Welcome to Devon Energy's conference call. At this time, all participants are in listen-only mode. This call is being recorded. I would now like to turn the call over to Mr. Scott Coody, Vice President of Investor Relations for Devon Energy. Sir, you may begin.
Thank you, operator, and welcome everyone to our conference call to discuss Devon's acquisition of Grayson Mill Energy in the Williston Basin. 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, David Harris, our Chief Corporate Development Officer, and a few other members of our senior management team. The press release and slides for today's announcement can be found on our homepage of the website. We will reference slide numbers throughout our call this morning to help everyone stay on track. Please take note of the advisory language regarding forward-looking statements in the press release, issued this morning. Comments on the call 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 the forward-looking statements. Please refer to the information on the Safe Harbor slide in the presentation as well, and the additional information contained in our SEC filings. Today's call will be 30 minutes. At this point, I will turn the call over to Devon's President and CEO, Rick Muncrief, for an overview of the transaction, and then we'll open the call to Q&A.
Thank you, Scott. Welcome, everyone, and thank you for joining us this morning. We're excited to share our thoughts on today's announcement to acquire Grayson Mill Energy and look forward to addressing your questions shortly. Now, for Devon, the Grayson Mill business is an excellent addition to our portfolio, fitting perfectly within our broader strategic framework to accumulate resource and grow our oil-weighted production in the best parts of the top U.S. shale plays. This transaction is also transformational to our operating scale in the Williston Basin and captures a meaningful runway of inventory that allows us to efficiently maintain high-margin production from this world-class oil basin for many years to come.
In addition to the strong industrial logic of the deal, the acquisition advances our financial strategy by delivering double-digit accretion to Free Cash Flow that is immediately a flow-through to shareholders in the form of higher cash distributions. Now turning to slide three. We have worked exceptionally hard through the years to assemble an asset portfolio that resides in the very best position plays on the U.S. cost curve. We believe being a low-cost, oil-weighted producer with quality, quality inventory is critical for our long-term success. As I've stated earlier, the Grayson Mill transaction is a great fit within this philosophy that opportunistically adds 100,000 Boe per day oil resource to our portfolio that substantially enhances the overall scale and scope of our upstream operations.
Pro forma for the transaction, Devon will be the one of the largest oil producers in the U.S., with average daily oil rates estimated at around 375,000 barrels of oil per day, with total volumes reaching 765,000 Boe per day. Now, as you can see on slide four, we have a history of growing oil production. With this transaction, we have now more than doubled our oil volume since 2020 through a combination of accretive acquisitions and organic growth. We expect this trend to continue. Now, turning to the asset level detail on slide five, it is easy to see that this acquisition is a great fit, adjacent to our acreage footprint and transformational to the size of our entire Williston Basin position.
This transaction secures a premier leasehold position of 307,000 net acres, positioning Devon as one of the largest operators in the play, now with over 430,000 net acres. The acquired business is expected to triple our in-basin production to roughly 150,000 Boe per day, with oil reaching almost 60% of the product mix. With enhanced scale in the basin, we expect to realize up to $50 million in annual average cost savings from operating efficiencies and marketing synergies. Now, moving to slide six. The Grayson Mill assets also expand our inventory runway in the play to about 10 years at the current pace of development. The acquisition adds 500 gross locations, consisting of a mix of 2-mile and 3-mile lateral opportunities, along with 300 high-quality refrac candidates.
Importantly, this resource effectively competes for capital within our diversified asset portfolio, allowing us to efficiently sustain our oil production in the Williston for many years. There is plenty of upside here as well. Now, I've been working in Williston for 40 years now, and I can tell you that there is still a lot of oil to be recovered in this basin. Whether it be through improved completion designs, tighter spacing, refracs, EOR, or additional exploration and development, there will be many innovations that promise to sustain the Williston Basin as one of the top three oil fields in the United States. Turning briefly to slide seven, with this inventory depth we now have, it's also important to highlight that both companies have a track record of delivering industry-leading well productivity.
The data illustrated on the slide clearly demonstrates that the average well performance over the past few years for both Devon and Grayson Mill consistently surpassed that of our leading competitors. Now, turning to slide eight. Another key point to be made is that the overall economics of the assets are bolstered by the ownership of the integrated midstream business that generates more than $125 million of EBITDA annually. This midstream infrastructure consists of an extensive network of gathering systems, disposal wells, and crude storage terminals. This midstream advantage drives peer-leading operating margins in the basin and provides us with the marketing optionality to capture higher oil pricing through access points to multiple end uses markets. Now, moving to slides nine and 10, this high-margin asset, combined with an attractive purchase price, delivers double-digit accretion to our Free Cash Flow outlook on a pro forma basis.
Due to our increased Free Cash Flow capabilities, I'm excited this morning to announce that we are increasing our share repurchase authorization by 67% to a total of $5 billion. This increased authorization provides us ample runway to opportunistically repurchase our stock and bolster our per share growth trajectory over the next few years. We also believe that the abundant Free Cash Flow from this acquisition will be additive to our dividend payout in 2025 and beyond. In addition to a higher cash return profile, we plan to earmark up to 30% of our annual free cash to reduce $2.5 billion of debt over the next 24 months or so. So in summary, on slide 11, I want to emphasize that the go-forward Devon possesses all the necessary attributes to continue to deliver outsized returns versus the broader market.
With the AI and tech mania that has a way of capturing all the headlines these days, I think it's important to remind investors that Devon has delivered the fifth-best total shareholder return of any company in the S&P 500 since 2020, outpacing the index average by a significant margin. The bottom line is that with the right strategy, the right people, the right assets, and the right financial framework, we will continue to deliver this outperformance for shareholders. The Grayson Mill acquisition only amplifies these inherent advantages, and our team is energized and ready to roll with this great addition to our multi-basin portfolio. I think it's also appropriate at this time to congratulate the entire Grayson Mill team on a successful outcome for they and their sponsors, EnCap. They've worked hard on building this company over the past number of years. Nice job.
With that, I'll now turn the call back over to Scott for Q&A.
Thanks, Rick. We will now open the call to Q&A. For today's call, please limit yourself to one question. This allows us to get to more of your questions on the call today. And with that, operator, we'll take our first question.
Thank you. Our first question is from the line of Nitin Kumar of Mizuho. Nitin, your line is now open. Please go ahead.
Good morning, Rick and team, and thanks for taking my question. I just wanna y ou know, looking at the slide, five and the map, this acreage is a little bit further away from some of your legacy assets in the basin. So I just wanna understand, what are the differences in geology and in terms of just the asset base, and are there any differences that you've noted so far in your work that could either help or hinder your execution on the asset?
Yeah, Nitin, that's a great, great question. Thanks for joining us today. You know, I think as you, as you see, eastern part of the, of the basin historically has had a nd this is east of the Nesson line that runs through there. Historically, especially on the Fort Berthold Indian Reservation, has some just phenomenal rock. As you go to the west, you've seen lighter development. The rock, rock is just a little bit tighter, but it really sets up well for exactly what you've seen, that, that development, taking place over there. I'm gonna have Clay weigh in here as well, but we're excited, especially with changing the orientation and going from the 2-mile to 3-mile laterals has truly been a game changer, and I think you're seeing it, you're seeing it in the results.
We feel very, very confident, and we love this acreage position.
Yeah, Nitin, this is Clay. Just to reiterate a couple of points. I mean, number one, biggest difference, number one, is on versus off the reservation. That is a material change for us. To have that optionality, I think, gives us a lot of flexibility in our own operations. Certainly, this adds to the significant scale of the Williston Basin. Oily inventory is very precious, and we don't ever take that for granted. But as you move west, it opens up some interesting opportunities. You know, this is kind of the product necessity is the mother of all invention kind of thing, where 3-mile laterals, you know, as that technology has really evolved, this area has really opened up and really lit up with kind of excitement. Rick also mentioned the completions technology.
As we continue to fine-tune that, this area continues to pay really nice dividends, and we're excited to have it in our portfolio.
Thank you. Our next question today is from the line of Neal Dingmann of Truist. Neal, please go ahead. Your line is open.
Morning, guys. Congrats on the deal. Rick and Clay, my question is, I know, you know, cognizant of not having the guidance out there yet, until the deal closes, but historically, at least the last several quarters, about 75% of your activity has been Delaware-based, and, you know, you mentioned three rigs will likely be running on the new property. Can you talk about maybe allocation on, on. Will that come then, and you'll have a little bit lighter activity in the Delaware as a result of that? I'm just trying to get a sense of pro forma this deal, how we might see activity between, you know, the Delaware and this sort of shakeout.
Hey, Neal, this is Clay. Thanks for the question. Yeah, I, I would say it's certainly too early to talk specifics on 2025. That, that guidance will be coming in, in the coming months. But what I can say is definitively, this, this doesn't impact our, our activity level in the Delaware Basin. That should be kind of the first call on capital, pretty consistent there. Really pleased with that economics. Have a great runway there. With this, think of this acquisition as really enhancing the multi-basin business that we have, really supplementing where we need it to in the Williston. And I think it adds, you know, really great opportunity set, not just in this year, but in, in several years to come.
Makes sense. Thanks, Clay.
Sure, Neal.
Our next question today is from the line of Kevin MacCurdy. Apologies, Kevin MacCurdy of Pickering Energy Partners. Kevin, your line will be open now if you'd like to proceed.
Good morning. I wonder if you guys could provide a little bit more color on the $50 million of synergies. What costs have you identified? And are the marketing synergies related to the midstream ownership? Thank you.
Thanks, Kevin, this is Clay again. You know, this is not your classic G&A synergies that some publicly traded combinations yield. We're thinking much more along the lines of kind of operational synergies. You know, the efficiency of scale inside the basin is critical. That opens up lots of things that we can do with our rigs, with our frack fleets, even from our marketing and supply chain side. That scale is quite valuable. I think that easily checks the box, but you also mentioned the marketing. I think as we start thinking about the infrastructure that comes with this asset, provides a lot of value. As we all know, if you can't produce the water, you can't get rid of the water efficiently, boy, it really encumbers your business.
The oil infrastructure, the gas infrastructure, all of that really adds value and provides us upside, from where we sit today. So excited about that. There'll certainly be other synergies along the way, but I think the $50 million is just a pretty conservative placeholder that we wanted to plug in.
Thank you. Our next question is from the line of Charles Meade of Johnson Rice. Charles, please go ahead. Your line is open.
Good morning, Rick and Clay, and the rest of the Devon team there. I wanted to go back to the midstream question, and I'm really trying to understand the cash flows there and how we should ascribe value there. The $125 million, is that just on the Grayson Mill assets, or is that on the combined asset base? Related to that, is that EBITDA kind of intercompany EBITDA, or are there third-party volumes that contribute to that?
Yeah, Charles, this is Jeff. You nailed it. That's exactly right. It's just related to the Grayson Mill asset business that we're acquiring, and it is effectively the, the $125 million of EBITDA that we've assumed and included in the, in the materials, is effectively intercompany. There is some third-party working interest owner EBITDA included in there, but it's very negligible. It's really driving the higher realizations that we're seeing across this business.
Got it. Got it. And then if s o if we were to think about it that way, Jeff, what I, I think you, you have some material on this, but, but what is the, Can you quantify that higher realizations on the, on the Grayson Mill assets versus, say, legacy Devon or, or, a basin standard?
Yeah, Charles, I think we've got a slide in the material. You'll actually see kind of on a relative basis across the basin, you can see that the infrastructure that's included in this business that we're acquiring effectively provides anywhere from a, you know, $3-$5 uplift in our realizations, which really sets the y ou can see it kind of in the bar chart, I think it's slide seven in our materials. You can see the improvement that we get as a result of that.
Thank you. Our next question today is from the line of Betty Jiang of Barclays. Betty, please go ahead. Your line is now open.
Good morning. Thank you for taking my question. So I wanted to ask about the inventory number highlighted in slide 6. Could you just provide a bit more context around that up to 10 years of inventory? Does that include refracs? And then how to think about the spread of those locations across the acreage between, say, that central McKenzie, Mountrail County versus the Western Extension area? Thanks.
Hey, hey, Betty, this is Scott. You were cutting out a bit. I heard slide six. I heard inventory, so I'll just turn it over to the team here with regards to just maybe an overview of the locations that we have, the 800 opportunities that we've identified and maybe what that's composed of. Clay?
Yeah, Betty, I hope this is your question. So we, we've identified 800, conservatively, 800 opportunities. 500 of those are new wells. We also have some refrac inventory. That's one thing, as you uniquely, as you move west, we think there's more refrac potential than we have seen and we've benefited from on the east side of the basin. So we're excited about that. Think of that refrac as kind of supplementing the base. What we're really focused on is the additional 500 wells of inventory. I think you might have asked about spacing. There's certainly, as you move further west, the Three Forks kind of pinches out about halfway through this 300,000 acres. So the west side is really dominated by the Bakken.
As you move on the east half of this, there's some Bakken, and there's some Three Forks potential. Anyway, I hope that answers your question. Sorry, we couldn't quite hear you.
Thank you. Our next question is from the line of Kalei Akamine of BofA Securities. Please go ahead. Your line is open. Our next question is from the line of Kalei Akamine of BofA Securities. Please go ahead. Your line is now open.
Sorry, I was on mute. My question goes to the cost structure of the acquired asset. Can you just give us a sense of how the operating expense and the logistics costs compare to legacy Devon?
Yeah. Yeah. This is David Harris. From an operating cost standpoint, we expect this asset to be pretty well in line with the legacy work we've done on our position.
Thank you, and our next question today is from the line of Scott Hanold of RBC. Please go ahead. Your line is now open.
Yeah, thanks. You know, on the 500 new drilling locations, it looks like y'all, you know, used $80 as the price to assess that at. But what does that look like at, you know, say, more a mid-cycle price, $60 or $65? And if you could also quantify, like, what percentage of those wells or what the count is Bakken versus Three Forks. I know you mentioned there's some of each, but if you can quantify that, that'd be great.
Yeah, I believe the percentage is about 80% Bakken, about 20% Three Forks. We used a $75 price deck to kind of analyze those returns. You can see the slide that shows the returns relative to our existing Williston Basin inventory. And what you can see there is the colors really dispersed nicely all the way from the front to, you know, 10+ years of inventory. So excited about this opportunity set. I think we'll continue to add value, not just today, but in years to come.
Great. Thank you. Our next question is from the line of David Deckelbaum of TD Securities. Please go ahead. Your line is open.
Thanks for taking my question. I'm curious, just, as you think about the pro forma now, you're tripling your production in the basin. Do you foresee sort of maintaining this 150 level, or is there an inherent step down, just given the fact that Grayson was growing over the last several years? I'm just curious.
Our plan right now is to maintain 150,000 BOE per day level for the foreseeable future.
Thanks, Rick.
Thank you. Our next question today is from the line of Ati Modak, Goldman Sachs. Please go ahead. Your line is now open.
Hi. Good morning, team. Thank you for taking the question. So just curious if you have any lessons from RimRock, for instance, that you could try and draw parallels to, and maybe give us a comparison on how this asset compares to what you're doing there and improvement potential.
Hey, Ati, this is Jeff. We're, we're having trouble hearing you guys. If you could try to make... Maybe speak directly into the phone, maybe that'll help, but it seems to be breaking up a little bit.
Yeah, sorry. Hopefully, this is better.
I was just trying to figure if you have any lessons from the RimRock assets that you could maybe draw parallels to or help us understand the relative positioning and quality in these assets.
Yeah. Hey, thanks, thanks for the question. I, I got you that time. That, that really helped. First of all, this is a significantly different asset than Rim Rock, in lots of regards, from scale to position, to maturity of that asset. But look, this is a humbling business, and I think the way that the thing that gets me most excited, what I really think about going forward, is our learning mentality inside of Devon. You know, we've taken some lessons. We've really learned from missteps that we had in that last deal. I think this is w e are much better positioned on not just the asset, but the team on both sides, and then as well as the, the transition program that we have. Significantly different set of circumstances today. We're really excited about where we're at.
Also, on the transition, you know, we're gonna be bringing over their employees, and so, you know, with, I think that and some very tactical things we're gonna be doing, I think will ensure a much smoother transition along. And excited about one other thing, Rick mentioned in his comments, the great work that the Grayson Mill's team has done. I just wanted to reiterate that. This is a very impressive accumulation of assets that they've put together. They've executed on it exceptionally well, and we look forward to learning from them and sharing some of our best practices as well along the way.
Thank you. And as a reminder, for any further questions, please dial star followed by one on your telephone keypad. And our next question is from the line of Paul Cheng of Scotiabank. Please go ahead. Your line is open.
Thank you. Maybe that this is for Clay. If I look at Grayson Mill's website, they are talking about 2023-
Hey, Paul, this is Scott. You're cutting out. Can you try to speak a little bit louder for us so we can hear your question? Thank you.
Sure. Sorry, can you hear me okay now?
Much better. Thank you.
No, let me o kay. If I look at Grayson Mill's website, their production in 2023 is 123,000 Boe per day, and they expect 2024 at 125,000 Boe per day. And you gentlemen, in the presentation, saying that you expect it to sustain at 100,000 barrels per day going forward. So that's a pretty substantial drop. What causing that drop? A nd that why we are not sustaining at the current production level? Thank you.
Paul, I think we got you on that. Thanks for speaking up a little bit. I think to reiterate your question, you said historically they've posted numbers closer to 120,000 or 125 ,000 barrels of oil equivalent a day. Look, I think what we've guided to is an expectation for 2025, around 100,000 barrels a day. We feel like that's a great model for us as we roll forward. Certainly, in the coming months, we throw everything into the hopper, we evaluate everything. Once we have certainty on close, and then we, you know, we have a really intense capital fight and look for the best opportunities to fund and have that all that yields will turn out to be what the resulting production will be.
But I think 100,000 is what we're guiding to give you a good idea, and the economics look good. The funding of the project looks really strong in that. Is there upside? Of course, there's always upside, but we feel real good about where we're at on the guide today.
Thank you. Our next question is from the line of Matthew Portillo of TPH. Please go ahead. Your line is now open.
Good morning, all. Can you hear me okay?
We sure can.
Thanks, Matt.
Perfect. Just a follow-up question on the lateral mix. Can you provide any additional color on the mix between the two-mile and three-mile laterals on those 500 gross locations? And then, as a second part to that question, are you considering any changes to the spacing design, or is that pretty much fixed at this point?
Yeah, Matt, this is Scott. I'll take the lateral length. About 40% of the locations that we've identified are 3-mile laterals, the rest are 2-mile laterals.
Yeah, I believe this is Rick. On the spacing, we'll see over time. The bottom line is, team's done a really good job. We're gonna follow their development procedure. We don't see any flaws with that. I can tell you there was an earlier question with the RimRock acquisition earlier. This was that. I can tell you we debated that with that team even prior to the transaction, and so we feel really, really good about where we're at right now. So we'll see over time, and it'll vary with geology. And a lot of times, quite honestly, we've talked about this on a lot of calls, spacing sometimes depends on the commodity price as well.
And so, weaker prices, you move it out, you tighten it up when times when you have much stronger commodity prices. But I think right now, fundamentally, we'll just stick to the profile they have right now.
All right. It looks like we've made it through the queue of questions for today. Appreciate your interest in Devon. If you have any other questions, feel free to follow up with the investor relations team at any point today. We'll be around all day. Once again, thank you for your time today.
This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.