Devon Energy Corporation (NYSE: DVN) Q4 2021 earnings call dated Feb. 16, 2022
Corporate Participants:
Scott Coody — Vice President, Investor Relations
Rick 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:
Arun Jayaram — JPMorgan Chase & Co. — Analyst
Neil Mehta — Goldman Sachs — Analyst
Doug Leggate — Bank of America Merrill Lynch — Analyst
Jeanine Wai — Barclays — Analyst
Nitin Kumar — Wells Fargo Securities — Analyst
Paul Cheng — Scotiabank — Analyst
Matthew Portillo — Tudor, Pickering, Holt, and Company — Analyst
John Freeman — Raymond James — Analyst
Presentation:
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 year and outlook in 2022. Throughout the call today, we’ll 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.
Rick Muncrief — President and Chief Executive Officer
Thank you, Scott. It’s great to be here this morning, we appreciate everyone taking the time to join us on the call today. For Devon Energy, 2021 was a transformational year that can best be defined by our willingness to be a first mover and pursue bold strategic consolidation, our operational excellence and unyielding commitment to capital discipline and the groundbreaking deployment of our industry-leading cash return business model underpinned by our fixed plus variable dividend.
As you can see on Slide 5 of our presentation, an event that was foundational for our success in 2021 was a merger of equals between Devon and WPX that brought together two highly compatible organizations with complementary assets to create an elite E&P company. This transaction was perfectly timed at the very bottom of the cycle and set the groundwork for Devon’s significant value creation during the year. With this advantaged platform, we executed on our Delaware-focused operating plan and captured cost synergies that resulted in $600 million of annual cash flow improvements. These margin expansion efforts, combined with a disciplined capital allocation framework to prioritize value over volumes resulted in Devon generating the highest level of free cash flow in our prestigious 50-year history.
With this powerful stream of free cash flow, we delivered on exactly what our shareholder-friendly business model was designed for, and that is to lead the industry in cash returns. As you can see on the graphic, we rewarded shareholders with outsized dividends, opportunistic share buybacks and we took meaningful steps to strengthen our investment-grade balance sheet. This disciplined execution was rewarded by the market with our share price achieving the highest return of any stock in the entire S&P 500 Index during 2021. I am so very proud of what we accomplished and I want to extend my sincerest gratitude to everyone involved. Our team comprehensively executed on the tenets of our strategy, while responsibly providing our nation with a low cost and reliable energy source that is the lifeblood of our modern economy.
Now turning to Slide 6. While 2021 was a record setting year for Devon, the set up for 2022 is even better. With the operational momentum we have established, we have designed a capital program to efficiently sustain production at a ultra-low WTI breakeven funding level of around $30 a barrel. Combined with the full benefit of merger-related cost synergies and a vastly improved hedge book, we’re positioned to deliver free cash flow growth of more than 70% compared to 2021. As you can see on the graph, this strong outlook translates into a free cash flow yield of 14% assuming an $85 WTI price. Clay will run through the details of our operating plan later, but simply put, we expect 2022 to be another great year for Devon.
Turning your attention to Slide 7. With this significant stream of free cash flow, the top priority for our free cash flow is the funding of our fixed plus variable dividend. This cash return strategy is a staple of our capital allocation process, allowing us to return meaningful and appropriate amounts of cash to shareholders across a variety of market conditions. With this differentiated framework, we’ve increased Devon’s dividend payout for five consecutive quarters, and in aggregate, we paid out $1.3 billion of dividend in 2021, which is a per-share increase of roughly two times that of 2020. Importantly, we expect our dividend growth story to only strengthen in 2022. As you can see on the bar chart, we are on pace to essentially double our dividend again in the upcoming year, which equates to around 8%. I would like to highlight that this attractive yield includes a substantial increase to our fixed dividend that we announced last night. This 45% increase in the fixed dividend reflects the confidence we have in our underlying business and financial performance as we head into 2022.
Now on Slide 9, I want to briefly showcase how our unique dividend policy offers a quite compelling alternative for yield-seeking investors. To demonstrate this point, we’ve included a simple comparison of our estimated dividend yield in 2022 compared to other commonly-referenced yields in the financial markets. As you can see, Devon’s yield of 8% is approximately six times higher than the S&P 500 Index and well in excess of the prevailing interest rate you can get from a 10-year treasury. While I fully acknowledge that these three instruments possess different risk and volatility characteristics, I believe it’s important to highlight the outsized income that Devon offers in this yield-starved world we live in today.
On Slide 10, in addition to our market-leading dividend payout, we’re also excited to announce that we are increasing our share repurchase authorization by 60% to $1.6 billion. At a multiple of less than 5 times cash flow, we believe our business trades at a substantial discount to the intrinsic value, especially given the structural improvements we’ve made to expand margins and returns. Given this favorable set up, we have put our money where our mouth is by aggressively repurchasing $589 million of shares just in the fourth quarter alone. With the Board expanding the capacity of our repurchase program, we will continue to be opportunistic buyers of our stock throughout the upcoming year.
And lastly, the diagram on Slide 12, I believe, does a great job of summarizing what we’ve created here at Devon. We’ve assembled a high-quality asset portfolio and a team that has worked incredibly hard to deliver on our commitment to expand margins and deliver growth and free cash flow, accelerate our cash returns with our market-leading dividend payout, enhance per share growth with opportunistic buybacks and take consistent and meaningful steps to further enhance our financial strength.
While 2021 was a record year, we’re only getting started. At Devon, we have the right mix of assets, proven management, the right team and a shareholder-friendly business model designed to continue to lead the energy industry in capital disciplines and cash returns.
And with that, I will now turn it to Clay for the call to continue and provide an overview of our recent operational results and upcoming capital plan. Clay?
Clay Gaspar — Executive Vice President and Chief Operating Officer
Thanks, Rick, and good morning everyone. As Rick touched on, 2021 was a pivotal year for Devon that demonstrated the power of our asset portfolio and the capabilities of our talented organization. Across the portfolio, our team delivered results that exceeded production and capital efficiency targets, while continuing to drive down per unit operating costs and improving margins.
Results matter, and while we don’t take any of these accomplishments lightly, I’m equally proud of the way that we were able to accomplish these financial metrics. Overcoming the challenges of the merger, pandemic and supply chain issues, we built a unified culture, took many best practices from both legacy companies and we’re now poised for further leverage of those collective wins.
Now let’s turn to Slide 14 and we’ll see how 2022 capital plan is designed to build upon the momentum that we’ve established this past year. The first key point is there is no change to the upstream capital budget of $1.9 billion to $2.2 billion as we disclosed last quarter. While inflation is an absolute reality, our teams have done a good job of working with our service companies, mitigating escalations where we can and quantifying the remaining impact to our forecast. The great thing about a cyclical business is that if you’re paying attention, you should have a pretty good idea of what the most critical things to focus on in anticipation of the next phase.
At this point in the cycle, we’re focused on listening to our service company partners and helping them help us be successful. In this very tight supply chain market, the key phrase we hear is predictable and reliable. You will notice that our ’22 program looks quite a bit like our ’21 program. This is what has allowed us to telegraph to our service companies, midstream partners, and other key stakeholders to expect more of the same. That predictability allows them to plan their own supply chain work and the reliability allows them to know that we’re going to do what we say we’re going to do. Relationships are one of our core values at Devon and this listening and working with our critical partners is an example of that value in action. The relatively steady level of activity in ’22 is projected to sustain our production throughout the year ranging from 570,000 Boe to 600,000 Boe per day.
Now let’s turn to Slide 15 where we can discuss our Delaware Basin asset, which we believe is the most capitally-efficient resource in North America. During 2021, we had great success with our capital program that resulted in production growth rate of 34% compared to our first quarter ’21. This high margin growth was driven by consistent execution and outstanding well productivity that was headlined by several memorable projects such as Danger Noodle, Boundary Raider and Thistle Cobra to name a few. Each of these prolific projects eclipsed 30 day rates of more than 5,000 Boe per day on a per well basis exhibiting the world-class reservoir potential that resides in the Delaware Basin.
It’s important to note that strong volume performance in 2021 was paired with excellent capital efficiency and substantial additions to our proved reserves. While I would never point to a single year of reserves booking as the measure of success, with consistent and reasonable conservative booking processes, which we have, it can provide insight into the quality of the underlying assets. At year-end, our proved reserves in the Delaware increased 18% on a pro forma basis and these reserve additions replaced more than 200% of what we produced during the year. I find it especially impressive that our team added these reserves at an ultra-low F&D cost of only $5 per Boe. This result is just another example of how advantaged and sustainable are resources in the Delaware Basin.
Turning your attention to the map on the right, you can expect more of the same from us in 2022. We have a great slate of projects lined up to execute on, and once again, most of our program will consist of the high-impact opportunities focused on developing Upper Wolfcamp and Bone Spring zones and, to a lesser degree, the Avalon targets as well. To execute on this plan, we expect to run 14 rigs and four frac crews during the year. This capital activity will be diversified across our acreage footprint with sweet spots in Southern Lea and Eddy Counties and Stateline receiving most of the funding. Not only will this level of activity continue to grow Delaware production in ’22, with the benefits of our operating scale and best practices from the merger integration, we are well-positioned to continue to improve our execution capabilities.
Let’s turn to Slide 16 where we have displayed our strong track record of continuous improvement. As you can see on the slide, with the efficiencies captured in the Delaware, the team has essentially doubled the productivity of our rig and frac equipment compared to just a few years ago. The operational improvements have also meaningfully reduced our cost over time to about $550 per lateral foot in 2021, which competes very well with anyone out there. As I look ahead to ’22, I expect our operational performance to continue to improve.
Our team consistently is identifying new ways to leverage technology, operational breakthroughs and industry best practices. Inflationary pressure and supply chain disruptions are a reality. Based on today’s industry activity and commodity price projections, we’ve baked in around 15% higher costs than we saw in 2021. We have been and continue to be focused on consistency, planning and staying out in front ahead of these and reacting to any unforeseen issues. This work will be even more critical as the market continues to tighten.
On Slide 17. The next area I want to showcase is the momentum we’re building in the Anadarko Basin, where we have a concentrated 300,000 net acre position in the liquids-rich window of the play. With the benefits of our $100 million Dow JV carry, we drilled over 30 wells in 2021 and commenced the first production on 16 of those wells during the year. As you can see on the charts on the right, the initial capital efficiency is excellent. With the benefit of state-of-the-art completion designs and appropriately up-spaced developments, per well capital cost have decreased by 25% versus legacy activity and well productivity to date has exceeded the type curve expectations by 35%. With the strong execution, the carried returns we’re seeing from this activity will compete for capital with any asset in our portfolio. Given the success, we’ve elected to step up activity in the Anadarko Basin to three rigs in ’22. This program will result in around 40 new wells coming online in 2022, allowing us to maintain steady production profile throughout the year and harvest significant amounts of free cash flow.
Now let’s turn to Slide 18 and I’ll cover a few points on the other assets that are creating huge value while flying under the radar. Collectively, these assets generated more than $1 billion of free cash flow in 2021 and we are on pace to produce a similar amount of free cash flow in ’22. Williston remains some of the best returns in our portfolio. The team is continuing to unlock additional locations and has leveraged company best practices to significantly improve our ESG footprint. Our Eagle Ford asset continues to deliver solid returns. The team is doing some very exciting work to unlock additional locations and a very significant refrac potential. The Powder is the basin with the most upside yet to unlock. Our team is making great progress in that regard by driving laterals longer to three miles and rebooting the stimulation design. We’re seeing very encouraging well results. I’m proud of what these assets are delivering and I appreciate the team’s hard work and effort that goes into fulfilling this important role within our portfolio.
Finally, let’s turn to Slide 19 where I’m excited to share some of our progress on the ESG front. As many of you are aware, we set aggressive emissions reductions targets last year that covered a myriad of near, mid and long-term priorities. In addition to our — to ensure organizational alignment, we directly tied progress on these targets to our annual compensation program. We’ve also dedicated a Board Committee to engage in our ESG goal setting process, performance and reporting. Since the announcement of these environmental targets, we’ve taken immediate action to and delivered results. We do not have finalized figures yet for this past year, but I can tell you our Scope 1 & 2 GHG emissions will improve roughly by 20% in 2021 versus our ’19 baseline, well ahead of that stated — the stated goals from this past summer.
Two of the key successes on reducing overall emissions is reducing methane emissions and reducing flaring. In 2020, we reduced methane emissions by 47% and we reduced flaring by 33%. I expect this positive rate of change to continue. Looking specifically at ’22, we have many visible catalysts that will drive important results, such as advancements in leak detection technologies, improved facility design, facility retrofits, wide scale deployment of air-driven pneumatic controllers, and electrification of select field operations. I believe that it’s also important to point out that these efforts are focused on changes that would not only improve our ESG metrics, but will also improve our overall operations. By focusing on these operational wins, we further align our organizational focus and excitement around ESG improvement.
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. My comments today will be focused on the key drivers of our financial results in 2021 and I’ll also provide some insights into our 2022 outlook.
Beginning with production, our total volumes in the fourth quarter averaged 611,000 Boe per day, exceeding the midpoint of our guidance by 3%. This production beat was across all products with the most significant outperformance coming from NGLs where processing economics were exceptionally strong during the quarter. In the upcoming quarter, we expect production to approximate 570,000 Boe’s per day. We expect this to be our lowest production quarter of the year due to winter weather downtime that reduce volumes by about 15,000 Boe per day. All winter-related curtailments are back online and we expect no impact to our full year production estimates.
Moving to expenses. Our lease operating and GP&T cost exited 2021 at a rate of $7.25 per barrel. This result represents a 1% decline compared to where we started the year, but was slightly elevated compared to our forecast. As you might expect, we experienced moderate pricing pressures across several service and supply cost categories in the quarter and we also incurred a non-recurring charge to GP&T expense in the Eagle Ford. Another key variance was higher workover activity, which contributed to our strong production results in the quarter. Overall, our exposure to higher value production, coupled with a low cost structure, expanded Devon’s field level cash margin to $42.37 per barrel, a 14% increase from last quarter.
Jumping to corporate cost, we did a great job of improving this expense category in 2021. in aggregate, G&A and financing costs declined 31% year-over-year on a pro forma basis due to lower personnel cost and the company’s ongoing debt reduction program. These structural improvements will carry over into 2022 and act as an ongoing annuity for years to come.
Cutting to the bottom line, Devon’s core earnings increased for the sixth quarter in a row to $1.39 per share. This level of earnings momentum translated into operating cash flow of $1.6 billion in the fourth quarter. After funding our disciplined maintenance capital program, we generated $1.1 billion of free cash flow in the quarter. This represents growth in free cash flow of more than 400% compared to where we started the year after closing the WPX merger. The top priority of our free cash flow is the funding of our dividend. As Rick covered earlier, in conjunction with our earnings report, we announced a fixed plus variable dividend of $1 per share that is payable in March and includes the benefit of our 45% raise to the fixed dividend. This payout represents the highest quarterly payout in Devon’s history.
Another avenue that we’re returning cash to shareholders through is the execution of our share repurchase program. Since we initiated the program in November, we’re off to a great start by repurchasing 14 million shares at a total cost of $589 million. This equates to an average price of $42 per share, which is around a 25% discount to our current trading levels. With the Board expanding our share repurchase program to $1.6 billion, we now have roughly $1 billion remaining on this authorization and we expect to continue to opportunistically buy back stock in 2022.
We also have returned value to shareholders through our efforts to reduce debt and improve the balance sheet. In 2021, we made significant progress strengthening Devon’s financial position by retiring more than $1.2 billion of outstanding notes and we achieved our net debt to EBITDA target ahead of plan, exiting the year at less than 1 turn of leverage. At today’s pricing, we expect our leverage to trend even lower in 2022, pushing towards a zero net debt balance by year-end.
And lastly, I do want to highlight that our disciplined strategy is also resulting in excellent returns on capital employed. In 2021, we achieved a 20% return on capital employed, and we are positioned for this measure to substantially increase in 2022. The strong rate of change we are delivering with Roche, combined with our cash return framework, further differentiates Devon versus other opportunities in the market today.
With that, I’ll now turn the call back to Rick for some closing comments.
Rick Muncrief — President and Chief Executive Officer
Thank you, Jeff, great job. In summary, 2021 was a banner year for Devon. We delivered on exactly everything we promised and then some. Now as we shift our focus to the upcoming year, I want to be clear that there is no change to our cash return playbook. It will be more of the same. We will be relentlessly focused on delivering high returns on capital employed, margin expansion, accelerating free cash flow growth and returning excess cash to shareholders. Our talented team here at Devon take great pride in leading the industry in this disciplined operating framework, and when coupled with the development and deployment of two new technologies, simply put, we are very energized and ready to roll in 2022.
I sincerely hope you can now appreciate how we’ve delivered on the vision that Dave Hager and I, along with our respective teams, had when we announced our merger in September of 2020. We wanted to create something truly special and we feel that we’ve done just that.
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. Please limit yourself to one question and a follow-up. This allows us to get to more of your questions on the call today. With that, operator, we’ll take our first question.
Questions and Answers:
Operator
Thank you. [Operator Instruction] Our first question is from Arun Jayaram with JPMorgan. Your line is open.
Arun Jayaram — JPMorgan Chase & Co. — Analyst
Yeah, good morning. Perhaps for Jeff, I wanted to get more insights on the base dividend increase and how we should think about the mix of base and variable dividends in future periods, because I believe the — historically, you guys have targeted about 10% of CFO [Phonetic] at, call it a, mid-cycle price for the base dividend. So I want to get some thoughts on how that’s evolving over time.
Jeff Ritenour — Executive Vice President and Chief Financial Officer
Yeah, you bet, Arun, thanks for the question. You’re spot on. Historically, the way we’ve thought about that is kind of on a normalizing — normalized price deck, kind of a mid-cycle price deck, we’ve targeted kind of a 5% to 10% payout ratio of our cash flow for that fixed dividend. So as we discussed the fixed dividend raise that we announced this quarter with our Board, as we did the math and worked through our model, we kind of centered in around a kind of a 7.5% payout ratio, again specific to mid-cycle pricing. So as we move forward into the future, I think that’s an area where you’re going to continue to see us debate that with the Board and frankly I think there is a high likelihood that we’ll have the opportunity to grow that fixed dividend further as we move forward. And so it will likely gravitate towards the higher end of that payout range, somewhere closer to 10% as we walk walk it forward.
Arun Jayaram — JPMorgan Chase & Co. — Analyst
Great. And my follow-up is, I had a question on just the Permian in general. One of the potential headwinds for the industry in terms of future growth will be gas takeaway, which I think today stands around 17 Bcf a day. You guys grew your Permian production by over 30% from 1Q and your net production is approaching 600 million a day. So I just wanted to see how is Devon positioned to manage this tightness that could occur in late 2023 or early 2024 with Permian takeaway?
Jeff Ritenour — Executive Vice President and Chief Financial Officer
Yeah, you bet, Arun, this is Jeff again. And you will remember some of this from a few years ago, the last time we had tightness in the Permian Basin, how we were set up and how we’ve managed it. We’ve also, subsequent to the WPX merger, it’s accrued to Devon’s benefit, the position that they had in place, the legacy position that they had in place in the Permian. So today where we sit is, we have firm takeaway from the Basin for our gas for the majority of the gas production that we have in Basin. With the remainder that stays in Basin, you’ll recall, Arun, we do term sales for the large part with pretty large counterparties, which also have firm takeaway from the Basin. So that combined, we feel really good about our ability to move the molecules out of the Basin and don’t foresee any issues with getting backed up and shutting in wells.
I’ll add to that, we’re also evaluating the participation in a couple of the new projects that have been discussed and, as you’re well aware, could probably come online in that ’23-’24 timeframe. So we feel really good about being able to move the molecules and get them taken away from the Basin. And then beyond just the takeaway, what I would highlight is obviously, we do have some price exposure in Basin for the sales that we do. And in that case, we’ve utilized basis swaps on just over 50% of our volumes there to help us manage that price exposure. So our marketing team has done a great job kind of setting us up, making sure that we have the ability to move the molecules and then go in even a step further and helping us mitigate the price pressure we’re likely to see as it’s going to be volatile as the market kind of evolves over the next couple of years.
Arun Jayaram — JPMorgan Chase & Co. — Analyst
Thanks, Jeff.
Jeff Ritenour — Executive Vice President and Chief Financial Officer
You bet.
Operator
The next question is from Neil Mehta with Goldman Sachs. Your line is open.
Neil Mehta — Goldman Sachs — Analyst
Thank you and let me first [Phonetic] by saying, Rick, congratulations on an unbelievable 2021. Being the best performer in the S&P is no joke, so well done.
Rick Muncrief — President and Chief Executive Officer
Thank you, Neil.
Neil Mehta — Goldman Sachs — Analyst
Look, my first question is about growth in the Permian and as one of the leaders in the region, would love your perspective, are you seeing any warning signs of U.S. growth accelerating prematurely as we still haven’t gotten clarity around Iran, or do you think the discipline is holding? And are you not concerned about growth in the Permian relative to the global oil market? And what would it take for Devon to change its own strategy around prioritizing free cash flow over growth?
Rick Muncrief — President and Chief Executive Officer
Yeah, Arun — I mean Neil, sorry, that’s a good question. When I think about the Permian, you are seeing continued growth there. I think most of the growth right now has been driven by many of the private operators and recently saw Exxon and Chevron talk about ramping some volumes up. I believe they’re probably going to be working down their DUC inventory to some degree. But they have not invested as much as they traditionally had out over the two or three prior years. So I do think you’re going to continue to see growth in the Permian. I don’t think it’s unhealthy. I don’t think it’s ahead of — it probably is going to be the only place in the U.S. you truly even see much growth to be honest with you is the way I think we’re looking at it.
As far as the lack of clarity around Iran, I think that’s a good point you make. It’s one of the reasons I believe that the market continues to be backward dated. If you look at the curve, it is such steep backwardation and that’s the thing that — Neil, I’ll just say, we really look at a lot is when you start thinking about activity down the road. So that’s why we’ve been so focused on remaining very, very disciplined, keeping our budgeted volumes flat, operating in the maintenance capital standpoint. I think that’s the right answer until we get some real clear indication that’s otherwise. So Clay, you may add anything to that?
Clay Gaspar — Executive Vice President and Chief Operating Officer
Yeah. I appreciate that, Rick. What I was just going to add, remember that we are growing in the Permian. At the same time, we’re keeping our overall production flat. And I think it’s kind of you have to watch the headlines and what’s the overall trend. I believe that’s the right mix for us with our assets, with our portfolio. Specific to Permian growth because that’s definitely the hot Basin, that’s where the marginal barrel comes from, there are natural governors, I’m speaking kind of from an operations point of view, to prohibit unbridled growth. I think about the supply chain things that obviously peppered throughout my earlier comments. There is also the takeaway issues Jeff was just talking about. There are some things that I think will keep that growth in check. Now all that said, certainly, I would expect continued growth in the Permian to offset declines from the other areas. Overall, we believe we’re staying with overall maintenance capital, we believe it’s the right approach for our shareholders, for our organization and it seems to be working quite well so far. Thanks, Neil.
Neil Mehta — Goldman Sachs — Analyst
Thank you. And the follow-up is your perspective on the A&D markets. When the WPX transaction was consummated, oil prices were half of where they are right now. So, Rick, I’d be curious on your perspective if you see this more as a seller’s market than a buyer’s market until we get more commodity clarity.
Rick Muncrief — President and Chief Executive Officer
Well, that’s always an interesting question. And today, once again, I’ll go back to the curve. If you’re a seller, I mean you’re wanting to sell at today’s prices. If you’re a buyer, you have to honor that curve. And that’s — it’s kind of an interesting time. So that’s why, as we talked here among this management team and with our Board, we felt like the clear thing for us to do is to double down on our share repurchases as we — we think about assets that might be out in the market, gosh, we just don’t see anything that really competes with what we have. And so that’s why we’ve doubled down on it. So I don’t know how to answer that question, Neil, it’s — if you’re a seller right now, it could be a nice time to be selling if you can find someone that will honor today’s commodity price, and are truly convinced that we’re going to see crude continue to to go up even further as — there are people certainly predicting that, but that’s not what the curve is illustrating today.
Neil Mehta — Goldman Sachs — Analyst
Thank you, Rick and Clay.
Operator
The next question is from Doug Leggate with Bank of America. Your line is open.
Doug Leggate — Bank of America Merrill Lynch — Analyst
Thanks and good morning — still morning. Hi, good morning, everybody. I guess this is for Jeff probably. I want to ask you about the breakeven, Jeff. You’re still showing us $30 price but a $2.50 gas price and obviously there is a cash tax evolution going on. So I wonder if you could kind of walk us through how was the evolution of the oil price breakeven? And to be clear, what I’m really driving at here is, it seems to me that your gas price is probably a bit lower, but your cash tax is helping you right now. Do those kind of offset each other as we go forward?
Jeff Ritenour — Executive Vice President and Chief Financial Officer
Yeah, Doug, you’re thinking about it right, spot on, as obviously with the assumptions that we made in the breakeven that we disclosed in the deck, frankly, gas prices are higher than that today and NGL prices are higher than that today. So I would tell you, when I do the back of the envelope math, set aside the cash taxes piece for a minute, we’re actually frankly below that $30 level and certainly that’s all pre-hedges, right? So you factor in hedges, you factor in a different price environment, that changes a little bit, but ballpark, we hover right around that $30 a barrel breakeven price. Your point on cash taxes is important going forward and we disclosed that back in the fall and reaffirmed our guidance for that for 2022 as it relates to the cash taxes. We think that the cash tax rate is probably going to be mid-single-digit, somewhere 5%, 6%, 7% depending on how prices shake out for the year. And that’s — on our business, that’s a, call it, $300 million to $400 million of cash taxes in the year. And so that — again, when we produce 100 million barrels of oil, that adds a couple of dollars per barrel to that breakeven prices, as you alluded to.
Doug Leggate — Bank of America Merrill Lynch — Analyst
So on a normalized basis, Jeff, I guess, post-2022, I’m assuming your NOLs are pretty much done, so that’s what I was getting at was if we use, let’s say, the forward strip for gas, does that offset the cash tax leaving you pretty much still around $30?
Jeff Ritenour — Executive Vice President and Chief Financial Officer
Yeah, you bet. And so, just to give you the full picture on the cash taxes and NOL, you’re spot on where we’ll walk into this year with about $3.4 billion of NOLs available to us. We’ll use up about, call it, two-thirds of that here in 2022, which is going to allow us to deliver that mid-single-digit cash tax rate that I mentioned. Going forward, that will evolve as you would expect. Presuming that prices obviously stay at this level or move higher, your total tax rate kind of flips and you’ll probably become two-thirds of that will be cash taxes. And then the remaining one-third will be your deferred tax piece. So somewhere in the ballpark of a cash tax rate of maybe 15% if you have kind of $80, $90 oil moving forward beyond 2022.
Doug Leggate — Bank of America Merrill Lynch — Analyst
Okay, thank you for the clarity. My follow-up is a quick one, hopefully. If I look at the strip, Jeff — it’s also for you, I’m afraid, even with the 50% variable after the base dividend increase, you still got an enormous amount of cash and you still — you’ve dealt with your balance sheet. So why there are a lot of conserve — or the lack of visibility on sustaining the buyback for an extended period beyond 2022? It seems you’ve got the capacity to…
Jeff Ritenour — Executive Vice President and Chief Financial Officer
Well, I would — we absolutely do. You’re exactly right. And I would tell you, our past behavior on this front is going to be a good indicator of what to expect from us in the future. We haven’t been shy about altering the framework on a go-forward basis. As I mentioned earlier, I think you’ll see more fixed dividend growth from us as the environment evolves and we get more comfort with some of the uncertainties that Rick highlighted in his last commentary. And then beyond that, going back to our Board as we just did this last quarter, for another reload on the share repurchase program. So I think you’re going to see us continue to evolve the framework. I don’t think you’ll see us materially move the variable dividend threshold to kind of the 50% level. We think that that’s important to have that sense of clarity and transparency for our shareholders.
But going forward, I think the fixed dividend can actually grow and absolutely the share repurchase is something that we’ll continue to lean into. As we look at the share repo, we believe we continue to trade at a discount to the broader market, a discount to the historical multiples and a discount to our closest peers. So we’re going to continue to be out there and be opportunistic about buying shares. And when we see the stock trade off on kind of an absolute and a relative basis, you should expect to see us enter the market and get after it.
Doug Leggate — Bank of America Merrill Lynch — Analyst
Great stuff. Thanks fellas.
Operator
The next question is from Jeanine Wai with Barclays. Your line is open.
Jeanine Wai — Barclays — Analyst
Hi, good morning everyone, thanks for taking our questions.
Rick Muncrief — President and Chief Executive Officer
Good morning, Jeanine.
Jeanine Wai — Barclays — Analyst
Our questions are on the Delaware. Maybe the first one is on operational momentum. Can you just talk, Clay, maybe about how the oil production should trend throughout the year? We know that Q1, there is some weather in there, but we’re particularly interested in kind of the momentum heading into year-end, given the potential for corporate growth in ’23.
Clay Gaspar — Executive Vice President and Chief Operating Officer
Yeah, thanks for the question, Jeanine. Yeah, certainly, we will see a depressed first quarter and I’ll speak corporately, first. We should see a nice uptick. We’ve got a pretty good slug of wells coming in at the end of the first quarter, really benefiting Q2. And then I think we’ll see kind of more ratable production for the balance of the year. I think it’s similar, as we peel back, in Delaware when you think about that kind of shape of the curve. So it should probably be a similar shape of the curve in Delaware. Obviously, the number is a little different.
Jeanine Wai — Barclays — Analyst
Okay, great. Maybe actually switching gears back to the balance sheet for a second here. So just to be clear, we wanted to check on the potential uses of cash in the future. So we just heard your commentary about potential to up the buyback if prices hold and things look good, that you don’t necessarily want to revisit the 50% of free cash flow, but there is room for growth in that base dividend. When we look at the last source of or use of cash, I guess that’s the balance sheet, and so it seems to us like there is limited opportunity to reasonably cull any debt early beyond what you’ve laid out in the slide for 2023. So we just wanted to check if there is any other debt reduction that you can reasonably do. We know that there is some pretty punitive make-whole premiums and stuff like that. And so we’re just trying to figure out how much cash could potentially go towards the buyback and the dividend since you can’t really do too much more on the debt side.
Jeff Ritenour — Executive Vice President and Chief Financial Officer
Yeah, you bet, Jeanine. As — no change to our game plan as it relates to our leverage position and the debt that we have outstanding. As you recall, what I walked through in the fall was that we’ve got about $400 million of cullable debt at the end of this year, call it, October of this year and then another just under $600 million of maturities, plus a more cullable debt that comes due in 2023. So our current base game plan is to take out that $1 billion of debt, kind of on that timetable. And then as you move into 2024, there is another — and 2025, there is another $500 million a year, roughly. So over the next, call it, three to four years, we think we can take another, call it, $2 billion, $2.5 billion of absolute debt out. That’s our current game plan. Obviously, depending on what rates do and how things shake out, we might alter that, but that’s our current intention.
Jeanine Wai — Barclays — Analyst
Great, thank you.
Jeff Ritenour — Executive Vice President and Chief Financial Officer
You bet.
Operator
The next question is from Nitin Kumar with Wells Fargo. Your line is open.
Nitin Kumar — Wells Fargo Securities — Analyst
Hi, good morning, Rick and congrats on another successful quarter. You’ve come a long way since the merger, as you said in your prepared remarks, but you’re generating about $60 per barrel in free cash, given your breakevens. You’ve talked about a market-leading yield for income investors but I imagine wellhead economics are pretty attractive at today’s prices. So the question I have is, how committed are you to sub-5% oil growth if commodity prices stay at today’s levels into 2023 and beyond? And maybe when do you think you have the license to grow again?
Rick Muncrief — President and Chief Executive Officer
Well, that’s a good question. I think, Nitin, what I would just point to is and I try to articulate this pretty routinely is we do put a lot of faith into the shape of the curve and sometimes you can debate where the absolute points on a curve are. But when you see such steep backwardation and you start thinking about trying to add activity, by the time you bring your barrels on, I mean, let’s face it, it would — it’s going to be a while down the road. So we think for us the 5% that we laid out at the time of the announcement of the merger is still — that still holds, that’s the max. And we really — to be honest with you, there is so much uncertainty probably as you look out in the outer years. I think for us, we’ll will stick to our knitting and maintain that max — that 5% growth.
Nitin Kumar — Wells Fargo Securities — Analyst
Great. I think that’s the answer most people wanted to hear.
Rick Muncrief — President and Chief Executive Officer
Yeah. And Nitin, can I — if I can, Nitin, let me just add one thing. I want to make sure that everyone on the call understand. We are growing. When you start talking about the free cash flow per share growth, we talked about 70% growth and you just need to let that soak in for a few moments [Indecipherable] of this year over next year. So it’s — that’s where we’re going to focus on our growth, to be honest with you.
Nitin Kumar — Wells Fargo Securities — Analyst
Great. I guess my next question is really for Clay. But you know the Eastern Delaware assets, the PRB, you have some of the newer assets in your portfolio. It’s a abundance of riches, but they’re not getting as much capital right now. So I just want to understand how do those assets fit into the broader Devon inventory pile?
Clay Gaspar — Executive Vice President and Chief Operating Officer
Yeah, thanks for the question, Nitin. And I tell you those teams are doing some great things. We do have some capital allocated in some work. In fact, we have two rigs over in the Eastern Delaware right now delineating a little bit more of that kind of Eastern shale play. The opportunity you pointed to or the abundance of riches is it just doesn’t compete for the lion’s share of the development where we’re really turning the crank to generate substantial returns, but we’re realists. I mean, we look down the curve and we say, okay, where do we need to invest those assessment dollars to further delineate. We’re watching aggressively across the fence. The Powder River Basin that you brought up is a great example of that. There’s some really exceptionally good companies investing real dollars in that. We’re participating. We’re watching. It’s a very relatively small percentage of our overall capital budget, but as this — as the prices continue to strengthen, all of these stuff lights up and is very productive, full cycle very strong returns and will compete for capital at some point in our portfolio. And so I don’t feel very rushed to push it out of our portfolio, if that was your question. I think there will be a great opportunity for this — for the sun to shine on these assets in due time.
Nitin Kumar — Wells Fargo Securities — Analyst
Thanks, that’s helpful.
Operator
The next question is from Paul Cheng with Scotiabank. Your line is open.
Paul Cheng — Scotiabank — Analyst
Thank you. Two question please. The first one I think is for Jeff. Jeff, this year that you hedged about 20% of the [Indecipherable] negative hedge I think from WPX. Going forward, with your balance sheet and with your cash flow model and operating model, is the 20% a reasonable level going forward that we should assume you guys going to hedge or that that’s the fundamental change maybe after this negative hedges that you guys are no longer going to do hedges?
Jeff Ritenour — Executive Vice President and Chief Financial Officer
Yeah. Thanks, Paul. Yeah, you bet, great question, and I would tell you really no material change to our philosophy from what we talked about on the last call back in the fall. Just to give you a little bit of a foundation for where we sit today, we’re roughly about 25% hedged on oil and about 30%, 35% on gas. We think that’s an appropriate level, given our financial strength and the margin of safety that we have on with our low reinvestment rate of our — kind of our base business model. So you’ve heard me talk about that in the past. The thing that’s fundamentally changed in our business versus two, three, four years ago is in the past we were spending all of our cash flow in an attempt to grow at a double-digit-type rate, which was competitive with the broader sector. Today, with the lower reinvestment ratio and the steady state level of activity, it just creates a margin of safety for us in our business to where even if prices pull back, it doesn’t alter our activity.
So you have heard me and Clay talk about it in the past. That’s what really dilutes our returns is when we have to yank around our operating activity from month-to-month or quarter-to-quarter. We try really hard not to do that. That’s why we developed a steady state kind of maintenance capital level program and it’s really served us well. Obviously, the commodity prices that we’re experiencing today have been a nice tailwind as well. But as it relates to our hedging program, we feel like going forward, you will see us hedge at this lower level somewhere around the 30% level, whereas historically we might have been closer to 50% or north of that.
Paul Cheng — Scotiabank — Analyst
So you’ll still be hedging, but not [Indecipherable] the hedges, because [Speech Overlap]
Jeff Ritenour — Executive Vice President and Chief Financial Officer
Yeah, absolutely. Yeah, you bet. So our executive team along with our marketing group is responsible for executing the hedges for us. We meet every every other week and we debate what we’re seeing in the market. We talk about not only the benchmark prices, but the prices that we’re seeing in the individual basins as well. And we are actively monitoring that and evaluating whether or not we want to layer on additional hedges. And we do it in a variety of ways. Sometimes we use swaps. Here more recently, we’ve used pretty wide costless collars to help us mitigate that risk that we see in the market.
Paul Cheng — Scotiabank — Analyst
Right. The second question, just trying to go back into the Powder River Basin. Clay, it seems that you guys merged and that is a new asset to you and maybe some of your team. So over the time, say, 15 months or 18 months, what have you learned and are we — are you guys going to take the approach, just let other people, like Continental and maybe EOG going to, say, spend the money and then you just watch or that you’re going to take a more active role over the next — may not be this year, but over the next, say, two or three years? What’s the approach that you guys are going to take here?
Clay Gaspar — Executive Vice President and Chief Operating Officer
Yeah, Paul, in my remarks, I talked a little bit about some of the work that we’re doing, the excitement around pushing the laterals a little longer, kind of rebooting the completion design and we have a couple of wells that came on last year, we’re watching. And I can tell you, especially in today’s strip, the returns are competitive. They make — competitive returns on a full cycle basis, they look really nice. Now they’re not competitive in amongst our full portfolio, but they yield positive returns. And so as we’re able to continue that, we have a handful of wells, I believe half dozen wells or so we’ll be drilling this year, again, pushing the laterals out, really watching the productivity side. I’m less concerned at this point on trying to drive down the cost side of the equation, because we have full confidence, once the team crosses that threshold, that we could get to a development mode, those costs will come down. So really watching that productivity side seeing how this reservoir really reacts. I’m speaking specifically around the Niobrara and somewhat the Mallory [Phonetic] as well, where you see a lot of the upside potential.
But don’t expect us to divert a whole lot of capital toward that asset in the near term. We are thrilled to see great companies like Continental and EOG and others continuing to invest in scale-up activity and that gives us really good confidence that we’ll be able to continue to learn even with a very moderate capital program.
Paul Cheng — Scotiabank — Analyst
Okay. Just curious that in Eagle Ford that you guys formed a joint venture and turned out to be extremely successful and you have someone there to help you and maybe accelerate that development. In Powder River Basin, does it makes sense for you guys that trying to do something like that or that this is something that is just such a early stage you think you do really don’t know what you have and you want to keep 100% until you know before you decide what to do?
Clay Gaspar — Executive Vice President and Chief Operating Officer
Yeah, Paul, I think our JV that we executed in the Mid-Con is a great example of how to find — how to allocate resource to a play that doesn’t on a heads-up basis compete today for capital. But you know you need to get that machine running. And so I think the Anadarko Basin is a great example of, we needed to get money back to it, we brought in a partner, leveraged that relationship and we have significantly outperformed on the well cost, we’ve significantly outperformed on well productivity and that asset continues to drive towards competitiveness on a heads-up basis. The returns, I can tell you, today and the strip environment are outstanding on a heads-up basis.
Powder is a little further — earlier in the mature cycle, I would say, from being able to cycle through that, but when we get to a point where we can go to a third party and say, here are the returns that we’ve exhibited in our routine basis and there is meat on that bone available for them to come in and lever, then we can take a leveraged approach just how we did in the Anadarko and scale that into something that really could compete on a heads-up basis. So that’s certainly a possibility. We’re not quite there yet, but certainly something in our frame of view that we will be excited to explored at the right time.
Paul Cheng — Scotiabank — Analyst
Thank you.
Operator
The next question is from Matthew Portillo with TPH. Your line is open.
Matthew Portillo — Tudor, Pickering, Holt, and Company — Analyst
Good morning all.
Rick Muncrief — President and Chief Executive Officer
Hey, Matt.
Matthew Portillo — Tudor, Pickering, Holt, and Company — Analyst
Just a quick question, maybe for Clay. I know that this has been a big focus for the organization of locking up and getting contiguous acreage in the Permian. I was curious how much additional room do you think there is to run with continuing to progress the lateral length? And what that might mean for the average lateral length in 2022 in the Permian? It continues to seemingly drive an improvement in capital efficiency here.
Clay Gaspar — Executive Vice President and Chief Operating Officer
Yeah, Matt, that’s definitely a tool. When you’re paying attention to average lateral length, you see the correlation between capital efficiency and lateral length and that drives all the way through to the bottom line returns. So we’re excited about longer laterals. We have a healthy dose of three-mile laterals in the mix for the Permian, but I would say, by far, most of our wells will be two-mile wells. The challenge there is when you set up the initial land development, a lot of times it’s — you’re kind of locked in and so retooling a development that’s partially developed from two to three is a pretty challenging opportunity. As we move into some of the other areas that either haven’t been fully developed or we’re continuing to work the land work, we will often — you’ll often see us push towards those three-mile laterals. We’ve built a lot of confidence in drilling those three-mile laterals.
I just mentioned the Powder, we’ve done quite a few in the Williston and quite a few now in the Delaware. And as you pointed out, there is a whole lot of value creation efficiency associated with that. We’re not done. Our land team is at it every single day. Those like-for-like trades are hugely mutually beneficial. And there is still opportunities out there. We’re working on several right now. Hope to talk more about in the coming quarters and just know every time we get one of those things done, that’s more green lights for us to either develop on a two-mile or a three-mile. And in these price environments, to be honest, the returns kind of cap out and max out all the tools that we have on rate of return. So it’s pretty awesome to watch. So a lot of good work going on there.
Matthew Portillo — Tudor, Pickering, Holt, and Company — Analyst
Perfect. And then my follow-up question, just relates to the Dow JV. Just wanted to check in where we are from a development perspective. I think the original deal was for 133 wells. So should we expect that, I guess, at the current pace to continue for the next few years? And then I guess with the strength in the commodity backdrop, do you see any further activity to either expand that existing JV or bring in new partners to continue to drive competitive rates of return with the Permian?
Clay Gaspar — Executive Vice President and Chief Operating Officer
Yeah, so we’re about 30% to date on the Dow deal. We’re scaling up activity a little bit relative — in ’21 relative to ’22. So we’ll be most of the way through end of ’22, probably have a tail in ’23. I can tell you, it’s one of those deals you love to see where we’re thrilled with it, with the right financial tool that we needed to apply to this great asset and Dow, on the other side, is thrilled as well. So I would say the door’s wide open to expand the conversation. There is a lot more acreage. We’ve got a tremendous position, but we also have to look at it and say, okay, where does this become essentially a competitive heads-up project for us and when do we just fund it straight up. So anyway, it’s a good problem to have, really pleased with the team that worked, the business development team that put it together initially. This is just a real great success and I hope to continue to model that where applicable and maybe Powder is a place that could use this kind of opportunity in due time.
Matthew Portillo — Tudor, Pickering, Holt, and Company — Analyst
Thank you.
Clay Gaspar — Executive Vice President and Chief Operating Officer
Thanks, Matt.
Operator
The next question is from John Freeman with Raymond James. Your line is open.
John Freeman — Raymond James — Analyst
Good morning. Thanks for squeezing me in.
Rick Muncrief — President and Chief Executive Officer
Hey, John.
John Freeman — Raymond James — Analyst
The first question I had, just a follow-up, Jeff, on what you were saying on the base or the fixed dividend. So just to be clear, the increase in that dividend was just a result of the payout ratio going higher and there was no change to your mid-cycle pricing that, that was based on?
Jeff Ritenour — Executive Vice President and Chief Financial Officer
Yeah, that’s correct. That’s the way we’ve thought about it is as we’ve gotten further into the environment and we worked through the cost structure, obviously, over the last several years, but particularly post-merger, when we sat back and looked at our cost structure and what we thought was sustainable going forward based on mid-cycle pricing, we decided it made sense to move that — the fixed dividend higher based on that payout ratio that I talked about kind of roughly at 7.5%.
John Freeman — Raymond James — Analyst
And Jeff, can you remind us, is the mid-cycle pricing that you are using, is that still around like a $50 oil, $3 gas type level?
Jeff Ritenour — Executive Vice President and Chief Financial Officer
No, it’s higher than that. We’ve been using kind of $60, $65 oil for that.
John Freeman — Raymond James — Analyst
And the gas price, is that around $3, $2.50?
Jeff Ritenour — Executive Vice President and Chief Financial Officer
$3, yeah, exactly.
John Freeman — Raymond James — Analyst
Okay, great. And then just the last question for me, I realize that the full year ’22 budget didn’t change at all. But the one number that I don’t think you all had, wouldn’t have had completely dialed in at that point, you all were sort of estimating was on the non-op side, I think you all were sort of thinking as a placeholder. That would be $50 million to $100 million. I’m just curious kind of where that’s [Indecipherable], given the big movement in commodity price since you all last spoke three months ago.
Clay Gaspar — Executive Vice President and Chief Operating Officer
Yeah. What I would say on that is, remember, we have a deal in place to cap that — the non-op exposure in the Permian. And so we’re really only exposed in the other basins. And so we feel like we are — we have it pretty well under control. But clearly as activity picks up, there is more pressure on that and we’ll figure out how we manage that during the course of the year.
John Freeman — Raymond James — Analyst
Great. Great job, guys, thanks.
Clay Gaspar — Executive Vice President and Chief Operating Officer
Thanks, John.
Scott Coody — Vice President, Investor Relations
Well, it looks like we’re at the end of our time slot today. We appreciate everyone’s interest in Devon. And if you have any further questions, reach out to the Investor Relations team at any time. And once again, thank you for your time and have a good day.