All right. Moving on to our next one. Clay Gaspar is CEO of Devon Energy. Clay, I was just complimenting you on how great of a job Devon is doing this year with just crushing it on the cost side.
I have to say there's TR walking out. That's Teddy Roosevelt, the great-grandson of the other Teddy Roosevelt. Want to say hi, TR? How are you doing, man?
Yeah, you as well. Always a pleasure.
Welcome. We'll get a good start on this conversation.
Yeah, no, thanks for the compliment, Betty. It's a hard fight. I mean, we're in it every day, and our credibility is always on display every quarter. We have a report card that we display as a publicly traded company, and we get that. We have to earn it every single day. I appreciate the compliments on behalf of the team. Things are going quite well.
Yeah, the, so digging a bit deeper on the $1 billion cost optimization, when you guys first came out with the targets, it was met with, it was surprising.
Rightfully so.
Yeah.
It's a big number.
It's a big number in the maturing portfolio. How did you guys evaluate it, the opportunity? How are you able to execute it so fast? Was there something changed organizationally and execution-wise that enabled you to deliver that?
Yeah, I think one of the funniest things I heard was, "All right, Clay, you've been sitting in the COO seat. If you've had all this value, why don't you just jump in and grab it?" I think there was a window of opportunities. In a publicly traded company, we're over a 50-year-old company, you know, $20 billion, $30 billion organization. I think there's always opportunity to wring out just a little bit more value. In this case, we really set a pretty lofty goal. With the change in CEO, we said, "Okay, how do we maximize the opportunity of this window?" Jeff Ritenour and I sat down at the very beginning. "Okay, what's that, what's that north star? What's the one thing that we can point to that really incites the organization, the organization entirely towards a common goal?" We selected free cash flow as that overall target.
No doubt about it, the drilling guys, the completing folks, the guys that really are really focused on the capital, they get a ton of attention because of the incredible work that they're doing to drive that cost structure down. You get folks really on the production side that, yeah, every day they're managing chokes, they're looking at artificial lift, they're managing cost structure. They have a great opportunity to add value to the organization every single day. There's another, you know, hundreds, if not thousands of people in the organization that also need to feel that level of excitement around, "We can do just a little bit more." When we pulled the number together, we had a team, a small team that came together. Scott Coody was part of it. We said, "Okay, what's the big aspirational goal?
This is the target we want to go to." We settled in on free cash flow. The initial approach was, "We can do $700 million in three years." I said, "Yeah, $700 million is a good number, but $1 billion is a whole lot." You know, a billion with your little pinky on your corner of your mouth is a whole lot cooler number. I said, "About that three years, our investment community can't think in terms of three years. Next year has a lot better ring to it." We settled on a $1 billion next year, which is by year-end 2026, really manifesting in 2027. I think that was quite aspirational. We didn't know how we were going to get there. We had a pretty good handle on a few things that we already had line of sight to.
What really started this free cash flow focus was we had some work that we had been doing for a couple of years that we were going to be able to announce more publicly. Some of these were like midstream contracts and other things that were going to seriously lower our cost structure. Each one of these deals was probably not 8-K worthy themselves, but you start pulling your arms around the preponderance of these number of operations and opportunities, and you start getting into these really big numbers. I think it was as much about manifesting the opportunity, really drawing to that north star. We had a pretty good runway on some big projects already underway, and then most importantly, getting the organization really pointed to that common north star that everyone, every single person, can contribute.
There's a whole host of technology, kind of a complement to all of this, but everybody can impact this free cash flow. I think really drawing the organization towards that has been really great.
I think we're just less than a year into this. Is the team going like, "Okay, everything we thought we saw before, now we are adding, there's more.
Success begets success. It gets people excited about, "Wait a minute, I can contribute to this." I mentioned the technology piece. One of the organizational changes that we had was we promoted our Chief Technology Officer to the executive committee, direct report to me. That is not just symbolic. Trey Lowe is his name. He's a longtime Devon guy, operational background, very savvy on the business that we do, but has always been a self-described tech nerd. You think about that one-two combination of truly understanding the business, but seeing everything through a technology-oriented lens, I think is also a great opportunity. He's not just our CTO. He's also the individual, the executive that's leading this business optimization. When I talk about it having a technology bent, it truly has a technology bent because the core leader to that process is our technology leader.
Everything is viewed through the lens of efficiency, optimization, value creation. Tom Hellman, who's with us in the audience today, is a new member who came in from the outside to join the executive committee. Tom said it well. He's like, "Look, if we're doing all this technology stuff and we're making jobs easier or we're saving people time in the day, that doesn't pay the bills. I want barrels or I want dollars." I just love that real nature of technology is not just here for fun. It's about creating value. All of that contributes to this billion-dollar target and really helps us continue to hone in on this north star.
Right. I was going to ask it later, but since you brought up technology and AI integration, it's all the rage this year. How much of what you see, like the leading edge, do you think things are moving so fast and improving so quickly that, how much of that are you getting, are you implementing internally, and how transformative is doing the leading edge and integrating into their organization?
I'm about to jump out of my seat. I'm so excited. Count me as an absolute AI bull. Whatever hyperbole you want to lay out there, I think it's going to be bigger than that. We are seeing significant and very material benefits. One of the ways that we kind of set this up to begin with was thinking about, you know, certainly when ChatGPT came out in November of 2022, by February of 2022, we're already thinking internally, "How in the world do we leverage this?" At first, it was getting, planning our next vacation or finding the chili recipe to win the chili cook-off or something, just anything to use it. We're really trying to push the use cases around the organization, knowing that this is a solution, not yet knowing what the challenges or problems that we were going to solve.
Quickly, I met resistance from my general counsel, and it was a brilliant interaction between executive members because I was pushing this. Everybody's had to use this. We got to turn the organization loose on this. His reminder was, "By the way, we don't have any securities in place around this." We started loading financials up into ChatGPT. That is a horrible outcome for the organization. By March of 2023, we hit pause. By May of 2023, we launched our first ChatDVN. This is a fully firewalled, protected, internal platform that we can then leverage all of the latest large language models and have the safety and security of turning the organization loose on ChatDVN. Now, two years later, we're on ChatDVN 3.0. We've had 100% training around the company on a ChatDVN 101 class. Everybody's been through it.
Inside of the Oklahoma City headquarters, we have near 100% utilization rate. Think about that. Every attorney, every accountant, not just the scientists and the engineers, nearly every person in that headquarters has used it in one capacity or another, and they're starting to grow that momentum. As of a couple of weeks ago, we hit a 50% milestone. On that particular day, 50% of the organization hit it and used it in one capacity or another. That momentum is starting to grow. One of the early goals was, how do we take what we characterize? We think of time use studies. We probably spend 75% of our time looking for data and 25% of the time analyzing the data. How do we flip-flop that? How do we take 75% of the time using the data and only 25%, you know, actually looking for the data?
What that manifests in is a three-times multiplier on the productivity of those employees. I'll go back to Tom's comment. If it doesn't translate into dollars or barrels, we're not winning yet. How do we evolve from time use studies and efficiency to real value creation? I could go on for a lot more than 19 minutes on use cases, but we were actually seeing, we had a board meeting yesterday where we were giving some updates to the board. We brought in one of our drilling supervisors, and he's talking about real-world examples on a daily basis of driving efficiencies throughout the organization on the drilling side, manifesting in more efficient drill times and minimizing bit destruction, and then ultimately driving wells down faster for more efficient costs. We see that throughout the organization. Count me as a pro AI guy.
Oh, my. Okay, so what I've heard so far is a lot more room for efficiency gains, lower costs, better productivity, and all that. The one area of artificial intelligence application that I've been wondering about is the whole resource recovery. Yeah, whether that, because that's a big question mark on the industry, is the resource duration and inventory depth. Do you find using artificial intelligence, looking at the data that you have in-house, is able to unlock new resources that's now economical with a lower cost that you're able to, you know, develop that asset?
I think about three points in time. The first point in time is when the first opportunity for us to actually see the rock that we're drilling. We're taking rock samples. You're getting cuttings as you're drilling the wells. You're taking these cuttings at the surface, and you typically have a geologist on location that's describing those cuttings. This type of sandstone, this color, these kind of angular features. For the first time, you actually hold that rock in your hand and you know what you're doing. Understanding the rock is pretty incredibly important. We're now taking artificial intelligence, and guess what? It's so much better than geologists. Consistently, 24/7, 365 on holiday weekends, at 3:00 A.M., doing that description consistently and productively than we've ever been able to do before. Small example. Actually drilling the wells.
I've talked about some of those examples on how we're drilling more efficiently and using artificial intelligence to steer the wells and efficiently get those wells down. From a production standpoint, we're using artificial intelligence now thinking about how do you control a super system of wells. Maybe you have 20 or 30 wells all tied back to artificial lift. One type of artificial lift is centralized gas lift. You've got central compression facilities directing certain amounts of gas to individual wells. All those wells are tied back to another system, a midstream system. That's tied back to compression. It's tied back to ambient temperatures and all the other dynamic things that are going on. How do you optimize that well's productivity, given all of the interconnectedness of those constraints?
I can tell you a year ago, it's a human being watching gauges, bouncing around, looking at automation because we gather a lot of this data into a central facility, and then either calling out and physically adjusting chokes or compressor settings, or maybe at the push of a button, making those adjustments. Now, bring in artificial intelligence. It's constantly, again, 24/7, 365, looking at all those systems and all of those opportunities to make adjustments and doing that real-time. That is an absolute step change. How do you measure that? Certainly in productivity, but looking at base declines and looking at uptime efficiency gains really ring the cash register and create more value.
Got it. That's what's driving the production of.
Oh, I'm sorry, Betty. I thought about one more. Sorry to interrupt. You asked specifically about exploration. There's a whole other effort thinking about how do you take the deep learning models, like an o3 type model, and then apply that to geologic understanding and then thinking in conjunction with our brilliant geologists, brilliant engineers to think about how do we create more value from these opportunities, bypass zones, bypass basins, and that's some really exciting work as well. Sorry, back to you.
Great. What you were saying about the production optimization ties back to the cost optimization program. Production optimization is a piece of it. I forgot whether that's a $300 million or $400 million number.
Pretty much.
That's everything that you were saying about optimizing the decline and then the cycle time is what feeds, or optimizing the lift using artificial intelligence. That's what's enabling the production optimization.
Yes.
Is that?
That's part of it. You know, thinking about how do we leverage technology? How do we use the genius human beings in conjunction with the technology to lower base declines, improve recovery factors, ultimately manifesting in better production? The byproduct, I'm sorry, I get really excited about this. The byproduct of improving that base decline and improving that uptime is that now, assuming that we hold the line on this maintenance capital, we're kind of a mid-380s oil-producing company. Let's say we just continue to run that forward. Now, the maintenance capital required, the number of sticks, the amount of that precious inventory that we consume every year gets a little bit lighter lift each year. Think of the business optimization as also an inventory enhancer.
No, absolutely. It's a virtuous cycle. All right, I can geek out on this a lot more, but back to the free cash flow trajectory. The maintenance cutback actually feeds into this question. Like, how to think about the business free cash flow generative ability beyond this year? Because you have the cost tailwind, you got the tax tailwind, you got the
Maturing of the portfolio as a headquarters.
Yes, maturity of the portfolio where it gets less capital intensive. How do you see that free cash flow wedge expanding?
Yeah, that's the challenge we fight every day, right? We're always trying to drill our best wells first. Inevitably, we are chewing through some really good inventory, and inevitably, like everyone else, we have a creaming curve that we go through. How does technology, how does our efficiency offset that natural maturing of that portfolio? What I would tell you is when you look back in the last few years, 2022, 2023, 2024, 2025, you'll see a little bit higher average well productivity, a little bit lower. Inside those high and low watermarks is kind of a reasonable expectation of what we think our productive capacity is from our existing inventory as we fast forward out three, five years, kind of into the visible future. Now, five years from now, we're going to be a whole lot smarter and we'll be a whole lot better and a lot more efficient.
I'll reserve judgment on years six, seven, and eight just yet. I would say for the foreseeable future, we think we're in that productivity bandwidth. You think about the capital efficiencies, you think about the technology evolution. I'm pretty optimistic on a growing free cash flow. We're in a ballpark of about $3 billion this year. I think that can continue to expand in the next coming years. Certainly, that is the line of sight, the focus that we have with this business optimization. That is the north star. You need to hold us accountable to growing. Of course, that takes into account a presumption of a mid-cycle commodity price environment. I mean, oil price certainly is the biggest input on free cash flow. We run about a $65 mid-cycle, and that's plus or minus about where we've been.
Amazingly consistently, by the way, even with the call for too much oil, OPEC oil coming online and all that, I think we haven't been too terribly surprised that gas hasn't run away, and I don't think we've been too terribly surprised that oil hasn't fallen back. We're about a $350, $65 shop running for the next few years. Hopefully, as the oil production comes back online, continues to come in online, we'll have to watch, you know, China demand. We certainly watch all the macro signals, but we don't see a significant indication of things running away one way or another.
That makes sense. That's because the business looks really good in the.
It works exceptionally well.
Yeah, we're generating, I mean, you think of our 53 or 54-year history, generating $3 billion in free cash flow is an outstanding, you know, top five year in our 50-year history. I think people look at the business today as like, "Oh, I just don't think things are going too well." I don't know what planet you're living on. This is a hard business. I've been in it long enough to know that these are the good years. We need to celebrate these years, and we need to propagate more and more years exactly like th is, generating this amount of free cash flow, buying back shares, paying down debt, stockpiling cash onto the balance sheet. That's winning, guys. That's exactly what we're trying to do.
Double and double click on that last comment about using that free cash flow.
Sure.
You're halfway through the $2.5 billion debt reduction target. That reduction is a big focus now. By the time you get there, how do you think about cash return? You mentioned just now stockpiling cash on the balance sheet, which also naturally leads to the question of why stockpiling cash. What's the use of that cash?
Yeah, so again, I'll start with our base dividend, and continuing to grow that every year is kind of a hallmark that we really hope to remain, kind of foreseeable future. That's essentially a non-negotiable as we start there. You know, above and beyond that, we've been buying back between $200 million and $300 million worth of our stock each quarter. You know, as we get more free cash flow, certainly half of the audience, I think you might be on this side of the equation, would like for us to lean in a little bit more on the share buybacks. I can tell you that we'll continue to revisit that. As a starting assumption, consider that $200 million - $300 million kind of the right, relative frame.
What we will try to avoid doing, which I've seen our industry do and other industries do, especially in commodity businesses where, say, for example, oil price runs, you get a lot of free cash flow. It's very tempting to buy back shares there exactly when you shouldn't buy back shares because that's when your shares are typically highest valued in the cycle. The contrary is true on the flip side. By having a little bit more of a methodical quarter-to-quarter basis, we feel like that helps take those dollars when you're traded a little bit lower and leverage them into more shares. On the countercyclical side, you're buying fewer shares when your share price is higher on a per-share basis. That's kind of a rough generic view going forward. Certainly, you mentioned the debt paydown, $2.5 billion. We're well on our way.
I feel very confident about being able to knock down the $500 million that's coming callable. We have a $1 billion term loan. We'll be able to take those out. I feel very confident in being able to do that. I think above and beyond that, hey, let's get the wins on the scorecard. We'll post more wins in the quarter when we have more, you know, credibility that we've received associated with this $1 billion. By the way, I don't expect us to be done at $1 billion. I expect that momentum to carry us through. I think there will be more and more wins on the technology front that we'll be able to leverage to the bottom line. We'll talk about what do we do with those proceeds.
As far as the balance sheet, and bringing dollars onto the balance sheet for now, I think the best way for us to pay down debt is in a net debt sense. Starting with the callable debt, we'll be able to take that down. This term loan, we'll be able to take that down. Above and beyond that, we don't have a lot of callable debt. The most cost-effective way we can do that is just offset that with cash. There's very little carrying cost associated with that debt. Certainly, as it becomes due, we'll be able to continue to chip down at that.
Great. That makes sense. Along that line, talked a lot about upstream, just how do you think about the value creation enabled by midstream and then the investment in the midstream business? Because you guys have been pretty early in doing the partnership with WaterBridge. What's your philosophy around that?
Yeah, I think this goes deep into our DNA. I mean, you've seen Devon over lots of years do things in the midstream space, very confident in this space. This is a skill set that we have, and a lot of times we can lever our upstream skills into more lucrative midstream deals. There are many, many, many examples of this. One of the most recent is the WaterBridge, or excuse me, the Matterhorn deal. We held an upstream position that enabled us, really required us to help underwrite that pipe. A great team we worked with quite a bit. We made a 5x multiple on that investment.
More important to that, we had the governance and the position, the relationship with that team to make sure that that pipe was built because the most important thing for us was getting that additional capacity of gas out of the Delaware Basin all the way to the Gulf Coast. We were able to accomplish that. You saw us at the same time, we announced the sale of Matterhorn. We capitalized on an investment, but most importantly, we accomplished our bigger goal, which is getting the pipe built. At the same time, you saw us announce something that seemed to move the opposite direction where we bought out the second half of the interest of the Cotton Draw midstream. This was a deal that we had in the works for several years. Our partnership there, we needed to build out some infrastructure.
We didn't want to put it entirely on our capital burden, so we had a partner come along. We've taken that partner out now. We own that. This, again, will be about $50 million- $90 million per year of avoiding cash out the door, paying our partner. It's a very significant return on investment associated with this $260 million investment. By the way, very importantly, those are two examples of deals that we're not claiming credit on towards our business optimization. You mentioned early, we didn't expect to get 100% credit associated with that on the day of announcement. The more quarters come, the more earnings that we post towards this goal, we will get more and more credit in the market associated with that. I think credibility associated with not claiming kind of easy victories, you mentioned the tax bill. That's about $300 million a year benefit to us.
That is a $300 million benefit in free cash flow. We're not claiming credit on that. That's not part of our billion-dollar optimization. We're seeing a little bit of deflation. I'd characterize it as an overall deflationary market. Those savings we're trying to parse out, set aside, all four of those things are above and beyond our $1 billion target. We're trying to be as consistent and credible on this $1 billion as we possibly can because I think the most important value creation opportunity for our Devon shareholders is increasing this credibility, increasing this view of this team's ability to create more and more value with these assets. I think that opens up many more doors down the line on more interesting things to do.
Yeah. No, that makes sense. If we just click back on the water side of things, you recently signed an agreement to buy pore space. I guess, where do you see other opportunity when it comes to the mission infrastructure? Do you see that as an area of investment for Devon or see that an area of monetization down the road around the partnership?
Yeah, I don't see the deals that we're doing around water as significant business extensions of what we do. This is a little bit more business enablers. I think about working in the Delaware Basin, two of the most critical things that you need to be really good at are, one, getting electricity to location, and two, getting water away from location. Those don't get any headlines and they don't get any excitement. I can tell you, if you fail at either of those, you're not getting oil away from the asset either. They're fundamental enablers. When I think about the work that we've done on both of those fronts over multiple years, I think we are well ahead of many of our peers. I'm really proud of the work that we're doing. Today, in state-of-the-art New Mexico, there is no more electricity that we can source from the utilities.
Excel said, "Look, we're tapped out. We can't build anymore." The whole political thing, I'll have a beer with you, we'll share some lamenting of some of those issues. Self-induced issues in New Mexico, there is no more electricity available. What have we done? We've been very proactive over the last several years. We've built over 800 mi of electrical distribution. We've got our own microgrids. In addition to generators on location, we're now looking at our own infrastructure. Step beyond that, we'll be looking and trying to understand our capabilities of building co-ops with peers to build essentially our own utilities. That's a whole political challenge and a whole other step. That's kind of the future that we're having to explore in a defensive mechanism. Water, as you mentioned, is another absolute critical path item to make sure that we have the ability to do what we do.
We produce just ourselves about 1.5 million bbl of water per day. That is a tremendous amount, every single day, a tremendous amount of water. A lot of that goes from New Mexico to Texas, and we own a lot of that infrastructure. You go back to the WPX legacy all the way back to 2015. One of the enablers of us entering the basin was that RKI had put a lot of water infrastructure and wells and pipes in place. That enabled us to really be able to see the value creation opportunity. We have built so much more since then. As you mentioned, we've done JVs. WaterBridge is the latest one. They had bought a bunch of open land, big, 20,000-acre, 30,000-acre ranches that hadn't been drilled yet. This is virgin acreage that hasn't been, the pore space hasn't been tapped.
What was notable in one of our recent announcements is that we reserve actual pore space. It does not matter if you have pipe or even if you have wells. If that pore space is full, you're done. Thinking really holistically about those potential gating issues and for Devon, really being proactive about making sure that we have the ability to continue to produce this incredible resource for decades to come.
That's great. As a wrap-up, I was going to ask you what makes you, what parts of Devon are you most excited about?
All of that.
Everything we talked about, you're really excited about. Is the takeaway of the.
In the last 29 minutes.
The free cash flow, the north star, when you think about how you, that the one thing that you look at to look at the progression of the company is the free cash flow extension.
Look, at the end of the day, we're here for shareholders. How do we create more value for shareholders? I think the key enabler is unlocking this credibility and this incremental value creation. I say credibility because we all think also in trading multiples. Right now, I think we're a bargain entry price. I think as we post more scores on the board in the coming quarters, we'll continue to unlock that potential. I think that's the investment thesis for Devon . What we do with that credibility is equally important. You'll see us talking more and more about more out on the horizon value creation opportunities, which is a whole nother 30 minutes. We'll have some other time.