Welcome to Devon Energy's Q2 Earnings Conference Call. At this time, all participants are in listen-only mode. This call is being recorded. I'd now like to turn the call over to Mr. Scott Coody, Vice President of Investor Relations. Sir, you may begin.
Good morning, and thank you to everyone for joining us on the call today. Last night, we issued an earnings release and presentation that cover our results for the quarter and updated outlook. Throughout the call today, we will make references to the earnings presentation to support prepared remarks, and these slides can be found on our website. Also joining me on the call today are Rick Muncrief, our President and CEO, Clay Gaspar, our Chief Operating Officer, Jeff Ritenour, our Chief Financial Officer, and a few other members of our senior management team. Comments today will include plans, forecasts, and estimates that are forward-looking statements under U.S. securities law. These comments are subject to assumptions, risks, and uncertainties that could cause actual results to differ from our forward-looking statements. Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials.
With that, I'll turn the call over to Rick.
Thank you, Scott. It's great to be here this morning, and we appreciate everyone taking the time to join us on the call today. By all measures, the Q2 was another excellent performance for Devon as our business continued to strengthen and build momentum. Our quarterly results were highlighted by our Delaware-focused operating plan that delivered production above our guidance expectations, capital was below budget, margins expanded, and we paid record high cash payouts to shareholders. We also took important steps to strengthen the quality and depth of our asset portfolio. All in all, it was another strong quarter of strategic and systematic execution across the tenets of our cash return business model that shareholders have become accustomed to. To begin with, I'd like to turn your attention to slide three and four, which describes who we are.
We are a financially disciplined company delivering high returns on invested capital, attractive per share growth, and large cash returns to shareholders. While our disciplined capital allocation framework on slide three is foundational to Devon's financial success, I also want to highlight that another critical competitive advantage contributing to our strong results is the depth and quality of our asset portfolio. As you can see on slide four, with Devon's portfolio anchored by our world-class Delaware Basin asset, we possess a long duration resource base that is high graded to the very best plays on the U.S. cost curve. Furthermore, with this low-cost asset portfolio, we also have diversified exposure across both oil and liquids-rich gas opportunities, affording us the flexibility to pursue the highest returns and netbacks through the commodity cycle.
While this premier multi-basin portfolio positions us to deliver strong capital efficiency and repeatable results for the foreseeable future, we are not complacent and are always looking for smart ways to strengthen our asset base. This is exactly what we accomplished with our recent acquisition of RimRock's assets in the Williston Basin, along with a series of high-impact acreage trades in the Delaware that optimized our leasehold for future development. Clay will cover these transactions in greater detail later in the call. However, I do want to emphasize that these portfolio additions are highly complementary to our existing acreage footprint. They tactically unlock quality inventory in the core of the play, and the immediate financial accretions from these transactions allow us to further step up the return of cash to shareholders. Now, moving to slide five, the key message here is very simple.
The combination of our strategy, our asset base, and execution had resulted in an impressive track record of value creation for our shareholders. Since we unveiled the industry's very first cash return framework upon the WPX merger in late 2020, we have consistently delivered on our strategy to return increasing amounts of cash to shareholders while steadily improving our investment-grade financial strength. As you can see on the chart, since the closing of the merger, we have cumulatively returned $6.2 billion of value to shareholders in only 18 months. For perspective, this value exceeds more than 100% of the combined market capitalization of the two companies at the time of the merger announcement. Unbelievable. Jumping ahead to slide seven. With the strong operational performance achieved year to date, we are raising guidance expectations for the full year of 2022.
As you can see on the top left, a key contributor to this improved outlook is our 2022 production targets increased by 3% to a range of 600,000-610,000 BOE per day. These higher volume expectations are due to better than expected well performance year to date and the positive impact from our recent bolt-on acquisition of Williston Basin. After accounting for the benefits of our share repurchase program, this outlook puts us on track to deliver a very healthy production per share growth rate of 8% this year. We are also adjusting our upstream capital to a range of $2.2 billion-$2.4 billion versus our prior guidance of approximately $2.1 billion.
This updated guidance incorporates $100 million of incremental capital from the Williston acquisition and includes additional inflationary cost pressures associated with this higher commodity price environment. Overall, at current pricing, this updated outlook is resulting in a 25%+ improvement in free cash flow generation compared to the assumptions that underpinned our original budget expectations. The key takeaway here is that our low-cost asset base is capturing the benefits of higher commodity prices and winning the battle against inflationary pressures. Now on slide eight, I want to briefly showcase how our improved 2022 outlook translates into a compelling free cash flow yield. To demonstrate this point, we have included a simple comparison of our estimated free cash flow yield in 2022 compared to other common equity benchmarks in the financial markets.
As you can see from the two charts at today's pricing, Devon's attractive free cash flow yield of 16% is up to four times higher than the broader market. I expect this valuation gap, which is at historically wide levels, to correct as investors rediscover highly profitable and value-oriented names like Devon. Now going to slide nine. With this powerful stream of free cash flow, our priorities remain unchanged, which means the first call on our free cash flow is the funding of our fixed plus variable dividend. With this predictive and formulaic framework, we are on track to pay out around $5 per share this year, which at a yield of more than 8% places Devon as one of the highest-yielding stocks in the entire U.S. market. However, I wanna be quick to add that we are not just a high-yielding dividend story.
We're also bolstering our per share growth by opportunistically repurchasing our stock. With this share repurchase program, we are on track to retire up to 6% of our outstanding shares at what we believe to be trading at a substantial discount to our intrinsic value. As you can see on the right, even with a large cash payout, we still have excess cash flow left over to further strengthen our investment-grade balance sheet. This balanced and transparent capital allocation framework provides us multiple avenues to create value for our shareholders through the cycle. Finally, on slide 14, I want to end my remarks with a few thoughts on what you can expect from Devon as we plan for the upcoming year.
While it is still a bit too premature to provide formal production and capital targets for 2023, I can tell you that there will be no shift to our strategy. We will continue to prioritize free cash flow and per share financial growth, not the pursuit of hi-top-line volume growth. We are designing a plan that pursues steady and consistent activity levels to optimize supply chain cost and certainty of execution in this exceptionally tight market. Finally, with our low break-even funding levels, we remain well-positioned to navigate the recent market volatility and build upon our track record of delivering outsized cash returns. With that, I will turn the call over to Clay to cover our operational highlights for this most recent quarter.
Thanks, Rick, and good morning, everyone. As I reflect back not just on the quarter, but the last 18 months since we've closed our merger, I'm very proud of what we've accomplished. Last year at this time, we were well past the hard work of organizational design, answering the who, but still very deep into the systems, process, and culture building that's incredibly important to answering the how of running the company. In some ways, we were rebuilding the engine while we ran the race. This year, we're continuing with the never-ending challenge of improving systems, processes, and culture, but we're also keenly focused on external factors like inflation and supply chain uncertainty. While these challenges are real and something we dedicate a lot of attention to, I'm also fully confident in our team's ability to once again differentiate Devon from the pack and execute on an exceptionally high level.
The Q2 results are a perfect example of this productivity related to this focus. As a summary of the operating results displayed on slide 16, which showcases our solid production beat, better than forecasted capital efficiency, and the expansion of our per unit margins to the highest level in more than a decade. I know it can be a bit mind-numbing when the team makes these results look as easy as they have. Listen, every well in the portfolio, the average 30-day IP for the entire company of 2,900 BOE per day per well, $60+ field level margins, and a reinvestment rate of 22% are incredibly impressive when you put them into historical context. The perpetually strong results that we've delivered since the merger between WPX and Devon is simply an outflow of three key factors.
The high caliber assets, our talented organization, and a disciplined investment framework that is designed to optimize returns and per share financial growth throughout the cycles. These key factors are held together by a steady strategic vision and a culture that exemplifies our corporate values. I wanna congratulate the entire team for the special results that we're creating together, and I'm confident we will build upon these accomplishments as we progress through the balance of the year and beyond. Now turning to slide 17. Our Delaware Basin asset was the exceptional capital efficient growth engine that drove Devon's operational outperformance in the Q2 . The net production from the Delaware continued to increase rapidly, growing 22% on a year-over-year basis.
This high margin growth was driven by 52 wells brought online that were diversified across our acreage footprint in New Mexico and the Texas State Line area. Looking at the project level detail, the top thematic takeaways was the consistent execution and outstanding well production while we achieve across the development programs. A great example of this theme was the prolific results we achieved in our Todd area in Eddy County, where we developed a highly charged thick seam of Upper Wolfcamp. The initial 30-day rates from this 12-well Wolfcamp-oriented development averaged 4,500 BOEs per well, with per well recoveries on track to exceed 1.5 million barrels of oil equivalent. With the strong upfront recoveries we're experiencing, coupled with the favorable commodity price environment, this package of wells is on track to pay out in less than six months.
Next, I wanna cover the multi-zone development success that we had in the Delaware Basin, where our recent activity successfully co-developed three different landing zones, the 3rd Bone Spring, the XY Sands, and the Upper Wolfcamp. The initial 30-day rates from Mr. Potato Head project averaged 3,100 BOE per day. Given the shallower drilling depths in this portion of the play, our D&C costs came in as low as $6.7 million per well. As we look to allocate capital for 2023 and beyond, this positive result will serve as another valuable data point to optimize future development activity and further deepen our conviction of the resource opportunity in the Delaware Basin area. Lastly on this slide, we also brought on several high return pads online in the State Line area.
Adding to our long-term track record of success in this prolific tranche of acreage, our recent capital activity was highlighted by the CBR eight and nine pads that outperformed our pre-drill expectations by as much as 20%, with the top well achieving 30-day rates as high as 4,300 BOE per day. In addition to these great wells, another impactful event for us this quarter was a recent trade completed that added to our acreage position in the State Line area. Turning to slide 18, you can see a zoomed-in map of this critical 3,000-acre trade that we completed in the Delaware Basin State Line field. You've heard me on prior quarters brag about the incredible results the team creates with these land trades. We typically execute dozens of trades every year.
In the company so far, we have executed on several trades, bringing in around 7,000 net acres to the Delaware. The trade we're highlighting today significantly enhances our Wolfcamp potential in the State Line area and unlocks more than 200 extended reach drilling locations that were previously constrained to one mile developments. This is the economic core of the play and is further enhanced with Devon's significant surface ownership, company-owned wet sand mine, water recycling and disposal infrastructure, and the midstream JV with Howard Energy. Each of these levers create an incremental margin to Devon that other operators would not benefit from. Also importantly, this transaction allowed us to trade out of acreage that was either not scalable to Devon or had lower priority within our capital allocation framework.
With this high grading of acreage and the capital efficiencies that come with this, we expect that a net present value uplift to Devon of more than $200 million on a time zero evaluation. Importantly, when we consider how these projects are getting pushed to the front of the development list, the uplift is over $350 million of present value. Moving to slide 19, another area we enhanced the depth and quality of our drilling inventory was in the Williston Basin. In June, we announced the bolt-on acquisition of RimRock's assets in Dunn County at a highly accretive valuation of around 2x cash flow. This acquisition adds contiguous position of 38,000 net acres directly offsetting the overlapping Devon's existing leasehold.
This consolidates tier one acreage on the Fort Berthold Indian Reservation, where we have an exceptional competency for not only the technical perspective, but also the strong relationships with the tribe and with the community. With completion activity lined up for the H2 of the year, we expect production from the acquired assets to exit the year around 20,000 BOE per day, increasing our pro forma production in the Williston to around 65,000 BOE per day. This acquisition also adds more than 100 highly economic undrilled locations, positioning our Williston assets to maintain this level of high margin production and strong free cash flow for years to come. Our Williston team continues to perform at an exceptionally high level, and I'm thrilled to reload their opportunity set for continued great results.
Finally, on slide 20, I'd like to call out the importance of our free cash flow generating assets that are also continuing success and sustainability of our business model. These assets may not capture as many headlines as the Delaware Basin, but I'm proud of the strong execution and consistent operating results that these teams have delivered to fulfill this critical role within our corporate strategy. As you can see by the slide, by driving capital efficiencies, optimizing base production, and keeping operating costs low, these high-quality assets are on pace to grow cash flow by about 40% this year to greater than $3 billion at today's commodity price. With our completion activity ramping up across each one of these plays in the H2 of the year, I look forward to providing another very solid update on our November call.
With that, I'll turn the call over to Jeff for a financial review. Jeff?
Thanks, Clay. I'll spend my time today covering the key drivers of our strong financial results for the quarter, and I'll also provide some insights into our outlook for the rest of the year. Beginning with production, our total volumes in the Q2 averaged 616,000 BOE per day, exceeding the midpoint of our guidance by 4%. This production beat was across all products due to another strong quarter of well productivity in the Delaware Basin. As Rick touched on earlier, with our performance to date, we now expect our volumes for the full year 2022 to be around 300 basis points ahead of our original budgeted expectations. For the H2 of the year, we expect the strongest oil growth to occur in the fourth quarter, driven by the timing of completion activity.
Moving to expenses, our lease operating and GP&T costs were $7.71 per BOE. This result was slightly elevated compared to our forecast due to higher workover activity and moderate pricing pressures across several service and supply cost categories. Overall, our exposure to higher value production coupled with a low cost structure expanded Devon's field level cash margin to $60.12 per BOE, a 22% increase from last quarter. Cutting to the bottom line, our core earnings increased for the eighth quarter in a row to $2.59 per share. This level of earnings momentum translated into operating cash flow of $2.7 billion in the Q2 . After funding our capital program, we generated $2.1 billion of free cash flow in the quarter.
This result represents the highest free cash flow generation Devon has ever delivered in a quarter and is a powerful example of the financial results our cash returns business model can deliver. The top priority for our free cash flow is the funding of our dividend. In conjunction with our earnings report, we announced a record high fixed plus variable dividend of $1.55 per share that is payable at the end of September. This payout represents a 22% increase from last quarter and includes the benefit of a 13% raise to the fixed dividend that was announced with our recent Williston Basin acquisition. In addition to the strong dividend payout, Devon also repurchased $324 million of stock in the Q2 .
Since we initiated the program last November, we've retired nearly 24 million shares, lowering our outstanding share count by 4%. We continue to believe the double digit free cash flow yield of our equity offers a unique buying opportunity for us. We also took steps to further strengthen our financial position in the quarter with cash balances increasing $832 million to a total of $3.5 billion. With this increased liquidity, Devon exited the quarter with a low net debt to EBITDA ratio of 0.4 times. Lastly, I want to briefly highlight that our disciplined strategy and execution are resulting in excellent returns on capital employed. Based on our performance year to date and our outlook for the remainder of the year, I expect our return on capital employed to exceed 40% in 2022.
This outstanding return profile, combined with our cash return framework, further reinforces the unique investment opportunity Devon offers versus other opportunities in the market today. With that, I'll now turn the call back to Rick for some closing comments.
Thank you, Jeff. Great job. I'd like to close today by reiterating four key messages from our call. Number one, Devon is a premier energy company, and the team is proving this quarter after quarter with our outstanding operational results and record-setting financial performance. Number two, the momentum of our business has established is resulting in an improved outlook, manifesting in higher per-share growth and cash payouts for the owners of our company. Number three, we've taken steps to opportunistically capture resource, strengthening the quality and depth of our portfolio while ensuring the long-term sustainability of our model. Number four, lastly, as we begin our planning processes for 2023, I can assure you there is no change to our strategy. We're driven by per-share value accretion, not the pursuit of volumes. I will now turn the call back over to Scott for Q&A.
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.
Thank you.
Operator, we're ready.
Our first question comes from Jeanine Wai from Barclays. Please go ahead.
Hi. Good morning, everyone. Thanks for taking our questions.
Good morning, Jeanine.
Good morning. Our first question is on discipline. You mentioned that you all, you marked to market the 2022 CapEx budget for inflation, presumably based on recent conversations with your providers. I guess how have those conversations really shaped your updated view on 2023? What we're getting at is you could pretty easily argue that returns being as high as they are, that inflation would have to get pretty high to make returns unattractive. It's pretty clear how the market defines discipline on the production growth side. How do you define discipline on the cost side?
Hey, Jeanine, it's Clay. I'll take this one. You know, the strategy remains the same. We do have categories of the strategy related to growth. The 0%-5% is kind of one of the metrics. If you refer back to slide three, we also focus a lot on free cash flow. On slide 16, we talk about some of the margins. You know that the focus is not just how much capital are we spending or how much production are we making, it's the flow-through result. While we're really excited about the margins today, and we're really excited about the 22% reinvestment rate.
You know, we have a stated goal to be somewhere below 70% on that reinvestment rate. There's a lot of flexibility on, you know, built in and allowing us to continue the strategy even with the headwinds of the very real inflation we're seeing today.
Okay, great. Maybe moving to cash returns. There's been a lot of talk on buybacks this morning. For the past two quarters, Devon has increased the buyback authorization by about the amount of share buybacks that you did during that quarter. This quarter, the board kept the authorization flat at $2 billion. We're just wondering, is there anything in particular that's driving you to treat the authorization differently this quarter than prior quarters? Thank you.
Yeah, Jeanine, this is Jeff. Thanks for the question. Yeah, the biggest thing that happened for us here at the quarter was we were blacked out the bulk of the Q2 as it relates to our share repurchase program, given the RimRock transaction that we've talked about. We didn't quite get as much done as we would have liked to. That left us with just over $800 million of authorization still available to us. We felt like we've got plenty to go execute on here over the next quarter and in the back half of this year.
Of course, if we make as much progress on that front as we hope to here in the near term, we'll absolutely go back to our board and reload that authorization to accomplish more share repurchase. It's a critical component of our cash return strategy. As Clay mentioned, we're very much focused on per share growth on all line items.
Great. Thank you very much.
The next question comes from Arun Jayaram from JP Morgan Securities. Please go ahead.
Good morning. My first question is, if we look at first half activity, you know, perhaps for Clay, you guys, you know, tied to sales 131 wells, about 80% or a little bit over 100 on Delaware Basin. We are seeing a little bit more spud activity or drilling activity in some of your other basins. I was wondering if you give us a sense of, you know, for the Q3 till Q4, maybe a little bit of help on the mix, you know, on a basin level, just broad mix.
Yeah. Arun, thanks for the question. We're still gonna be obviously dominated by Delaware activity. We have some interesting work coming in in the other basins as well, but it's. I would say for the third quarter in particular, you know, consider it at least 55% or so Delaware, some other number of wells coming in in the other areas. You're also gonna see, you know, the productivity of the Delaware Basin will also leverage that turn-in-line number to a higher productivity, the higher contribution. You know, we've gotten a lot of questions on the numbers on the kind of the flow of the capital throughout the year. We're definitely more back-end weighted with the activity, the number of wells that we bring online.
We also have an ebb and flow related to working interest that relates also to some of the capital flows as well.
Great. That's helpful. Maybe one for Rick. Rick, you guys announced a couple things on portfolio renewal over the last quarter, RimRock, plus some of the acreage trades in the Delaware. I was wondering if you view kind of RimRock as kind of a one-off, just opportunistic or is this part of a broader strategy called these niche acquisitions to address portfolio renewal?
Well, Arun, that's a good question. We get that quite a bit, and I think we have been very consistent with our answer for the last couple of years. We will always be looking for unique opportunities like RimRock afforded us, also like the acreage trade that Clay talked about. We'll continue to look for those opportunities. You know, I'll say this. There's something pretty attractive about buying something that 2x cash flow you know in this day and time, and when you think that it really fits in with your story and you've got the industrial logic. You know, I don't expect us to ever be a serial purchaser per se.
I hear that term a lot, but I will say that we'll always be looking for opportunities to strengthen our company's asset base and, you know, continue to build Devon for the long haul. We mentioned earlier this year, you know, we celebrate our 50th anniversary as a company, and we really think about multi-decade. When we talk about it's just not an arm-waving exercise. We truly are committed to that.
Thanks, Rick.
The next question comes from Doug Leggate from Bank of America. Please go ahead, Doug.
Well, thanks. Good morning, everyone.
Good morning, Doug.
Rick, I wonder if I could ask you or maybe Jeff about the H2 CapEx run rate. Obviously, RimRock is part of that, but there was also some midstream spending in there. How should we think about the 2023 implications of the H2 of 2022? Can we kind of annualize that and get a handle as to what we think CapEx might look like next year?
Well, yeah. You know, I'd say this, Doug, it's as we said in our prepared comments, it's a little early for us to give you granular detail. You know, we're gonna continue to stick with our strategy of, you know, maintenance type spending level. You talk about the midstream asset spending. We do have, you know, some expansion. We have the joint venture. We're gonna be building our third train. That JV is going very well. We've got the 400 million-a-day cryo plant is full, and so we'll be working with our partners there to expand that to handle, you know, our gas production there. Still too early for us to be laying out any 2023 numbers.
I don't know if Clay or Jeff wanna weigh in on that, but that's kind of where we're at right now, Doug.
Okay. Thank you. Rick, I guess my follow-up would be on gas. The economics of your portfolio, you know, obviously has got a lot of variability in it depending on what the gas deck is. Obviously it looks to us at least that the outlook for U.S. gas has been reset some here, maybe to some kind of a new normal. I'm just wondering if you could talk then about capital allocation across the portfolio. Obviously what I've got in mind is in MidCon in particular.
Yeah, that's Doug, that's a great question. We get it quite a bit. I can tell you, when you're looking at an $8 commodity price for gas, it's, I think, people listen to us more than they did back when it was a $3.50 gas price. We talked about the diversity that we enjoy with this portfolio that we have.
For us, I don't know that you're going to see us change our capital program allocations because recall that in our Delaware Basin, we do have a great deal of gas production there. So it really gives us some wonderful returns. We do have four rigs running here in the Anadarko Basin, to your point. We're seeing some great returns there. You know, the one thing that we wanna do is a little bit more assessment type work there, some ideas that we have. We'll be very measured with that. But it's a wonderful asset. We have a great acreage position. We have a great joint venture partner, as we talked about with Dow.
You know, that JV is going very well. We're generating some phenomenal returns with it. We're gonna be very measured, very thoughtful about it. I wouldn't expect us to have significant changes in our capital allocation mix.
All right. I appreciate the answer. Thanks, Rick.
Thank you.
The next question comes from Scott Hanold from RBC Capital Markets. Please go ahead, Scott.
Yeah, thanks. You know, my first question is you know, gonna be around, you know, your view of intrinsic value. Could you give us a sense of, you know, how you get your arms around what the, you know, Devon's intrinsic value is and, you know, how aggressive will you get on the stock buybacks? Is part of that discussion be interesting to hear your thoughts on your 50% variable dividend payout ratio, if there's some flexibility to move higher than that, or is really just keeping optionality for buybacks and maybe bolt-on and other kind of M&A activity the continued plan?
Yeah, Scott, this is Jeff. Thanks for the question. Maybe I'll hit the second part first, which is, you know, we're big believers in all of the above. So, you know, with the framework that we've laid out provides, you know, an opportunity for a fixed plus variable dividend, and then the share repurchases as you mentioned. We think all those are critical components to deliver on the business and operating in the financial model that we've laid out. Feel really good about that. Don't expect to see that change from us in the near term. We feel really good about the 50%, you know, threshold level for the variable dividend.
As you point out, it provides us flexibility to bring cash back to the balance sheet for, obviously any debt repurchases that we wanna do, which we've mapped some of that out, you know, here over the last couple calls. We've got $1 billion we think we can do over the next two years, which is important to us, to maintain our financial strength on the balance sheet. On top of that, we can execute on our share repurchase initiative. To your first question around intrinsic value and how we kinda think about the share repurchase, we're just like you guys.
We've got three, four, five, 10 different models that we look at when we evaluate our core business, run sensitivities on, you know, operationally and financially, different price decks, different discount rates, and how we think about that, calculating that intrinsic value. We also do a lot of market comparisons, right? With from a multiple standpoint and otherwise. Bottom line is when we put all that together, any which way we cut it, we think our shares are, you know, an outstanding value right now and have been for some time.
When you look at the business model that we've rolled out and the outputs that we're generating, case in point, the second quarter result, it's pretty clear to us that folks ought to be buying our equity, and that's exactly what we're gonna be doing going forward. As I mentioned earlier, we've got over $800 million to go execute remaining on the current authorization and expect to approach the board later this year for additional upside.
That's great color. Thanks. My follow-up question is, you know, you talked about, you know, looking at opportunistic activity, I mean, with the bolt-ons and RimRock. But I think the term you used for that is portfolio renewal. Can you give us a sense of how you think about portfolio renewal versus, you know, acquisition for scale? Is Devon's, you know, the a right scale for to be a very efficient company, or do you think there is still some advantages of rather than just buying stuff for renewal, just for scale to have better cost efficiency on a per unit basis?
Well, you know, I'll say this. I think we're gonna continue to see opportunities that, you know, come our way that we have to contemplate a number of things. Number one is the renewal, if you will, of inventory. You know, we drill 300-400 wells a year. So you just think of that. Even though you've got a deep inventory, you know, we are an industry that needs to continue to renew your inventory, whether it's through exploration or transactions. You know, I think that'll always be part of our game plan to consider those. There's also other things that come into play.
Clay mentioned the acreage trades, where suddenly, you know, we can drill another couple of hundred two-mile laterals instead of one mile. I can tell you, it just supercharges your returns. There's a lot of ways we'll do that. We have a great team, both the land and the business development side. We look at all sorts of opportunities. We have a very high bar, and we're gonna keep that bar quite high, and we can do that because of the inventory that we currently enjoy. I just don't know that we'll always say that it's just absolutely part of our game plan.
I do think we'll have opportunities that come our way that could make sense for us.
Understood. Thanks.
Yeah, thank you.
The next question comes from Neal Dingmann from Truist Securities. Please go ahead.
Morning, guys. I appreciate shareholder returns, Devon. You guys are gonna continue paying out. Rick, my question is rather more on overall strategy. Specifically, are there macro drivers or maybe even change in large investor sentiment that would have you all consider potentially more growth, you know, let's say, next year, coupled with this large shareholder return?
You know, the shareholders we talk to and we frequently engage with, you know, the feedback we get continues to be, you know, similar to ours, and that is focused on a per share approach. When we talk about growth, it's a per share growth. I, you know, fundamentally, unless we have shareholders, numerous shareholders that come in and say, "Look, absolutely, we do not like these big dividends. We do not like your share repurchase programs. We want you to go back to a growth model." Until we see that, you know, I see no reason to change our strategy. This is a strategy that we didn't.
You know, we've really not tweaked our strategy since we laid out the merger announcement September of 2020 nearly two years ago. I think we've been very consistent. You know, we did like a few quarters back, we did talk about bumping our fixed dividend, and we also talked about adding the share repurchase option. Those are things that really just solidified our cash return model. I think as commodity prices strengthened, we saw it just really endeared us to our shareholders when you could go across with all those options and deliver across the board.
To go back and completely change our strategy, I don't know, it just seems like a real long putt for us right now. You know, we're certainly not getting that feedback from our investors.
Yeah. No, I would agree. That would definitely a long putt today. Then second question, maybe for Clay on Delaware activity specifically. Could you address the current and future federal permits, of course in the New Mexico area? I'm just wondering, will these permits or potentially just in the entire play lease expirations cause you to reallocate more activity into either Southern Delaware or Lea County than you currently have?
Yeah. Thanks for the question, Neal. It's, you know, I relate the federal land, it's kinda like working international stuff. You have certain rules to live by. There's really good things about it, and there's some challenging things about it. I think specifically with the federal lands is you need to have a long view on a program. You need to be two years out ahead. You need to plan for your right of ways. You need to plan for your tie-ins. You need to plan for all the contingencies, and that's how we treat it. Happy to report we still have 600+ permits out ahead of us. That gives us plenty of runway. We're working very diligently with the local BLM office. I think they have a better understanding of what D.C.'s asking them to do.
Great hardworking people that want to do their jobs well, and we work really hard to make them successful at helping us do what we need to do. I would say so far we feel good about the trajectory. There's always the concern of something changing. We'll react to that then. I think most importantly is having a long vision, a roadmap that allows us to stay out in front. As Rick mentioned earlier, you know, having a diverse portfolio, having assets on the Texas side of the basin, having assets in other areas around the country is only accretive to the story.
Currently, we're allocating quite a bit of our total capital to the northern Delaware because of the amazing returns that we have there, and the great work that the team does allowing us to execute on it.
Thanks, guys.
The next question comes from John Freeman from Raymond James. Please go ahead, John.
Good morning. The Delaware well results continue to look quite good. It is interesting that the lateral lengths are a good bit shorter through the H1 of the year than what we've seen the prior couple years. Obviously y'all highlighted the state line acreage trade that y'all did, which you know, cored up a good bit of the acres there, allowed you to do some more extended reach laterals. I guess I'm just trying to get a sense of kind of, I guess, A, what has kind of driven kind of the first half activity to be, you know, maybe on the shorter side on the laterals. Again, good results, but the laterals being a good bit shorter than what we've been accustomed to.
Maybe how to think about that going forward if we'll kind of move back toward that 10,000 type lateral length or better.
Yeah. John, appreciate the question. We are always striving to drill long laterals, and long today is sometimes two, sometimes three-mile laterals. We've built really good proficiency in multiple basins to drill three-mile laterals in North Dakota and the Anadarko Basin, quite a bit all over the Delaware Basin as well. Where the land position allows us to do that's often our first option. I can tell you in a little bit more of a mature development, you kind of set the tone on development, for example, two-mile lateral development relatively early, and once that's established, it's hard to revert to three miles. You just saw the great trade that we did, allowing us to go from one mile to two mile. That's of very high importance. We really try.
We've been holding back all that development, those nine DSUs, avoiding the one-mile drilling because we had hoped to be able to get this transaction completed. You'll continue to see us push two and three miles, and sometimes we'll have 7,500s out of necessity and of course, the occasional one mile. As I look at the results for the second quarter, 9,100 feet is what we delivered. That's a little bit shorter than the 9,700-10,000 that we'd seen in prior quarters. I wouldn't take that as a statistical anomaly. It's just a stack of how many actual three miles versus how many 7,500s fell into that quarter. We're always trying to push longer and keep that capital efficiency up high.
Thanks, Clay. The follow-up question from me, you know, in the past, you've talked about one of the things that y'all have used to try and combat cost inflation is sort of y'all's size and kind of consistent activity levels in terms of being able to look out and maybe, you know, layer in some longer term sort of contracts for both materials and services. I'm just curious if we could get some feel for kind of what, you know, the environment is at the moment in terms of service providers kind of willingness to to offer longer term contracts through 2023, and if it's or if it's just too cost prohibitive to kind of do that at this point.
Yeah. John, appreciate you bringing up the question because it's if it was important last year, it's 10x important this year. In fact, I would even point to a transaction like RimRock as maybe one of the contributing factors of us being able to get that deal done. As you could imagine, working in a tough environment like North Dakota, having to try and pick up, drop various services, it is a really tall order. Even to get basic casing design and some of the basic equipment necessary to get work done. I think that allowed us to come in with scale and have a higher degree of execution certainty and kind of break the logjam.
We had been trying to buy this particular piece of business for several years, and I think that was a contributing factor. Like I said, incredibly important. We're really proud of the business model. The consistency helps a ton as we have lots of dialogue with our service company partners. It's the first thing they bring up. Number one is scale. Number two is consistency. Very much top of mind. Specific to your question on longer time contracting, there's always an appetite for us, from our side, from their side. It's just a matter of that, kind of that bid-ask spread. We have our own view on where service cost is gonna go.
Kind of pairing that out and lining that up, I would say we try to balance some of the longer term and mid and shorter term as well to keep ourselves active in the market.
Thanks, Clay. Appreciate the responses.
The next question comes from Neil Mehta from Goldman Sachs & Co. Please go ahead.
Thank you. You know, for Rick, the first question is for you on the macro. You've had a really good call and better than most on the oil macro with the bullish view that you laid out earlier this year on one of the calls. We're going into an OPEC meeting tomorrow. I'd just love to hear your perspective on the moving pieces, them being the demand outlook, U.S. production, decline rates in non-OPEC, and obviously OPEC behavior. How do you think about the moving pieces as we look forward and the sustainability of this upcycle?
Yeah. Neil , great question. You know, I guess for us, we think that just fundamentally, you know, OPEC is. We'll see what they come up with. You know, they probably may handicap a little bit of the concerns around a possible recession that, you know, that could impact demand somewhat. I don't think it's gonna be very large. If they were to bump their, let's say Saudi specifically, if they were to bump their productivity, I don't think it would be a large bump because I think in the back of their minds, they're looking at a lot of data like we all are, right? And so
They're gonna be. I think they're gonna be very measured. The rest of OPEC, I just think quite honestly are gonna be very, very challenged to getting more closer quotas. That's been, I think, well represented. For us, when we think about maybe a slight uptick in Saudis' production, maybe even the UAE, but I don't think it's gonna be that strong. You see continued discipline. You do see some growth here in the lower 48, but it's still a disciplined approach. China is. There's a point in time when you will see that demand, I believe, increase as they start reopening.
In our mind, demand is gonna be strong, and I think demand is gonna be strong. You'll still see some demand growth, you know, until we see prices, you know. I think WTI, you know, north of $120, that's kinda what we thought the first time, and it, you know, pulled back and could have been just circumstantial. We'll see. I think for us, we're very, you know, very constructive on the commodity price environment. That's both on the crude side and then on the gas side too. You know, I've been a little surprised that gas didn't pull back a little harder and stay.
You know, it's, I think, you know, we've talked about it with our team. You know, just fundamentally, you do not wanna be short gas in this world, and I think that's had that point driven, whether it's a, you know, a Uri storm or type storm or some of the geopolitical things. You just do not wanna be short gas. That's an uncomfortable place for governments and utilities and, you know, the greater society. We're very constructive. I think for us, you know, just, you know, Neil, we're very pleased with our execution. We're staying on top of the supply chains the best we can, and it's, I think, going well.
You know, we've made some really strong moves on the marketing front, both on the gas side and the crude side to ensure, in my mind, very consistent, reliable flows to the market. I think we've done what we need to do and I guess the takeaway for us is that we still are constructive on demand, both on the oil and gas side.
Yeah. That's really helpful perspective. If I could dive a little deeper into the U.S. production profile, you know, that's one of the great debates in the oil markets right now is where we are in terms of productivity of U.S. shale and whether the U.S. oil assets are maturing, at which point, we're moving more to maintenance mode versus growth mode. You have a unique perspective 'cause you operate in so many different basins. I would love your perspective on whether we should be thinking of the U.S. as more of a mature basin as opposed to a growth basin, which again, would support the more constructive macro view.
Yeah. I think, let's start with crude. I think for us, you know, there's ranges of estimates out there, so we think about the balance of growth throughout the back half of 2022, and we. You know, we're probably a little more conservative than what some of the estimates are. In other words, we're not as bullish on U.S. growth as some will be for the back half. There's a number of reasons there. I think as far as the maturation, where we're at with the lower 48 plays, you know, fundamentally, I think you've seen places like the Bakken, the Eagle Ford, in particular, where you've seen.
Volumes are hanging in there, but you're really not seeing a lot of growth. I think we did see an uptick in the Eagle Ford, but it's come back some. I think both of those basins will be challenged to grow much. I think you have plays like the DJ and the Anadarko. We're not in the DJ, but you know that's a place we watch. I think in places like, especially like the Anadarko, you can see some growth there, but it's gonna be, I think, in the aggregate, somewhat moderate. It all comes down to the Permian, and I think the Permian will continue to be the only basin that grows substantially.
Even with the Permian, I think you'll start seeing impacts of, you know, things like the supply chain pinch and others. I think many of the private operators have been the ones that have driven the growth, you know, I'd really say about the last 12 months. I think that's gonna moderate a little bit. You know, we'll see how it all plays out. You'll still see growth obviously, but I think it's gonna play out a little bit. It may not be quite as much growth as some people have forecasted. We'll see how it plays out.
Thanks, Rick.
Yeah. Thank you.
The next question is from Matthew Portillo from TPH&Co. Please go ahead.
Good morning, all. Perhaps just a question.
Good morning, Matt.
Question for Clay around delineation in the Permian. You've had some pretty outstanding results in the Bone Spring, and I was curious how your thinking on that play has evolved as you've worked the asset both in New Mexico and at the state line, and what that might mean for inventory expansion over time.
Yeah, Matt, thanks for the question. Yeah, you might have noticed that, in the slide we highlighted some of the results. On the New Mexico side, it was really focused a lot on the Wolfcamp, which has kind of been seen as the secondary bench.
Secondary to some of the Bone Spring activity that's dominated the area for the last few years. Then on the Texas side, we actually talked a lot about the Bone Spring, which again is a little bit secondary historically to Wolfcamp. As you can see from the results, these results are exceptional. It gives us great confidence that the productivity of Wolfcamp and Delaware doesn't change magically at the border. It's pretty ubiquitous throughout this part of the Delaware Basin. The real trick is finding out the right recipe, spacing, staggering, sequencing, and the team's making tremendous progress on that. It's kinda one of the hidden synergies of having two really strong teams that have worked this problem individually, come together, compare notes, and really try and parse out what is the right solution on this.
We'll never have the final answer, but I can tell you we are much further along than we were even just a year or two ago in understanding how to do this, and that's certainly a significant contribution to our understanding of the portfolio and the incredible results that you're seeing today.
Great. Just as a quick follow-up, last quarter you highlighted the potential savings from vertical integration on your sand mine expansion in the Permian. I was just curious if you'd give us updated thoughts on potentially expanding this operation beyond the Permian and additional mines that might be able to be developed going forward to continue to lower your cost on development.
Yeah, we're certainly looking at it. You know, when a slide like that makes the deck, you can bet around the company everybody wants some of that. It's been a lot of fun to see the excitement and the kinda creativity around the organization. What I'll tell you is we have a really unique position in the Delaware. One, it starts with the geology, in this case, the surface geology, but also the ownership, also the logistics. Those holes have to line up for us to be able to execute on this. I would say I'm cautiously optimistic at this point of being able to expand not just into Delaware, but to other basins and use some of the same techniques. We're learning a lot, but it's been a real home run to our operations.
As I mentioned this trade, the wet sand mine that we have up and running even further enhances the already incredible economics that we're producing. That leveraging of the margin, especially in a place like State Line, is just pretty phenomenal. Happy to see more of it in due time.
Thank you.
Thanks, Matt.
The next question is from Kevin MacCurdy from Pickering Energy Partners. Please go ahead, Kevin.
Hey, good morning guys. My question is, now that you've closed on the RimRock acquisition, I'm curious what you're seeing on costs compared to your legacy acreage and any opportunities for further efficiencies.
Thanks, Kevin. I would say it's really pretty early. We are just taking over some of the operations now. You know, best thing to do is a whole lot of consistency to make sure we don't have any of the wheels fall off in the process. There's certainly, you know, techniques. I would say generally speaking, completion designs are roughly similar. I think we'll see some tweaking. I think certainly our supply chain efforts will help right away in kind of the next round of wells. I wanna be real clear, we are also taking this opportunity to learn. You know, we can learn from everybody. RimRock is fighting the good fight just as everyone else in our industry is doing.
Every time we either look at one of these deals or when we're able to actually consummate a deal, we take it as an opportunity to step up our own game as well. There's things mainly on the facility side, some nuggets that we've already picked up and we're exporting to the rest of the basin, from this transaction.
Great. As a follow-up, any color that you can give us on the comment of steady and consistent activity levels next year, and maybe how production could trend from your Q4 exit rate at a steady and consistent level?
Yeah, I would just say directionally, you know, same strategy, so 0%-5%. You know, when we come off that zero or low end growth, know that it takes time to move that. I would say where we stand today, you know, consider us on the low end of that 0%-5% range. As you see in our quarters, we'll have quarters that are a little higher and a little lower, but when you zoom out a little bit and you draw a line through it, we're well inside the strategy and we hope that we plan for that to continue into 2023.
All right. Well, it looks like we're at the end of our.
Yeah.
It looks like we're at the end of our time slot today. We appreciate everyone's interest in Devon, and if there's a few questions we didn't get to, gosh, reach out to the investor relations team at any time. Thank you and have a good day.
Thank you all for joining. This now concludes today's call. Please disconnect your lines.