Devon Energy Corp

NYSE:DVN

Earnings Call Transcript 2020-Q4

[Operator]

Welcome to Devon Energy's Fourth Quarter and Year-End 2020 Earnings Conference Call. [Operator Instructions]. This call is being recorded. I'd now like to turn the call over to Mr. Scott Coody, Vice President of Investor Relations. Sir, you may begin.

[Scott Coody, VP, IR]

Good morning, and thank you to everyone for joining us on the call. Last night, we issued an earnings release and presentation that cover our results for the year and our forward-looking outlook for Devon in 2021. Throughout the call today, we'll 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 other members of our senior management team, including Dave Hager, our Executive Chairman.

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.

[Richard Muncrief, President, CEO & Director]

Thank you, Scott. Great to be here this morning. We certainly appreciate everyone taking time to join us. With the merger of equals between Devon and WPX Energy now finalized, we have an exciting story to share with you about the prospects of our new company. We have definitely timed this merger well, catching the very bottom of the cycle and positioning ourselves to capture the full upside presented by the recent strengthening of macro fundamentals.

With these more favorable conditions, the team at Devon is not taking anything for granted. We are extremely focused on capturing synergies and executing our plans. We remain disciplined with our capital program, and we are delivering some very positive results well ahead of plan, even with all the disruptions driven by COVID-19, politics and recently, winter weather. We will provide an update on the impact from this Arctic storm later on, but our field personnel are doing a tremendous job fighting through these challenging conditions and meeting the energy needs of consumers in tough times like these.

Extreme weather like this is a good reminder of how the products we produce are absolutely essential to protect and improve the quality of life for society. Now for those of you who are new to our story, let's turn to Slide 3 of the presentation to briefly review the advantaged attributes of the go-forward Devon.

In January, we successfully closed the all-stock merger of equals between Devon Energy and WPX Energy in only 3 months. This is a remarkable pace to complete a transaction of this scale. And I want to thank both organizations for their dedication and efforts to reach this milestone.

Progress on integrating the merger is also off to a great start with our blended leadership team and staffs working remarkably well together. By bringing together our respective companies, shareholders will benefit from enhanced scale, immediate cost synergies, higher free cash flow and a financial strength to accelerate the return of cash to shareholders through our innovative fixed plus variable dividend strategy.

Also adding to Devon's investment thesis is our attractive valuation, which I believe to be the best value available in the entire energy space. As we execute on our strategy and more evidence continues to emerge that we will be able to efficiently develop our federal acreage in the Delaware Basin, I truly expect Devon to re-rate higher.

Now jumping to Slide 5, the power of the combined company was showcased for our outstanding fourth quarter results that outperformed Street expectations. Across the portfolio, our teams are delivering results that continue to exceed production and capital efficiency targets while successfully driving down per unit operating cost and maximizing margins.

This is evidenced by several noteworthy accomplishments in the fourth quarter, including our oil production exceeded guidance by 5%, driven by well performance, not higher activity. Our operating and corporate costs also exhibited sharp declines year-over-year. And importantly, these efforts translated into $263 million of free cash flow.

Now coupled with the closing of our Barnett divestiture, we generated nearly $600 million of excess free cash flow during the fourth quarter, a truly fantastic result for our organization.

Now moving to Slide 6. Devon has a long history of returning cash to shareholders, paying an uninterrupted quarterly dividend for 28 consecutive years. The combination of Devon and WPX will allow us to step up our game by implementing our fixed plus variable dividend strategy.

And with the free cash flow we generated in the quarter, I am proud to deliver on our commitment to reward shareholders with higher cash returns by declaring an industry-first variable dividend of $0.19 per share. Jeff will cover the details of the differentiating dividend policy later on, but this fixed plus variable dividend framework will be a staple of our capital allocation process, allowing us to return meaningful and appropriate amounts of cash to shareholders across a variety of market conditions.

Now moving ahead to Slide 11. The positive momentum of our business has established is also resulting in an improved operational and financial outlook for 2021. And how do I define an improved outlook? Well, it's very simple: lower breakeven funding levels and higher free cash flow generation.

Beginning with production, given the strong results we delivered over the second half of 2020, we now expect to maintain a higher level of oil volumes throughout 2021. This enhanced outlook is underpinned by improved capital efficiency compared to what we estimated at the time of our merger announcement last year.

Even after raising production expectations in 2021, our upstream capital program is coming below our previous expectations at approximately $1.7 billion, representing a reinvestment ratio of less than 70%, assuming a $50 WTI price deck. Also of note, most of the corporate capital we expect to spend in 2021 will not be repeated in 2022 or beyond. Combined with the merger-related cost synergies that Jeff will cover later on, we are effectively lowering our funding requirements in 2021 to a WTI breakeven price of $32, which positions Devon with a free cash flow yield of 13% at today's pricing.

Furthermore, on an unhedged basis and assuming year-end run rates for cost synergies, our free cash flow yield expands to greater than 20%. This free cash flow yield screens at the very top of our industry makes Devon a uniquely attractive investment proposition when compared to the record high valuations for most other sectors and asset classes in the market today.

And lastly, on this slide, while the recent uptick in commodity prices are certainly a welcome change and very beneficial to our free cash flow generation, I want to be very clear with this message. We have no intentions of adding any growth projects until demand fundamentals recover, inventory overhangs clear up and OPEC+ curtailed volumes are effectively absorbed by the world markets.

Importantly, I encourage other producers to be very thoughtful and disciplined when it comes to capital plans. High returns on capital employed, reduced reinvestment rates and free cash flow generation will determine the winners and losers in this upcoming cycle, not just top line growth. Devon will be a leader in this movement.

The final topic I would like to cover today is Devon's commitment to top-tier ESG performance. Excellence in ESG is a core value here at Devon. We believe that performance in ESG impacts every aspect of our business, both operationally and financially, including our social license to operate over the long term.

On the environmental front, Devon's top priorities will be: the reduction of greenhouse gas emissions; methane intensity rates; and the advancement of water recycling. Once we fully integrate our operations from the merger, a top line goal of mine this year is to establish quantitative targets for these environmental priorities.

In addition to these objectives, we are also sharpening our governance practices, which include initiatives to refine executive compensation to further enhance alignment with our shareholders and advance initiatives to foster inclusion and diversity within our organization. The bottom line is this: We are committed to responsible operations to advance the best interest of all stockholders.

And with that, I'll turn to -- I'll turn the call over to Clay to cover our operating highlights for the quarter. Clay?

[Clay Gaspar, EVP & COO]

Thank you, Rick, and good morning, everyone. The strategic combination of Devon and WPX creates a powerful asset portfolio that strikes a great balance between sustainable growth opportunities and strong free cash flow generation. Given the strength of our fourth quarter operating results and 2021 outlook, we're off to a great start executing on our strategy that will drive the next phase of financial growth and strong returns for the company.

Let's turn to Slide 14, and I'll give you a brief overview of our incredible Delaware Basin position. Our world-class Delaware Basin asset is a capital-efficient growth engine for driving Devon's operational performance. As you can see, we have amassed a dominant position of 400,000 net acres of stacked pay in the economic core of the basin that accounts for about 60% of our pro forma production.

The operating scale of our consolidated Delaware footprint provides a multi-decade inventory of high-return opportunities at our current activity level. Another important point that this slide demonstrates is our position's geographic diversity between New Mexico and Texas. By having a blend of federal, state and feed lands and positions in both Texas and New Mexico, we're able to leverage the significant economies of scale and, at the same time, benefit from market diversity and navigate the evolving regulatory climate.

While we fundamentally believe that we'll be able to efficiently develop our federal acreage in New Mexico, we have proactively managed this risk by building up an inventory of around 500 approved drilling permits that cover our planned activity on federal lands for multiple years. Our forethought has allowed us to secure the necessary permits, easements and rights of way required to execute on our near-term capital program with minimal impacts to our day-to-day operations.

Looking beyond the 60-day regulatory transition, we will be highly engaged and collaborative with policymakers to ensure that we retain ability to efficiently develop our federal leases and maximize value for all stakeholders involved.

Moving to Slide 15. The fourth quarter operations results across the Devon legacy position highlight why we believe this basin to be the best resource in North America. Our oil production from this operating region continued to increase rapidly, growing 41% year-over-year. This growth was supported by 23 high-impact wells that were brought online across the Southeast New Mexico during the quarter.

While we had great results across our acreage, our activity in the Cotton Draw region, targeting the Second Bone Spring, topped the highlight list. This package of 8 wells delivered average 30-day rates of more than 4,000 BOE per day, which equates to an impressive 450 BOE per 1,000 feet of lateral length. With D&C costs averaging less than $6 million per well, the overall returns from this Bone Spring activity ranks among the very best returns Devon has ever delivered in the basin.

Turning your attention to the far right-hand side of the slide, another noteworthy trend is our improving capital efficiency. With consistent improvements throughout the year, our drilled and completed costs exited 2020 at around $560 per lateral foot. We believe these results to be best-in-class among our peers in the area.

The key drivers of this performance were optimized completion design, repetition gains and nonproductive time improvements across all phases of the value chain. I expect this positive trend of steadily improving cycle times and costs to carry into and benefit our 2021 program. Congrats to David Harris and the Devon legacy team for this outstanding set of results.

Moving to Slide 16. We also continue to build operational momentum across the legacy WPX acreage position. Beginning with our Stateline area, the key takeaway is our co-development drilling program in the Upper Wolfcamp and Bone Spring that is providing great results at a 4 to 5 well spacing per bench. The 26 wells that were brought online in the Stateline area, we continue to outpace type curve expectations with peak 30-day rates averaging around 2,300 BOE per day and the D&C costs associated with this activity improving by 44% compared to just a few years ago.

We've also made significant progress in our Monument Draw area with encouraging results at our Cathedral and Bridal Veil projects. As you recall, WPX acquired this asset from Felix about a year ago. With the 2020 slowdown in activity, we're just getting to see the results of the first WPX drilled and completed wells, and we're very pleased with these results and continue to see significant upside to the asset.

A critical subset of these projects, which co-developed the Upper Wolfcamp and the Third Bone Spring line, was a trial of a more aggressive flowback methodology, along with improved spacing and also efficient -- a more efficient completion process. The results were lower well cost and again, improved productivity.

This approach, which is similar to the techniques in Stateline, was applied to a subset of 6 Wolfcamp wells across the 2 projects. The 38 day IP rates for these wells averaged 2,300 BOE per day with 76% oil. The wellbore cleanout process has improved, and we're not seeing any geomechanical or geochemical downsides to the more aggressive flowbacks.

With these positive tests, we will continue to evolve the completion design in Monument Draw program in 2021. As we extrapolate these results, the Monument Draw will compete very effectively for capital with our Delaware Basin portfolio.

Turning to Slide 17. I will cover our other positions in our border-to-border premier oil fairway. From the WPX portfolio, the Williston Basin continues to provide phenomenal returns. We will continually -- continue our highly profitable program into 2021. In the Powder, we will continue to deliver on appraisal and leasehold objectives with a focus on advancing our understanding of the emerging Niobrara oil play.

Anadarko Basin is back to work with 2 rigs funded by a joint venture partnership. By the way, I have a long history with the Anadarko Basin. I have full confidence in Devon's ability to extract significant value from this asset with the right well placement strategy and operational excellence and where the opportunity presents some leverage through partnerships.

Finally, in the Eagle Ford, with our partner with BPX, we plan to run a 2-rig program in 2021 and jump-start our activity by bringing online 22 high-impact DUCs in the first half of the year.

Turning to Slide 18. The first key point is that our maintenance capital program is designed to optimize capital efficiency, with approximately 80% of our capital allocated to the Delaware Basin. Within the Delaware, the capital will be relatively evenly split between New Mexico and Texas, with an abundance of flexibility to reallocate capital if we see a differential economic opportunity on either side of the border, or even an unforeseen delay on federal lands.

As Rick stated earlier, the capital efficiency associated with this plan is outstanding. We expect to maintain our production at levels slightly elevated to 2020 for roughly 10% less capital on a year-over-year basis. We expect to invest about 30% of our capital -- of our 2021 capital in Q1 due to the timing of D&C activity, with some momentum rolling in from 2020. After this heightened activity for the first quarter, the capital is expected to be more ratable for the balance of 2021.

While we expect the current weather conditions to negatively impact first quarter production, we also expect the balance of the year to be relatively flat. As you can see on the right-hand side of the slide, we also continue to act with a sense of urgency to materially improve our cash cost structure in order to get the most value out of -- we can out of every barrel.

With this intense focus, we are on track to reduce LOE and GP&T costs by 8%. To achieve this step-change improvement in the field level costs, we have line of sight to meaningfully reduce our recurring LOE expense across several categories, including chemical, water disposal costs, compression and contract labor. The gains that we make in this area often act as ongoing annuities that we will benefit from for years to come.

I want to commend the production operations team that fight for these improvements every day. I also want to add some additional color on the severe weather event that's impacting a large part of the U.S. today. First, we are focused on ensuring the safety of our employees and the service company partners that work with us each day in these challenging conditions. I've talked to several of our field leaders over the last few days. And consistently, the first thing they mentioned is protecting the health and safety of people.

We also know the critical value of the commodities that we produce. Many of us, as well as our family and friends, have been personally impacted by the lack of electricity necessary to keep up with the demands associated with this intense winter storm. We're doing everything we can to safely keep production flowing to the communities that desperately need it.

As we try and quantify the impact of our -- to our first quarter production numbers, I would just say it's too early to tell. We've included some downtime in the annual numbers, but we have elected not to give first quarter guidance at this time. In the coming weeks, we'll have a much better understanding of the impact, and we'll provide additional information on the first quarter expectations.

With that, I'll turn it over to Jeff for the financial review.

[Jeffrey Ritenour, EVP & CFO]

Thanks, Clay, and good morning, everyone. My prepared remarks today will focus on the progress we've made advancing our financial strategy, as well as providing some context on a few key metrics that have improved in our 2021 outlook disclosed last night.

Beginning on Slide 7 with a review of our balance sheet. Over the past 3 months, we've continued to make progress strengthening our investment-grade financial position. As Rick touched on earlier, the strong operational performance of the combined company allowed us to generate a substantial amount of free cash flow in the quarter and build an incremental $500 million of cash in the quarter.

With the benefit of this cash build, Devon possessed $5.6 billion of liquidity at year-end, consisting of $2.6 billion of cash on hand and $3 billion of undrawn capacity on our unsecured credit facility.

As market conditions allow, we'll look to further reduce our absolute debt level with select repurchases under our $1.5 billion board authorized debt repurchase program. Subsequent to quarter end in February, we took our initial step in this debt reduction plan by redeeming $43 million of senior notes that were due in 2022. This action completely clears Devon's debt maturity runway until the second half of 2023.

We'll have another opportunity to reduce absolute debt in the second quarter with the potential early redemption of our $500 million tranche of 2026 bonds, which become callable in June at a fixed price. With the remainder of our debt reduction program, we'll remain flexible and evaluate opportunities as we keep a close watch on interest rates and credit spreads.

Longer term, it's our firm belief that a successful E&P company must maintain extremely low levels of debt, given the volatility of our cash flows. We'll continue to manage towards our stated leverage target of 1x net debt-to-EBITDA or lower, and we've charted a pathway to get there within the next year at today's spot pricing.

Our disciplined financial model grounded on a low capital investment ratio -- excuse me, reinvestment ratio and variable dividend payout of only 50% of excess free cash flow allows us to consistently build our cash balance, reducing net debt over time and driving us to our 1x net debt-to-EBITDA target.

In addition to our debt reduction efforts, we expect to accelerate the return of cash to shareholders in 2021. Given the stretched balance sheets across the sector, many of our peers will have to reduce debt with free cash rather than returning cash to shareholders. We believe we're uniquely positioned, given our financial strength to do both.

To optimize the outcome of our cash return strategy through the cycle, we've adopted a fixed plus variable dividend framework. This cash return strategy is designed to pay a sustainable fixed dividend and evaluate a variable dividend on a quarterly basis.

The fixed component of this policy is our legacy quarterly dividend that is paid at a rate of $0.11 per share and targeted at a sustainable payout level of approximately 10% of operating cash flow at mid-cycle pricing. The variable dividend is intended to be a supplemental distribution in periods of excess free cash flow beyond the fixed dividend.

More specifically, after the fixed dividend is funded, which is the first call on our free cash flow, up to 50% of the remaining free cash flow in a quarter will be distributed to shareholders through a variable dividend.

As Rick touched on earlier, given the strength of our fourth quarter results, the Board has approved Devon's inaugural variable dividend at a rate of $0.19 per share. The remaining excess free cash flow builds upon our balance sheet and reduces our net debt, as I mentioned earlier. Once again, the variable dividend is in addition to Devon's previously declared fixed quarterly dividend of $0.11 per share. Both the fixed and variable dividend will be distributed on March 31st for a total payout of $0.30 per share.

And lastly, I'd like to wrap up my comments today on Slide 8 by covering the progress we've made capturing the merger-related synergies that are expected to drive $575 million in annual cash flow improvements by year-end 2021.

I won't go through all the details on this slide, but we have a detailed plan in place to meet this target, which includes a range of actions to achieve more efficient field level operations, lower drilling and completion costs, better alignment of personnel with go-forward business and a reduction of financing costs. To be clear, our efforts to reduce costs go beyond just dollars and cents and represent a meaningful shift in our culture to more streamlined leadership, more reliance on technical expertise and intense focus on delivering top-tier returns on our investments.

The team is acting with a sense of urgency, and we're running well ahead of plan with approximately 60% of these cost reductions already reflected in our 2021 outlook, and the remaining synergies to achieve our $575 million target have been identified and are expected to be captured on a run rate basis by the end of this year.

The value creation of these synergies are very material and impactful to our go-forward value proposition, resulting in a PV10 over the next 5 years of more than $2 billion, or roughly 15% of our market capitalization. We'll provide further updates as we progress through the year.

And with that, I'll now turn the call back to Rick for some closing comments before we open the call to Q&A.

[Richard Muncrief, President, CEO & Director]

Thanks, Jeff. Nice job. We have covered a lot of good information today, and I'd like to reiterate a few key points. Number one, this transformative merger creates a leading U.S. energy company that possesses arguably the best value proposition in the entire E&P space.

Number two, the power of our portfolio is evident with our outstanding fourth quarter operating and financial results. Number three, the momentum that our business has established is resulting in an improved operational and financial outlook for 2021. Number four, our business is scaled to generate substantial amounts of free cash flow, and we are proud to reward shareholders with an industry-first variable dividend.

And lastly, number five, we are committed to delivering top-tier ESG performance. And we expect to establish quantitative targets for our environmental priorities later this year.

And with that, I'll now turn the call back over to Scott for Q&A.

[Scott Coody, VP, IR]

Thanks, Rick. We'll now open the call to Q&A. [Operator Instructions]. With that, operator, we'll take our first question.

[Operator]

[Operator Instructions]. Your first question comes from the line of Arun Jayaram with JPMorgan.

[Arun Jayaram, JPMorgan Chase & Co.]

Rick, I wanted to get some insights regarding kind of the decision to start the variable dividend program before the merger -- for the period before the merger was closed, and just thoughts on that decision to kind of accelerate the variable dividend.

[Richard Muncrief, President, CEO & Director]

Yes. It's a great question. I think at the end of the day, when we sit down and we look at the pro forma results for the fourth quarter, both legacy companies were so strong. We added so much cash to the balance sheet. We felt like it was a perfect opportunity to get out ahead and say exactly what we -- do exactly what we said we would do, and that's implement this variable dividend in 2021.

Now we talked to the Board level. We felt now is a great time to do it. And we wanted to make it substantial enough that it showed our leadership and showed our focus on getting cash back to shareholders, as you well know, which has been one of the -- one of the things that our industry has had pushback from. So we thought it was a great opportunity to show leadership. And so we quickly move that way.

[Arun Jayaram, JPMorgan Chase & Co.]

Great. And my follow-up is, perhaps for Jeff, maybe a two parter for Jeff and Clay. Maybe, Jeff, could you help us maybe reconcile the CapEx guidance between upstream, midstream and total relative to Devon's previous commentary around a, call it, $1.7 billion sustaining kind of program?

And Clay, my follow-up there is, maybe if you could talk through the trajectory of 2021 oil volumes. I know you clipped 305 for the fourth quarter. But just maybe help us think about the trajectory over the balance of the year.

[Jeffrey Ritenour, EVP & CFO]

Arun, this is Jeff. Thanks for the question. Yes, simply put, if you look back at the capital program that we rolled out with the merger, that was on a run rate basis. So we were -- we made the assumption that we captured all the synergies, day 1. It obviously accounted for our hedging program at that point in time and really just rolled that forward for the full year.

Today what we -- or excuse me, last night, what we've rolled out is what we actually expect the cash expenses to be, obviously, in 2021. As you would expect, as we're working through our integration, the timing of some of those synergies works their way throughout the year. So whereas we had $100 million synergy assumption at the time of the rollout as it related to capital, of course, again, that's captured here as we work our way through '21. And we've tried as best we can in the disclosure we provided last night to provide you the level of detail, to see what the cash flows and CapEx will actually look like here in this current year.

[Arun Jayaram, JPMorgan Chase & Co.]

That's helpful.

[Clay Gaspar, EVP & COO]

Yes, Arun, I'll answer your 2.b -- 2b question. You want to conform to the one question, one follow-up, I'll give you that. So hey, let me address. I'll throw put on a part C as well, because I think there's a question around the cadence of capital and the cadence of production.

So capital first. We have some activity rolling in from 2020 that will -- we just have more activity going on in the first quarter of 2021. And so what we articulated is about a 30% of the capital for '21 will be spent in the first quarter. We caution that even though we're not giving first quarter guidance in earnest, we want to make sure that's in your model so that we don't surprise anybody. We just have more activity in that first quarter.

Now I would say, beyond that, second through fourth, it's pretty consistent. We get to the run rate, a steady-state activity, and it's pretty consistent from there. Interestingly, production is almost like an inverse.

First quarter, we've got a couple of things happening. Remember, we only have a partial quarter for the WPX production. Don't forget that. And then secondly, this weather impact will hit us in the first quarter. We don't have a good number on that yet. But both of those things will weigh on the first quarter total production numbers.

Now beyond the first quarter, and when you think about the full year guidance, second through fourth are pretty steady state, once again. So we're going to have some disruption in the first quarter. We'll tell you a little bit more about that in the coming weeks. But I would say second through fourth, beyond that, we're pretty much in a steady-state environment.

[Operator]

Your next question comes from the line of Brian Singer with Goldman Sachs & Company.

[Brian Singer, Goldman Sachs Group]

My first question is with regards to the capital plan. And I think, Rick, you were very clear in saying that the capital plan, you're going to look very closely before reconsidering, based on demand fundamentals, inventories and OPEC+ curtailed volumes and making sure that those are absorbed in the market.

And I wanted to follow-up to ask if this means that the capital budget that you've announced today is firm until the above or until those three boxes are checked, or if there is flexibility within the 70%, 80% reinvestment rate framework to move activity around?

[Richard Muncrief, President, CEO & Director]

No. I think those sort of boxes are checked. I think you have it captured well. And Brian, we are going to be very disciplined. I know that we're all excited about the strengthening commodity price, but we're not back on demand where we need to be. And I think you see that in the strip. We're in the upper 50s on WTI today, but you lose about $10 a barrel over the next 2 to 3 years. So I think we just need to keep that in perspective. And we will keep that in perspective, and we'll stay disciplined.

[Brian Singer, Goldman Sachs Group]

Great. And then my follow-up is with regards to how you're allocating capital between New Mexico and Texas within the Delaware Basin. You highlighted the 500 permits on federal land that you think can last 4 years.

And I wondered if you could add more color on the ability and risks to execute on those 500 permits, which -- and particularly if there's other permits needed, and whether you're getting those more midstream or other permits beyond the drilling permits.

And then how you could see the capital allocation relative to an even split between New Mexico and Texas changing, depending on what comes out from the federal government.

[Richard Muncrief, President, CEO & Director]

You bet. Brian, I'll start and then I'll pass it off to Clay for a little more color. But at the highest levels, we feel very optimistic that you're going to see the resumption of permits, sundry notices, all these things get back into play in the next month or so, maybe two months. But for sure, the next month.

And as you've mentioned, we do have a backlog of permits. We do have a number of pads that have already been constructed, pipelines. The infrastructure has been laid to that. So we feel -- we feel confident in that we'll be able to go to our planned capital activity.

Now should we be surprised? That's why we wanted to illustrate the really, really strong results in our Stateline activity that we had in the fourth quarter, with some of the Bone Springs and the Upper Wolfcamp results. The same with Monument Draw. We saw some great performance and excess -- that drove our outperformance on the WPX side, if you look at it from that perspective.

So we feel very good about where we're at. We keep lines of communication with, certainly, the leadership in the state of New Mexico. As you know, New Mexico is a state that we know pretty well. Devon has operated in there for nearly 50 years.

And personally, as I've shared with many of you on the call, I live about half of my life in the state of New Mexico. I was educated there. My family was raised there. My wife was a school teacher there. We have a lot of relationships there. So I think that we have a pretty clear picture of the reality that will happen. And so we remain confident, Brian. So with that, Clay, you have some more color you want to add?

[Clay Gaspar, EVP & COO]

I think that was well said. The only thing I would add, Rick, is I think it's our job to be nimble and proactive when it comes to whatever storms are ahead of us that's weather-related, political-related, however it is. And so I think the work, specifically on the Devon legacy side to get ahead of this storm, is a perfect example of that.

We can only speak to what we know today. We have a 60-day pause in leasing. We have responded very well. I can tell you from that perspective, we're in really good shape. And I can tell you, we are ready to roll with the punches on whatever comes our way. I mean, we have a -- I think back to Phillips Brooks, the 17th century scholar, we don't pray for lighter load, we pay -- excuse me, pray for a stronger back. That's kind of the job that we're in. So keep rolling.

[Operator]

Your next question comes from the line of Doug Leggate with Bank of America.

[Doug Leggate, Bank of America Merrill Lynch]

I appreciate all your remarks today from Rick and your team. Rick, I've got 2 questions. I wanted to pick up on a comment you made, something we care very deeply about, which is you expect Devon to re-rate. I wanted to put it to you that the multiple is the output of 2 inputs, which is capital efficiency and portfolio debt. So my questions are basically on those 2 things. Those are the 2 things, I guess, you can control.

So when I look at Slide 8, you've given an update on progress and the synergies. I'm just wondering how you see the risk to those numbers going forward as you've got chance to really peel back the layers of the combined company. That's my first question.

My second question is maybe to Clay. You talked about decades of drilling inventory at the current pace. So I wonder if you could break that down for us by basin and specifically speak to the future of the Bakken and the portfolio. I'll leave it there.

[Richard Muncrief, President, CEO & Director]

You bet, Doug. Great questions. As far as the synergies, we feel very, very good. We felt confident on the merger rollout. We feel even more confident today than we did then. And so I hope that everyone is hearing that.

We already have -- and Jeff, I think, talked about it in some of his prepared remarks, and you may ask him to weigh in as well if I miss something. But at the end of the day, we've captured quite a few of the synergies already and have that built into our 2021 forecast.

And so Doug, we feel very good about it. And I don't want investors to underestimate our focus on that, and our diligence on that -- something this management team is highly focused on. So Clay, you want to talk about the capital?

[Clay Gaspar, EVP & COO]

Sure. The inventory. Yes, Doug, I think the -- as we think about the inventory and how we're investing today, I feel very confident in our ability to run in perpetuity in the Delaware Basin. We talk about a certain amount of high-quality inventory. And I think, rightfully so, the investors only have a certain view of how far they can go out.

What I want to articulate is that we feel very confident in that solid next decade of opportunity. And also know that we're continuing to refine those opportunities for years 11, 12 and beyond.

This is the basin that keeps on giving. This past quarter, some of the splashiest, most exciting news was around the Second Bone on the Stateline side. And I can tell you, that's just -- that has been something that we've been evolving over the last couple of years. It's not fully baked into our forward look.

But I can tell you, just the upside associated with that is tremendous. I'm fully confident on the North side, the same opportunity holds as we move a little bit down structure into the Wolfcamp opportunities.

As we talk about other basins, Doug, I know you're -- there's a lot of people new to the WPX side of the story again, but we've never shied away from the fact that we have a quantifiable amount of inventory in the Williston Basin. It has been a tremendous asset for WPX, a huge amount of our growth high, high-quality operations and results. But at end of the day, we're going to run one rig because, for a reason, we have only so much inventory remaining.

Now what happens with that asset and what happens with the other assets, it is way too early for us to tell. I'm really excited about some of the real exciting things, basins that I'm kind of looking at for the first time in a few years and kind of some of the opportunities there. So we'll see how we can roll it out over the coming quarters on more information there.

[Richard Muncrief, President, CEO & Director]

Doug, one thing I'd say also is the, if I might add, is just the diversity we have throughout our portfolio. Not only are we just over 50% crude oil, but we have a strong leverage to natural gas and natural gas liquids. And so when we talk about diversified, not only is it just a multi-basin opportunity, but it's also a multi-commodity issue. And I want to make sure that we cover -- get that covered.

[Doug Leggate, Bank of America Merrill Lynch]

Maybe just to kind of get to the punchline. The $32 breakeven has already been trending a little lower, Rick. I'm just wondering if there's additional downside potential for that breakeven. I guess that's really the summary question I was trying to get.

[Richard Muncrief, President, CEO & Director]

Okay. I think there's always going to be the things where we try to lower that breakeven, Doug. And so we have -- I want you to know, we've got a very focused team here and creative team. And I do think there's some upside to that breakeven down in the upper 20s.

[Operator]

Your next question comes from the line of Jeanine Wai with Barclays.

[Jeanine Wai, Barclays Bank]

I hope everybody is managing okay with 50s freeze out there. My first question is for Rick. It's on the reinvestment framework. We know that the "up to 50% payout of the excess free cash flow," that's got certain criteria attached to it related to the balance sheet and the macro. And one of the criteria is strong leverage.

And I know a lot of things can happen, and we don't want to get ahead of ourselves, but I guess we are here. But at strip pricing, Devon gets down to its 1x leverage goal within a few years. And even if you do around the max payout, you're still left with sufficient cash after all of that. So if this scenario ends up playing out, is there a next evolution of your corporate strategy, such as revisiting the max 50% payout or moving to additional buybacks? Or would you rather reduce leverage further beyond the 1x just to be conservative?

[Richard Muncrief, President, CEO & Director]

Yes, Jeanine, those are good questions. And that is the beauty of Devon today, is we're sitting on -- we're generating a lot of free cash. We're sitting on a lot of cash. We have no near-term debt maturities. As Jeff said in his prepared remarks, we have a good plan of retiring debt over the next couple of years, so we'll be focused on that.

To the extent that we pay out up to 50% on the variable dividend, we reduced our debt, we keep moderate growth. Recall, we've laid out a cap of 5% growth on the oil production. I think if all those line up and we still see that we're generating incremental free cash, we'll certainly revisit all those things. But first things first, I think we're excited about implementing the variable dividend. We're excited about being proactive and are paying down debt. We're excited about the free cash flow that we're generating with this amazing team on these amazing assets. So, Jeff?

[Jeffrey Ritenour, EVP & CFO]

Yes. Jeanine, the only other thing I would add is, Rick hit all the right points. If we get into that situation, not only will we reevaluate the upper limit of the variable dividend target, but I think you'll also be thinking about growing your fixed dividend. We want to make sure we maintain that at a sustainable level, kind of in a normalized price environment. But that would be another lever we could pull, was to start thinking about the growth of the fixed dividend component and then thinking about the upper end on the variable as well. And then, again, I would marry that with -- we would certainly talk to the Board about buybacks if the opportunity presented itself.

[Jeanine Wai, Barclays Bank]

Okay. Great. My second question maybe is for Clay, and it's following up on Doug's question just now on deal synergies. I know not much time has passed since the deals closed. But where do you see the most potential upside on additional synergy capture?

Do you think it's more on the D&C side of things? Because we noticed that the legacy WPX well costs were down meaningfully. Or do you think it's more in the netback improvement bucket?

[Clay Gaspar, EVP & COO]

Yes. Thanks for the question, Jeanine. As I think about the synergies, some of the things I'm most excited about is just we are just now blending teams. I mean this week, we are finalizing a lot of the organizational structure, and these teams really have yet to kind of sit around even the virtual table together, look each other in the virtual eyes and say, okay, how do we share these best practices.

Some of the observations from the folks that have been working and on -- really on task, I would say some of the application of the WPX completion techniques and efficiencies are very applicable to the Devon side of the house. And I think some of the casing design, drilling efficiencies on the Devon side of the house are very applicable to the south side of the border.

And so there are some immediate things that you have to try, you have to work through these. But there's things we're experimenting with in real time. I think on the supply chain side of the organization, I would characterize Devon as exceptionally good at understanding contracting strategy and have done some really innovative things around the contracts in the business side of supply chain.

I would say on the WPX side, the engineering side of the house has done a good job of understanding those contracts and bringing out the most appropriate value. And as you can see, those two things coming together will really materialize into additional value. So I'm excited about the D&C, the capital synergies that we have ahead of us. I'm also excited, as I mentioned in the prepared remarks, about some of the things that are kind of more annuitized payments like LOE and GP&T. We're starting to see some early wins there. We're a long way down the road on some of the G&A savings.

And of course, we've talked about those being fully baked in, really starting early '22. But you'll see a lot of that manifest during the course of '21. So really excited about where we're going, and we're just getting started.

[Operator]

Your next question comes from the line of Brian Downey with Citigroup.

[Brian Downey, Citigroup]

Clay, I was curious if you could dig in more on the -- your comments around the aggressive flowback methodology you mentioned in the legacy Felix portion of the Delaware Basin. I'm curious, thought process there, given I believe you're actually testing a slowback strategy there a year or so ago. What has been the findings to date? And is that something you'll apply in other areas? And I guess, lastly, is that a strategy that will be at all dependent on your view of absolute commodity price or shape of the forward curve as we think about initial production rates versus the production curve there?

[Clay Gaspar, EVP & COO]

Thanks for the question, Brian. Yes. Certainly, all of these things are dependent on the macro environment: well cost, service cost environment, commodity price certainly plays into the overall economic decision. And that's how we make these final decisions, is how do we generate the most dollar to the bottom line.

I think it's broader. As I think about what we call Monument Draw, the Felix assets, it's broader than just a more aggressive flowback. I think we tend to use a little bit of terminology that's kind of easy to convey in these calls, but it's bigger than that. We have a little different completion strategy. Spacing is incredibly important. And then also, how do we manage the facilities and the ability to flow back more aggressively?

If you might recall from the Felix acquisition a year ago, we were very open to understanding their slower back strategy in how that creates incremental value. But we are also very clear, we're going to explore different options on all of these techniques to really kind of get to what is the best of.

We were slowed down during 2020, as you can imagine, with the slowdown in activity. And so we've had a delayed response to the first of some of these trials. Now what I'm saying is that we are seeing incremental gains, both on the cost side of the equation and the productivity side of the equation that are yielding much better returns. And this is still very early.

So if I think about absolute returns today, Monument Draw versus Stateline, Stateline's ahead. But the trajectory for Monument Draw is very, very favorable. And what I said in my prepared remarks is I fully expect it to compete head-to-head with the best of in our Delaware Basin portfolio. So really excited about the direction we're added there and the work that the team's done, boots on the ground.

[Brian Downey, Citigroup]

And your point about the facilities, does that impact at all the capital spend? Like is there any benefit of the flowback strategy beyond the initial production rate?

[Clay Gaspar, EVP & COO]

Yes. Again, all of that comes into play. How you design your facilities maybe for efficiency, maybe you need to scale them up, maybe you can combine with multiple wells on a pad. Those are all things. I mean, even direct flowback, straight bypassing tanks into the markets, into the oil lines, the gas lines and to the water disposal. Those are all things that we're exploring right now to bring out those dollars, both from the capital side. And of course, you don't want to give up on the productivity side. And so we're very cognizant of that at the same time.

[Operator]

Your next question comes from the line of Nitin Kumar with Wells Fargo.

[Nitin Kumar, Wells Fargo Securities]

First of all, I want to just congratulate you on delivering on the promises you made on what we call Shale 3.0. Rick We talked a little bit about, and you've addressed the federal acreage issue. I'm going to use Clay's words, you are -- your job is to look a bit the strongest ahead. The regulatory environment is changing. There are other things.

Can you maybe talk a little bit about what else you see out there and how you're changing the operations of the combined company to address things like the DAPL issue or flaring or taxes and things like that?

[Richard Muncrief, President, CEO & Director]

Sure. I would say that, as Clay mentioned, we are just now getting our teams together and having some real meaty discussions about future opportunities over and above what we've laid out from the synergies. Let's -- in the merger.

I will say, go down the list there, with DAPL, we feel that as you recall, we had -- made sure that we would not be impeded in any way. We did take out a 1-year rail agreement to handle some of the smaller percentage of the total volumes that we have up in the Williston. That's -- that gives us an added protection.

I do think that there is probably more upside. I think the market is priced down -- mostly downside, and I think that that's somewhat overbaked. I think that when you really think about the efficiency of DAPL getting the crude oil to the markets in a very efficient way, very safe way, very environmentally friendly way, I tend to believe that the new administration will see it the same way. So we'll see it all plays out.

As far as some of the other things, I can tell you that flaring is something that -- we'll touch on that for just a moment. We continue to try to drive down flaring even more. I think that the legacy Devon had done a good job with WPX. We were a little bit more challenged, quite honestly, up in the Bakken, but we've made some great progress there.

You'll see that some of the incremental midstream dollars we plan to spend this year, a direct result some of the phenomenal results we saw in the Stateline area. And what we saw, the reality was we started bumping up against some of our systems' capabilities. And if you didn't watch it, you'd end up flaring more. We don't want to do that. And so we're getting out ahead of that.

But Nitin, I think what you'll see, certainly, Clay and his teams are going to be very, very focused on what you're bringing up. You'll hear more of that as we go throughout the future. But it's something that's very, very important to us.

[Nitin Kumar, Wells Fargo Securities]

Great. And Rick, you always looked forward, I remember when you were at WPX, you had looked forward to the midstream issues, the basin had and kind of planned ahead for it. The other topic is ESG, and I appreciate your comments earlier on the different pillars there.

But is there an opportunity for the new Devon, given your balance sheet, given your footprint and -- to create any opportunity out of that? And I'm thinking about any lines of business or revenue streams down the road that you could participate in.

[Richard Muncrief, President, CEO & Director]

Nitin, that's something that we actually -- our senior leadership team, had our first combined strategy session, where we thought about just those opportunities. And a bit more to come on that, but it's something that we're spending quite a bit of time evaluating the true opportunities, the true threats around the energy transition that we hear a lot about.

So we want to be thoughtful. We want to be very good stewards of our capital that we have, the cash flows that we have. And -- but I think that's something you'll hear us -- more dialogue from our team as we go forward. We are going to be very thoughtful in our approach.

[Operator]

Your next question comes from the line of Paul Cheng with Scotia Bank.

[Paul Cheng, Scotiabank]

Two question, please. I think the first one is for Jeff and Rick and the second one is probably for Clay. Historically, that -- the E&P sector, the balance sheet is weak and they spend too much money. So everyone is evolving with a lot of hedging.

As Devon today, with a much stronger balance sheet, much larger scale and a very low breakeven requirement, do we really need to have the hedging program? I mean, long term, this doesn't really create value since no one can predict the future.

And yet if you want re-rating from the long-only accounts, could it be possible that by not having the hedging, it will simplify and make it easier for the long-only account to understand and analyzing the company and make it more easy for them to invest? So that's the first question.

The second question relates to the Powder River Basin, that for this year, you are looking at appraisal and derisking. So Clay, can you maybe share with us that. What is the time line and what type of program we could see for the Powder River Basin and in the Niobrara over the next, say, 3 to 4 years?

[Jeffrey Ritenour, EVP & CFO]

Paul, this is Jeff. I think I'll take your first question on the hedging. Philosophically, we haven't changed our view, which is, for some time now, we believe it's incredibly important to use both the balance sheet and our hedging program to maintain our financial strength.

We think it's important for all of our investors to try to minimize the volatility that we see in our cash flows on a quarter-to-quarter and year-to-year basis. It allows us to, frankly, plan and manage our operational activity and maintain and sustain a pretty consistent level of activity, which I think Clay would tell you, is really important in the day-to-day operations of our business.

And so we -- philosophically, we like to think about having roughly 50% of our cash flows hedged in any one given year. That's where we sit right now, just to give a recap on where we sit on both oil and gas today.

We're just below 50% for 2021 and just over 50% on natural gas for 2021. As you look ahead into 2022, we do have some hedges in place, but that's less than -- roughly around 15% of our position is hedged at this point on both commodities.

As you know, Paul, we typically use our systematic program to be in the market on a month-to-month basis and layer in hedges at market. And then we layer on top of that, hedges with our discretionary program as we see different opportunities arise in the market.

So I don't think you'll see us change from that tactic in the near future. We certainly recognize that with commodity prices moving higher, it's a real benefit. But we think it's important to try to limit the amount of that volatility that we see in our cash flows on a go-forward basis. Clay?

[Clay Gaspar, EVP & COO]

Yes, Paul, I'll take your second question in regards to Powder River. What I could tell you is I've personally worked the Powder, worked at Eagle Ford, worked the Anadarko Basin over the years. And what I'm very strongly trying to do with a lot of discipline is not let my view from 10 or 15 or 20 years ago kind of overshadow what's the current state of what's going on.

What we have right now is such an incredible opportunity. We're going to have fresh eyes on all of these assets. And so to really take a fresh look at what's the opportunity ahead, how do we fund that, how do we maximize the value to shareholders with this incredible footprint, and know that we're a 0% to 5% growth company, we are cash flow generators, and that is kind of the overall structure and drive of the organization.

So I would say it's a little early. My views are a little bit dated. And that team, I think, has a lot of opportunity ahead. And the doors are wide open to whatever we see as the most viable economics for our disciplined capital allocation program.

[Operator]

Your next question comes from the line of Neal Dingmann with Truist Securities.

[Neal Dingmann, Truist Securities]

Nice job so far, Rick. My question, Clay, for you looking at -- looking at that Slide 14, obviously, the massive acreage. Could you talk a bit about you've now got that massive footprint. Could you talk about cadence as you approach not only this year, but how you sort of see that maybe even 2, 3-year plan?

[Clay Gaspar, EVP & COO]

Yes. Neal, I'll reference back to my comments on -- to Paul on the last question. it's hard to predict 2 to 3 years from now. I don't want to let my bias coming in. I understand the south side of the acreage a lot better than I do the north side of the acreage.

We have fresh sets of eyes on the north side. On the south side, we have teams that are that are working together to share those best practices. And the big message for the investors is we have lots of flexibility. I fully expect, as we've articulated, the initial guidance would be 80% of our capital, relatively equally split north side of the border, south side of the border.

I would wager that by the end of the year, we will see differential economic opportunities, either drawing money to the north or to the south, that will influence that. But I just can't tell you today, which one of those economic opportunities are going to prevail.

And I think it'd be presumptive on my part to do so. So I look forward to the team's diving in. We've got a lot of flexibility, a lot of optionality, and we will make the most of that without prior prejudice. So thanks for the question.

[Neal Dingmann, Truist Securities]

Yes. And then one last follow-up if I could. Just you guys, I know I'm trying to think of WPS, how long ago this was maybe a year or two, you did that great right of way deal that you added some -- just key right of ways. And I believe that could continue to be potential with the new administration initiative. Could you talk about how you and Rick, not only just pure infrastructure, but your thoughts about just your right-of-way excess ability going forward?

[Clay Gaspar, EVP & COO]

Yes, Neal, what you're talking about is our surface acreage acquisition, it was a $100 million deal a couple of years ago when we basically bought a significant chunk of land under our most viable subsurface acreage. And the logic there was we wanted to make sure to preserve our optionality to fully develop this asset.

We could see a third-party coming in and just kind of squeezing us from a surface side. This is such a beautiful, contiguous operation from roads, from pipes, from electrical infrastructure. And then whatever -- however we decide to leverage that go forward, I can tell you that $100 million investment has paid out in spades.

And we have really been pleased with that -- I can't say that too many more of those opportunities exist. Stateline is a pretty unique 50,000 to 60,000 acre big continuous block. And so that was a pretty unique situation. But where those one-off opportunities, we'll continue to present and we'll evaluate and remain good stewards of the shareholders' investment.

[Richard Muncrief, President, CEO & Director]

Neal, this is Rick. As you recall, we did have some questions about why -- when capital was tied, we want to lead in on that $100 million investment. And I think it just played into our strategy of getting out ahead of potential challenges you may have in the future.

So that's something you'll continue to see us do. We're -- we expect to be questioned sometimes on a little more clarity on some of the capital. But we think we've established a pretty good track record of being very prudent with our capital spending.

[Scott Coody, VP, IR]

All right. Well, I see that we're at the top of the hour. I appreciate everyone's interest in Devon today. And if you have any further questions, please don't hesitate to reach out to a member of the Investor Relations team at any time. Have a good day.

[Richard Muncrief, President, CEO & Director]

Thank you very much.

[Operator]

Ladies and gentlemen, that does conclude today's conference call. You may now disconnect.