's the first thing I'll add to and I think that's going to even further optimize the returns we get. And then, there are going to be other small opportunities out there.
We really focused on bolt-on type of things that really make industrial, make a lot of sense from an industrial perspective. And so I think you'll continue to see that. I'll also just way in The last two days, we've had an internal tech conference. And when I look at the unbelievable technology that's being employed by Devon today is we find more and more opportunities within the acreage we're already operating. I got really excited, and I think the entire organization is excited about what the future looks like. Those are a couple of ideas that we have. And I'm confident that our team will continue to keep a long runway of inventory opportunities up front. Clay, you may might want to add to that.
Thanks, Rick. I'll just reiterate a couple of your points. Number 1, Arun, as you well know, we're always trying to drill our best well next. And it's amazing to me, as long as we've all been in this business, today we're drilling the best wells we've ever drilled. And it's not because we saved them until today. It's because our teams have continued to innovate, get better. How do we get on the efficiency side? How do we figure out how to wring out the most optimal amount of resource from these incredible plays? How do we understand the plays? What Rick was just talking about, some of the technology we are involving today is absolutely outstanding. Second tip of the hat I'd like to provide is to the land team, and Rick mentioned this, but the incredible work that's been done in trading around our core areas just makes us all better.
Both parties typically in a trade, we're like-for-like exchanging, at the same time we're extending laterals, we're building efficiencies in a ground floor level. And that just makes us better. And so those things will continue. Specific to your comment on moving some of the de -risked -- excuse me, the upside inventory to the de -risked inventory. Absolutely, that'll happen. The luxury that we have today is because we have so much quality out in front of us we don't have to different -- don't have to invest significant amount into that de -risking program. So we could accelerate it faster, but we're going to be very measured about this.
By far most of our investment is just plowing the ground, driving down costs, getting exceptionally efficient, and just wringing out that free cash flow machine that we talk about strategically. So that will have hydrea confidence that 2500 wells. And by the way, it's a whole lot more than 2500, we'll eventually roll into the de -risk bucket. And it's not too much of a stretch to say when we drill those, some of those will be the best wells that we've ever drilled, even 5 and 10 years from now.
Great. Thanks for that and my follow-up is for Jeff. I wonder if you could just maybe provide a little bit more color on how management, the board, is thinking about the buyback. Jeff, you mentioned that maybe post the blackout in a couple of days you would opportunity mystically look to be back up. Perhaps using the buyback authorization, but I wanted to get a sense of maybe you could better define this sense of opportunistic nature of the buyback and thoughts on, do you think you'd get a billion dollars done by year-end 2022?
Absolutely, Arun. Where we sit today, and we look at -- again, I'll point you back to Slide 6, which was in our deck. If you look at picture price deck, with a 15% to 20% free cash flow yield, we think an investment in Devon stock is an absolute no - brainer where we sit today. You compare that to the multiples we're trading at relative to our highest quality peers, probably, again, 1/2 ton to a ton below those folks. I think it was a pretty easy decision for our Board to go ahead and approve the billion-dollar share repurchase.
And so as I made comments in our open, once we get to the blackout here at the end of this week, we expect to jump into the market and really get after it. So we're excited about the investment opportunity that we have married with the fixed and variable dividend framework. Just to be candid, there just isn't anybody else in our sector that's providing this cash returns to our shareholders.
Great, thanks a lot.
Our next question comes from the line of Neil Mehta with Goldman Sachs.
Good morning, team. And nice quarter here. I want to start off on the NGL side of the equation because it doesn't get enough attention in your portfolio. But it's been a hidden driver of a lot of cash flow generation. Can you just remind us how that business is set up here as you think about fourth quarter into 2022, obviously, Anadarko is a little bit more liquids-rich. And how that changes, where that asset in particular competes within the portfolio.
Neil, it's a great question. We appreciate you making the point for us, because, again, it's been a real high point for us throughout this year, obviously, with the tailwind that we've seen on NGL prices. Just to remind folks, in 2021, we're producing over 130,000 barrels a day of NGL. And I would expect you moving into 2022, you'll see that grow a bit moving forward. so it's been a really nice tailwind for us. And as you point out, it's not an insignificant portion of the cash flow that we're delivering, and the free cash flow that we're delivering this year and expect that to grow moving into 2022.
Really, I'd expand on that a little bit. And Neil, you have certainly -- you and your firm have your own view, but ours is that we're pretty constructive on NGL pricing as the worldwide economy just continued to get stronger and stronger. And so I think a point has been made. It's a real nice position to be in when you can see these kind of volumes be put up and helps -- helps with cash flow in a big way.
I agree with that point. And then the follow-up is just when do you think about moving outside at this maintenance mode type of program that the business model that's been set up here [Indiscernible] generate a lot of free cash and return that capital to shareholders. But when do you think it makes us actually pursue a modest degree of growth? Or -- and what are the signals that you're looking for whether it's demand signals, OPEC spare capacity to make that call?
I think -- the way we're looking at it, Neil, is we're really focused, and we said in our remarks, on the cash flow per share growth. And it's -- when you start looking at 40% cash flow growth in '22/'21, just keeping your volumes flat, absolute volume growth really didn't have a -- we just need to -- we need to make sure that, as we said, the OPEC+ barrels are back in the market and we'll watch things. We'll be thoughtful. But if you think about our retiring or repurchasing actually 4% of your shares, you are going to get some per-share production growth. I think for most of the investors that we talk to, that's plenty good for them and that's how we're thinking about it.
Thanks, Rick.
Your next question comes from the line of Doug Leggate with Bank of America.
Hey, good morning, everybody. Had some phone line issues this morning, so I just want to check if you can all hear me okay.
We sure can.
Excellent. Well, thanks Rick for the presentation. I got a couple of questions, I guess the first one is on the break-even. I just want to make sure I'm reading this right. So you're $30 sustaining capital break-even is using 250 gas, which is obviously quite a bit below where the strip is right now. So given your comments about your gas exposure, if you use current strip, do you think your sustainable breakeven is and if I may tie go and maybe to that, what is the embedded cash tax assumption and not break even?
Just -- I frankly haven't done the math to give you an exact number, but it's certainly lower, and I would guess somewhere in the mid 20s would be the breakeven using the current strip of the, call it $3 to $4 on gas prices and then NGLS as well.
And on the tax price, Jeff?
On a cash tax basis, you'll see we noted that on -- again on Slide 6 in our presentation. Where things sit today and where commodity prices sit, we'll have to see how the rest of this year shakes out to give you an exact answer on where our NOL balance will land. But generally speaking, we think it's going to be around $3 billion that will carry forward into 2022. On top of that, we will have some foreign tax credits, which will also help us shield some of our income in next year. So again, depending on where commodity prices shake out, we'll be in a pretty good position to shield a fair amount of that taxable income. However, we're guessing it's going to be somewhere in the mid-single-digits will be our current tax rate as we move into 2022. And that's what we've assumed in the forecast that we've outlined on that Slide 6 that I referenced earlier.
Okay. Thanks for that. My follow-up is -- first of all, Rick, I'm delighted to see the buyback introduced and we'll see how that plays out. But I guess the question I have is your variable dividend is a big k not in the context of the total cash return. But I think you know my view on this, which is that it's somewhat backward looking. I don't think the market necessarily gives you a discounted move-forward variable dividend as something that they are prepared to recognize. So buybacks are more permanent, it buys you growth per share. How should we expect the split between the two to evolve over time?
Well, I think the way we are looking at Neil the variable dividend concept, this is -- I guess, here in December will be the fourth quarterly distribution. So it's I'd say it's still relatively new. It's being very, very well-received, we think is very prudent. We agreed your comments on the share repurchase those those -- are permanent and meaningful. But I think with the variable dividend, we've had a lot of the discussion. Some, people have really asked us about, are we, wanting to bump that up to say a 75% threshold or something, that I think for us, we think the 50% is a very prudent level and see how this plays out.
We talked the base dividend, there's variable dividend, now the share repurchases and then as Jeff talked about the debt reduction, those all add up to a very, very compelling story for shareholders, something that we really don't feel good about. So I think that, we'll see how the share repurchase program goes. I think a question will be down to -- this question you're asking, give us a few months, give us a few quarters and let's see how things -- how things play out, and what really makes sense. But that's really how we're looking at. I think a balance approach is pretty hard to compete with. Jeff you may have some additional point here.
I would reiterate that last point, Doug, which is we feel like we're delivering all of the above. So whatever your favorite mechanism for cash returns, an investment in Devon is delivering that. As Rick mentioned, as we move into next year, we settle out to the budget, figure out down to the line item how we think the business is going to perform. My guess is we're going to have opportunities to even build further on this framework with the potential to raise the fixed dividend on a go-forward basis. And then we'll reevaluate other additions to the framework as we move through the year and see cash build.
Guys, let me instead close out with a comment because you've led the market on this. You've been early to it, and I think you're really changing the perception of what the [indiscernible] business model can look like. So congratulations on that. Thanks.
Thanks, Doug. I appreciate it
I appreciate it.
Your next question comes from the line of Jeanine Wai with Barclays.
Hi, good morning, everyone. Thanks for taking our questions.
Absolutely. Good morning, Jeanine, and thanks for sending the picture. Congratulations on the young one.
Thank you. She's adorable. And thanks for looking. Maybe just following up on Arun and Doug's questions on the buyback. Can you just address how you specifically determine the size and the timeframe of the authorization? should we think about you revisiting either the buyback or the percent variable payout ones. Kind of get through a good portion of that billion-dollar gross debt reduction, or are those decisions independent? I know you just mentioned that the 50% is prudent at this time. You have to see how the business performs and it sounds like maybe in a couple of Quarters you might revisit that, but just maybe dig in a little bit deeper on that, on how it relates to the debt reduction.
Yeah, that's right Jeanine, appreciate the question. We -- as I mentioned just on the last question, I think that the first thing we'll probably look to add onto our framework would be a potential rays of the fixed dividend. But absolutely we're going to reconsider as we work our way through next year, should we up size the share repurchase program beyond a billion-dollars. If we get to the end of the year and our cash build exceeds our expectations, I think you could consider a special dividend and then certainly we would reevaluate the 50% threshold on the variable dividend.
However, I would just point out, we think there's real value and consistency of maintaining that framework. And so I think, generally, you'll see us work around the edges in some of these other items that we've talked about. But those are all things that we'll debate with the Board as we work our way through the year. To your question about how we determine size, really, it was just a function of looking forward with our projections using what we think is a rational price deck, a normalized price deck, and $1 billion felt like a fair amount. But again, as I mentioned earlier, we'll reevaluate that as we work our way through it and see how it performs, and certainly, we'll have the potential to up size that with the Board.
Sounds great. Maybe my second question is on the '22 budget. So we know there's a few moving pieces in the midstream side and the other buckets as well. Are there any opportunities that you can walk us through on the midstream and the other bucket side and how those should trend year-over-year now that the integration of WPX is complete? And I think on the upstream side, $1.9 to $2.2 billion forecast, is there anything else there other than inflation that is driving the range, for example, anything on efficiencies or anything macro-related?
Hey, Jeanine. Thanks for the question. It's Clay. Yeah, I would say on the E&P parts specifically, we all -- we love that our team continues to be more efficient. There's always that hope in that opportunity ahead. I can tell you we've got some pretty good headwinds coming toward us as an industry inflationary-wise. So will we be able to fully offset inflation, in this case we have not assumed that we would. We've baked in something north of 10%, call it 10% to 15%, inflation into our E&P operations. And then the above -- the other items, midstream, the other spend, some of the corporate capital and the ESG spend. That's something that we're probably going to lean into a little harder this year in the range you could probably say about $200 million, which would probably be a high watermark.
I don't expect this every year, but I think there is some opportunities for us to really take some significant steps to build out a little bit ahead, make sure that we are being a little bit more forward thinking on some of our infrastructure, and that will allow us to run our operations smoother, including important factors like environmental. So I think this gives you an idea of what we're thinking about. And of course, we'll continue to refine this as we seek board approval, and next visit with you guys we'll give -- offer more details.
Thank you very much.
Thanks.
Your next question comes from the line of John Freeman with Raymond James.
Good morning, guys.
Hey, John.
Just kind of a follow-up on Jeanine's question. So you have mentioned that the drilling efficiencies that you all done a remarkable job on that have compressed to cycle times, has been pulling forward activity. I'm curious on the 2022 preliminary plan. Does that assume that you all have a static rig and frac crews relative to the 16 rigs frac crews you have currently or does that assume potentially doing doing more with less next year?
Yeah, I would say, John, it's directionally the same. We consider it flat activity. You know how it works, we'll -- depending on working interest, other factors, rigs will come and go. We're always upgrading fleets, contract rolls off, contract rolls on. But -- and directionally, we are flat and consistent in our operations. And I can tell you it's part of our inflationary hedge, is that consistency. As we look to our suppliers and try and get goal alignment with these important partners. I can tell you what they want to know is that we're going to be very consistent in our operations. Through the fourth quarter of this year, we're not abnormally dropping rigs and trying to monkey with the system, and then as we roll into next year. And so I think that level of consistency helps tremendously internally and externally as well.
Great. And just my follow-up question, the terrific results on the boundary radar project and just I guess any additional color there in terms of repeatability and running around that area, any sort of rate through than anything you did on the completion design or anything else that you might be able to take to some of the other area?
Yeah John, I think it's -- we're at the point of evolution where it's a million small things. And so I think every new pad that we drill, we're continuing to improve. We're shaving minutes and we're shaving just the small-single percentage increases on all of these efficiency gains, really continue to add up. I think in this particular case, we were sitting on top some amazing geology, that certainly helps in this business. But I think -- I look across the board, and you're right. I see the efficiency gains. Some of the capital that we saw in the third quarter.
And as we roll into fourth quarter, that is -- there's some efficiency being baked in from the drilling and from the completion side that as you know starts stacking capital up a little bit. We've considered that as we look ed at 2022. We haven't built additional efficiency gains into 2022. And as I mentioned on a previous question, we've actually acknowledged some pretty significant exposure for inflation. I think that's a prudent step to take.
Thanks. Appreciate. Congratulations on a nice quarter.
Thanks, John.
Your next question comes from the line of Neal Dingmann with Truist Securities.
Good morning guys. I don't want to [indiscernible] but the shareholder [indiscernible]?return?, obviously, is the topic that is there these days and Rick, I remember meeting up with you several months ago early on and your comment at that time this is I think maybe even up to just the one variable dividend that you thought maybe you weren't being properly [indiscernible] on. I'm just wondering, as you said now with several under your belt, I think you've all been properly compensated for these and if not, would you consider lowering the formula or doing something different on the go-forward?
Neil, I think we have been rewarded to a degree, I think. But, if you'd asked Scott Coody, the number of phone calls, inbound phone calls that he's getting from more and more generalist investors and people quite honestly, he's never talk to or even heard of, that's extremely encouraging. So I think we have started to see the tip of the iceberg on our recognition, the appreciation of how, what a strong tool is, variable dividend is. So yes, I think if you go back to our conversation we had several months ago, I think it was still just a little bit of a wait-and-see and we talked, I think at that time about, Interestingly enough, if you're just a yield investor, you're out mining for yield and comparing opportunities.
If you look at Bloomberg, Facet, places like that, it just picks up that fixed dividend and it doesn't always contemplate the variables or specials and those sorts of things. I think it's a little bit of a wait-and-see mode now. You fast forward to who we are today and I think we have seen some recognition of that, the feedback we get from our shareholders. We've seen the shareholder base actually change a fair amount. I think the calls we're getting would probably illustrate that, yeah, we're starting to get some get some recognition of the power of that -- the variable dividend. And certainly, I think when people open the envelope here at the end of the year on this $0.84 per share dividend, that's a nice one. So I think is going to continue to be very much appreciated. And so -- tip of the iceberg though.
No, I agree. It's good to hear because you guys have certainly been a leader in all this. And then my follow-up is maybe for you or Clay. You can't help but notice when you guys start the presentation on the slides, on Slide 4, having 5 distinct great areas, and Clay mentioned how strictly they compete for capital. So with that said, would you consider on some of those areas that maybe won't make it in your vote to the top line, would you fund those, bring somebody else in as a partner, somebody else to fund those that way, or would you more likely think about letting some of those assets go?
As we stated on several occasions, all 5 of our assets play a very key role in our going-forward strategy. You bring up something, could you bring in a partner? Yeah, absolutely. That's always something you can do. And the returns that they would get would be quite honestly phenomenal and the preference we would get would be phenomenal I think. So that's always an opportunity. We just wanted to do the right thing for the long-term success of the Company. I can tell you that we'll continue in all of our basins to find more and more creative ideas on the resource. This is the subsurface. So I think as we get into it, a little next year or 2, we'll always have those opportunities, and we'll evaluate them as they come along. But our phone does ring and so it is something that we contemplate on. Clay, you may want to comment on that.
Thanks, Rick. And Neil you know as well, Right? We our business folks and we really look for value creation opportunities, and sometimes that comes in the name of buying assets or selling assets, or doing creative structures. All of that's always on the table. We have to be very creative. What I like, something we've highlighted this quarter is our joint venture with Dow. That's a perfect alignment. We had a resource that we knew was not going to compete on a heads-up basis. We also had a little bit of a stagnant time, so we knew that there could be a little bit of kind of startup friction. We brought in a partner. They love it.
It is a home run for Dow. It is a home run for us. And as we cycle through this, we're both winning and it's a great thing for the shareholders because ultimately that asset is being converted into value. So we love those kind of deals. Both legacy organizations have a very creative bend to them, and so I think that carries through to us going forward, so I look forward to more creative opportunities ahead.
Neal, I'll add one more thing to that point that Clay just made. And I think that if you look at the legacy of Devon, it's the Company that people want to work with. And so case in point is Dow partnership, that's the second one. The first one was launched back in the Barnett days. So once you prove that you're a viable partner and that you can make people some money, they will come back. I'd like to add that.
In great detail. Thanks guys.
Your next question comes from the line of Scott Hanold with RBC Capital Markets.
Thanks and congrats on the quarter. I'm going to touch a little bit on 2020 to quickly here. But when you look at -- maybe can you -- give you -- if you can give us some perspective on how big than non-operated part of that budget is and obviously, outside of the Eagle Ford but in places like the Permian Basin and even Oklahoma, how much non-op spend do you have right now?
So Scott speaking of partnerships, we have a partnership in the Delaware where we have a partner that we have prescribed agreement in place where we can offload some of the non-op, mainly because a non-op is very hard to budget for. And speaking from our own prior experience, when you bust the budget and it's on somebody else's fourth quarter activity, it can be a little bit frustrating. So again, we have a creative structure in place, very beneficial to us, very beneficial to our partner that acts as a little bit of a shock absorber. So as we think about opportunities in other areas, and as commodity price increases, and we see some non-op partners lean into it a little bit, we'll consider those options. But I think it's probably $50 to $100 million around the Company is probably in the right ballpark.
Got it. Makes quite a lot of sense. And obviously, you guys’ operational performance has been outstanding and it's just not the last quarter too, it's been for quite some time. And when you think about managing growth based on the oil macro right now, if you're in a position where you are outperforming next year, with a plan B to taper activity to stay within a flattish growth outlook, or would you drop Capex a little bit to stay flatter?
Yeah, I hear you. And I -- that's always the challenge. As we do better, become more efficient, the acceleration causes us to push towards the high side of the capital range. It's what we're experiencing the third and fourth quarter of this year. I hope we have that same problem. What I'll tell you is we're going to really try hard to honor the high side of that range. And if necessary, then we would trim back on activity to make sure we stayed inside that range. It's not something we take lightly. Like I said earlier, this is very disruptive to internal and external operations.
And so we don't take that kind of operational scaling up and down lightly. I would tell you that it's something we plan to honor and to be very consistent in. And sometimes there's other creative ways to make sure that we still meet our capital guidance and continue the incredible consistency that we have rolling.
Got it. I appreciate that. And 1 really quick one for Jeff. Jeff, you mentioned the tax attributes of around $3 billion and that seems to hold off through 2022. Is it fair to assume at strip, like sometimes in mid-2023, a lot of that is utilized?
Yeah, that's right. And just to be clear, in 2022, at the current strip prices, we would expect to pay some cash taxes and that's the assumptions we outlined on the slide deck. But certainly as you move into 2023, if we maintain this price level through this next year, you're absolutely going to be in a cash tax position and you'll see that current tax ratio move higher.
Okay. High-class problem. Thanks guys.
Your next question comes from the line of Matthew Portillo with TPH
Morning all. Maybe a question for Clay. Just on the PRB, was curious if you can give us an update on your learning, some of the delineation in the Niobrara, and what you would need to see from either a well productivity perspective or from a cost perspective to feed that asset more capital over the medium-term.
Yeah, Matt. This is one of the areas it doesn't get a lot of spotlight. So one, I appreciate the question and being able to talk about it. This is a massive oil in place resource. There's no question. As we think about historical exploration, exploring is figuring out if there is oil in place. We're past exploration. Now it's figuring out, how do made -- how do we develop this in an economically competitive way in the portfolio that we have. And therein lies the challenge. the current delivery on economics doesn't compete in with the Delaware Basin. Obviously that is a tough portfolio to compete in.
So let's think about it. We've drilled a couple of 3-mile laterals that we brought on earlier this year. I can tell you they're -- they're really strong. We like the returns and they will compete their very strong economics. We've got a lot of repeatability on that. And so I look over to maybe how we did something with the Anadarko Basin. If it's not competing in our Basin, how do we creatively create value for shareholders for an asset that sits on our portfolio. And there's a number of ways to do that. Clearly, other industry peers are active in the Basin. We look to learn from them, we look to partner with them.
All of that's on the table. Certainly, bringing in outside funding is on the table. The homework that we need to do is continue to improve on the repeatability and the certainty of the outcome. And that allows us to negotiate the best opportunity for us to really wring out the value.
Perfect and then, just maybe a follow-up question on assets specific capital allocation. You have some absolutely phenomenal results around the acreage in Lea and Eddy County, and then some of the State line acreage from WPX. Just curious how Felix stacks up today? What you learned from your updated development program there and how we should think about the return profile of that position in the Southern Delaware Basin versus your more northerly acreage.
Yeah. Good question. As we draw the circles, we have some [indiscernible] development, that's in what we call the monument draw, which is mostly Felix. The [indiscernible] stuff was kind of in between state line and the eastern most side of the basin. That pad recently came on during the third quarter. Big development, I think 10 or 12 wells, outstanding results, so we're excited about that. Clearly as you move further east, things just get more challenging, the steering gets a little more difficult, the economics get a little bit more difficult and again, in this super competitive portfolio that we have, it's just the eastern most stuff is not commanding the most capital today. So as we look at the depth of inventory in Lea and Eddy, and really loving counties, that's where the lion's share of our capital activity will be.
Thank you.
Looks like we are at the end of our time slot today, we really appreciate everyone's interest in Devon and I know we didn't get to everyone in the queue today. So if you have any further follow-up questions, please don't hesitate to reach out to the Investor Relations team at any time. Thank you. Have a good day.
This concludes today's conference call. Thank you for participating. You may now disconnect.