Devon Energy Corp

NYSE:DVN

Earnings Call Analysis

Increased Earnings Amidst Headwinds

The company faced a challenging quarter marked by headwinds but managed to exceed revenue projections, achieving a significant jump compared to the previous year. Margins were squeezed due to rising costs, yet operational efficiencies helped mitigate their impact. The leadership emphasized strategic capital allocation and tangible shareholder returns, with a commitment to maintaining a strong balance sheet. Looking ahead, specific guidance includes a revenue growth forecast and a focus on maintaining healthy margins despite external pressures.

Striving for Efficiency and Safety in Operations

The executive team at Devon highlighted their dedication to improving operational efficiencies, particularly through the innovative use of simul fracking — a technique which enables the simultaneous fracturing of multiple well stages. This practice not only contributes to cost savings but also boosts productivity. The team reflected on the unexpected level of efficiency gains achieved, exceeding their projections from just a year ago. In preparation for these advanced techniques, they've been planning well site locations and configurations far in advance, which has facilitated more opportunities for simul fracs. Such forward-thinking strategies have proven to be materially beneficial for the company's bottom line, reflecting a culture that values continuous improvement and efficiency in their operations.

Expanding and Optimizing in the Wolfcamp B

A notable advancement in Devon's strategy is their development within the Wolfcamp B zone. Prior uncertain prospects have now been de-risked through rigorous testing and optimization throughout 2023, setting a strong foundation for development moving into 2024. The company has successfully transformed once lower-priority, riskier zones into competitive and highly accretive assets. This shift underlines their ability to evolve their operational strategy in response to unfolding data and conditions, setting the stage for robust development and potentially significant returns.

Capital Allocation Balancing Growth and Stability

Devon's approach to capital allocation appears to mirror its broader corporate growth strategy — modest and calculated. In discussing the Delaware basin, executives presented it as an asset aligned with Devon's overall low growth outlook, emphasizing a range of 0% to 5%. While Delaware may experience quarters or years of slight growth, it should not be misconstrued as a standout growth asset. The basin's oil production is expected to be relatively stable; however, natural gas and NGL (natural gas liquids) production may see significant growth even if oil remains flat. This balanced approach to resource development is intended to align with the broader growth trajectory of the company and the Permian Basin as a whole.

Managing Increasing Capital for Carbon Initiatives

Devon is actively anticipating and adapting to changing environmental regulations by allocating capital towards carbon management and emission reduction initiatives. Understanding the challenges posed by potentially onerous regulations, they aim to stay ahead of the curve by retrofitting existing facilities with designs to lower emissions, ensuring compliance and asserting their corporate responsibility to environmentally conscious practices. These investments, although modest at present, are expected to gradually increase over the next few years not just out of necessity, but as a strategic move to safeguard Devon's operational capabilities and its role in providing energy globally.

Conclusion and Commitment to Stakeholders

The earnings call concludes with a reaffirmation of Devon's commitment to efficiency, innovative practices, strategic growth, and environmental stewardship. While acknowledging that the operating environment poses its set of challenges and opportunities, the company closes on a note of readiness to address further queries and engagement with the investor community. This ongoing dialog reflects Devon's commitment to transparency and active communication with its stakeholders.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, everyone, and welcome to Devon Energy Fourth Quarter and Full Year 2023 Conference Call. [Operator Instructions] This call is being recorded.

I would now like to turn the call over to Scott Coody, Vice President of Investor Relations. Sir, you may begin.

[Scott Coody, executive]

Good morning, and thank you for joining us on the call today. Last night, we issued an earnings release and presentation that cover Devon's results for the past year and our outlook for 2024. Throughout the call today, we will make references to the earnings presentation to support 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.

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 our actual results to differ materially 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, executive]

Thank you, Scott, and I appreciate everyone taking time to join us this morning. For today, my comments will be centered on 4 key themes: Devon's accomplishments in 2023, the catalyst of our improved outlook for 2024, the depth of the resource we possess in our portfolio, and the strategic priorities that will drive our free cash flow allocation going forward.

Now beginning with the fourth quarter, we exited the year with a solid quarter of execution, highlighted by production that exceeded the top end of guidance, meeting consistency across all products. Disciplined reinvestment resulted in our 14th consecutive quarter of free cash flow, and we took steps to increase cash returns by stepping up the pace of our stock buyback. These positive results rounded out another successful year for Devon, where we achieved several key milestones that I am extremely proud of.

On Slide 7, you can see we delivered production growth rate of 8% in 2023, resulting in new high all-time production for oil. This healthy growth rate was also paired with returns on capital employed that outpaced the S&P 500 by a substantial margin for the third straight year. With the free cash flow our business produced, we rewarded shareholders with an impressive cash return yield of around 10% that was balanced between buybacks and dividends.

As I touched on during the last call, our team has done a great job of designing a plan to deliver improved capital efficiency in 2023 -- excuse me, 2024. With the current industry conditions, we still believe it is prudent to deploy a steady capital program designed to optimize returns while maintaining volumes around levels where we exited 2023. Importantly, we expect to deliver this production for 10% less capital versus last year, funded at a WTI breakeven price of around $40.

In conjunction with this outlook and given the confidence that we have in the underlying health of our business, the Board has approved a 10% increase to a fixed dividend payout.

Now looking briefly at the trajectory of our capital production profile in 2024 on Slide 9, we plan to be spending to be slightly elevated in the first half of the year due to the addition of a fourth completion crew in the Delaware Basin. Due to timing of completions and recent curtailments from extreme winter weather, we expect first quarter production to be the lowest quarter of the year. However, we expect volumes and capital efficiency to move higher over the remainder of the year.

In 2024, a key contributor to our improved capital efficiency will be the well productivity improvements we expect to achieve in the Delaware Basin.

Turning to Slide 12. And with the easing of constraints across the basin, we plan to concentrate roughly 70% of the Delaware's capital in New Mexico while optimizing the remaining activity across our acreage in Texas. This allocation to New Mexico is meaningfully higher than what we were able to deploy during 2023 and is more in line with our historic activity in the basin. Overall, this refined capital allocation is expected to increase well productivity in the Delaware by up to 10% on a year-over-year basis.

Given that 2/3 of our Delaware Basin inventories in New Mexico, we anticipate being able to sustain our pace of activity on both sides of the Stateline for the foreseeable future. With this advantaged acreage footprint, you can see on Slide 14 that we have one of the largest inventories among operators in the basin, providing us with a multi-decade resource that will drive our enterprise-wide performance for many years to come.

The quality of our Delaware weighted resource base, combined with our disciplined strategy positions us to generate a differentiated amount of free cash flow for many years to come. As you can see on Slides 15 and 16, our business is set to deliver a free cash flow yield that is up to 3x that offered by the broader markets. With this free cash flow, we are targeting a cash return payout of around 70%, while earmarking the remainder to further strengthen our balance sheet.

With our flexible cash return framework, we will judiciously allocate our free cash flow toward the best opportunity, whether that be buybacks or dividends. Given that the equity market is heavily discounting valuations in the energy sector, it's an easy decision to prioritize the buyback over the variable dividend to capture the incredible value that Devon offers at these historically low valuations.

Slide 19 helps better visualize this compelling value proposition. On the right, you can see energy represents less than 4% of the S&P 500 while contributing more than 10% of the EBITDA in 2023. This is noteworthy given the Energy's S&P weighting historically tracks its earnings contribution over time. I believe this gap exist due to extreme valuations in tech, combined with a pervasive misunderstanding of hydrocarbon demand over time.

With global energy demand forecasted to increase 50% by 2050, the world is going to need growth from all sources of energy, including oil and natural gas. With the world's power needs continuing to grow, it is evident that peak oil demand is nowhere in sight, and our industry will be an important contributor of energy growth for the foreseeable future.

Furthermore, high-quality names like Devon, provide significant equity upside over time as you collect outsized cash returns. And as I said earlier, this is why we are putting our money to work actively repurchasing shares.

And with that, I'll turn the call over to Clay.

[Clay Gaspar, executive]

Thank you, Rick, and good morning, everyone. The Devon team did a really good job of rounding out 2023 by exceeding our operational targets for the fourth quarter. These positive results were driven by 3 key factors: number one, improved uptime, driving base production; number two, increased efficiencies through faster cycle times, resulting in lower capital per well; and number three, better new well productivity, improving our wedge production volume.

Slide 5 provides a good visual of these favorable operating trends. The chart on the left highlights the efficiencies we've delivered in our drilling and completions operations. On the right, you can see this track record of efficiency gains is also paired with some of the best well productivity of any producer in the U.S.

While these results can certainly vary from quarter-to-quarter, our consistency over time demonstrates the quality of our assets and execution capabilities. The most significant contributor to this advantaged capital efficiency was our franchise asset in the Delaware Basin. In the fourth quarter, roughly 60% of our capital was deployed to this prolific basin allowing us to run a consistent program of 16 rigs.

This activity -- with this activity, we brought online 62 new wells, grew productivity 6% year-over-year and expanded our DUC inventory, allowing us to add a fourth completion crew earlier this year.

While we had strong results across our acreage position, in the quarter, the top contributors to our performance were several large pads within our Cotton Draw and Stateline areas. At Cotton Draw in the core of the basin, we brought on 11 3-mile laterals that showcased the stacked pay potential and prolific rates this area can deliver. These extended reach wells were diversified across 5 different producing intervals in the Avalon, Bone Spring and Wolfcamp formations.

In aggregate, the oil-weighted production from these wells achieved a 30-day rates of 4,400 BOE per day with impressive per well recoveries trending as high as 4 million BOE. In addition to the high rates at Cotton Draw, we also delivered record-setting drilling and completion times. This performance included a record completion pace of 3,100 feet per day, and drilling times for these 3-mile laterals came in as low as 19 days with the final mile drilled in a record time of just over 24 hours.

Another standout performance during the quarter and possibly my favorite in terms of naming convention was our clawhammer project in the Stateline area. Clawhammer was named by a geologist after the style of playing the banjo that his dad used in their family jam sessions. The good news for him and his family is that these wells are fantastic.

This 8-well pad consists of 2-mile laterals, codeveloped in multiple intervals in the Wolfcamp A with production rates averaging 3,900 BOE per day. This package of wells delivered the highest well productivity per lateral foot of any project during the quarter.

As I look ahead to 2024, I expect another big year for the Delaware Basin as we have a great slate of projects lined up. We plan to bring online around 215 wells for the year with most of the capital deployed towards the best parts of our acreage in Southern Lea and Eddy Counties and the Stateline area of Texas.

This plan is designed to deliver improved capital efficiency and better well productivity through the full column of development of the Upper Wolfcamp, along with select landing zones in the Wolfcamp B where applicable. The derisking of multiple targets in the Wolfcamp B over the past year has allowed us to pursue more extensive multi-zone developments in 2024, bolstering our high-quality inventory, delivering higher net present value per project and still delivering exceptional rates of return.

Turning to Slide 13. To build upon Rick's comments from earlier, we're confident in our ability to deploy more capital to the core of the Delaware because of a long list of improvements in infrastructure. These improvements include 2 Bcf a day of processing additions -- gas processing additions, expansions to the downstream gas takeaway, enhanced water handling capabilities with our WaterBridge joint venture, build-out of gathering and compression and investment in self-generated power and microgrids to increase the reliability of the electrical infrastructure.

With these improvements, we are very well positioned to execute on our 2024 plan. In fact, year-to-date, we're delivering at a pace ahead of schedule, allowing us to fully offset the winter weather downtime we experienced in January across the field.

Shifting to the Eagle Ford. The successful integration of our Validus acquisition was one of the key drivers of the production increase of 56% during 2023. With our enhanced scale in the basin, the team did a great job of capturing synergies by driving improvements across each phase of our operations. This progress can be seen through several indicators, including year-over-year 15% decrease in production costs, a 30%-plus improvement in completion cycle times over the course of the year, and we set a company record spud to rig release of only 5 days.

Our activity during the year continued to demonstrate that the Eagle Ford provides one of the most promising opportunities for resource upside in the U.S. shale. Through tighter redevelopment spacing and refracs, our capital program not only replenished, but expanded our risk resource in the play to an inventory runway of around 10 years at today's pace of activity.

Looking to 2024, our key focus for the Eagle Ford team is to sharpen capital efficiency by incorporating appraisal learnings from the past year, along with more balanced activity across DeWitt and Karnes County. This plan is expected to deliver single-digit production growth for roughly $75 million less capital over last year.

In the Rockies, we possess a unique combination of assets that can provide both growth and free cash flow specifically in the Powder River Basin, we are building upon the well productivity improvements achieved over the past couple of years, where the average 6-month cumes increased nearly 20% from historic levels. A recent highlight was the [ SHU Iberlin 3X ] well, which reached peak rates in Q4. This 3-mile Niobrara well achieved initial production rates greater than 1,500 BOE per day with an 85% oil cut and then hung in at that rate for quite a while.

In addition to the strong oil productivity, the Iberlin attained a record drilling performance of 1,350 feet per day, a 45% improvement compared to the average Niobrara well. In 2024, our efforts will be focused on refining spacing, reducing costs and continue to ready this asset for full development in the later part of this decade.

In the Williston, I want to thank the team for safely working through the incredibly severe winter storm weather that we experienced in January and rapidly restoring affected production. As I look into 2024, our focus for this asset will be to optimize base production, deploy selective investments to high-confidence projects, and harvest $300 million of field level cash flow. So far this year, our capital program is off to a great start with our bull moves project maxing out our production facilities at over 15,000 barrels of oil per day with several of the wells flowing 3,000 barrels per day or more during their flowback.

Lastly, I'd like to briefly cover our activity in the Anadarko Basin, where we delivered an 8% production growth rate during 2023. The 3-rig drilling program funded by our Dow joint venture, delivered very impressive well production. The value of this production was also enhanced by our ability to route volumes into the premium Southeast gas markets and by the team driving operational costs 10% lower.

In 2024, we plan to maintain a similar pace of drilling activity in the Anadarko with a keen focus on developing the liquids-rich window of the play, where returns from our joint venture activity will benefit from higher condensate cuts.

And with that, I'll turn the call to Jeff for a financial review. Jeff?

[Jeffrey Ritenour, executive]

Thanks, Clay. I'll spend my time today discussing the highlights of our financial performance in 2023 and the priorities for our free cash flow as we head into 2024. Beginning with our fourth quarter financial performance, Devon's operating cash flow totaled $1.7 billion, exceeding consensus estimates and represents the highest quarterly total of the year. This cash flow comfortably funded our capital spending and resulted in $827 million of free cash flow, driving full year free cash flow to $2.7 billion. Even in the face of headwinds from lower commodity prices, this level of free cash flow ranks as one of the highest in Devon's 50-year-plus history. Another powerful example of the consistent financial results, our disciplined strategy can deliver.

As Rick touched on earlier, with this free cash flow, we're targeting a cash return payout of 70% with the remainder reserved for balance sheet improvement. Slide 23 in the appendix is a good exhibit representing how we allocated our cash returns in the most recent quarter. Given the compelling valuation of our equity, we prioritize share repurchases over the variable dividend. This resulted in us repurchasing 5.2 million shares in the fourth quarter at a total cost of $234 million. In 2024, we've continued to actively acquire shares through our 10b5-1 program, and we plan to supplement this with systematic buying with open market purchases during the year. With plenty of runway remaining in our $3 billion buyback authorization, we see Devon's current valuation as a great opportunity to compound the per share growth for our investors.

In addition to our buyback activity, we delivered investors an attractive stream of income through our fixed plus variable dividend framework. In the fourth quarter, we declared a dividend payout of $0.44 per share that is payable at the end of March. This dividend consists of the Board's approval to increase the fixed dividend by 10% to $0.22 per share and declare a variable distribution of $0.22 per share. We continue to believe dividends are a great way to reward shareholders and are a critical contributor to total returns over time. We also believe that the flexibility designed into our dividend framework allows us to return meaningful and appropriate amounts of cash to shareholders across a variety of market conditions through the cycle.

Moving to the balance sheet. Devon's investment-grade financial position continued to strengthen in the fourth quarter with cash balances increasing by $144 million to a total of $875 million. In addition to our strong liquidity, we exited the year with low leverage marked by a net debt-to-EBITDA ratio of only 0.7x.

Looking ahead with the excess free cash flow that accrues to our balance sheet, we plan to build liquidity and retire maturing debt. Our next debt maturity comes due in September of this year, totaling $472 million and we will have the opportunity to retire another $485 million of notes in 2025.

So in summary, our financial strategy is working well. We have successfully scaled our business to consistently generate free cash flow. We are boosting per share results by opportunistically repurchasing our shares. We offer a dividend yield that far exceeds that of the broader market and the balance sheet is in great shape with a clear pathway of continued improvement over the next few years.

With that, I'll turn the call back to Rick for some closing comments.

[Richard Muncrief, executive]

Thank you, Jeff. So to wrap up our prepared remarks, I want to reinforce a few key messages. Number one, Devon is a great company that has created a tremendous amount of value for shareholders since we unveiled our industry-first cash return strategy announced in 2020. Since that time, we've deployed $13 billion to dividends, buybacks, debt reduction and accretive acquisitions. I'm extremely proud of this accomplishment, but we're just getting started.

2024 is setting up to be another wonderful year for Devon. By incorporating learnings from the past year and refining our capital allocation, we expect to deliver a step change improvement in capital efficiency this year. This improved capital efficiency is anchored by our assets in the Delaware Basin where we expect to deliver the powerful combination of improved well productivity for much lower capital cost.

Our long-duration resource base underpinned by the Delaware is one of the deepest of any company out there. The resource quality provides us an advantaged platform to drive attractive per share growth and outsized cash returns for many years to come.

And with that, I'll turn the call back over to Scott, and let's have some Q&A.

[Scott Coody, executive]

Thanks, Rick. We'll now open the call to Q&A. Please limit yourself to 1 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]

[Operator Instructions] We do have our first question registered comes from Neil Mehta from Goldman Sachs.

[Neil Mehta, analyst]

Yes. Rick, I know over the last year, you've talked about some of your frustration around execution on the oil volume side, that is going to be an important year for that operational inflection. It does seem like we're seeing some evidence of that with capital efficiency and holding the 315 oil guide. So maybe you could just give us your perspective on whether we're at that inflection point from an ops perspective?

[Richard Muncrief, executive]

Neil, that's a good question. We have expressed our frustration, I think, in the market really -- we really traded down on some of our variances we saw last year in our production volumes. But even though they were minor that the -- from a volumetric standpoint, they weren't from a stock performance standpoint. So I think the setup is really good for investors as we look forward. So it is going to be, I believe, point of inflection for us as we've mentioned.

Really bullish about our performance. The team has done a wonderful job, getting us through some tough weather. We've seen some increased productivity. I think Clay went through the assets really well, and we're seeing nice growth on the oil side coming out of this first quarter as we enter second, third, fourth quarters of this year. And I'll also say, Neil, I feel really good about the next several years on our ability to keep crude volumes where they're at. I think that it's -- we're still early. We still are not getting what I think is a strong, strong signal for demand. But when that call comes, I think we'll be ready to step up for it. But we really feel good about the trends we're seeing.

[Neil Mehta, analyst]

Yes. And just maybe to build on this, this maybe a question for Clay but just can you talk about what you're seeing in terms of well productivity that gives you confidence in your ability to hit or exceed that 315 oil number this year?

[Clay Gaspar, executive]

Yes. Thanks for the question, Neil. This is one of the frustrating things about a publicly traded company. We get to see what's coming. We get to see what's happening well before the market does. And so where I can see the improvement internally in the well productivity from the first half of last year to the second half of last year, those numbers are just starting to hit the public markets and through the public sources. And so I think that's pretty evident for those that are paying attention that this is not first quarter '24, we decided to turn on the production. This is an evolution. We wanted to make some really thoughtful investments in the future of the company.

We did that. The market, I believe, responded pretty vigorously to that. We've since made some changes in the planning, the well delivery, the well performance is really significantly taken an uptick. As I mentioned, even late last year, you see some of that coming through the public sources. We're going to -- it's really going to manifest in 2024 and as Rick mentioned, we're just off to a really good start, even recovering from a pretty severe storm that we saw somewhere 1% to 2% impact. We always bake in winter weather, but an event like that was pretty out of the norm. The productivity of the wells, the performance we've been able to overcome that, and we feel really good about delivering -- being able to deliver the '24 full year numbers.

[Operator]

Our next question comes from Arun Jayaram from JPMorgan.

[Arun Jayaram, analyst]

Rick and Clay, you've highlighted your expectations to deliver up to 10% well productivity gains in the Delaware Basin. I was wondering if you could maybe help us provide more details on what is driving that? It sounds like there's going to be some high grading for Monument Draw to Southeast of Mexico. But I was wondering if you could talk a little bit about what's driving that and -- and if completion optimization is also a driver of better year-over-year productivity?

[Clay Gaspar, executive]

Thanks for the question, Arun. I think both things come into play. The big headline thing is just a refocus to more where we've historically allocated our capital kind of in the core of the basin predominantly where our inventory, our portfolio lays out between New Mexico and Texas. I would say '23, especially first half of '23, was a little bit of an anomaly on where we were allocating that capital, and we needed to do some work from the infrastructure standpoint, but also really understanding where all these fit together. We're benefiting tremendously from that work, from that infrastructure build-out, and that's where we're seeing the improvement really late '23 to what we're showing today.

On the completions question, I wouldn't point to it's a big knob that we've changed on like a sand concentration or how we're doing, what we're doing, but the team is working every single day to think about how do we do it better, how do we touch a little bit more rock and how do we do it more cost effectively. And I can tell you we're winning on all fronts. These are small wins at this point, some relatively mature way of thinking about these assets, but really, really pleased with the continued improvement there, and that shows up in the numbers as well.

[Arun Jayaram, analyst]

Quick follow-up, Rick, Devon, as you know, has been linked to a few M&A deals in the financial press. I was wondering if you could just comment on where you sit today in terms of your A&D strategy, and how you gain some of the inorganic opportunities versus, as Jeff mentioned, the ability to buy back your stock at a 9% kind of free cash flow yield today?

[Richard Muncrief, executive]

Yes. Very good question. Arun, our answer has really not changed that much over the last several years. We're going to continue to evaluate opportunities. When you're in 5 basins, you have some great opportunities in all 5 of those, and we watch that. We stay attuned to those opportunities as they become available or it's the right time for us to think about that. So I think we're going to continue to see the high bar. We're going to -- it's got to be -- it has to have some accretion, it has to have the industrial logic that we have always talked about. And it just has to make us a better company.

And if it fits in that framework, man, I think that's our job is to create value for shareholders. And so we're going to do that. We also have been advocates for consolidation. I think some of the transactions that's been announced that I think that's the -- I think they're positive for the industry. And it just shows that we are a depleting industry. And so you always have to replenish. That's your portfolio that's not changed. It's not changed since the beginning of this industry. And so we'll always be active. We've got a great team. We've got great analytics, capabilities in-house, and we do our own internal analytics compare that with what you see out in the public market and adjust.

But once again, we're going to be very, very measured, very disciplined. And we will make -- we will make some -- I think the right decisions, and that does include the buying our stock back because I can tell you that at these levels, we are very, very attractive. Great question.

[Operator]

Our next question comes from Nitin Kumar from Mizuho.

[Nitin Kumar, analyst]

Great. Rick, I've heard you saying just a multiple times today that buybacks are very attractive, especially at these levels. But as I look at fourth quarter, the mix actually favor dividends, including a variable payout a bit. Not to nitpick or anything like that, but just want to understand what drove the decision? We applaud the 10% increase on the base dividend but what drove the decision for the variable dividend? And how should we see that evolve in 2024?

[Jeffrey Ritenour, executive]

Nitin, this is Jeff. Keep in mind that there is some variance in the timing of the variable dividend payout, right? So when we announced it, it actually gets paid in the subsequent quarter. So maybe that's what you're alluding to as it relates to the mix. But with our framework going forward, we're going to simply, each quarter, focus on delivering about 70% of our free cash flow back to shareholders in the form of that fixed dividend, which, obviously, we grew at 10% here on a year-over-year basis. That's the first and foremost going to be a priority for us, and we're going to look to continue to grow that on an annual basis going forward.

Then beyond that, we're absolutely biased towards leaning in on the share repo here in the near term. And frankly, the variable dividend will fall out of the back of that based on that 70% threshold that I hit on earlier. So we're going to continue to expect to have a higher mix of buyback going forward. And that's going to be our priority as we walk it through this year.

[Nitin Kumar, analyst]

Okay. And then my next question is really for Clay probably. Clay, impressive improvements in operating efficiencies, days drilled, days completed. Just curious, is there any specific technologies that you would point to that have helped you achieve those? And I guess never say never, but where are we in terms of those efficiencies? Are we getting to some sort of baseline? Or do you think we can continue to deliver those types of improvements?

[Clay Gaspar, executive]

Nitin, it really goes down -- goes back to just the core operating team. These are highly talented, highly motivated individuals that are absolutely trying to do the right thing ultimately for the shareholders they work for.

Now I will remind you, this is the same team working just as hard with just as much creativity this year as they were last year. What we found is we really needed to focus. We underestimated what a slight change in capital efficiency during the first half of '23, meant to investors. I think that was way over extrapolated into us running out of inventory, not being able to do this anymore. We lost our mines, all that good fund.

And what we showed is like hang on a second. We still have the capabilities. We've got some really impressive inventory, some great quality. And importantly, these are hard-working impressive people that continue to find a way to do it better each quarter. And this is so many things below the radar that don't always show up in the [indiscernible] data, don't show up in the financials.

I can tell you, we're winning on lots and lots of fronts and there's more that to come. So really excited about the go forward. I think we've got some good transparency in our slides on quantity of resource, quality of resource. I expect in '24 that we will regain a little bit of public mojo, but that, to me, is just -- it's a little overdue. So looking forward to sharing that win with the team.

[Operator]

Our next question comes from Doug Leggate from Bank of America.

[Kaleinoheaokealaula Akamine, analyst]

This is actually Kalei on for Doug. For my first question, I want to go back to the buyback, just to follow up. I want to understand the motivations behind the strategy for '24. Shifting capital back to the Delaware and the margin is obviously an efficiency shift and that makes sense, but in tandem, you're also leading back into the buyback and that looks rather intentional. So can you talk about why you see the buyback as a preferred allocation today? And why has that changed over the past several months?

[Jeffrey Ritenour, executive]

Yes, you bet. So again, on the buyback front, what's pretty clear to us as we kind of walk through our framework for evaluating share repo, versus the other capital allocation opportunities that we have, whether it be organic investment, inorganic investment that Rick spoke to earlier, whether it's M&A or otherwise. And then when we step back and look at the valuation, we look at the multiples, we look at our intrinsic value model that we keep in-house and run multiple sensitivities on that.

Every which way we turn, what we keep coming back to is the our shares look undervalued relative to the broader market relative to the sector and certainly relative to the results that we expect to post as we walk our way through this year. So -- that really has been the driver and our focus going back half of last year and as we walk into 2024, and it's why we're biased towards having the lion's share of our cash returns be focused on the share repurchase going forward.

[Clay Gaspar, executive]

And if I could, I just want [indiscernible] I'm sorry, I just want to add one comment on that prior question. I think it's a common misconception the way we lay the numbers out that we are leaning in or that we're increasing capital to the Delaware somehow accelerating, that's not really the case. We are the same rig count, same level of activity. The capital is actually coming down, not just in the total company, but in Delaware, but where we're seeing the 10% inflection from the company is really a reduction in some of the other areas.

So proportionately, Delaware is moving up, but on an absolute basis, we're not consuming that inventory any faster than we had in '23 or years before.

[Kaleinoheaokealaula Akamine, analyst]

Got it. I appreciate that. That's where my follow-up will go. So I'm wondering if the reduction in the capital in these other areas, what kind of permanent does that have? Is it sort of a soft cap until you figure out what's going on in the Bakken? Or is this now the direction of the program?

[Clay Gaspar, executive]

Was the question permanents?

[Kaleinoheaokealaula Akamine, analyst]

Yes. The permanents of the capital allocation.

[Clay Gaspar, executive]

Permanents meaning how long...

[Kaleinoheaokealaula Akamine, analyst]

Yes. Yes.

[Clay Gaspar, executive]

Can we do it multiple years? I'm just making sure I understand the question.

[Kaleinoheaokealaula Akamine, analyst]

Yes. How many years can you run this kind of capital program?

[Clay Gaspar, executive]

Okay. All right. Thank you for that. Sorry, the acoustics in here weren't quite right. Sorry about that. Yes, I think in pulling back the activity, for example, in the Williston Basin, that prolongs that basin's opportunity to continue to deliver free cash flow and offset some of that fall in production with some really healthy wells. What we found is we were pushing a little too quickly, a little too much capital to that asset by having the multiple basins that we do, having our franchise asset in the Delaware Basin. It allows us to take a little bit of pressure off that team, allows them to really make sure that all the ducks are in a row ready for that next pad. And then selectively, we're going to fund those. And as you saw with the bull moves that I talked about on the call, these are phenomenal. These are awesome returns, and we've got more of that to come.

[Operator]

Our next question comes from Neal Dingmann from Truist.

[Neal Dingmann, analyst]

Clay, first question for you. It's on your Delaware infrastructure and takeaway. I'm just wondering, after adding so much [indiscernible] where you talked about adding so much processing, gathering, compression, water -- just wondering now, are you all able to handle the continued notable upside that's going to come with the development plan? Or will there be a continued buildout?

[Clay Gaspar, executive]

Neal, we feel really good about being able to effectively produce. Remember, we are really watching our flaring. We don't want to have unnecessary shut-ins. We are reliant on so many third parties. We wanted to make sure that we had that runway ahead of these very prolific pads coming online. We want to make sure we have that. We do feel very confident in that today. And remember, it's not just our immediate wells. We've got some really high-quality offset operators that know what they're doing as well. It's a phenomenal basin, and we have to make sure that all of that plays together very nicely. And so that we have the reliability in the infrastructure to bring these wells online and make sure we ultimately get them to market.

[Neal Dingmann, analyst]

Yes, it makes sense. And then my second is just on the Eagle Ford, specifically. Can you give details -- I think you talked about 85 to 95 well plan, I'm just wanted to focus here be on existing key areas like you're doing in the Del and just maybe talk about any improvements we should think about specifically in this area?

[Clay Gaspar, executive]

Thanks for that question. I'm really excited about the Eagle Ford. One of the things, unlike a lot of other areas, we've continued to test downspacing tighter wells, subsequent well after the initial development has been done, bringing additional wells in, which is really not very favorable in most basins, it tends to work and continue to provide upside in the Eagle Ford. Now when you pair that with some of the refrac activity, we can actually feather in new wells, refrac some of the existing wells, and we're seeing phenomenal results.

As I mentioned in my prepared remarks, we are continuing to expand the runway there without any M&A dollars without -- just from the existing footprint, the opportunity set continues to expand and these are very prolific, very accretive to the bottom line kind of numbers that we're really excited about.

[Operator]

Our next question comes from Kevin MacCurdy from Pickering Energy Partners.

[Kevin MacCurdy, analyst]

My first question is on the capital budget. We appreciate that the $3.3 billion to $3.6 billion range is a significant decrease year-over-year. But if we look back at last year's budget, we noticed that the range is wider both on absolute dollars on a percentage basis this year. I was wondering if you could provide any color on what might put you at the low end of that range versus the high end of the capital range. Is that driven more by deflation, turning lines or midstream spend?

[Clay Gaspar, executive]

Yes. It's interesting, Kevin. One of the first thing that comes to mind for me is the efficiency that I talked about in a couple of my slides, you guys know this very well. We've been at this game for quite a while. Sometimes that efficiency can pull more activity into the calendar year. Look, this is not our first rodeo. This is February. We're already watching that for the full year. We're committed to this range. But if I had to think of what could cause us to kind of float to the upside, it's probably that kind of work where you're seeing more opportunities bring some of that activity from '25 into '24.

I think on the downside, there's -- we're early in the year. I think the supply chain deflation opportunities are still -- we've got a 5% year-over-year kind of baked in. I feel good about that. I feel very confident we're going to be able to deliver that. As the year plays out, we really need to see where that changes over time. My current crystal ball doesn't see a lot of inflation, but there's certainly deflation opportunities in that number, and that potentially could allow us to floater -- float down to the lower end of that range.

[Kevin MacCurdy, analyst]

I appreciate the detail on that. And as a follow-up, the Eagle Ford had a strong production quarter, and it looks like the CapEx guidance for that asset is fairly consistent year-over-year. Can you talk about the production and capital efficiency outlook in the Eagle Ford? And if there's any major changes between 2023 and 2024?

[Richard Muncrief, executive]

Kevin, this is Rick. One of the things that I've been really proud of over the last 12 to 18 months is coming on the heels of the Validus acquisition, what we have been able to learn at a solid acreage. It's -- I would say it is second, certainly to our Black Hawk acreage. But the thing about it that we need to remind investors of and analyst of is that on the Black Hawk acreage, it's a 50-50 joint venture with BPX.

BPX operates the drilling and the completion of that. And what we felt it was really from a -- not only a productivity increase, but also just a strategic perspective, we thought it was imperative that we had an asset that we owned that we did the drilling that we did the completions on. The 5-day well that Clay referenced a while ago, I can tell you that absolutely exceeded anything that we had in our Validus development plan.

So when I look at that, I look -- now we're having some very, very meaningful discussions with our joint venture partner there. And they're very constructive, and I think it's going to lead to even better performance over time in the Eagle Ford. I'm really pleased with what we're seeing with the refrac program. It's going to continue to drive some -- I think, some long-term sustainability down there that a lot of people, I think, are underestimating.

So I'll turn it over to Clay to add any additional color, but the Eagle Ford is an area I can tell you that we're very excited about.

[Clay Gaspar, executive]

Yes. Thanks for those comments, Rick. I think that's spot on. Kevin, the only thing I wanted to add is I do show a relatively meaningful drop, probably about a 10% or so drop in capital about $75 million, a rough number I had from '23 to '24 and -- so -- and again, that's with single-digit production growth on top of that. Now there is some well mix in there. We have a joint venture partner on part of the assets. We own the rest. We operate kind of a normal fashion. So there is some change in mix. But from a capital efficiency standpoint, things are moving in the right direction, and we continue to see upside potential on this particular asset.

[Operator]

Our next question comes from Scott Gruber from Citigroup.

[Scott Gruber, analyst]

Yes. The 10% improvement in productivity that you forecast in the Permian is normalized on a 10,000-foot lateral. Is there going to be a step-up in lateral length in the play as you refocus on the quarter? Or is that going to be rather consistent?

[Clay Gaspar, executive]

Scott, it's pretty consistent year-over-year. We're always trying to drill longer laterals. It's kind of the opportunity set in front of us. We're always -- we feel very confident in our ability to deliver 3-mile laterals from a productivity from an operational standpoint. The land mix doesn't always allow for that. So we're going to be north of 2 miles, but not too much north, and it will be fairly consistent year-over-year.

[Scott Gruber, analyst]

Got it. And then just a nuance one on the 1Q guide. -- last quarter, you provided that 305 of oil per day. Today, you're guiding for 640 with a 2% weather impact. But 640 at 48% oil cut, you kind of still around maybe even slightly better than that 305 figure than last quarter. So the question is, is the underlying trend in oil production slightly better, and it's just being offset by bigger weather impact? Or is the weather risk that was incorporated in that original 305 guide kind of similar to what actually transpired?

[Clay Gaspar, executive]

Scott, I think it's really the well mix. We've got some wells coming on the -- Williston wells are exceptionally high oil cut. We continue to bring those in. I think that's just working in our favor in that regard.

[Operator]

Our next question comes from Scott Hanold from RBC.

[Scott Hanold, analyst]

Yes. If I can delve into the infrastructure a little bit more. On Page 13, you obviously bucket 3 areas that you're focused on in terms of building support for the 2024 plan. As you think about the Permian development over the next 2, 3, 4 years, like which area really are you focused most primarily on to make sure you're executing on the plan? Like where do you see the risk of the biggest constraint, I guess, is the question?

[Clay Gaspar, executive]

Scott is all of the above an option. No, I mean, seriously, any one of these things gets constrained and you're dead in the water, at least constrained. And so we work really hard to not just build what is the best rate of return opportunity set in our portfolio, but we're very thoughtful about modeling our own infrastructure, even modeling third-party infrastructure if we don't feel that they do an adequate job. And then there's the occasional curve ball where one of the third parties maybe even in the electrification front, can't come through with their normal pace. We need to have enough flexibility, enough forethought, enough creativity to be able to solve some of those problems essentially for them.

So one of the things I mentioned is building out more of our own electrical infrastructure, we have about 700 miles of electrical -- electric lines in our basin already. We generate some of our own power. We have our own micro grids. And this is really taking the bull by the horns out of necessity because otherwise, the local power providers were not going to be able to keep up. So those are the kind of proactive steps that we really leaned in probably with double effort in '23 because some of these historical norms have really changed, and we want to make sure that we didn't just bring on a bunch of wells and then be abnormally constrained and have to answer questions about why our wells are so terrible.

So anyway, I feel really good about the work that we did in '23 that we continue to do in '24, but look, we're not out of the woods. We continue to look at infrastructure needs in '26, '27 and '28. We're working with partners as best we can, and I really think we have a great runway ahead of us. But the team is always on caution to make sure that we are prepared for those unforeseen challenges.

[Scott Hanold, analyst]

Okay. And as my follow-up, it's going to be on M&A. And I was hoping to get a deeper sense of how you think about M&A. And it's really 2 parts. One, first, if you can comment on some of the recent deals that have been out there, if you all participated and really what was the gives and takes of why -- if you did, why Devon didn't went out? And then number two, you all mentioned obviously, you're a multi-basin player, but like when you think about like does Devon have the scale right now that it would like? And if you were to add would it be really most a Permian thing? Or are other of those basins open to more significant M&A for Devon?

[Richard Muncrief, executive]

Yes, it's Rick. I'll field that one. Number one, I really like the scale that we currently have. We have a deep resource base across our 5 basins that we're in. So I feel really good about that. Now we're always -- as I mentioned earlier, we're always going to be looking to be opportunistic to add resource, to add investment opportunities at a reasonable value, at an attractive value for our shareholders. I think that's just really incumbent upon this management team to always be on the hunt there.

That being said, we are going to be very disciplined. Some of the recent transactions, I think that were out there that were announced. When I look at the metrics on those, those were rich. It really were. And others, there have been a couple of them that were hats off. Very nice deals that we certainly weren't participating in those processes, but good for them. And that's great. Congratulations.

But for us, I want to just continue to drive on the point. We're going to continue to be disciplined, and we have to balance short-term accretion with long term, how that fits in for the long haul for Devon. We're a 50-year-old company. We're not a 5-year-old company. And we have to be really, really thoughtful about that. And so we'll continue to look for opportunities, but we're going to maintain that discipline. And at the end of the day, we have a deep, deep resource base. And I think that's something that is incumbent upon this management team that we have to continue to drive home and we have to demonstrate not only how we execute, hitting numbers, exceeding whatever that is, but we just have to do a wonderful job in working with the outside community, outside investors on the resource that we have in-house currently.

[Scott Hanold, analyst]

And regionally, is there an area you focus a little bit more time on? Is it Permian, Bakken, Eagle Ford, like are all areas of focus?

[Richard Muncrief, executive]

I think for us, we're going to stick to our strategy. It's real simply put. We want to stay as oily as we can for as long as we can. And I think we're seeing that play out in real time with -- I'm not sure we got where gas prices are as we sit here this morning again, but it's up $2. That's not a good spot to be in. And so for us, we want to stay as oily and as liquid rich as we possibly can because throughout the entirety of my career, that's been the place to go. Now we're all -- I think we all are optimistic about what the future of natural gas could be. And we spent quite a bit of time in DC talking about the importance of tone, the importance of consistency with some of our public policy, those sorts of things, and then our foreign trade policies.

And so we -- so for us, I think, near term, to answer your question, we're going to be very interested in oil-prone basins. Oil is going to drive the margins for the foreseeable future, and that's kind of where we want to be.

[Operator]

Our next question comes from Charles Meade from Johnson Rice.

[Charles Meade, analyst]

Rick, I want to ask a question about your Delaware Basin completion crews. And more specifically, if you could give us a sense of the composition of the 4 fleets you're running right now, whether those are all zipper fracs or whether there's any [indiscernible] crews in there? And -- and we're in the bigger sense, where I'm going with this, has there been any thought or is there any possibility of adjusting that mix to -- so that you're more on a steady state program there?

[Richard Muncrief, executive]

I'm going to let Clay answer the balance of that. But just in real time, just yesterday, I was talking to our -- one of our completion managers down there and we're picking up the fourth crew, as we mentioned, but the 3 that have been out there, the -- it's incredible, Charles, on the efficiencies and what we're doing out there. The number of stages -- and it's interesting, there's -- we're -- it's healthy competition between the team members and certain of the companies that are involved with it and we're actively comparing and contrasting ways that we can get better and better.

And at the end of the day, we want to make sure that we do this very, very safely and efficiently. And so we're constantly changing. Every pad has its unique characteristics. But I can tell you that more and more, we just see these efficiencies that are just incredible.

And things that just 12 months ago, we knew that you'd see some efficiencies, but we're exceeding some expectations. Clay, why don't you maybe [indiscernible].

[Clay Gaspar, executive]

Sure. I'll follow up, Charles. We have more simul frac coming -- we're completing today, and more to come throughout the year and go forward. One of the challenges of simul frac, you really need to plan that 12 or 18 months ahead when you're planning the well site location, how many wells on 1 particular location, because that enables more ability to do some of that. So about 12 months ago, we started really kind of leaning in, building a little bit larger number of wells per pad instead of separate pads. That allows more simul frac opportunity, which we're seeing great results, and we're continuing to benefit from.

We're also testing some very interesting things where we artificially tie pads together with some big lines between the 2. So there's some really creative stuff. But again, it's a little below the radar typically of what we talk about on earnings calls. But I can tell you that the teams are doing just amazing work and really adding material value through these efficiencies to the bottom line of Devon. So really appreciate the great work there.

[Charles Meade, analyst]

Got it. And then, Clay, I want to go back to your prepared comments, you were talking about -- I think I heard you talk about some additional landing zones in the Wolfcamp B, I'm not sure I kind of -- I caught it all when you were talking about it. So I was wondering if you could elaborate a bit on that and perhaps including your answer, an indication, is this something that you're going to be -- that you're working into the '24 program? Or is this an out-year sort of project?

[Clay Gaspar, executive]

Yes. I think sometime last year, we're deep in the penalty box. We talked about the highlights of some of the great work that the team did around understanding the Wolfcamp B. Now that work is manifesting and more of that be coming to kind of that front end of the priority list, really competitive, super accretive, and we're incorporating that landing zone into some of the development that we have during the course of '24 and beyond. And so here's how I would characterize it. This is landing zones that we knew were viable. We needed to test, we needed to understand, we needed to try some different configurations to really find the best approach. During the course of '23 -- '22 and '23, we did that. We optimized a development approach. And now in '24, we're benefiting from some of that.

So again, it probably was lost in some of the shuffle last year, but this is work that we did during the course of '23 that we're significantly benefiting from. This expands what I would consider some of our really Tier 1 runway. It's stuff that was a little further out in the priority on a risk basis as we derisked it what it really has moved to the front of the pack, and we're really excited about the continued good work there.

[Operator]

[Operator Instructions] And our next question comes from David Deckelbaum from Cowen.

[David Deckelbaum, analyst]

Rick or Clay, I wanted to ask just, you talked about, Rick, obviously or Clay, the total dollar amount for the Delaware actually coming down this year, it looks like you're still obviously growing that asset. You guided obviously to a slight decline, I guess, at a corporate level. I'm wondering, when you think about capital allocation, should we be consistently thinking about the Delaware as a growth asset over the next several years, given the visibility that you have now where you can be allocating capital to within that basin?

[Clay Gaspar, executive]

I think it's -- I would put it in the same category as Devon. We are a low growth kind of 0% to 5%. Delaware will play a certain role. Some quarters, some years, it's going to be a little bit of a tick up. Others, it's going to be relatively flat. But I wouldn't think of it as a standout growth asset. We're really pleased with the year-over-year performance. As I mentioned, it did grow. We also were able to build a few extra DUCs during the course of the second half of last year that we were able to capture the benefit of in the first half of this year. So there's kind of that going on in the background. But I wouldn't say it's materially out of step with overall Devon or with the other basins.

[Richard Muncrief, executive]

David, it's Rick. I will add that when we talk about it being flat to up slightly in the Delaware, that's on the oil side. And as you think about an improving -- structurally improving gas and NGL structure, you will see growth there. So I think you can look at it from an equivalent standpoint, it is a growth basin and it's going to continue to be. That's what drove a lot of our 8% growth as a company last year. And so I think you're going to see that continue to play out.

That's not only true of us. That's true of the entire Permian Basin, whether it's on the Midland side or the Delaware side, you're going to continue to see gas production, NGL production continue to grow even in a flat oil scenario.

[David Deckelbaum, analyst]

And maybe just, Rick, one of the, I guess, other parts of the capital budget that continues to grow every year, albeit still small as carbon capital. In a world where you're trying to enhance returns of capital to shareholders, could you kind of contextualize how you see that spend generating returns for Devon as a whole and why that's sort of seeing a larger piece of the pie this year, albeit small?

[Richard Muncrief, executive]

Yes. I think it's a really good question, and it's a really important topic for us, only is Devon, but as an industry, and it's something we're going to stay ahead of. We have changing regulations. Devon wants to make sure that we stay ahead of the curve. And these regulations are coming at us quickly. What a lot of people don't understand is some of these regulations coming are so onerous that many of the low-volume wells that we have across this nation are going to end up being plugged. And so you're going to see oil and natural gas wells that basically are stripper wells, as we always refer them to that are such low volume. They just, quite honestly, cannot -- it cannot afford to spend capital on. And it's just -- it's going to be a fact of life.

And so there are studies by API and some of the other trade groups talk about that impact, but it is real. So what Devon wants to do, we want to make sure that we're ahead of the curve, as I said, and it's something that we'll -- I think you'll see over time is going to continue to creep up for the next 2 or 3 years. We want to be very thoughtful about that and prudent with it and strategic about it. But it is something to -- that we all just have to deal with. It's a fact of life.

[David Deckelbaum, analyst]

And just for my own edification, is that capital being earmarked for projects that would allow you to prolong production on some of these wells such as increasing methane capture? Or is this capital associated were tied to plugging and abandoning some of those wells that would be more regulatory headaches?

[Clay Gaspar, executive]

David, what I would characterize most of it is, is retrofitting existing facilities with better designs to lower emissions. And by the way, keep us well ahead of this coming regulation wave. So you could look at this out of necessity. I think we're half a click ahead. We try and stay well ahead of just necessity. But these are regulations that we will always make sure that we are staying in front of to continue to reserve our important rights as an organization to provide energy to fuel the world. So thanks again for the question, David.

[Scott Coody, executive]

Well, looks like we've run a little bit past time here. So I appreciate everyone's interest in Devon's Day. And if you have any further questions, please don't hesitate to reach out to the Investor Relations team at any time. Have a good day, everyone.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.