Devon Energy Corporation (NYSE:DVN) Q4 2023 Earnings Call Transcript

Devon Energy Corporation (NYSE:DVN) Q4 2023 Earnings Call Transcript February 28, 2024

Devon Energy Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone and welcome to Devon Energy Fourth Quarter and Full Year 2023 Conference Call. [Operator Instructions] This call is being recorded. I would now like to turn the call over to Scott Coody, Vice President of Investor Relations. Sir, you may begin.

Scott Coody: Good morning and thank you for joining us on the call today. Last night, we issued an earnings release and presentation that cover Devon’s results for the past year and our outlook for 2024. Throughout the call today, we will make references to the earnings presentation to support prepared remarks and these slides can be found on our website. Also joining me on the call today are Rick Muncrief, our President and CEO; Clay Gaspar, our Chief Operating Officer; Jeff Ritenour, our Chief Financial Officer; and a few other members of our senior management team. Comments today will include plans, forecasts and estimates that are forward-looking statements under U.S. securities law. These comments are subject to assumptions, risks and uncertainties that could cause our actual results to differ materially from our forward-looking statements.

Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials. With that, I’ll turn the call over to Rick.

Rick Muncrief: Thank you, Scott and I appreciate everyone taking time to join us this morning. For today, my comments will be centered on four key themes: Devon’s accomplishments in 2023, the catalyst of our improved outlook for 2024, the depth of the resource we possess in our portfolio, and the strategic priorities that will drive our free cash flow allocation going forward. Now beginning with the fourth quarter, we exited the year with a solid quarter of execution, highlighted by production that exceeded the top end of guidance, meeting consistency across all products. Disciplined reinvestment resulted in our 14th consecutive quarter of free cash flow and we took steps to increase cash returns by stepping up the pace of our stock buyback.

These positive results rounded out another successful year for Devon, where we achieved several key milestones that I am extremely proud of. On Slide 7, you can see we delivered production growth rate of 8% in 2023, resulting in new high all-time production for oil. This healthy growth rate was also paired with returns on capital employed that outpaced the S&P 500 by a substantial margin for the third straight year. With the free cash flow our business produced, we rewarded shareholders with an impressive cash return yield of around 10% that was balanced between buybacks and dividends. As I touched on during the last call, our team has done a great job of designing a plan to deliver improved capital efficiency in 2023 – excuse me, 2024. With the current industry conditions, we still believe it is prudent to deploy a steady capital program designed to optimize returns while maintaining volumes around levels where we exited 2023.

Importantly, we expect to deliver this production for 10% less capital versus last year, funded at a WTI breakeven price of around $40. In conjunction with this outlook and given the confidence that we have in the underlying health of our business, the Board has approved a 10% increase to our fixed dividend payout. Now looking briefly at the trajectory of our capital and production profile in 2024 on Slide 9, we plan to be spending to be slightly elevated in the first half of the year due to the addition of a fourth completion crew in the Delaware Basin. Due to timing of completions and recent curtailments from extreme winter weather, we expect first quarter production to be the lowest quarter of the year. However, we expect volumes and capital efficiency to move higher over the remainder of the year.

In 2024, a key contributor to our improved capital efficiency will be the well productivity improvements we expect to achieve in the Delaware Basin. Turning to Slide 12. And with the easing of constraints across the basin, we plan to concentrate roughly 70% of the Delaware’s capital in New Mexico while optimizing the remaining activity across our acreage in Texas. This allocation to New Mexico is meaningfully higher than what we were able to deploy during 2023 and is more in line with our historic activity in the basin. Overall, this refined capital allocation is expected to increase well productivity in the Delaware by up to 10% on a year-over-year basis. Given that two-thirds of our Delaware Basin inventories in New Mexico we anticipate being able to sustain our pace of activity on both sides of the state line for the foreseeable future.

With this advantaged acreage footprint, you can see on Slide 14 that we have one of the largest inventories among operators in the basin, providing us with a multi-decade resource that will drive our enterprise-wide performance for many years to come. The quality of our Delaware weighted resource base combined with our disciplined strategy positions us to generate a differentiated amount of free cash flow for many years to come. As you can see on Slides 15 and 16, our business is set to deliver a free cash flow yield that is up to 3x that offered by the broader markets. With this free cash flow, we are targeting a cash return payout of around 70%, while earmarking the remainder to further strengthen our balance sheet. With our flexible cash return framework, we will judiciously allocate our free cash flow towards the best opportunity, whether that be buybacks or dividends.

Given that the equity market is heavily discounting valuations in the energy sector, it’s an easy decision to prioritize the buyback over the variable dividend to capture the incredible value that Devon offers at these historically low valuations. Slide 19 helps better visualize this compelling value proposition. On the right, you can see energy represents less than 4% of the S&P 500 while contributing more than 10% of the EBITDA in 2023. This is noteworthy given the energy’s S&P weighting historically tracks its earnings contribution over time. I believe this gap exists due to extreme valuations in tech, combined with a pervasive misunderstanding of hydrocarbon demand over time. With global energy demand forecasted to increase 50% by 2050, the world is going to need growth from all sources of energy, including oil and natural gas.

With the world’s power needs continuing to grow, it is evident that peak oil demand is nowhere in sight, and our industry will be an important contributor of energy growth for the foreseeable future. Furthermore, high-quality names like Devon, provides significant equity upside over time as you collect outsized cash returns. And as I said earlier, this is why we are putting our money to work actively repurchasing shares. And with that, I’ll turn the call over to Clay.

Clay Gaspar: Thank you, Rick and good morning everyone. The Devon team did a really good job of rounding out 2023 by exceeding our operational targets for the fourth quarter. These positive results were driven by three key factors: number one, improved uptime, driving base production; number two, increased efficiencies through faster cycle times, resulting in lower capital per well; and number three, better new well productivity, improving our wedge production volume. Slide 5 provides a good visual of these favorable operating trends. The chart on the left highlights the efficiencies we have delivered in our drilling and completions operations. On the right, you can see this track record of efficiency gains is also paired with some of the best well productivity of any producer in the U.S. While these results can certainly vary from quarter-to-quarter, our consistency over time demonstrates the quality of our assets and execution capabilities.

The most significant contributor to this advantaged capital efficiency was our franchise asset in the Delaware Basin. In the fourth quarter, roughly 60% of our capital was deployed to this prolific basin allowing us to run a consistent program of 16 rigs. With this activity, we brought online 62 new wells, grew productivity 6% year-over-year and expanded our DUC inventory, allowing us to add a fourth completion crew earlier this year. While we had strong results across our acreage position, in the quarter, the top contributors to our performance were several large pads within our Cotton Draw and Stateline areas. At Cotton Draw in the core of the basin, we brought on 11 3-mile laterals that showcased the stacked pay potential and prolific rates this area can deliver.

These extended reach wells were diversified across five different producing intervals in the Avalon, Bone Spring and Wolfcamp formations. In aggregate, the oil weighted production from these wells achieved a 30-day rates of 4,400 BOE per day with impressive per well recoveries trending as high as 4 million BOE. In addition to the high rates at Cotton Draw, we also delivered record-setting drilling and completion times. This performance included a record completion pace of 3,100 feet per day and drilling times for these 3-mile laterals came in as low as 19 days with the final mile drilled in a record time of just over 24 hours. Another standout performance during the quarter and possibly my favorite in terms of naming convention was our [indiscernible] project in the Stateline area.

[indiscernible] was named by a geologist after the style of playing the banjo that his dad used in their family jam sessions. The good news for him and his family is that these wells are fantastic. This 8-well pad consists of 2-mile laterals, co-developed in multiple intervals in the Wolfcamp A. With production rates averaging 3,900 BOE per day, this package of wells delivered the highest well productivity per lateral foot of any project during the quarter. As I look ahead to 2024, I expect another big year for the Delaware Basin as we have a great slate of projects lined up. We plan to bring online around 215 wells for the year with most of the capital deployed towards the best parts of our acreage in Southern Lea and Eddy counties and the Stateline area of Texas.

This plan is designed to deliver improved capital efficiency and better well productivity through the full column of development of the Upper Wolfcamp, along with select landing zones in the Wolfcamp B where applicable. The derisking of multiple targets in the Wolfcamp B over the past year has allowed us to pursue more extensive multi-zone developments in 2024, bolstering our high-quality inventory, delivering higher net present value per project and still delivering exceptional rates of return. Turning to Slide 13, to build upon Rick’s comments from earlier, we are confident in our ability to deploy more capital to the core of the Delaware, because of a long list of improvements in infrastructure. These improvements include 2 Bcf a day of processing additions – gas processing additions, expansions to the downstream gas takeaway, enhanced water handling capabilities with our WaterBridge joint venture, build-out of gathering and compression and investment in self-generated power and microgrids to increase the reliability of the electrical infrastructure.

With these improvements, we are very well positioned to execute on our 2024 plan. In fact, year-to-date, we are delivering at a pace ahead of schedule, allowing us to fully offset the winter weather downtime we experienced in January across the field. Shifting to the Eagle Ford. The successful integration of our Validus acquisition was one of the key drivers of the production increase of 56% during 2023. With our enhanced scale in the basin, the team did a great job of capturing synergies by driving improvements across each phase of our operations. This progress can be seen through several indicators, including year-over-year 15% decrease in production costs, a 30% plus improvement in completion cycle times over the course of the year and we set a company record spud to rig release of only 5 days.

Our activity during the year continued to demonstrate that the Eagle Ford provides one of the most promising opportunities for resource upside in the U.S. shale. Through tighter redevelopment spacing and refracs, our capital program not only replenished, but expanded our risk resource in the play to an inventory runway of around 10 years at today’s pace of activity. Looking to 2024, our key focus for the Eagle Ford team is to sharpen capital efficiency by incorporating appraisal learnings from the past year, along with more balanced activity across DeWitt and Karnes counties. This plan is expected to deliver single-digit production growth for roughly $75 million less capital over last year. In the Rockies, we possess a unique combination of assets that can provide both growth and free cash flow specifically in the Powder River Basin we are building upon the well productivity improvements achieved over the past couple of years, where the average 6-month cumes increased nearly 20% from historic levels.

A recent highlight was the SHU [indiscernible] 3x well, which reached peak rates in Q4. This 3-mile Niobrara well achieved initial production rates greater than 1,500 BOE per day with an 85% oil cut and then hung in at that rate for quite a while. In addition to the strong oil productivity, the [indiscernible] attained a record drilling performance of 1,350 feet per day, a 45% improvement compared to the average Niobrara well. In 2024, our efforts will be focused on refining spacing, reducing costs and continue to ready this asset for full development in the later part of this decade. In the Williston, I want to thank the team for safely working through the incredibly severe winter storm weather that we experienced in January and rapidly restoring affected production.

As I look into 2024, our focus for this asset will be to optimize base production, deploy selective investments to high-confidence projects, and harvest $300 million of field level cash flow. So far this year, our capital program is off to a great start with our bull moves project maxing out our production facilities at over 15,000 barrels of oil per day with several of the wells flowing 3,000 barrels per day or more during their flowback. Lastly, I’d like to briefly cover our activity in the Anadarko Basin, where we delivered an 8% production growth rate during 2023. The 3-rig drilling program funded by our Dow joint venture, delivered very impressive well production. The value of this production was also enhanced by our ability to route volumes into the premium Southeast gas markets and by the team driving operational costs 10% lower.

In 2024, we plan to maintain a similar pace of drilling activity in the Anadarko with a keen focus on developing the liquids-rich window of the play, where returns from our joint venture activity will benefit from higher condensate cuts. And with that, I’ll turn the call to Jeff for financial review. Jeff?

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

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

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

Moving to the balance sheet. Devon’s investment-grade financial position continued to strengthen in the fourth quarter with cash balances increasing by $144 million to a total of $875 million. In addition to our strong liquidity, we exited the year with low leverage marked by a net debt-to-EBITDA ratio of only 0.7x. Looking ahead with the excess free cash flow that accrues to our balance sheet, we plan to build liquidity and retire maturing debt. Our net debt maturity comes due in September of this year, totaling $472 million and we will have the opportunity to retire another $485 million of notes in 2025. So in summary, our financial strategy is working well. We have successfully scaled our business to consistently generate free cash flow.

We are boosting per share results by opportunistically repurchasing our shares. We offer a dividend yield that far exceeds that of the broader market and the balance sheet is in great shape with a clear pathway of continued improvement over the next few years. With that, I’ll turn the call back to Rick for some closing comments.

Rick Muncrief: Thank you, Jeff. So to wrap up our prepared remarks, I want to reinforce a few key messages. Number one, Devon is a great company that has created a tremendous amount of value for shareholders since we unveiled our industry-first cash return strategy announced in 2020. Since that time, we’ve deployed $13 billion to dividends, buybacks, debt reduction and accretive acquisitions. I’m extremely proud of this accomplishment, but we’re just getting started. . 2024 is setting up to be another wonderful year for Devon. By incorporating learning’s from the past year and refining our capital allocation, we expect to deliver a step change improvement in capital efficiency this year. This improved capital efficiency is anchored by our assets in the Delaware Basin, where we expect to deliver the powerful combination of improved well productivity for much lower capital cost.

Our long-duration resource base underpinned by the Delaware is one of the deepest of any company out there. The resource quality provides us an advantaged platform to drive attractive per share growth and outsized cash returns for many years to come. And with that, I’ll turn the call back over to Scott, and let’s have some Q&A.

Scott Coody: 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.

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Q&A Session

Operator: Perfect. Thank you. [Operator Instructions] We do have our first question registered comes from Neil Mehta from Goldman Sachs. Neil, your line is now open.

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

Rick Muncrief: Neil, that’s a good question. We have expressed our frustration, I think, in the market really – we really traded down on some of our variances we saw last year in our production volumes. But even though they were minor from a volumetric standpoint, they weren’t from a stock performance standpoint. So I think the setup is really good for investors as we look forward. So it is going to be, I believe, point of inflection for us as we’ve mentioned. Really bullish about our performance, the team has done a wonderful job, getting us through some tough weather. We’ve seen some increased productivity. I think Clay went through the assets really well, and we’re seeing nice growth on the oil side coming out of this first quarter as we enter second, third, fourth quarters of this year.

And I’ll also say, Neil, I feel really good about the next several years on our ability to keep our crude volumes where they’re at. I think that it’s – we’re still early. We still are not getting what I think is a strong, strong signal for demand. But when that call comes, I think we’ll be ready to step up for it. But we really feel good about the trends we’re seeing.

Neil Mehta: Yes. And just maybe to build on this is my big question for Clay – but just can you talk about what you’re seeing in terms of well productivity that gives you confidence in your ability to hit or exceed that 315 oil number this year?

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

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

Neil Mehta: Okay, thanks, Clay. Thanks, Rick.

Rick Muncrief: Thanks, Neil.

Operator: Our next question comes from Arun Jayaram from JPMorgan. Arun, your line is now open.

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

Clay Gaspar: Thanks for the question, Arun. I think both things come into play. The big headline thing is just a refocus to more where we’ve historically allocated our capital kind of in the core of the basin predominantly where our inventory, our portfolio lays out between New Mexico and Texas. I would say ‘23, especially first half of ‘23, was a little bit of an anomaly on where we were allocating that capital, and we needed to do some work from the infrastructure standpoint, but also really understanding where all these fit together. We’re benefiting tremendously from that work, from that infrastructure build-out, and that’s where we’re seeing the improvement really late ‘23 to what we’re showing today. On the completions question, I wouldn’t point to it’s a big knob that we’ve changed on – excuse me, like a sand concentration or how we’re doing, what we’re doing, but the team is working every single day to think about how do we do it better, how do we touch a little bit more rock and how do we do it more cost effectively.

And I can tell you we’re winning on all fronts. These are small wins at this point, some relatively mature way of thinking about these assets, but really, really pleased with the continued improvement there, and that shows up in the numbers as well.

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

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

And so we’re going to do that. We also have been advocates for consolidation. I think some of the transactions that’s been announced that I think that’s the – I think they’re positive for the industry. And it just shows that we are a depleting industry. And so you always have to replenish. That’s your portfolio that’s not changed. It’s not changed since the beginning of this industry. And so we’ll always be active. We’ve got a great team. We’ve got great analytics, capabilities in-house, and we do our own internal analytics compare that with what you see out in the public market and adjust. But once again, we’re going to be very, very measured very disciplined. And we will make – we will make some – I think the right decisions, and that does include the binder stock back because I can tell you that at these levels, we are very, very attractive.

Great question.

Arun Jayaram: Thanks, guys.

Rick Muncrief: Thanks, Arun.

Operator: Our next question comes from Nitin Kumar from Mizuho. Nitin, your line is now open.

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

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

And frankly, the variable dividend will fall out of the back of that based on that 70% threshold that I hit on earlier. So we’re going to continue to expect to have a higher mix of buyback going forward. And that’s going to be our priority as we walk it through this year.

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

Clay Gaspar: Nitin, it really goes down – goes back to just the core operating team. These are highly talented, highly motivated individuals that are absolutely trying to do the right thing ultimately for the shareholders they work for. Now I will remind you, this is the same team working just as hard with just as much creativity this year as they were last year. What we found is we really needed to focus. We underestimated what a slight change in capital efficiency during the first half of ‘23, meant to investors. I think that was way over extrapolated into us running out of inventory, not being able to do this anymore. We lost our minds, all that good fund. And what we showed is like hang on a second. We still have the capabilities.

We’ve got some really impressive inventory, some great quality. And importantly, these are hard-working impressive people that continue to find a way to do it better each quarter. And this is so many things below the radar that don’t always show up in the [indiscernible] data, don’t show up in the financials. I can tell you, we’re winning on lots and lots of fronts and there’s more that to come. So really excited about the go forward. I think we’ve got some good transparency in our slides on quantity of resource, quality of resource. I expect in ‘24 that we will regain a little bit of public mojo, but that, to me, is just – it’s a little overdue. So looking forward to sharing that win with the team.

Nitin Kumar: Great, thanks, guys.

Rick Muncrief: Thanks, Nitin.

Operator: Our next question comes from Doug Leggate from Bank of America. Doug, your line is now open.

Unidentified Analyst: Hey, good morning, guys. This is actually [indiscernible] on for Doug. So, thanks for taking me on. For my first question, I want to go back to the buyback, just to follow-up. I want to understand the motivations behind the strategy for ‘24. Shifting capital back to the Delaware and the margin is obviously an efficiency shift and that makes sense, but in tandem, you’re also leading back into the buyback and that looks rather intentional. So can you talk about why you see the buyback as a preferred allocation today? And why has that changed over the past several months?

Jeff Ritenour: Yes, you bet. So again, on the buyback front, what’s pretty clear to us as we kind of walk through our framework for evaluating share repo, versus the other capital allocation opportunities that we have, whether it be organic investment, inorganic investment that Rick spoke to earlier, whether it’s M&A or otherwise, and then when we step back and look at the valuation, we look at the multiples, we look at our intrinsic value model that we keep in-house and run multiple sensitivities on that. Every which way we turn, what we keep coming back to is the – our shares look undervalued relative to the broader market relative to the sector and certainly relative to the results that we expect to post as we walk our way through this year.

So – that really has been the driver and our focus going back half of last year and as we walk into 2024, and it’s why we’re biased towards having the lion’s share of our cash returns be focused on the share repurchase going forward.

Clay Gaspar: And if I could, I just want to clarify – I’m sorry, I just want to add one comment on that prior question. I think it’s a common misconception the way we lay the numbers out that we are leaning in or that we’re increasing capital to the Delaware somehow accelerating, that’s not really the case. We are the same rig count, same level of activity. The capital is actually coming down, not just in the total company, but in Delaware, but where we’re seeing the 10% inflection from the company is really a reduction in some of the other areas. So proportionately, Delaware is moving up, but on an absolute basis, we’re not consuming that inventory any faster than we had in ‘23 or years before.

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

Clay Gaspar: Was the question [indiscernible].

Unidentified Analyst: [indiscernible]

Clay Gaspar: Can we do it multiple years? I’m just making sure I understand the question.

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

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

Unidentified Analyst: Thanks for the comments.

Clay Gaspar: You bet.

Operator: Our next question comes from Neal Dingmann from Truist. Neal, your line is now open.

Neal Dingmann: Good morning, guys. Thanks for the time. Clay, first question for you. It’s on your Delaware infrastructure and takeaway. I’m just wondering, after adding so much [indiscernible] where you talked about adding so much processing, gathering, compression, water – just wondering now, are you all able to handle the continued notable upside that’s going to come with the development plan or will there be a continued build-out?

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

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

Clay Gaspar: Thanks for that question. I’m really excited about the Eagle Ford. One of the things, unlike a lot of other areas, we’ve continued to test downspacing tighter wells, subsequent well after the initial development has been done, bringing additional wells in, which is really not very favorable in most basins, it tends to work and continue to provide upside in the Eagle Ford. Now when you pair that with some of the refrac activity, we can actually feather in new wells, refrac some of the existing wells, and we’re seeing phenomenal results. As I mentioned in my prepared remarks, we are continuing to expand the runway there without any M&A dollars without – just from the existing footprint, the opportunity set continues to expand and these are very prolific, very accretive to the bottom line kind of numbers that we’re really excited about.

Neal Dingmann: Great to hear. Thank you.

Rick Muncrief: Thank you, Neal.

Operator: Our next question comes from Kevin MacCurdy from Pickering Energy Partners. Kevin, your line is now open.

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

Clay Gaspar: Yes. It’s interesting, Kevin. One of the first thing that comes to mind for me is the efficiency that I talked about in a couple of my slides, you guys know this very well. We’ve been at this game for quite a while. Sometimes that efficiency can pull more activity into the calendar year. Look, this is not our first rodeo. This is February. We’re already watching that for the full year. We’re committed to this range. But if I had to think of what could cause us to kind of float to the upside, it’s probably that kind of work where you’re seeing more opportunities bring some of that activity from ‘25 into ‘24. I think on the downside, there’s – we’re early in the year. I think the supply chain deflation opportunities are still – we’ve got a 5% year-over-year kind of baked in.

I feel good about that. I feel very confident we’re going to be able to deliver that. As the year plays out, we really need to see where that changes over time. My current crystal ball doesn’t see a lot of inflation, but there’s certainly deflation opportunities in that number, and that potentially could allow us to float down to the lower end of that range.

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

Rick Muncrief: Hi, Kevin, this is Rick. One of the things that I’ve been really proud of over the last 12 to 18 months is coming on the heels of the Validus acquisition, what we have been able to learn at a solid acreage. It’s – I would say it is second, certainly to our Black Hawk acreage. But the thing about it that we need to remind investors of and analyst is that on the Black Hawk acreage, it’s a 50-50 joint venture with BPX. BPX operates the drilling and the completion of that. And what we felt it was really from a – not only a productivity increase, but also just a strategic perspective, we thought it was imperative that we had an asset that we owned that we did the drilling that we did the completions on. The 5-day well that Clay referenced a while ago, I can tell you that absolutely exceeded anything that we had in our Validus development plan.

So when I look at that, look, now we’re having some very, very meaningful discussions with our joint venture partner there. And they’re very constructive, and I think it’s going to lead to even better performance over time in the Eagle Ford. I’m really pleased with what we’re seeing with the refrac program. It’s going to continue to drive some – I think, some long-term sustainability down there that a lot of people, I think, are underestimating. So I’ll turn it over to Clay to add any additional color, but the Eagle Ford is an area I can tell you that we’re very excited about.

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

Operator: Our next question comes from Scott Gruber from Citigroup. Scott, your line is now open.

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

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

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