Good morning, and welcome to Devon Energy's and WPX's strategic merger of equals conference call. At this time, all participants are in a 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 the strategic merger of equals between Devon and WPX. On the call this morning are Dave Hager, Devon's President and CEO, Rick Muncrief, WPX's Chairman and CEO, Jeff Ritenour, Devon's Chief Financial Officer, Clay Gaspar, WPX's President and Chief Operating Officer, and David Harris, Devon's Executive Vice President of Exploration and Production. The press release and slides for today's announcement can be accessed from the homepage of both companies' websites. 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 US 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 as the additional information, contained in the SEC filings for both companies. I will now direct everyone's attention to slide two of our presentation and turn the call over to Devon's President and CEO, Dave Hager, for an overview of the transaction.
Thank you, Scott. Welcome, everyone, and thank you for joining us. I'm excited to announce that Devon and WPX have entered into an agreement to combine in an all-stock merger of equals. This is a transformational event for both companies as we unite our complementary assets and operating capabilities to maximize our business in today's environment and create value for many years to come. Before we jump into all the compelling strategic drivers and financial benefits of the transaction, I want to take a minute to tell you how we got here today. As you would expect, our organizations and leadership teams have long known each other and respected each other. Both companies focus on the Delaware Basin, we both have our headquarters in Oklahoma, and we share common cultures and values.
These are bedrock reasons we are confident this merger is the best path forward and will create more value than either company could on a standalone basis. By combining in an all-stock merger of equals, we are bringing together two highly compatible organizations to attain greater operating scale, accelerate the return of capital to shareholders, and advance our ESG goals. I also want to acknowledge that this combination was made possible by our respective leadership teams focusing solely on what is best for the shareholders and the go-forward prospects of the combined company. We commonly get the question why there is not more consolidation in this industry. Unfortunately, I suspect the answer is not due to strategic merits or synergies, but it is likely that the lack of consolidation in our industry results from social issues.
With this combination, our commitment to shareholder interest and trust and cultural alignment and strategy supersede any individual. I want to extend my sincerest gratitude to everyone involved. I have no doubt that this is the right combination and transaction structure. On slide two, this strategic combination will create one of the largest unconventional oil producers in the U.S., with an asset base underpinned by a premium 400,000 net acre position in the economic core of the Delaware Basin. The combined company, which will be named Devon Energy, will benefit from enhanced scale, improved margins, higher free cash flow, and the financial strength to accelerate the return of cash to shareholders through an industry-first fixed plus variable dividend strategy.
This stock-for-stock combination underscores our confidence that this transaction will allow shareholders of both companies to benefit from synergy realization and the powerful upside potential associated with our progressive cash return business model. As I have said many times before, to win in the next phase of the energy cycle, a successful E&P company must employ a financially driven business model that is underpinned by top-tier asset quality, proven operational capabilities, a strong balance sheet, and a disciplined framework that prioritizes cash returns directly to shareholders. The go-forward Devon possesses all these attributes. Turning to slide three, this merger will be immediately accretive on virtually every relevant financial metric in year one, including earnings, cash flow, and most importantly, free cash flow. The combination is also expected to enhance the company's credit profile, improve returns on invested capital, and optimize net asset valuations.
This immediate accretion is anchored by the pro forma synergies we expect to accomplish by year-end 2021 and the optimized capital allocation from combining our complementary asset portfolios. Both of these items will be covered in more detail later in the call. Turning to slide four, this is an all-stock transaction valued at approximately $12 billion on an enterprise value basis. Under the terms of the agreement, WPX shareholders will receive a fixed exchange ratio of 0.5165 shares of Devon common stock for each share of WPX common stock owned. Upon completion of the transaction, Devon shareholders will own approximately 57% of the combined company, and WPX shareholders will own approximately 43% of the combined company on a fully diluted basis. The company headquarters will be in Oklahoma City, and I am excited about the outstanding team we have assembled to lead the go-forward Devon.
Following the merger, the board of directors will comprise 12 members, consisting of seven directors from Devon and five from WPX, including the lead independent director. I will serve as the Executive Chairman of the board, and Rick Muncrief will serve as President and CEO. The combined company's executive team consists of top-tier talent, including Jeff Ritenour as Executive Vice President and Chief Financial Officer, Clay Gaspar as Executive Vice President and Chief Operating Officer, David Harris as Executive Vice President and Chief Corporate Development Officer, Dennis Cameron as Executive Vice President and General Counsel, and Tana Cashion as Senior Vice President of Human Resources. The transaction, which is expected to close in the first quarter of 2021, has been unanimously approved by the boards of directors of both companies.
The merger is subject to approval by Devon and WPX shareholders and receipt of certain regulatory approvals and satisfaction of other customary closing conditions. Turning to slide five. The value of this merger lies not only in the power of our enhanced scale and strong financial position, but also in how we will manage the advantage attributes of our company in the future. With a commodity business such as ours, any successful strategy must be grounded in supply and demand fundamentals. We understand the maturing demand dynamics of our industry and recognize the traditional E&P growth model of the past is not a viable strategy going forward. Investors have been vocal in advocating for responsible consolidation in our industry to enhance scale and operational efficiencies, to drive improved financial performance, and to increase shareholder returns. Devon and WPX have listened and acted.
This strategic combination accelerates our transition to a progressive cash return business model, under which we will intentionally moderate growth, emphasize capital efficiency, and prioritize upfront cash returns to shareholders. With this highly disciplined strategy, management is committed to limiting the top-line growth aspirations to 5% or less in times of favorable conditions, pursuing margin expansion through operational scale and a leaner corporate structure, moderating investment rates at 70%-80% of operating cash flow, maintaining extremely low levels of leverage to establish a greater margin of safety, and returning more cash directly to shareholders through an industry-first fixed plus variable dividend strategy. I believe this shareholder-friendly framework under which we will manage our go-forward business will position Devon to be a prominent and consistent builder of economic value through the cycle.
Others may be contemplating and talking about the possibilities of a cash return model, but at Devon, we are taking action and executing on this strategy. With that, I'll turn the call over to Rick Muncrief to discuss the pro forma company in more detail.
Thank you, Dave. Good morning to everyone. To reiterate Dave's earlier comments, I could not be more excited to be part of this transformational merger, and from WPX's perspective, this is absolutely the top idea on our list. In addition to being part of this unique merger of equals, it's also a great privilege to lead the combined company that will be one of the premier large-cap E&P companies in North America. Now, turning to slide six. This all-stock transaction ensures the combined company will retain an extremely strong financial position. As you can see on the left-hand of the slide, the pro forma company has $4.7 billion of liquidity, consisting of $1.7 billion of cash on hand and $3 billion of undrawn revolver capacity on our unsecured credit facility, which does not mature until the end of 2024.
Also adding to Devon's financial margin or safety are minimal debt maturities until 2023, which is a critical competitive advantage in this period of unusually high economic uncertainty and weak commodity pricing. The overall financial strength of the combined company is showcased on the right-hand side of the slide with pro forma net debt to EBITDA well below the industry average. Now while our balance sheet is strong, we are not done making improvements. The top priority for the large amount of cash we have will be the repayment of up to $1.5 billion of debt. Given the uncertainty we still face with the COVID-19 crisis, we will remain flexible with the timing of our program and how we execute the repurchases, which may include both open market transactions and tender offers.
Longer term, it is our fundamental belief that a successful E&P company must maintain extremely low levels of leverage. In accordance with this belief, we will continue to manage toward our stated leverage target of approximately 1x net debt to EBITDA over time. Moving to slide seven. I cannot emphasize this point enough. Operating scale is an essential attribute to maximize the effectiveness of our cash return model for our shareholders, and this transformational transaction delivers the critical mass needed. This combination will create one of the largest unconventional oil producers in the U.S. with current production of 277,000 barrels of oil per day and a deep inventory of high-return drilling opportunities across our multi-basin portfolio.
The enhanced scale and scope of the combined company will enable us to expand cash flow by leveraging operational efficiencies across our complementary assets, eliminating corporate redundancies, optimizing marketing arrangements, and enhancing our supply chain purchasing power. Now turning to slide eight. The combined company's asset portfolio is headlined by a dominant position in the world-class Delaware Basin, which will account for about 60% of total pro forma production and is expected to be the capital-efficient growth engine of the company. This leading acreage position in the Delaware Basin consists of 400,000 net acres of stacked pay resource in the economic core of the play. Furthermore, our go-forward Delaware Basin acreage is geographically diversified between Southeast New Mexico and West Texas, with only 35% of the combined leasehold on federal land.
The consolidated Delaware footprint provides a multi-decade inventory of high-return opportunities at our current combined activity level of 17 operated drilling rigs. Now turning to slide nine. This exhibit builds upon my earlier comments about the quality of our Delaware acreage position. The Delaware, which is part of the greater Permian Basin, is the highest return opportunity in North America. Given the prolific returns that this basin offers, thousands of our wells have been drilled across Southeast New Mexico and West Texas over the past several years and have been plotted on this slide. Going from left to right on this slide, you can see that our combined acreage position resides in the economic heart of the play, where drilling results have delivered a powerful combination of the best well productivity, highest oil mix, and lowest operating cost. Turning to slide 10.
In addition to having our acreage concentrated in the very best U.S. resource play, both companies have a track record of delivering excellent operational results. This is evidenced by this chart at the top of this slide that showcases Devon and WPX's track records of industry-leading well productivity. On initial 90-day production rates, the average well performance for both Devon and WPX has exceeded virtually every top competitor in the U.S. We know that everyone likes to highlight their best wells, and admittedly, we do too. However, this slide captures every well for Devon, WPX and peers since 2018. No exceptions were made, and anyone can replicate this chart with publicly reported data. In addition to strong well productivity, Devon and WPX are delivering some of the lowest-cost drilling and completion results in Delaware Basin.
This is shown at the bottom of the slide, where costs per foot have declined by more than 30% for both companies since 2018. Key drivers of this performance are the continued optimization of well bore and completion designs, along with repetition gains and non-productive time improvements across all phases of the value chain. Importantly, we expect these steadily improving cycle times and cost reductions to continue as our talented teams collaborate, share best practices, and leverage leading technologies to further improve drilling times and completion designs. The bottom line is get used to Devon being on the top of these standings. We have the right acreage, the proven ability to execute and depth of inventory to continually deliver industry-leading results for the foreseeable future. Moving to slide eleven. Another critical attribute of this merger that drives immediate accretion is the corporate cost synergies from combining our two companies.
Combined cost savings from efforts currently underway and synergies from the merger are expected to expand margins and drive $575 million in annual cash flow improvements by year-end 2021. These savings are expected to be attained through drilling and operating efficiencies, net back improvements, lower G&A costs, and reduced financing costs. The net present value of these cost synergies over the next five years equates to more than $2 billion of incremental value. Importantly, this all stock transaction structure allows shareholders of both Devon and WPX to benefit from the cost synergies as well as the enhanced dividend strategy. Turning to slide 12. With the merger expected to close in early 2021, I would now like to provide a few high-level thoughts on how the combined company plans to approach capital allocation as we head into next year.
While it is too soon to provide detailed guidance for our combined program for 2021, I can tell you that our top priorities in the current environments are to protect our balance sheet, financial strength, fund our quarterly dividend, preserve our productive capacity, and generate free cash flow. Turning your attention to the right-hand side of the slide, I want to also provide insight as to how we will manage the company through the extreme price volatility we have recently experienced. If current strip pricing manifests, we would expect to invest in maintenance capital levels in 2021, and with our pro forma cost structure, we can fund this capital program at an ultra-low breakeven level of $33 WTI pricing. Our fixed quarterly dividend can also be organically funded at $37 WTI. With prices above $37 WTI, I want to be extremely clear with this point.
We are absolutely going to prioritize the growth of free cash flow over adding incremental drilling projects. By prioritizing free cash flow growth, we are establishing a much-needed margin of safety should price volatility continue. This discipline provides us with an avenue to accelerate cash to shareholders. In fact, we will not even consider adding select high return growth projects until we are confident that the supply and demand dynamics, product inventory levels, and other leading economic indicators provide a high degree of certainty that a pricing of $45 WTI or higher is sustainable. This is worth mentioning again. With any pricing windfall, we will be extremely disciplined with our capital programs and limit growth in a given year to no more than 5%. Slide 13 outlines the free cash flow that our business can now deliver at various pricing points.
As I've already emphasized, we will expect to fund our estimated maintenance capital requirements in 2021 at a WTI breakeven price of $33. This maintenance capital assumption does not assume a drawdown of our DUC inventory, which is estimated to be around 130 wells by year-end. However, should we desire to lower our capital intensity further in 2021, we possess this optionality with our DUC inventory. From a sensitivity perspective, for every 25 DUCs we draw down, we could decrease our capital intensity in 2021 by an incremental $50 million. That's pretty impressive. In addition to a low WTI price required to fund our operations, this slide also showcases the attractive free cash flow our business can deliver at various pricing points after funding our maintenance capital requirements.
These yields range from 8% at a $40 WTI pricing to an incredible 31% at $60 WTI, providing a very attractive investment proposition, especially compared to the exceptionally high valuations in other sectors in the broader market today. On slide 14. With our operation scale to generate substantial amounts of free cash flow, we are committed to returning more cash directly to our shareholders. However, we believe this traditional dividend growth model deployed by most U.S.-based companies is flawed when applied to a commodities business. The historical practice in the industry of raising a fixed quarterly dividend in times of prosperity and cutting the dividend or under-investing in the core business during down cycles is not an optimal solution. With these specific challenges in mind, we are unveiling the industry-first fixed plus variable dividend framework to optimize the cash return to shareholders through the cycle.
This progressive dividend strategy is uniquely designed for our inherently volatile business, whereby a sustainable fixed dividend is paid every quarter and a supplemental variable dividend is also calculated and reviewed every quarter. When there is excess free cash flow to fund a variable dividend from a process perspective, it will be announced and paid in conjunction with a fixed quarterly dividend. More specifically, upon closing of the transactions, Devon's fixed quarterly dividend will remain unchanged and paid quarterly at a rate of $0.11 per share, with a target payout of approximately 10% of operating cash flow. In addition to the fixed quarterly dividend, up to 50% of the excess free cash in a given quarter will be distributed to shareholders through the supplemental variable dividend if certain liquidity, leverage, and forward-looking price criteria are met.
In conjunction with this higher payout strategy, we will also utilize a portion of the combined company's excess free cash flow to continue to further improve our balance sheet and evaluate opportunistic share repurchases. Slide 15, I want to highlight the unique value proposition that our Delaware Basin oil business provides. To demonstrate this point, we've included a simple comparison to an enterprise value to EBITDA versus peers, and to the right, you can see that the pro forma Devon will be highly competitive on key operating leverage and shareholder return metrics. Given that this business combination addresses several market concerns regarding operating scale, federal acreage exposure, and the visibility of free cash flow generation, I believe investors have a once in a generation opportunity to own a top-tier E&P at an incredibly attractive valuation.
Moving to slide 16, I want to be clear the combined company's commitment to ESG performance will remain a very high priority. ESG excellence is a part of our DNA as an organization that has been a focus for WPX and Devon for long before the ESG trend took off in recent years. We believe that strong performance in the ESG space is essential and impacts every aspect of our business operationally and financially. As with other aspects of our business, our focus is to control what we can control. Working to consistently improve our own operations to push toward the optimal balance of providing the sources of energy that power modern life while mitigating the environmental and social cost of doing so. As such, our top environmental priorities include advancing water recycling, reducing emissions, and eliminating routine flaring.
We will also plan to pursue low carbon technologies and opportunities across our acreage footprint to improve our business. In addition to these environmental objectives, we strive to cultivate an inclusive and diverse workplace where broad experiences and fresh perspectives can sharpen our competitive edge. From a governance perspective, we are proud that the combined company will have a strong, diverse, and independent board committed to responsible operations to advance the best interest of our shareholders. Now I would like to turn the call back over to Dave Hager to round out our prepared remarks from our presentation today. Thanks, Rick. Moving to slide 17 to close out our prepared remarks, I want to emphasize that the go-forward Devon has all the necessary attributes required to successfully navigate and flourish in today's environment, and the company is built to create value for many years to come.
This view is underpinned by our dominant position in the world-class Delaware Basin, which is supported by high-margin resource plays in many of the best basins in the U.S. The go-forward company has a highly disciplined, returns-driven strategy and a management team with a long track record of delivering top-tier operational results. This all-stock transaction ensures the combined company will retain strong liquidity and financial strength. Lastly, with our business scale to generate free cash flow, we are committed to returning more cash to shareholders through our industry first fixed plus variable dividend strategy. With that, I will now turn the call back over to Scott for Q&A.
Thanks, Dave. We'll now open the call to Q&A. With that, operator, we'll take our first question.
Thank you. Our first question comes from the line of Doug Leggate from Bank of America.
Good morning, guys. Congratulations to both of you for getting this done. Dave, I guess we'll see you on the board. Rick, it'll be good to work with you again. Rick, I'm going to be pretty direct about this, if I may. Dave has led the industry in calling for a change in this business model, and Devon has been very clear about what they wanted to do in terms of the variable dividend. It seems, not to be cruel about this, but it seems that you're going to inherit that strategy as CEO. Can you give us some comfort that you agree and remain committed to the framework that's been laid out? Obviously it is pretty innovative and pretty differentiated for Devon.
Doug, that's a great question. I guess what we've always taken pride in ourselves, this is a legacy WPX side, was always doing what we said we were going to do. From our perspective, to answer your question, we are absolutely committed to this. It is the framework that we've been hearing for quite some time from investors, the fact that Devon Energy is showing that leadership to do that, I think will absolutely separate us from the crowd. If you know our history at WPX Energy, we were really striving to get to the point to just implement, initiate a base dividend. The fact that I can tell you how excited I am to be sitting here, not only to do a really nice base dividend, but the variable dividend structure as well. Yes, we're absolutely committed to that.
I appreciate the answer. My follow-up is just, I guess a quick one. Obviously, the combined portfolio has a much larger footprint. There's some early-stage assets in there, like the Powder River. There's some late-stage assets in there, like the Eagle Ford. Obviously there's issues to be resolved with DAPL and so on. What is your thinking in terms of the combined portfolio? Are you happy with the footprint you have? Should we expect some high grading, some non-core asset sales? How do you think about the combined assets? I'll leave it there. Thank you.
The thing I get excited about is, number one, you do have some assets that are a little more mature, and they are spinning off a lot of free cash right now. I can tell you that's been something that, as you well know, Doug, has been somewhat rare in our space. The fact that you've got just an unbelievable growth engine in the Delaware Basin, and you've got these solid cash-generating assets like the Eagle Ford, like the Bakken, like the MidCon here in the Anadarko, those are three really nice cash-generating options. Certainly longer term, the WPX team, we did a deep dive on the Powder, and I can tell you that is a basin. There's a nice resource there that is longer term, and I think the way Devon has it characterized is the way we would as well.
For now, I think our footprint, we're very happy with it, and gives us a lot of optionality, not only from a geographic perspective, but from a commodity perspective as well, and it's just a really nice position to be in.
Congrats again, guys. Good luck to both of you.
Thank you, Doug.
Thank you.
Our next question comes from the line of Scott Hanold from RBC Capital Markets. Your line is open.
Thanks. Good morning, and congrats to all. Could you all provide me some context around the maintenance capital savings you all have? It looks like previously, individually, you guys talked about 1,750 to around 1,800. Again, that's on a combined basis for maintenance CapEx. I know, Devon, you are at a $35 per barrel breakeven. Now on a combined basis, we drop, I guess, meaningfully on both. Can you quantify the savings? If I'm not mistaken, I don't think WPX had as low of a breakeven point as Devon individually.
Hi, Scott. Yeah, this is Dave. With the current cost structure, we expect that it's going to be about $1.7 billion of capital to maintain our oil production. That estimate really utilizes the cost expectation for 2021 previously disclosed by both of our companies, and it also incorporates the synergies, both what Devon has announced previously of $300 million plus the $275 million of synergies that we estimate going forward. Importantly, I'd say that also lowers the breakeven with the inclusion of these synergies down to $33 WTI. Again, we think this is a great attribute of the transaction that we are not only combining just two great companies, but that we are accomplishing one of our strategic objectives, which is to lower the breakevens-
Yeah
That we can be successful in any commodity price environment.
Yeah, Scott, I may just add one thing, and that is this is all before we've had our asset teams together to really compare and high grade our portfolio. From a development perspective, I can certainly see a possible outcome where maybe not so much in 2021, but going into 2022, 2023, you really see an optimized capital program that does exactly what Dave said. At the lower spend rates, you're going to see this base decline start diminishing, and I think you're going to see capital efficiency just continue to decline. When you look at 280,000 barrels of oil a day, that is not an insignificant amount of crude oil production.
Okay. If I may add, I think it's important for investors and analysts alike to see sort of a monitoring and a go-forward track of are we hitting the synergy numbers? Certainly, we hear a lot about synergies in these combinations and obviously, we'd like to see sort of some of the output to get our hands around if we're achieving those targets. If I could move on to another question, you talked about growing up to 5%. You also in your variable dividend talked about a constructive price outlook. Could you give us some context of what would it take for Devon to look at a growth target that starts to move up toward that 5%? How do you look at it in with the variable dividend growth, like what is the constructive market for y'all?
Well, for us, I think, a couple things we would really look at is, and what I'd like to take you back just fundamentally. $33 WTI funds our maintenance CapEx, $37 WTI funds our maintenance CapEx and our dividend. Between $38 and $45 WTI, that's where we'll certainly prioritize free cash flow generation, and as I said in our comments, it just really provides you margin of safety, should you see a pullback. Recall, we've had several head fakes over the last few years on when you see the strengthening commodity price, only to see it for one reason or the other pullback. I think over $45, that's where, if we think that it's sustainable, we're going to be very thoughtful in the response on that.
We believe that now you're looking at seeing maybe an additional $100 million of capital for every 1% growth or so. If you think about for us, $50 WTI is probably a good number for us to deliver 5% oil growth, and that's $10 from where we're currently trading. We're going to be very thoughtful around that. Certainly, when you look at the assets here longer term, if you've had a more constructive environment and you felt very confident that the higher prices were here to stay, then we could adjust accordingly. For now, I think this gives you a pretty good framework for how we'll operate.
Yeah. Rick, just to clarify, you said that's $100 million for every 1% of incremental growth. Is that correct?
I think that's a good ballpark. That's some of our preliminary evaluation. We'll always update and refresh that number, but that's a pretty good starting point for now for your models.
Thank you.
Yeah, just to be clear on that, Scott, at $50 oil, we essentially accomplish all of our strategic goals and of 5% oil growth and generating very competitive free cash flow. Certainly, as Rick said, the current environment doesn't support growing more than 5%. We'll just, we get above 50, we just accumulate more free cash flow, goes back to the shareholders. Only if we see a fundamental demand expansion, which we don't see at this point, does it really make sense to grow more than 5%, we believe.
Appreciate that. Thanks.
Our next question comes from the line of Nitin Kumar from Wells Fargo. Your line is open.
Good morning, gentlemen, and congratulations on the deal.
Thanks, Nitin.
Thank you.
Very quick question. Maybe this is for Dave Hager. You laid out the variable dividend policy. I'm just curious, it is certainly unique and industry leading. Why the quarterly payout? Why not bank some of those cash flows for a longer period? I just want to understand the thinking behind that.
Well, we've looked at a lot of different approaches to this. We think it's more appropriate to consider this on a more frequent basis rather than a less frequent basis. We think that with that, we are showing much stronger commitment to returning this cash to the shareholders rather than if you may just look at it on an annual basis. You see the way that we've constructed the formula here, so we can allocate. We do have some flexibility around how much, and we have certain criteria that we have to meet around the liquidity and the strength of the balance sheet, the financial metrics, the net debt to EBITDA, et cetera, before we are going to do that.
We think in general that the more frequent we do it shows the commitment to this, and we think that that's more likely to get priced into our share price, doing it more frequently rather than less frequently. I think it brings uncertainty into the equation as to how dedicated you are to the strategy.
Great. That's an interesting standpoint. Rick Muncrief, for you, Mr. Hager pointed out earlier that there are social issues that have prevented some of your peers from doing these kind of things, which we certainly like the deal. I'm curious from your perspective, what was your thinking? Obviously, WPX stock was undervalued for what the company was. What is attractive about this deal that brought it to the table for you?
A couple things. I feel like you're right, and we were certainly undervalued, but we also felt like Devon was undervalued too, and that there was an overhang on them that provided just a unique opportunity for us to put these companies together. I'll say that I've got a lot of respect for Dave and his team, what they've done historically, and I think we were able to sit down and work out, once again, as Dave illustrated in his opening comments, that this is a combination that benefits shareholders and is all about shareholders. We've done a lot of things to try to attract interest to this sector, especially from the generalist community.
I think this approach on returning cash back to shareholders is going to be something that may take a little bit of time, but it is going to catch on, and that's what we felt like the timing was right, the cultures were right. For Dave and I, we were able to work out a solution. A lot of times, egos could get in the way or that sort of thing, or control issues, and we were able to sit down and work out a solution with not only between Dave and I, but our management teams as well. I think that's what makes this deal unique, and I think it's also what's prevented a lot of deals in the past from being able to get across the line.
I'll just add to that by our work that we did, we believe it's been something like 18 years since there's been a merger of equals in our space. It does feel like along the way, there may have been the opportunity for some of those. It really takes trust, it takes relationships, and it takes a commitment from both sides that you're really trying to create something better than either company could have achieved individually. Both sides understand there are social challenges related to a transaction, and everybody has to compromise a little bit in order to create something that's even stronger. I think that's where it really starts with Rick and I. We just have so much respect for each other.
As we started to work on this, and we got our respective leadership teams together with the same attitude towards that, it just became obvious that culturally, the synergies are there, and they're going to happen. I feel very confident around that. The business combination of what we can accomplish, I think is quite clear, and believe me, we're going to deliver on that. I think the other aspect is just as unique about this, unfortunately, as more uniquely like, is just the trust and the relationship that we had, that we're going to work together to create something uniquely strong that neither company could easily accomplish on its own. I think that's what gets us really excited.
Great job, David, Rick. Excellent. Thank you.
Our next question comes from the line of Neal Dingmann from Truist Securities. Your line is open.
Yes, good morning. Congrats, guys. First question for Dave or Rick. You all suggest that the new 2021 maintenance CapEx funding requirement's now at $33-$275. Could you talk about, would this assume around the current rig count around 17 rigs that the combined companies have, and maybe talk about the completion side as well that you all are thinking around that?
Well, yeah, the 1.7, that's around that level of activity. You can assume that it's somewhere around, that we basically just combined the activities of the two companies and then factored in the synergies that we're going to achieve from the combination that we announced as part of the transaction. $300 million was already announced on Devon and the incremental $275 as a result of this transaction. The exact rig count and activities, you can tell that obviously the great emphasis is going to be in the Delaware Basin in 2021. We haven't gone as far as developing a detailed specific activity schedule at this point.
Okay. Then, Dave, for you or Rick, just how you think about the pro forma. You mentioned about $6 billion, will put you in that upper echelon or large cap is certainly, Rick, that you had stated that there's certainly still a few larger independents that even have quite broader size than you all. I'm just wondering, with that new size, is that going to give you, do you think, the scale you need, or would you continue to be acquisitive if you saw the attractive deals out there even post this deal?
Well, Neal, the bottom line is you're going to have the cash on hand, the balance sheet, all those free cash flow generations do something like that. The fact is we're going to be really focused on putting the two organizations together and getting optimized on that base business, and we'll see after that. You can see just on that, I think the production slide really just illustrates where you put yourself in comparison with the other E&Ps. I think that, just reiterate. Step one is we absolutely need to get the companies together. We need to make sure that we deliver on the synergies that we've stepped up to promise, and we'll do that, and then we'll see after that. We certainly like the optionality that we're going to have.
Agreed. Thanks, Rick. Thanks, Dave.
Our next question comes from the line of Leo Mariani from KeyBank.
Thanks. Question here for Rick at WPX. Just was hoping you could provide a little bit more information in terms of how the deal came about with Devon. Did WPX look at other combination transactions? This has been something that's been brewing for quite some time. Is this something that really came about during the downturn and the pandemic year?
Yeah, Leo, good question. Of course, you'll see later on in disclosures the history of the transaction. Just, I think it's fair to say that Dave and I have known each other for a while. We've watched each other's companies and certainly, we're aware of what our respective competitors are doing as well. This is a very competitive business. So we're aware of that. I think for us, what really separated Devon for WPX to combine with was the quality of the assets, the balance sheet, the cash on hand, and really, Leo, if you look at the debt towers and the timing of when those debt towers come down, it's amazing.
I know we, as an industry, and we talk about debt to EBITDA, but you don't see very many balance sheets like Jeff and the team have put together here where you have half of your debt is not maturing until 2040. You start looking at the uniqueness of that, the cash on hand. For us, it was absolutely, as I said in my prepared comments, it was the top idea. The fact that Dave and I were able to shepherd our respective teams through this process and get unanimous board support on that. Our boards are excited about what we're building, and that, I think, is probably appropriate way to leave it for now, and then there'll be plenty in the disclosures later on.
Okay. Just jumping over to the synergies. In terms of the incremental synergies in the merger, you had talked about $100 million in G&A, and that seems relatively easy just given that it's smaller than the existing WPX G&A, but I was hoping for a little bit more color around the $100 million in D&C efficiencies and the $75 million in the net back improvements that you guys talked about. Is the D&C efficiencies more just a function of service cost reductions over time? What can you tell us about the net back improvement? Is that more just better oil price? Any details would be great.
Thank you, Leo. What we would say on the D&C efficiencies, let's just start there, that $100 million. When you start looking at putting the respective teams together, I think the purchasing power we're going to see from a supply chain perspective. We're going to have a lot of opportunities. I'll just say, and I'm kind of an old driller at heart myself. When you start putting two drilling groups together, it's amazing the ideas, the creative ideas that come up, sometimes even sitting around a coffee pot. I feel very confident that the combination of supply chain purchasing power, the creativity, and I'd say a certain amount of competitiveness between engineers and operating people. The fact is, I think that you look at an industry where you're seeing a lot more discipline than we've historically seen.
Even on the service sector, they're looking to approach their service and supply chain, and to try to drive costs down. We think that this $100 million is very achievable. I think that gives you a little bit of color. I think the netback improvements, I think when we sit down, and once again, we get our marketing teams together, we start looking at creative ideas we can come up, and I feel very confident about that $75 million. To your point, that $275 million does not feel like a huge stretch to me. You think about that plus what the legacy Devon plan of $300 million. Just please circle on that slide 11, that PV-10 over the next five years of $2 billion. You're talking about a third of the combined market caps of this.
That's incredible. You don't see that in any other sector. It's just truly incredible.
Thank you.
Our next question comes from the line of Matt Portillo from TPH. Your line is open.
Good morning, all.
Morning, Matt. Morning, Matt.
Just a quick follow-up question on the cost side of things. I was just curious. Devon has highlighted in Q2 D&C cost per foot coming down to about $700. Then I know at WPX, you guys were working really hard to get towards $800 per foot in the back half of this year, and probably some incremental benefits heading into 2021. I was just curious, as you look at the combined entity, should we expect that cost structure migrates down towards that Devon level as you progress over the next kind of 12 - 18 months? Is that a good way to think about the benefits you're highlighting on the cost savings?
I think that would be a conservative view. I think we're going to try to even get below that. And I can tell you that at Devon, that we've already drilled leading edge wells that are lower than what we have in our public disclosure. I think it's just what Rick said, that you get the combined groups together, you're going to see the creativity and the supply chain benefits, the value of scale in negotiating contracts. All of that is going to create unique opportunities that even though I think we've both been doing well individually, but the combined company has the ability to do something even more than either one could do individually.
Great. Then just as my follow-up question, looking out into 2021 and beyond, I know the program is very heavily dominated by the Permian, but obviously you've got some high rate of return opportunities in areas like the Bakken, and the Eagle Ford. I was just curious, as you think about capital allocation to basins outside the Permian, are there any moving components as you combine the two entities together that we should be thinking about? Or is kind of the stated plan of moving forward with the Dow JV, the Eagle Ford program at kind of a moderated pace and kind of the one rig running in the Bakken a good way to think about next year?
Yeah, Matt, I think that's exactly how I would recommend you look at it. Certainly, later on down the road, we'll sit down as a collective group and prioritize and sort the highest return projects. I think for now, that's exactly how you need to look at it.
Thank you.
Thank you.
Our next question comes from the line of Paul Cheng from Scotiabank. Your line is open.
Oh, thank you. Good morning. Dave, I think the first question. I actually have two questions. First, you highlighted in the presentation that this combination will allow you that to have the variable dividend restriction to 5% grow, net debt reduction. Does any of those target or objective that you cannot accomplish when you are standalone? Because I thought that those are what anyway that you're targeting for. With the combined company then, what extent they have changed? Is it just the acceleration or that because of the economy of scale allow you that you think you will be able to achieve it easier? The second question is that, when you guys targeting a net debt to EBITDA of one time, I think in this downturn, it seems to suggest that perhaps the industry should be even more conservative.
Why not try to target a net debt to be zero at the top end of the cycle? Also, do you have any breakup fee in this transaction that you can share? Thank you.
Hey, Paul. This is Jeff. I just want to repeat back that first question to make sure we got it. It sounds like you're asking what does the transaction do that's incremental to what Devon was doing on a standalone basis as it relates to that variable dividend strategy. Is that correct?
That's correct. Yeah. Thank you.
Yeah. Again, at a high level, and Dave and Rick have already talked about this to some degree, but when you take the quality of these combined assets and the free cash flow generation capability, again, as Dave mentioned his opening remarks, we believe this to be incredibly free cash flow accretive to the combined company going forward. That really just furthers and advances our cash return model that we set out as a standalone company. We think it accelerates, and it adds to the cash flow return model that we've already talked about.
I think the key is the synergies to this. By accomplishing these synergies that we have, that generates incremental cash flow beyond which we could have been able to do individually. That's what really accelerates the accomplishment of the model. Second question around the net debt to EBITDA, I think, Jeff, you want to answer that?
Yeah, you bet, Paul. As you highlighted, we absolutely have targeted that kind of 1 x level. Both Rick and Dave have commented on this earlier. The combined company, the incremental leverage that we're bringing into the portfolio is incredibly manageable with liquidity and cash position that we have on the balance sheet. We feel like that coupled with the free cash flow generation that we just talked about is really going to allow us to drive towards that 1 x net debt to EBITDA. As you mentioned, we do believe, in the go-forward business model in the E&P space, it's going to be critical that companies have that sort of financial strength to weather the downturns that we obviously we're living through today. Hopefully, 2020 won't be repeated.
We certainly believe that the financial strength of the company is critical going forward to us accomplishing our strategic objectives. To the extent that we can, we're going to work towards that one time. I think you'd ask why wouldn't we even go lower? Certainly, that's something we'll think about, but we're going to be very much focused on continuing to drive towards that first target.
Paul, to answer your question you didn't ask too, but I did read your note that you put out. I'll answer your question how synergistic really the Delaware Basin acreage really is. There may be some, but there's not going to be a tremendous number of opportunities where you go from a 5,000-foot lateral to 10,000-foot just due to adjacencies of acreage. As Rick was saying earlier this morning, it's a nine iron from each other. We frankly evaluated at the time of the purchase, that RKI did, both the state line acreage and also the Felix acquisition. We have a very good understanding, and they are in such close proximity to each other that that is absolutely going to drive efficiencies in the field with how we manage those assets.
Thank you. How about breakup fee ? I'm sorry?
I'm sorry, Paul. Can you repeat that question for us one more time?
Yeah. Jeff, how about the breakup fees?
Breakup fees.
If either side wants to back out from the deal, if there's a better offer.
Yeah, Paul, as you would expect, there's your typical kind of market break fee included in the transaction. Again, you'll see all those materials filed today.
Thank you.
Our next question comes from the line of David Heikkinen from WhiteHawk Energy. Your line is open.
Good morning, guys, and team. Congratulations.
Morning, Dave.
Dave, Rick, and everybody.
Thank you.
You guys hit and really checked a lot of the boxes on the combination. The one thing I was thinking about was the BlackRock sustainability report that took voting action on 53 companies and placed, I think, 190 or so more on watch. Can you talk about how the new company avoids being on that watch list? A lot of energy companies were, and how you think through the view and vision on the climate issues and really just kind of the sustainability perspective.
Yeah. It's a good question, Dave. I can tell you that it is front and center with a lot of investors' minds. Just use and illustrate BlackRock as an example. Not only what they've put out there and some of their publications and the pushback that they've given to some management teams. I was on actually a conference call the other day with some of their folks. They're drawing the hard line in the sand. I think it's going to be very important for us, not only on the E, but also the S and the G, to continue to keep this front and center in the strategies of the management. What we will strive to do is take the best practices with each company. A lot of this is around disclosures as much as what we're actually doing.
We'll be updating that. Certainly, Dave and I are very involved with some of the trade groups, where we're trying to work with a lot of our peer companies and make a lot of the disclosures clear, and not only achievable, but understandable. That's the one challenge, I think, out there is there are just a lot of different ways to evaluate things. At the end of the day, it becomes very confusing and frustrating for investors. I think it's up to not only individual companies' management teams, but also our industry to coalesce around this issue and try to get that clarity, that focus, and that resolve that we need to.
There's a need for a better consistent standard. Clarity is a good way to put it, Rick. Thanks for that, and appreciate the question, and go Cardinals. Have a good day.
Yeah, go Cardinals. Yeah.
Our next question comes from the line of Subash Chandra from Northland Securities. Your line is open.
Yeah. Hi, guys, and congrats as well.
Hey, Subash.
Hey, how are you, Rick? Just curious on the Catalyst Energy joint venture. Any opportunities there, or is all the acreage sort of pre-dedicated already?
No. That acreage is dedicated, but we'll continue to be looking for opportunities to expand. The JV is working really well, and we'll continue to focus on that.
Okay, guys. No obvious overlap in the Devon combination?
Sorry, Subash, we missed that last part. Did you ask if there's any obvious, I think it was obvious overlap with the combination?
Yeah. With Catalyst. Yeah.
Subash, if you think about the Delaware, we have pumpers. Devon pumpers are driving right past WPX pumpers daily. There will be a fair amount of overlap out there, and I think when we get the two teams combined, you'll see further optimization even in our field operations. Just as a good example of that, we both have offices. We're in Carlsbad, they're in Hobbs and Artesia, and places like that. You're going to see a lot of synergies on that. We also, as I mentioned with our drilling and completions guys, when you get operations folks sitting down and comparing notes and talking, and you'll be surprised with the continuous process improvements that you'll realize over time. We're real excited about that.
Got it. How should we think about the base dividend increase? Is sort of the first filter that 10% marker, and when you have confidence that that can be sustained? Should we think that you've got to get to the billion and a half of debt reduction first before you address the base dividend? Do we think about really the variable dividend being the bigger delta here going forward than addressing the base?
Yeah. I'd say, Subash, it's a balance of all that, clearly. As Rick kind of outlined in the materials, kind of our priorities at different price levels, absolutely the first thing is we want to maintain that productive capacity. On top of that, obviously, we're going to fund that fixed dividend. We try to give you a rough payout ratio, which is around that kind of 10% of cash flow on that fixed dividend. As you said there at the end of your comment, the incremental piece is really the variable. That's the piece that really allow us to have some flexibility and flex up and down on those payouts to shareholders over time, depending on how we are on achieving our debt reduction targets, as well as just funding the broader business.
Okay. Thanks, guys. Congrats again.
Well, I show that we're at the end of our time slot today. I appreciate everyone's interest in Devon and WPX, and if we didn't get to your question, please don't hesitate to reach out to the investor relations team at Devon or WPX. Have a good day, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.