Devon Energy Corporation (DVN) Q2 2022 Earnings Call Transcript

Devon Energy Corporation (NYSE: DVN) Q2 2022 earnings call dated Aug. 02, 2022

Corporate Participants:

Scott Coody — Vice President, Investor Relations

Richard E. Muncrief — President and Chief Executive Officer

Clay Gaspar — Executive Vice President and Chief Operating Officer

Jeff Ritenour — Executive Vice President and Chief Financial Officer

Analysts:

Jeanine Wai — Barclays — Analyst

Arun Jayaram — JPMorgan — Analyst

Doug Leggate — Bank of America Merrill Lynch — Analyst

Scott Hanold — RBC Capital Markets — Analyst

Neal Dingmann — Truist Securities — Analyst

John Freeman — Raymond James — Analyst

Neil Mehta — Goldman Sachs — Analyst

Matthew Portillo — Tudor, Pickering, Holt & Co. — Analyst

Kevin MacCurdy — Pickering Energy Partners — Analyst

Presentation:

Operator

Welcome to Devon Energy’s Second Quarter Earnings Conference Call. [Operator Instructions].

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

Scott Coody — Vice President, Investor Relations

Good morning, and thank you to everyone for joining us on the call today. Last night, we issued an earnings release and presentation that cover our results for the quarter and updated outlook. 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 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 E. Muncrief — President and Chief Executive Officer

Thank you, Scott. It’s great to be here this morning, and we appreciate everyone taking the time to join us on the call today. By all measures, the second quarter was another excellent performance for Devon as our business continued to strengthen and build momentum. Our quarterly results were highlighted by our Delaware-focused operating plan that delivered production above our guidance expectations. Capital was below budget, margins expanded and we paid record high cash payouts to shareholders. We also took important steps to strengthen the quality and depth of our asset portfolio.

All in all, it was another quarter of systemic and systematic execution across the tenets of our cash return business model that shareholders have become accustomed to.

To begin with, I’d like to turn your attention to Slide 3 and 4, which describes who we are. We are a financially disciplined company delivering high returns on invested capital, attractive per share growth and large cash returns to shareholders. While our disciplined capital allocation framework on Slide 3 is foundational to Devon’s financial success, also want to highlight that another critical competitive advantage contributing to our strong results is the depth and quality of our asset portfolio.

As you can see on Slide 4, with Devon’s portfolio anchored by our world-class Delaware Basin asset, we possess a long duration resource base that is high graded to the very best plays on the U.S. cost curve.

Furthermore, with this low-cost asset portfolio, we also have diversified exposure across both oil and liquids-rich gas opportunities, affording us the flexibility to pursue the highest returns and netbacks through the commodity cycle. While this premier multi-basin portfolio positions us to deliver strong capital efficiency and repeatable results for the foreseeable future, we are not complacent and are always looking for smart ways to strengthen our asset base. And this is exactly what we accomplished with our recent acquisition of RimRock’s assets in the Williston Basin along with a series of high-impact acreage trades in the Delaware that optimize our leasehold for future development.

Clay will cover these transactions in greater detail later in the call. However, I do want to emphasize that these portfolio additions are highly complementary to our existing acreage footprint. They tactically unlock quality inventory in the core of the play and the immediate financial accretions from these transactions allow us to further step up the return of cash to shareholders.

Now moving to Slide 5. The key message here is very simple. The combination of our strategy, our asset base and execution has resulted in an impressive track record of value creation for our shareholders. Since we unveiled the industry’s very first cash return framework, upon the WPX merger in late 2020, we have consistently delivered on our strategy to return increasing amounts of cash to shareholders while steadily improving our investment-grade financial strength.

As you can see on the chart, since the closing of the merger, we have cumulatively returned $6.2 billion of value to shareholders in only 18 months. For perspective, this value exceeds more than 100% of the combined market capitalization of the 2 companies at the time of the merger announcement, unbelievable.

Jumping ahead to Slide 7. With a strong operational performance achieved year-to-date, we are raising guidance expectations for the full year of 2022. As you can see on the top left, a key contributor to this improved outlook is our 2022 production targets increased by 3% to a range of 600,000 to 610,000 BOE per day. These higher volume expectations are due to better-than-expected well performance year-to-date and the positive impact from our recent bolt-on acquisition in the Williston Basin. After accounting for the benefits of our share repurchase program, this outlook puts us on track to deliver a very healthy production per share growth rate of 8% this year.

We are also adjusting our upstream capital to a range of $2.2 billion to $2.4 billion versus our prior guidance of approximately $2.1 billion. This updated guidance incorporates $100 million of incremental capital from the Williston acquisition and includes additional inflationary cost pressures associated with this higher commodity price environment. Overall, at current pricing, this updated outlook is resulting in a 25% plus improvement in free cash flow generation compared to the assumptions that underpinned our original budget expectations.

The key takeaway here is that our low-cost asset base is capturing the benefits of higher commodity prices and winning the battle against inflationary pressures.

Now on Slide 8. I want to briefly showcase how our improved 2022 outlook translates into a compelling free cash flow yield. To demonstrate this point, we’ve included a simple comparison of our estimated free cash flow yield in 2022 compared to other common equity benchmarks in the financial markets. As you can see from the 2 charts at today’s pricing, Devon’s attractive free cash flow yield of 16% is up to 4x higher in the broader market. I expect this valuation gap, which is at historically wide levels to correct as investors rediscover highly profitable and value-oriented names like Devon.

Now going to Slide 9. With this powerful stream of free cash flow, our priorities remain unchanged, which means the first call on our free cash flow is the funding of our fixed plus variable dividend. With this predictive and formulaic framework, we are on track to pay out around $5 per share this year, which is at a yield of more than 8%, places Devon as one of the highest-yielding stocks in the entire U.S. market.

However, I want to be quick to add that we are not just a high-yielding dividend story. We’re also bolstering our per share growth by opportunistically repurchasing our stock. With the share repurchase program, we are on track to retire up to 6% of our outstanding shares at what we believe to be trading at a substantial discount to our intrinsic value. As you can see on the right, even with a large cash payout, we still have excess cash flow left over to further strengthen our investment-grade balance sheet. This balanced and transparent capital allocation framework provides us multiple avenues to create value for our shareholders through the cycle.

And finally, on Slide 14, I want to end my remarks with a few thoughts on what you can expect from Devon as we plan for the upcoming year. While it is still a bit too premature to provide formal production and capital targets for 2023, I can tell you that there will be no shift to our strategy. We will continue to prioritize free cash flow and per share financial growth, not the pursuit of top line volume growth. We are designing to plan that pursue steady and consistent activity levels to optimize supply chain cost and certainty of execution in this exceptionally tight market.

And finally, with our low breakeven funding levels, we remain well positioned to navigate the recent market volatility and build upon our track record of delivering outsized cash returns.

And with that, I will turn the call over to Clay to cover our operational highlights for this most recent quarter.

Clay Gaspar — Executive Vice President and Chief Operating Officer

Thanks, Rick, and good morning, everyone. As I reflect back, not just on the quarter, but the last 18 months since we’ve closed our merger, I’m very proud of what we’ve accomplished. Last year at this time, we were well past the hard work of organizational design answering the who, but still very deep into the systems process and culture building that’s incredibly important to answering the how of running the company. In some ways, we’re rebuilding the engine while we ran the race. This year, we’re continuing with the never-ending challenge of improving systems, processes and culture, but we’re also keenly focused on external factors like inflation and supply chain uncertainty. While these challenges are real and something we dedicate a lot of attention to, I’m also fully confident in our team’s ability to once again differentiate Devon from the pack and execute on an exceptionally high level.

The second quarter results are a perfect example of this product related to this focus. As a summary of the operating results displayed on Slide 16, which showcases our solid production beat better-than-forecasted capital efficiency and the expansion of our per unit margins to the highest level in more than a decade. I know it can be a bit mind numbing when the team makes these results look as easy as they have. But listen, every well in the portfolio, average 30-day IP for the entire company of 2,900 BOE per day per well, $60-plus field level margins and a reinvestment rate of 22% are incredibly impressive when you put them into historical context.

The perpetually strong results that we’ve delivered since the merger between WPX and Devon is simply an outflow of 3 key factors: the high-caliber assets, our talented organization, and a disciplined investment framework that is designed to optimize returns and per share financial growth throughout the cycle. These key factors are held together by a steady strategic vision and a culture that exemplifies our corporate values.

I want to congratulate the entire team for the special results that we’re creating together. And I’m confident we will build upon these accomplishments as we progress through the balance of the year and beyond.

Now turning to Slide 17. Our Delaware Basin asset was exceptional — was the exceptional capital-efficient growth engine that drove Devon’s operational outperformance in the second quarter. The net production from the Delaware continued to increase rapidly, growing 22% on a year-over-year basis. This high margin growth was driven by 52 wells brought online that were diversified across our acreage footprint in New Mexico and the Texas Stateline area.

Looking at the project level detail, the top thematic takeaways was the consistent execution and outstanding well production while we achieve across the development programs. This — a great example of this theme was the prolific results we achieved in our Todd area in Eddy County, where we developed a highly charged thick team of Upper Wolfcamp. The initial 30-day rates from this 12-well Wolfcamp oriented development average 4,500 BOEs per well, with a per well recoveries on track to exceed 1.5 million barrels of oil equivalent.

With the strong upfront recoveries we’re experiencing, coupled with the favorable commodity price environment, this package of wells is on track to pay out in less than 6 months.

Next, I want to cover the multi-zone development success that we had in the Potato Basin where our recent activity successfully codeveloped 3 different landing zones: The Third Bone Spring, the XY sands and the Upper Wolfcamp. The initial 30-day rates from Mr. Potato Head project averaged 3,100 BOE per day and given how the shallower drilling depths in this portion of the play, our D&C costs came in as low as $6.7 million per well. As we look to allocate capital for ’23 and beyond, this positive result will serve as another valuable data point to optimize future development activity and further deepen our conviction of the resource opportunity in the Potato Basin area.

And lastly, on this slide, we also brought on several high-return pads online in the Stateline area. Adding to our long-term track record of success in this prolific tranche of acreage, our recent capital activity was highlighted by the CBR 8 and 9 pads that outperformed our predrill expectations by as much as 20% with the top well achieving 30-day rates as high as 4,300 BOE per day. In addition to these great wells, another impactful event for us this quarter was a recent trade completed that added to our acreage position in the Stateline area.

Turning to Slide 18. You can see a zoomed-in map of this critical 3,000-acre trade that we completed in the Delaware Basin State Line field. You’ve heard me on prior quarters, brag about the incredible results the team creates with these land trades. We typically execute dozens of trades every year in the company so far, we have executed on several trades bringing in around 7,000 net acres to the Delaware.

The trade we’re highlighting today significantly enhances our Wolfcamp potential in the Stateline area and unlocks more than 200 extended reach drilling locations that were previously constrained to 1 mile developments. This is the economic core of the play and is further enhanced with Devon’s significant surface ownership, company-owned wet sand line water recycling and disposal infrastructure and the midstream JV with Howard Energy.

Each of these levers create incremental margin to Devon that other operators would not benefit from. Also importantly, this transaction allowed us to trade out of acreage that was either not scalable to Devon or had lower priority within our capital allocation framework. With this high grading of acreage and the capital efficiencies that come with us, we expect that a net present value uplift to Devon of more than $200 million on a time 0 evaluation. And importantly, when we consider how these projects are getting pushed to the front of the development list, the uplift is over $350 million of present value.

Moving to Slide 19. Another area we enhanced the depth and quality of our drilling inventory was in the Williston Basin. In June, we announced the bolt-on acquisition of RimRock’s assets in Dunn County at a highly accretive valuation of around 2x cash flow. This acquisition adds contiguous position of 38,000 net acres, directly offsetting the overlapping Devon’s existing leasehold. This consolidates Tier 1 acreage on the Fort Berthold Indian reservation, where we have an exceptional competency for not only the technical perspective, but also the strong relationships with the tribe and with the community.

With completion activity lined up for the second half of the year, we expect production from the acquired assets to exit the year around 20,000 BOE per day, increasing our pro forma production in the Williston to around 65,000 BOE per day.

This acquisition also adds more than 100 highly economic undrilled locations, positioning our Williston assets to maintain this level of high-margin production and strong free cash flow for years to come. Our Williston team continues to perform at an exceptionally high level, and I’m thrilled to reload their opportunity set for continued great results.

And finally, on Slide 20, I’d like to call out the importance of our free cash flow generating assets that are also continuing success and sustainability of our business model. These assets may not capture as many headlines as the Delaware Basin, but I’m proud of the strong execution and consistent operating results that these teams have delivered to fulfill this critical role within our corporate strategy.

As you can see by the slide, by driving capital efficiencies, optimizing base production and keeping operating costs low. These high-quality assets are on pace to grow cash flow by about 40% this year to greater than $3 billion at today’s commodity price. With our completion activity ramping up across each 1 of these plays in the second half of the year. I look forward to providing another very solid update on our November call.

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

Jeff Ritenour — Executive Vice President and Chief Financial Officer

Thanks, Clay. I’ll spend my time today covering the key drivers of our strong financial results for the quarter, and I’ll also provide some insights into our outlook for the rest of the year.

Beginning with production, our total volumes in the second quarter averaged 616,000 BOE per day, exceeding the midpoint of our guidance by 4%. This production beat was across all products due to another strong quarter of well productivity in the Delaware Basin.

As Rick touched on earlier, with our performance to date, we now expect our volumes for the full year 2022 to be around 300 basis points ahead of our original budgeted expectations. For the second half of the year, we expect the strongest oil growth to occur in the fourth quarter driven by the timing of completion activity.

Moving to expenses. Our lease operating and GP&T costs were $7.71 per BOE. This result was slightly elevated compared to our forecast due to higher workover activity and moderate pricing pressures across several service and supply cost categories. Overall, our exposure to higher value production, coupled with a well cost structure, expanded Devon’s field level cash margin to $60.12 per BOE, a 22% increase from last quarter.

Cutting to the bottom line, our core earnings increased for the 8th quarter in a row to $2.59 per share. This level of earnings momentum translated into operating cash flow of $2.7 billion in the second quarter. After funding our capital program, we generated $2.1 billion of free cash flow in the quarter. This result represents the highest free cash flow generation Devon has ever delivered in a quarter and is a powerful example of the financial results, our cash returns business model can deliver.

The top priority for our free cash flow is the funding of our dividend and in conjunction with our earnings report, we announced a record high fixed plus variable dividend of $1.55 per share that is payable at the end of September. This payout represents a 22% increase from last quarter and includes the benefit of a 13% raise to the fixed dividend that was announced with our recent Williston Basin acquisition. In addition to the strong dividend payout, Devon also repurchased $324 million of stock in the second quarter. Since we initiated the program last November, we’ve retired nearly 24 million shares, lowering our outstanding share count by 4%.

We continue to believe the double-digit free cash flow yield of our equity offers a unique buying opportunity for us. We also took steps to further strengthen our financial position in the quarter with cash balances increasing $832 million to a total of $3.5 billion. With this increased liquidity, Devon exited the quarter with a low net debt-to-EBITDA ratio of 0.4x.

And lastly, I want to briefly highlight that our disciplined strategy and execution are resulting in excellent returns on capital employed. Based on our performance year-to-date and our outlook for the remainder of the year, I expect our return on capital employed to exceed 40% in 2022.

This outstanding return profile, combined with our cash return framework, further reinforces the unique investment opportunity Devon offers versus other opportunities in the market today.

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

Richard E. Muncrief — President and Chief Executive Officer

Thank you, Jeff. Great job. I’d like to close today by reiterating 4 key messages from our call: Number one, Devon is a premier energy company, and the team is proving this quarter after quarter with our outstanding operational results and record-setting financial performance.

Number two, the momentum of our business has established is resulting in an improved outlook, manifesting in higher per share growth and cash payouts for the owners of our company.

Number three, we’ve taken steps to opportunistically capture resource, strengthening the quality and depth of our portfolio while ensuring the long-term sustainability of our model.

Number four, lastly, as we begin our planning processes for 2023, I can assure you there is no change to our strategy. We’re driven by per share value accretion, not the pursuit of volumes.

I will now turn the call back over to Scott for Q&A.

Scott Coody — Vice President, Investor Relations

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

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Our first question comes from Jeanine Wai from Barclays. Please go ahead.

Jeanine Wai — Barclays — Analyst

Hi, good morning everyone. Thanks for taking our questions. Our question is on — our first question is on discipline. You mentioned that you mark-to-market the 2022 capex budget for inflation, presumably based on recent conversations with your providers. And I guess, how has those conversations really shaped your updated view on ’23? And what we’re getting at is you could pretty easily argue that returns being as high as they are, that inflation would have to get pretty high to make returns unattractive. And it’s pretty clear how the market defines discipline on the production growth side. But how do you define discipline on the cost side?

Clay Gaspar — Executive Vice President and Chief Operating Officer

Jeanine, this is Clay. I’ll take this one. The strategy remains the same. We do have categories of the strategy related to growth. The 0% to 5% is kind of one of the metrics. But if you refer back to Slide 3, we also focus a lot on free cash flow. On Slide 16, we talk about some of the margins. And so now that the focus is not just how much capital are we spending or how much production are we making. It’s the flow-through result. And so while we’re really excited about the margins today, and we’re really excited about the 22% reinvestment rate, we have a stated goal to be somewhere below 70% on that reinvestment rate. So there’s a lot of flexibility on built in and allowing us to continue the strategy even with the headwinds of the very real inflation we’re seeing today.

Jeanine Wai — Barclays — Analyst

Okay. Great. And then maybe moving to cash returns. There’s been a lot of talk on buybacks this morning. For the past 2 quarters, Devon has increased the buyback authorization by about the amount of share buybacks that you did during that quarter. This quarter, the Board kept the authorization flat at $2 billion. And so we’re just wondering, is there anything in particular that’s driving you to treat the authorization differently this quarter than prior quarters?

Jeff Ritenour — Executive Vice President and Chief Financial Officer

Yes, Jeanine, this is Jeff. Thanks for the question. Yes, the biggest thing that happened for us here at the quarter was we were blacked out the bulk of the second quarter as it relates to our share repurchase program, given the RimRock transaction that we’ve talked about. So we didn’t quite get as much done as we would have liked to, that left us with just over $800 million of authorization still available to us. And so we felt like we’ve got plenty to go execute on here over the next quarter in the back half of this year. And of course, if we make as much progress on that front as we hope to hear in the near term, we’ll absolutely go back to our Board and reload that authorization to accomplish more share repurchase. It’s a critical component of our cash return strategy. And as Clay mentioned, we’re very much focused on per share growth on all line items.

Jeanine Wai — Barclays — Analyst

Great. Thank you very much.

Operator

The next question comes from Arun Jayaram from JPMorgan Securities. Please go ahead.

Arun Jayaram — JPMorgan — Analyst

Good morning. My first question is if we look at first half activity, perhaps for Clay. You guys tried to sells 131 wells, about 80%, a little bit over 100 in the Delaware Basin. We are seeing a little bit more spud activity or drilling activity in some of your other basins. So I was wondering if you could give us a sense for the 3Q TILs of 100, maybe a little bit of help on the mix on a basin level, just broad mix?

Clay Gaspar — Executive Vice President and Chief Operating Officer

Yes, Arun, thanks for the question. We’re still going to be obviously dominated by Delaware activity. We have some interesting work coming in, in the other basins as well. But it’s — I would say, for the third quarter, in particular, consider at least 55% or so, Delaware, some other number of wells coming in, in the other areas. You’re also going to see the productivity of the Delaware Basin will also lever that turn-in-line number to a higher productivity, the higher contribution. We’ve gotten a lot of questions on the numbers on the kind of the flow of the capital throughout the year.

We’re definitely more back-end weighted with the activity, the number of wells that we bring online but we also have an ebb and flow related to working interest that relates also to some of the capital flows as well.

Arun Jayaram — JPMorgan — Analyst

Great. That’s helpful. And maybe one for Rick. Rick, you guys announced a couple of things on portfolio renewal over the last quarter, RimRock plus some of the acreage trades in the Delaware I was wondering if you view kind of RimRock as kind of a one-off just opportunistic? Or is this part of a broader strategy, call it these niche acquisitions to address portfolio renewal?

Richard E. Muncrief — President and Chief Executive Officer

Well, Arun, that’s a good question. We get that quite a bit. And I think we have been very consistent with our answer for the last couple of years, and we will always be looking for unique opportunities like RimRock afforded us, also like the acreage trade that Clay talked about. We’ll continue to look for those opportunities. And I’ll say this is — there’s something pretty attractive about buying something at 2x cash flow in this day and time, when you think that it really fits in with your story and you’ve got the industrial logic.

So I don’t expect us to ever be a serial purchaser per se. I hear that term a lot, but that does, but I will say that we’ll always be looking for opportunities to strengthen our company’s asset base and continue to build Devon for the long haul. We mentioned — earlier this year, we celebrated our 50th anniversary as a company, and we really think about multi-decade. When we talk about it, it’s just not an arm waving exercise. We truly are committed to that.

Operator

The next question comes from Doug Leggate from Bank of America. Please go ahead, Doug.

Doug Leggate — Bank of America Merrill Lynch — Analyst

Thanks. Good morning everyone. Rick, I wonder if I could ask you or maybe, Jeff, about the second half capex run rate. Obviously, RimRock is part of that, but there’s also some midstream spending in there. How should we think about the 2023 implications of the second half of ’22. Can we kind of annualize that and get a handle as to what we think capex might look like next year?

Richard E. Muncrief — President and Chief Executive Officer

Yes. I’d say this, Doug, as we said in our prepared comments, it’s a little early for us to give you granular detail. We’re going to continue to stick with our strategy of maintenance type spending level. You talked about the midstream asset spending, we do have some expansion. We have the joint venture. We’re going to be building our third train. That JV is going very, very well.

We’ve got the 400 million a day cryo plant is full, and so we’ll be working with our partners there to expand that to handle our gas production there. But still too early for us to be laying out any 2023 numbers. And I don’t know if Clay or Jeff want to weigh in on that, but that’s kind of where we’re at right now, Paul.

Doug Leggate — Bank of America Merrill Lynch — Analyst

Okay. Rick, I guess my follow-up would be on gas. You guys are the economics of your portfolio, obviously, has got a lot of variability in it. depending on what the gas deck is, and obviously, it looks to us at least that the outlook for U.S. gas has been reset some here, maybe to some kind of a new normal. I’m just wondering if you could talk then about capital allocation across the portfolio. And obviously, what I’ve got in mind is in Mid-Con, in particular.

Richard E. Muncrief — President and Chief Executive Officer

Yes. Doug, that’s a great question. We get it quite a bit. And I can tell you, when you’re looking at a $1 commodity price for gas, it’s — I think you’re really — I think people listen to us more than they did back when it was a $3.50 gas price, and we talked about the diversity that we enjoy with this portfolio that we have. And so for us, I don’t know that you’re going to change — you’ll expect to see us change our capital program allocation because recall that in our Delaware Basin, we do have a great deal of gas production there.

So really some wonderful returns. We do have 4 rigs running here in the Anadarko Basin to your point. We’re seeing some great returns there. And the one thing that we want to do is a little bit more assessment type work there, some ideas that we have. And so we’ll be very measured with that. But it’s a wonderful asset. We have a great acreage position. We have a great joint venture partner, which we talked about with Dow. And the JV is going very well. We’re generating some phenomenal returns with it. We’re going to be very measured, very thoughtful about it. So I wouldn’t expect us to have significant changes in our capital allocation mix.

Doug Leggate — Bank of America Merrill Lynch — Analyst

All right. Appreciate the answer. Thanks, Rick.

Richard E. Muncrief — President and Chief Executive Officer

Thank you.

Operator

The next question comes from Scott Hanold from RBC Capital Markets. Please go ahead, Scott.

Scott Hanold — RBC Capital Markets — Analyst

Thanks. Yes. Just — my first question is going to be around your view of intrinsic value. Can you give us a sense of how you get your arms around what the Devon’s intrinsic value is. How aggressive will you get on the stock buybacks? And as part of that discussion, it would be interesting to hear your thoughts on your 50% variable dividend payout ratio if there is some flexibility to move higher than that? Or is really just keeping optionality for buybacks and maybe bolt-on another kind of M&A activity, the continued plan?

Jeff Ritenour — Executive Vice President and Chief Financial Officer

Yes, Scott, this is Jeff. Thanks for the question. Maybe I’ll hit the second part first, which is we’re big believers in all of the above. So the framework that we’ve laid out provides an opportunity for a fixed plus variable dividend and then the share repurchases, as you mentioned. We think all of those are critical components to deliver on the business and operating in the financial model that we’ve laid out. Feel really good about that. Don’t expect to see that change from us in the near term. We feel really good about the 50% threshold level for the variable dividend. As you point out, it provides us flexibility to bring cash back to the balance sheet for, obviously, any debt repurchases that we want to do, which we’ve mapped some of that out here over the last couple of calls. We’ve got $1 billion, we think we can do over the next 2 years, which is important to us to maintain our financial strength on the balance sheet. And then on top of that, we can execute on our share repurchase initiative.

So to your first question around intrinsic value and how we kind of think about the share repurchase, we’re just like you guys, we’ve got 3, 4, 5, 10 different models that we look at when we evaluate our core business, run sensitivities operationally and financially, different price decks, different discount rates and how we think about that calculating that intrinsic value. We also do a lot of market comparisons, right, with — from a multiple standpoint and otherwise. Bottom line is when we put all that together, any which way we cut it, we think our shares are an outstanding value right now. And have been for some time. When you look at the business model that we’ve rolled out and the outputs that we’re generating case in point, the second quarter result. It’s pretty clear to us that folks ought to be buying our equity, and that’s exactly what we’re going to be doing going forward. So as I mentioned earlier, we’ve got over $800 million to go execute remaining on the current authorization and expect to approach the Board later this year for additional upside.

Scott Hanold — RBC Capital Markets — Analyst

That’s great color. And my follow-up question is you talked about looking at opportunistic activity, I mean with the bolt-ons and RimRock. But I think the term you used for that is portfolio renewal. Can you give us a sense of how you think about portfolio renewal versus acquisition per scale? Do you — is Devon a right scale for — to be a very efficient company? Or do you think there’s still some advantages of rather than just buying stuff for renewal just for scale to have better cost efficiency on a per unit basis?

Richard E. Muncrief — President and Chief Executive Officer

Well, I’ll say this. I think we’re going to continue to see opportunities that come our way that we have to contemplate a number of things. Number 1 is the renewal, if you will, of inventory. We drill 300, 400 wells a year. So you just — you think of that, even though you’ve got a deep inventory, we are an industry that needs to continue to renew your inventory, whether it’s through exploration or transactions. And so I think that will always be part of our game plan to consider those. But there’s also other things that come into play. Clay mentioned the acreage trades where suddenly we can drill another couple of hundred 2-mile laterals instead of 1 mile, and I can tell you, it just supercharges your returns. So there’s a lot of ways we’ll do that. We have a great team both the land and the business development side, we look at all sorts of opportunities, but we have a very, very high bar and we’re going to keep that bar quite high, and we can do that because of the inventory that we currently enjoy. And so I just don’t know that we’ll always — we’ll ever say that it’s just absolutely part of our game plan, but I do think we’ll have opportunities that come our way that could make sense for us.

Scott Hanold — RBC Capital Markets — Analyst

Understood. Thanks.

Richard E. Muncrief — President and Chief Executive Officer

Thank you.

Operator

The next question comes from Neal Dingmann from Truist Securities. Please go ahead.

Neal Dingmann — Truist Securities — Analyst

Good morning, guys, and I’ll refrain for sure returns to Devon, you guys are going to continue paying out. But Rick, my question is rather more on overall strategy, specifically, are there macro drivers or maybe even change in large investor sentiment that would have you all consider potentially more growth, let’s say, next year, coupled with this large shareholder return?

Richard E. Muncrief — President and Chief Executive Officer

The shareholders we talk to and we frequently engaged with, the feedback we get continues to be similar to ours, and that is focused on a per share approach. And so when we talk about growth, it’s a per share growth. And so fundamentally, unless we have shareholders, numerous shareholders that come in and say, look, we absolutely — we do not like these big dividends. We do not like your share repurchase program. We want you to go back to a growth model. Until we see that, I see no reason to change our strategy. And this is a strategy that we didn’t — we’ve really not tweaked our strategy since we laid out the merger announcement in September of 2020 and nearly 2 years ago.

And so I think we’ve been very consistent. We did — a few quarters back, we did talk about bumping our fixed dividend and we also talk about the — adding the share repurchase option. And those are things that really just solidified our cash return model and I think as commodity prices strengthen, we saw it just — it really adhered us to our shareholders when you could go across with all those options and deliver across the board. So to go back and completely change our strategy, I don’t know, it just seems like a real long put for us right now to — and we’re certainly not getting that feedback from our investors.

Neal Dingmann — Truist Securities — Analyst

Yes. No, I agree. That definitely long put today. And then second question, maybe for Clay on Delaware activity specifically, could you address the current and future federal permits, of course, in the New Mexico area and I’m just wondering, will these permits or potentially just in the entire play lease expirations cause you to reallocate more activity into either Southern Living or Wingfield counties than you currently have?

Clay Gaspar — Executive Vice President and Chief Operating Officer

Yes. Thanks for the question, Neil. It’s — I relate the federal land, it’s kind of like work in international stuff. You have certain rules to live by. There’s really good things about it, and there are some challenging things about it. I think specifically with the federal lands is you need to have a long view on a program. You need to be 2 years out ahead. You need to plan for your right of ways, you need to plan for your tie-ins, you need to plan for all the contingencies and that’s how we treat it. So happy to report. We still have 600-plus permits out ahead of us. That gives us plenty of runway. We’re working very diligently with the local BLM office. I think they have a better understanding of what D&C is asking them to do, great hard working people that want to do their jobs well. And we work really hard to make them successful at helping us do what we need to do.

So I would say, so far, we feel good about the trajectory. There’s always the concern of something changing. We’ll react to that then. But I think most importantly, is having a long vision, a road map that allows us to stay out in front. As Rick mentioned earlier, having a diverse portfolio, having assets on the Texas side of the basin, having assets in other areas around the country is only accretive to the story. Currently, we’re allocating quite a bit of our total capital to the Northern Delaware because of the amazing returns that we have there. And the great work that the team does allowing us to execute on it.

Neal Dingmann — Truist Securities — Analyst

Thanks, guys.

Operator

The next question comes from John Freeman from Raymond James. Please go ahead, John.

John Freeman — Raymond James — Analyst

Good morning. The Delaware well results continue to look quite good, but it is interesting that the lateral lengths are a good bit shorter through the first half of the year than what we’ve seen the prior couple of years. And obviously, you all highlighted the Stateline acreage trade that you all did, which caught up a good bit of the acreage highlighted to do some more extended reach laterals and, I guess, I’m just trying to get a sense of kind of, I guess, a, what has kind of driven kind of the first half activity to be maybe on the shorter side on the laterals. Again, good results, but the laterals being a good bit shorter than what we’ve been accustomed to and maybe how to think about that going forward if we’ll kind of move back toward that 10,000 type lateral length or better?

Clay Gaspar — Executive Vice President and Chief Operating Officer

Yes, John, appreciate the question. We are always striving to drill long laterals. And long today is sometimes 2-, sometimes 3-mile laterals. We’ve built really good proficiency in multiple basins to drill 3-mile laterals in North Dakota in the Anadarko Basin quite a bit all over the Delaware Basin as well. And so where the land position allows us to do that, that’s often our first option. I can tell you in a little bit more of a mature development, you kind of set the tone on development, for example, 2-mile lateral development relatively early. And once that’s established, it’s hard to revert to 3 miles.

You just saw the great trade that we did, allowing us to go from 1 mile to 2 miles, that’s of very high importance. We really try — we’ve been holding back all that development, those 9 DSUs avoiding the 1-mile drilling because we had hoped to be able to get this transaction completed.

So you’ll continue to see us push 2 and 3 miles. And sometimes we’ll have 75,000 out of necessity and of course, the occasional 1 model. As I look at the results for the second quarter, 9,100 feet is what we delivered. That’s a little bit shorter than the 97,000 to 10,000 that we’ve seen in prior quarters. I wouldn’t take that as a statistical anomaly. It’s just the stack of how many actual 3 miles versus how many 75,000 fell into that quarter. But we’re always trying to push longer and keep that capital efficiency up high.

John Freeman — Raymond James — Analyst

Thanks, Clay. And then a follow-up question for me. In the past, you’ve — you talked about one of the things that you have used to try and combat cost inflation as sort of your size and kind of consistent activity levels in terms of being able to look out and maybe layer in some longer-term sort of contracts for both materials and services. And I’m just curious if we could get some feel for kind of what the environment is at the moment in terms of service providers kind of willingness to offer longer-term contracts through 2023 or if it’s just too cost prohibitive to kind of do that at this point?

Clay Gaspar — Executive Vice President and Chief Operating Officer

Yes, John, I appreciate you bringing up the question because it’s a — if it was important last year, it’s 10x important this year. In fact, I would even point to a transaction like RimRock as maybe one of the contributing factors of us being able to get that deal done. As you can imagine, working in a tough environment like North Dakota, having to try and pick up, drop various services. It is a really tall order. Even to get basic casing design and some of the basic equipment necessary to get work done. And I think that allowed us to come in with scale and have a higher degree of execution certainty and kind of break the log jam. We have been trying to buy this particular piece of business for several years.

And I think that was a contributing factor. So like I said, incredibly important. We’re really proud of the business model, the consistency helps a ton as we have lots of dialogue with our service company partners. It’s the first thing they bring up. Number 1 is scale. Number 2 is consistency. So very much top of mind.

Specific to your question on longer time contracting, there’s always an appetite for us. From our side, from their side, it’s just a matter of that kind of that bid-ask spread. And we have our own view on where service cost is going to go. So kind of pairing that out and lining that up. I would say we try to balance some of the longer term and mid and shorter term as well to keep ourselves active in the market.

John Freeman — Raymond James — Analyst

Thanks, Clay. Appreciate the responses.

Operator

The next question comes from Neil Mehta from Goldman Sachs & Co. Please go ahead.

Neil Mehta — Goldman Sachs — Analyst

Thank you. And Rick, the first question is for you on the macro. You’ve had a really good call better than most on the oil macro with the bullish view that you laid out earlier this year on one of the calls. We’re going into an OPEC meeting tomorrow. I’d just love to hear your perspective on the moving pieces then being the demand outlook, U.S. production decline rates in non-OPEC and obviously, OPEC behavior. How do you think about the moving pieces as we look forward and the sustainability of this up cycle.

Richard E. Muncrief — President and Chief Executive Officer

Yes, Neil, great question. I guess for us, we think that just fundamentally, OPEC, we’ll see what they come up with. But they probably may handicap a little bit of the concerns around a possible recession that could impact demand some — somewhat. I don’t think it’s going to be very, very large. If they were to bump there, let’s say, Saudi specifically, if they were to bump their productivity. I don’t think it would be a large bump because I think in the back of their minds, they’re looking at a lot of data like we all are, right? And so they’re going to be — I think they’re going to be very measured. The rest of OPEC, I just think, quite honestly, I think are going to be very, very challenged to getting more close their quotas. That’s been, I think, well represented.

So for us, when we think about maybe a slight uptick in Saudi’s production, maybe even the UAE, but I don’t think it’s going to be that strong. You see continued discipline. You do see some growth here in the lower 48, but it’s still a disciplined approach. China is — there’s a point in time when you will see that demand, I believe, increase as they started reopening. In our mind, demand is going to be strong. And I think demand is going to — net-net is you’re going to start — you’ll still see some demand growth until we see prices — I think WTI north of 120. That’s kind of what we thought the first time and it pulled back and it could have been just circumstantial. But — so we’ll see. But I think for us, we’re very constructive on the commodity price environment. That’s both on the crude side and then on the gas side, too. I’ve been a little surprised that gas didn’t pull back a little harder and stay, but it’s — I think we’ve talked about it with our team, just fundamentally, you do not want to be short at gas in this world. And I think that at that point-driven, whether it’s whether it’s a Uri storm or type storm or some of the geopolitical things, you just do not want to be short at gas.

That’s an uncomfortable place for governments and utilities and the greater society. So we’re very, very constructive. I think for us, we just — Neil, we’re very pleased with our execution. We’re staying on top of the supply chain the best we can, and it’s, I think, going well. We’ve made some really strong moves on — in the marketing front, both on the gas side and the crude side to ensure, in my mind, very consistent reliable flows to the market. So I think we’ve done what we need to do. And I guess the takeaway for us is that we still are constructive on demand, both on the oil and gas side.

Neil Mehta — Goldman Sachs — Analyst

That’s really helpful perspective. If I could dive a little deeper into the U.S. production profile, that’s one of the great debates in the oil markets right now is where we are in terms of productivity of U.S. shale and whether the U.S. oil assets are maturing at which point we’re moving more to maintenance mode versus growth mode. You have a unique perspective because you operate in so many different basins. I would love your perspective on whether we should be thinking of the U.S. as more of a mature base and as opposed to a growth base, which again would support the more constructive macro view.

Richard E. Muncrief — President and Chief Executive Officer

Yes. I think — let’s start with crude. I think for us, we are really — there’s ranges of estimates out there. So we think about the balance of growth throughout the back half of ’22, and we’re probably a little more conservative than what some of the estimates are. And so in other words, we’re not as bullish on U.S. growth as some will be for the back half. And there’s a number of reasons there. I think for the — as far as the maturation where we’re at with the lower 48 plays, fundamentally, I think you’ve seen places like the Bakken, the Eagle Ford, in particular, where you’ve seen volumes are hanging in there, but you’re really not seeing a lot of growth.

I think we did see an uptick in the Eagle Ford, but it’s come back some, but I think both of those basins will be challenged to grow much. I think you have plays like the DJ and the Anadarko. We’re not in the DJ, but that’s a place we’ll watch. I think in places like — especially like the Anadarko, gas is going to be — you can see some growth there. But it’s going to be, I think, in aggregate, going to be somewhat moderate. And so it all comes down to the Permian. And I think the Permian will continue to be the only basin that grow substantially. But even with the Permian, I think you’ll start seeing impacts of things like the supply chain pinch and others. I think many of the private operators have been the ones that have driven the growth. The first — I really say about the last 12 months. And so I think that’s going to moderate a little bit. And so we’ll see how it all plays out. You’ll still see growth, obviously, but I think it’s going to play out a little bit. It may not be quite as much growth as some people have forecasted. We’ll see how it plays out.

Neil Mehta — Goldman Sachs — Analyst

Thanks, Rick.

Richard E. Muncrief — President and Chief Executive Officer

Thank you.

Operator

The next question is from Matthew Portillo from TPH. Please go ahead.

Matthew Portillo — Tudor, Pickering, Holt & Co. — Analyst

Good morning, all. Perhaps just a question for — a question for Clay around delineation in the Permian. You’ve had some pretty outstanding results in the Bone Spring. I was curious how your thinking on that play has evolved as you work the asset both in New Mexico and at the Stateline and what that might mean for inventory expansion over time.

Clay Gaspar — Executive Vice President and Chief Operating Officer

Yes, Matt, thanks for the question. Yes, you might have noticed that in the slide, we highlighted some of the results. On the New Mexico side, it was really a lot on the Wolfcamp, which has kind of been seen as the secondary bench, secondary to some of the Bone Spring activity that’s been — that’s dominated the area for the last few years. And then on the Texas side, we actually talked a lot about the Bone Spring, which again is a little bit secondary historically to Wolfcamp. As you can see from the results, these results are exceptional. And so it gives us great confidence that the productivity of Wolfcamp and Delaware is — doesn’t change magically at the border.

It’s pretty ubiquitous throughout this part of the Delaware Basin. The real trick is finding out the right recipe, spacing, staggering, sequencing and the team is making tremendous progress on that. It’s kind of one of the hidden synergies of having 2 really strong teams that have worked this problem individually, come together, compare notes and really try and parse out what is the right solution on this.

So we’ll never have the final answer, but I can tell you we are much further along than we were even just a year or 2 ago and understanding how to do this. And that’s certainly a significant contribution to our understanding of the portfolio and the incredible results that you’re seeing today.

Matthew Portillo — Tudor, Pickering, Holt & Co. — Analyst

Great. And then just as a quick follow-up. Last quarter, you highlighted the potential savings from vertical integration on your sand mine expansion in the Permian. I was just curious if you could give us updated thoughts on potentially expanding this operation beyond the Permian and additional mines that might be able to be developed going forward to continue to lower your cost on development.

Clay Gaspar — Executive Vice President and Chief Operating Officer

Yes, we’re certainly looking at it. When a slide like that makes the deck, you can bet around the company, everybody wants some of that. And so it’s been a lot of fun to see the excitement and the kind of creativity around the organization. What I’ll tell you is we have a really unique position in the Delaware, one it starts with the geology in this case, the surface geology, but also the ownership, also the logistics. And so those holes have to line up for us to be able to execute on this. I would say I’m cautiously optimistic at this point of being able to expand, not just in the Delaware, but to other basins and use some of the same techniques. We’re learning a lot, but it’s been a real home run to our operations. As I mentioned, this trade, the wet sand mine that we have up and running even further enhances the already incredible economics that we’re producing. So that leveraging of the margin is, especially in place like Stateline is just — is pretty phenomenal. So happy to see more of it in due time.

Matthew Portillo — Tudor, Pickering, Holt & Co. — Analyst

Thank you.

Richard E. Muncrief — President and Chief Executive Officer

Thanks, Matt.

Operator

The next question is from Kevin MacCurdy from Pickering Energy Partners. Please go ahead, Kevin.

Kevin MacCurdy — Pickering Energy Partners — Analyst

Hey, good morning, guys. My question is now that you’ve closed on the RimRock acquisition. I’m curious what you’re seeing on costs compared to your legacy acreage and any opportunities for further efficiencies.

Clay Gaspar — Executive Vice President and Chief Operating Officer

Thanks, Kevin. I would say it’s really pretty early. We are just taking over some of the operations now. Best thing to do is a whole lot of consistency to make sure we don’t having any of the wheels fall off in the process. But there’s certainly techniques. I would say, generally speaking, completion designs are roughly similar. I think we’ll see some tweaking. I think certainly, our supply chain efforts will help right away in kind of the next round of wells. But I want to be real clear. We are also taking this opportunity to learn. We can learn from everybody, RimRock is fighting a good fight just as everyone else in our industry is doing. And so every time we either look at one of these deals or when we were able to actually consummate a deal, we take it as an opportunity to step up our own game as well. And there’s things mainly on the facility side, some nuggets that we’ve already picked up, and we’re exporting to the rest of the basin from this transaction.

Kevin MacCurdy — Pickering Energy Partners — Analyst

Great. And as a follow-up, any color that you can give us on the comment of steady and consistent activity levels next year and maybe how production could trend from your 4Q exit rate at a steady and consistent level?

Clay Gaspar — Executive Vice President and Chief Operating Officer

Yes. I would just say directionally, same strategy, so 0% to 5%. When we come off that zero or low end growth, know that it takes time just to move that. So I would say where we stand today consider us on the low end of that 0% to 5% range. As you see in our quarters, we’ll have quarters that are a little higher and a little lower, but when you zoom out a little bit and you draw a line through it, we’re well inside the strategy, and we hope that, that — we plan for that to continue into ’23.

Scott Coody — Vice President, Investor Relations

All right. Well, it looks like we’re at the end of our — it looks like we’re at the end of our time slot today. We appreciate everyone’s interest in Devon. And if there’s a few questions we didn’t get to, gosh, reach out to the Investor Relations team at any time. Thank you, and have a good day.

Operator

[Operator Closing Remarks]