Devon Energy Corp. is planning to focus a majority of its capital on the Permian Basin’s Delaware sub-basin this year, management said Wednesday.
Oklahoma City-based Devon, a leading Lower 48 independent, operates primarily in the Permian Delaware, Anadarko, Williston and Powder River basins, along with the Eagle Ford Shale.
Devon has set a 2023 capital expenditures (capex) budget of $3.6-3.8 billion. The midpoint of the budget would be a 46% increase from 2022’s capex spending of $2.54 billion. The company expects to self-fund the entire budget even if West Texas Intermediate oil prices drop as low as $40/bbl, CEO Rick Muncrief said during the fourth quarter earnings call.
The Delaware “will be the top funded asset in our portfolio, representing roughly 60% of our total capital budget for this year,” said COO Clay Gaspar, who joined Muncrief on the call. Gaspar said Devon’s Delaware wells have shown “world-class productivity.”
In addition, “The marketing team has done an excellent job of diversifying across multiple transportation outlets and sales points, allowing us to avoid many of the takeaway constraints in the basin,” said Gaspar.
“Looking specifically at the gas volumes, approximately 95% of our gas in the Delaware is protected by either firm contracts…or by regional basis swaps.”
Across its sprawling Lower 48 portfolio, Devon plans to consistently run 25 rigs throughout the year, resulting in about 400 wells placed online, Muncrief said. More than 200 new wells are planned for the Delaware.
Roughly two-thirds of the Delaware drilling activity “will be directed toward development opportunities in New Mexico, with the remaining investment allocated to high-return projects across the company’s acreage in Texas,” management said.
Through March, though, “production in the Delaware will be impacted by infrastructure downtime resulting from an outage at a compressor station in the Stateline area along with minor third-party midstream downtime across the basin.”
The temporary outages are expected to curtail volumes by about 10,000 boe/d. Devon expects to “resume normal operations by the end of the first quarter.”
Diversified Approach
In the Eagle Ford, Devon is planning to run three rigs during 2023 and bring online nearly 90 wells across its 82,000 net acre position.
In the Anadarko, plans are to operate a four-rig program and bring online more than 40 wells across its 300,000 net acre position. Powder River Basin (PRB) activity this year includes drilling about 20 wells across the 300,000 net acre position.
Meanwhile, Williston production late last year was impacted by severe winter weather that caused temporary well shut-ins, facility downtime and delays in completion activity. Devon has since restored the affected production. Plans now are in place to bring online around 40 gross wells in 2023 across its 123,000 net acres.
“As I look to 2023, there will be no change to our disciplined approach to the business,” Muncrief said. “We have designed a capital program to efficiently sustain production, deliver high returns on capital employed and generate significant free cash flow that can once again be harvested for shareholders.”
CFO Jeff Ritenour said recent natural gas market volatility has not affected Devon’s plans, explaining that “most…of our activity is oil focused and driven by the prices that we see there and the cost structure.”
Muncrief echoed this sentiment, saying, “we’re going to continue to stay as oily as we can for as long as we can, I can assure you. We just think that’s a winning combination…”
Production this year is expected to average 643,000-663,000 boe/d, versus the 636,000 boe/d average in 4Q2022. Oil is expected to account for about one-half of total production, Muncrief said.
‘Full Benefit’ of High Prices
Output in 4Q2022 comprised 1.03 Bcf/d natural gas, a quarterly record 316,000 b/d oil and 148,000 b/d natural gas liquids. These figures compare with 943 MMcf/d, 300,000 b/d and 154,000 b/d, respectively, in 4Q2021.
The Delaware and Anadarko basins accounted for the bulk of quarterly natural gas output at 626 MMcf/d and 238 MMcf/d, respectively.
Muncrief noted that severe winter weather across Devon’s portfolio caused a 2% dent in total production for the final three months of last year.
The company’s “streamlined cost structure captured the full benefit of rising commodity prices, and our disciplined reinvestment rates allowed us to generate a record-setting amount of free cash flow during the year,” he said. “This free cash flow generation allowed us to reward shareholders by more than doubling our dividend payout and we expanded our share-repurchase program twice during the year to further compound per-share growth.
“We also deployed a portion of our excess cash toward strengthening our asset portfolio by closing on two highly accretive bolt-on acquisitions.”
Devon acquired Eagle Ford pure-play Validus Energy for $1.8 billion and snapped up RimRock Oil and Gas LP’s Williston leasehold stakes and related assets for $865 million.
Average realized natural gas pricing without hedges was $4.39/Mcf during the fourth quarter, with an average realized price including cash settlements of $4.01. These prices compare to $4.68 and $3.26, respectively, in 4Q2021.
Broken down by basin, the Powder River recorded the highest average realized gas price at $5.57/Mcf. It was followed by the Anadarko ($5.37), Eagle Ford ($5.02) and Delaware ($4.30). A notable exception to the strong gas pricing was the Williston, where prices averaged only 44 cents/Mcf. Williston producers face a lack of pipeline connectivity to more lucrative gas markets, namely the Gulf Coast LNG export corridor.
Devon reported net income of $1.2 billion ($1.84/share) for the fourth quarter, versus $1.51 billion ($2.24) in 4Q2021. Full-year net earnings were $6.04 billion, up from $2.83 billion in 2021.
Total revenue was $4.3 billion in the fourth quarter, compared with $4.27 billion in the same period of 2021. Full-year revenues were $19.2 billion in 2022, up from $12.2 billion in 2021.
