Welcome to Devon Energy's Q4 earnings conference call. At this time, all participants are in a 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 year and our outlook for Devon in 2023. Throughout the call today, we'll make references to the earnings presentation to support prepared remarks. 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 materially from our forward-looking statements.
Please take note of the cautionary language and risk factors provided in our SEC filings and earnings materials. With that, I'll turn the call over to Rick.
Thank you, Scott. It's great to be here this morning. We appreciate everyone taking the time to join us. On the call today, I will cover three key topics: our record-setting performance in 2022, the strong outlook we have for 2023, and the cadence of our capital and production in the upcoming year. I'd like to turn your attention to slide six and seven, which cover our results for the past year. As you can see, for Devon Energy, 2022 was another year of outstanding accomplishments. We achieved all the capital objectives associated with our disciplined operating plan. We delivered the best financial performance in our company's prestigious 52-year history, and we took important steps during the year to strengthen the depth and quality of our asset portfolio.
The slides on slide six show a great visualization of the solid execution we delivered over the course of 2022. Production per share advanced by 9% year-over-year. This growth resulted from a combination of record oil production that has more than doubled since 2020 to accretive acquisitions and timely stock buybacks. Our streamlined cost structure captured a full benefit of favorable commodity prices, expanding per unit margins year-over-year. Returns on capital employed set a new company record at 39% for the year. This impressive return profile outpaced the S&P 500 by a substantial margin. This strong capital efficiency translated into free cash flow, reaching an all-time high of $6 billion in 2022, more than doubling the previous year. I wanna congratulate the entire team at Devon for these accomplishments in 2022.
This type of operational excellence and financial performance differentiates Devon as one of the premier energy companies in the U.S. Another key highlight for 2022 was the market-leading cash returns we delivered to investors. On slide seven, we have included a comparison of our total cash payout that reached around 10% for the year versus other opportunities in the market. As you can see in the red portion of the bar, Devon's dividend payout was more than double that of the energy sector and vastly superior to every sector in the S&P 500. I want to be quick to add that we are not just a high-yielding dividend story. We are also compounding per share growth for investors through the execution of our $2 billion share repurchase program.
By upsizing this buyback authorization twice during the year, we reduced our outstanding share count by 4% since program inception and security shares at a substantial discount to current trading levels. We also supplemented per share growth in 2022 by deploying a portion of our excess cash toward taking advantage of unique M&A opportunities. These acquisitions in the Williston and Eagle Ford were highly complementary to existing acreage. We secured them at an attractive and accretive valuation and captured top-tier oil resource in the best part of these prolific fields. While tough to come by, these transactions successfully demonstrate another way our plan can create value for shareholders. On slide 11, as we shift our focus to 2023, I wanna be clear that there's no change to our discipline strategy.
At Devon, we are driven by per share value creation, not the pursuit of produced volumes. For the upcoming year, we have designed a consistent capital program to sustain production, deliver high returns on capital employed, and generate significant free cash flow that can be harvested for shareholders. Let's run through some of the highlights of our 2023 outlook. Beginning with production, we expect volumes to build throughout 2023 to reach an average of 643,000-663,000 BOE per day for the full year, of which approximately half is oil. Combined with the tailwinds from share repurchases and our two well-timed acquisitions, our volumes on a per share basis are on track to deliver an attractive high single-digit growth rate once again in 2023.
The capital investment required to deliver this production profile is expected to range from $3.6 billion-$3.8 billion, with these capital requirements being self-funded at pricing levels as low as a $40 WTI oil price. This low break-even funding level showcases the durability of our business model and positions us with an attractive free cash flow yield in 2023. That screens as much as 2x higher than other key indices in the market. With this strong free cash flow, we will continue to prioritize the funding of our dividend, which includes an 11% hike to our fixed dividend payout beginning in March. We will also have plenty of excess cash after the dividend to evaluate opportunistic share buybacks or take steps to further improve our balance sheet.
Lastly, on slide 12, I would like to end today's comments with a few key thoughts on the trajectory of our capital spending and production profile as we progress through 2023. Beginning with capital, we plan for spending to be slightly elevated in the H1 of the year due to the addition of a temporary fourth frac crew in the Delaware Basin. This elevated completion activity in the Delaware is expected to be wrapped up by mid-year, resulting in reduced capital spending over the H2 of 2023. Looking specifically at Q1 production, we expect volumes to approximate 635,000 BOE per day. Our production during the quarter is expected to be temporarily limited by three factors. First, due to the timing of activity, we expect to bring online around 90 gross operated wells in the Q1.
This will be our lowest quarterly amount for the year. Activity does ramp up from here with roughly 15% more wells online per quarter over the remainder of 2023 compared to the Q1. Another factor impacting near term production is infrastructure downtime in the Delaware Basin due to a temporary outage at a compressor station in the state line area, along with some minor third-party midstream interruptions in the area. We estimate these outages will limit Q1 volumes by around 10,000 BOE per day. We expect to fully resolve these issues and resume operations by the end of the quarter. Lastly, our forecast is also assuming that we elect to reject ethane at several processing facilities across our portfolio in the Q1. This is expected to limit volumes by roughly 10,000 BOE per day during the quarter.
The key takeaway here is that while our Q1 production will be held back a bit due to timing of activity and infrastructure, we do expect volumes to fully recover and increase over the remaining few quarters of 2023 to an average of roughly 660,000 BOE per day. In summary, since we first unveiled the industry's very first cash return framework in late 2020, we have created tremendous amount of value for our shareholders. 2021 was a great year. 2022 was one for the record books, and 2023 is shaping up to be another excellent year for Devon. The outlook beyond 2023 is also exceptionally bright, given my belief that we are still in the early stages of a multi-year energy upcycle.
This conviction is anchored by supply constraint from a decade of global underinvestment, ongoing sanctions on Russian production, a generational low in OPEC spare capacity, fiscal discipline among U.S. producers, and the inevitable rise in demand for our products as global economies normalize and grow post-COVID. I fully expect this favorable supply and demand set up to be another catalyst for our energy appreciation or our equity appreciation as more investors rediscover highly profitable and value-oriented names like Devon. With that, I will now turn the call over to Clay to cover a few operational results and more details regarding our capital activity in 2023. Clay?
Thank you, Rick, and good morning, everyone. In addition to our strong 2022 financial results, Devon also continued a run of strong operational execution as well. As you can see on slide 14, this was evidenced by several noteworthy accomplishments, including a new all-time high for oil production that was underpinned by another year of world-class well productivity in the Delaware. Devon's oil-weighted production mix, coupled with our low-cost asset base, allowed us to capture record margins and maintain low reinvestment rates of just over 30% of cash flow. We also efficiently expanded our resource base in 2022, with proved reserves advancing 12% through the combination of strong drilling results and by seamlessly integrating two property acquisitions during the year.
Flipping to slide 15, you can see that these strong operating results in 2022 also place us in the top echelon of capital efficiency for the entire industry, differentiating Devon in this crowded and competitive space. These operational achievements across every phase of the business demonstrate the power of Devon's advantaged asset portfolio, the success of our rigorous capital allocation process, and the quality of our people to extract the most value out of these assets through superior execution. For the remainder of my prepared remarks, I plan to discuss the key capital objectives and catalysts of our 2023 operating plan. For 2023, we plan to maintain a very similar activity level as compared to the Q4 of 2022, which was the first full quarter of operations with our recently acquired assets in the Williston Basin and Eagle Ford.
Overall, we plan to run consistently 25 rigs throughout the year, resulting in approximately 400 new wells placed online in 2023. Turning to slide 16, once again, the Delaware Basin will be the top funded asset in our portfolio, representing roughly 60% of our total capital budget for this year. To execute on this plan, we will operate 16 rigs across our acreage footprint. With The sweet spots in southern Lee and Eddy counties in the state line area of Texas receiving most of the funding. Approximately 90% of our capital will be allocated towards high return development activity in the Upper Wolfcamp and Bone Spring, while the remaining 10% will be allocated toward delineating upside opportunities in a deeper Wolfcamp that will add to the depth and quality of our inventory in the basin.
Importantly, we expect overall well productivity from this program to be very consistent with the high quality wells we have brought online over the past few years. We are well-positioned to maximize value for our production in the Delaware for the upcoming year. The marketing team has done an excellent job of diversifying across multiple transportation outlets and sales points, allowing us to avoid many of the takeaway constraints in the basin. Looking specifically at the gas volumes, approximately 95% of our gas in the Delaware is protected by either firm takeaway constraints, excuse me, contracts, or Gulf Coast by regional basis swaps. With oil production, we expect our revenue to benefit from access to premium Brent pricing through Pin Oak's export terminal in Corpus Christi.
This advanced pricing combined with low LOE plus GP&T cost structure of around $7 per BOE will drive another year of strong margins and excellent free cash flow from this franchise asset. Lastly on this slide, I would like to provide a few more thoughts on our Q1 infrastructure downtime in the Delaware. As pointed out on the map, in late January, we had a fire at one of our compressor stations in the state line area that severely damaged the electrical system and the dehy unit. The station is our largest operated compressor facility in the basin with a capacity of 90 million cubic feet per day, it's a key component to our centralized gas lift operations in the surrounding area. We have secured necessary replacement equipment, the team is currently on-site repairing the facility.
With this disruption and other third-party midstream downtime in the area, we expect to have a negative production impact of 10,000 BOE per day in the Q1. With the quick reaction time and the team's focus on safety and recovery, we expect to have this facility back up and the affected production fully restored by mid-March. We do not expect to have any negative production impacts drag into the Q2. Turning to slide 17 and moving on to the Eagle Ford, the team has done a great job integrating the Validus acquisition into our operations, resulting in our Q4 production nearly doubling to 68,000 BOE per day. With this increased scale, the Eagle Ford will play a much bigger role in our capital allocation in the upcoming year, accounting for just over 15% of our total capital spend.
During the year, we plan to run a steady three-rig program with 70% of the activity deployed towards developing our recently acquired acreage in Karnes County, with the remaining capital invested in our JV partner, BPX in DeWitt County. This development-oriented activity is designed to maintain steady production in 2023. Looking beyond the production trajectory, a key catalyst for this asset in the upcoming year will be the continued appraisal of resource upside from tighter redevelopment spacing and refracs. Early results indicate there's a lot more oil to be recovered from this prolific play over time. As we get more data points, I expect to provide more commentary on this important resource expansion catalyst in the near future.
Moving to the Anadarko Basin, in 2022, the team's approach of wider well spacing and larger completions design consistently delivered triple digit returns with the benefit of our $100 million carry with Dow. As we look ahead to 2023, I expect continued value creation as we plan to deploy a steady program of four operator rigs, once again carried by Dow. This program is expected to result in around 40 new wells placed online, focused on primarily the co-development of the Meramec and the Woodford formations in the condensate window of the play. The carried returns of these projects will once again be very strong, allowing us to maintain a steady production profile throughout the year while harvesting significant amounts of free cash flow.
For both the Williston and the Powder River Basin, I want to begin by acknowledging the tremendous job our field personnel did in fighting through extremely challenging weather conditions over the past few months. While operations in the Q4 were certainly slowed due to these arctic conditions, the production from the business was resilient, collectively averaging 80,000 BOE per day between these assets in the Williston and the Powder River Basin. Looking ahead to 2023, approximately 10% of our capital spend will be deployed across these two plays, resulting in approximately 50 new wells placed online during the year. Approximately two-thirds of the Rockies capital activity will reside in the Williston Basin.
In 2023, the capital objectives for this asset are to efficiently sustain production through low-risk infill drilling, evaluate resource upside with a handful of refrac tests, and generate around $700 million of cash flow at today's pricing. In the Powder, our objective is designed to build upon the three-mile lateral success from last year by taking the next step in the progression of the Niobrara with spacing tests of up to four wells per unit. These pilots will not only help us better understand spacing, but also help us inform optimal landing zones and completion designs. The key takeaway here is that Powder is one of the few emerging oil plays in North America, and we have a 300,000 acre net position in the core of the oil fairway, providing Devon an important oil growth catalyst for the future.
Overall, we're very excited about the prospects in 2023. I believe with the high quality slate of projects we have lined up for the upcoming year, we expect to continue to deliver top-tier capital efficiency that investors have become accustomed to. We're also well-positioned to refresh and add our depth of inventory as we execute on these programs in 2023. A good visual reminder of Devon's depth of inventory and upside potential is on slide 18. I've covered this topic at length during previous calls, so I won't go through the details today, but I do want to emphasize two key takeaways from the slide. First, we have identified roughly 12 years of high return development inventory evaluated at mid-cycle prices. This inventory positions us to deliver highly competitive results for the foreseeable future.
Secondly, I want to highlight that this inventory does not fall off a cliff at the end of the year 12. We expect to systematically refresh this inventory over time as we successfully characterize and de-risk the many upside opportunities that exist across our diverse set of assets. Lastly, on slide 19, we are continuing to make significant strides in our environmental performance as outlined in our recently published sustainability report. This comprehensive report details Devon's aggressive mid and long-term ESG targets, including those highlighted on the right side of the slide, as well as meaningful steps that we've taken towards meeting these targets. Our actions demonstrate the priority we have placed on long-term carbon reduction intensity of our operations. I'm really proud of the team's commitment to doing business in the right way, which means balancing three mandates.
First, providing the critical energy to power the world's economy. Second, provide compelling and sustainable returns to our investors. Third, do all of this in an environmentally conscious way. You can expect Devon to continue to raise the bar on all three of these imperatives. With that, I'll turn the call over to Jeff for the financial review. Jeff?
Thanks, Clay. I'd like to spend my time today discussing the highlights of our financial performance in 2022 and the capital allocation priorities for our free cash flow as we head into 2023. A good place to start is with a review of Devon's 2022 financial performance, where operating cash flow totaled $1.9 billion in the Q4, an 18% increase versus the year-ago period. This level of cash flow funded all capital requirements and resulted in $1.1 billion of free cash flow for the quarter. For the full year 2022, free cash flow reached $6 billion, which is the highest amount Devon has ever delivered in a year and is a powerful example of the financial results our cash return business model can deliver.
Turning your attention to slide eight, with this significant stream of free cash flow, a unique component of our financial strategy is our ability and willingness to accelerate the return of cash to shareholders through our fixed-plus-variable dividend framework. Under this framework, Devon's dividend payout more than doubled in 2022 to a record high of $5.17 per share. Based on our strong Q4 financial performance, we announced a fixed-plus-variable dividend of $0.89 per share that is payable in March and includes the benefit of our 11% raise to the fixed dividend. Another priority for our free cash flow is the execution of our ongoing $2 billion share repurchase program.
On slide nine you can see that we upsized this buyback authorization twice during the year, and we bought back $1.3 billion of stock at prices well below the current market level. Over the past two quarters, our buyback activity has been limited given the large cash outlays associated with our recent acquisitions and our preference to rebuild cash balances to optimize our financial flexibility. As we head into 2023, we expect to be active buyers of our stock, especially if we see trading weakness relative to our peers. On slide 10, I'd like to give a brief update on our efforts to improve the balance sheet. In the Q4, our cash balances increased by $144 million to total $1.5 billion.
With this increased liquidity, Devon exited the quarter with a very healthy net debt to EBITDA ratio of only half a tone. Our strong investment-grade financial position provides us the opportunity to return more free cash flow to shareholders and be less aggressive on debt reduction. Moving forward, we'll look to retire debt as it comes due, utilizing our healthy cash balance. Our next debt maturity comes due in August of this year, totaling $242 million. We will have additional opportunities to pare down debt with maturities coming due in 2024 and 2025 as well. Finally, I'd like to highlight the excellent return on capital employed we delivered in 2022. As Rick touched on earlier, we achieved a company record 39% return on capital employed during the year.
Importantly, even with today's lower commodity price environment, we expect to deliver another fantastic result with return on capital employed projected in excess of 25% based on our provided guidance and current strip pricing. This showcases the durability of our financial model to deliver highly competitive returns through the cycle. I'll now turn the call back to Rick for some closing comments.
Thank you, Jeff. Great job. To wrap up our prepared remarks today, I want to reinforce that at Devon, we are unwavering in our focus to deliver differentiated results for our stakeholders, including our shareholders and employees. To meet these high standards, it all begins with our commitment to be a financially disciplined company that delivers high returns on invested capital, attractive per share growth, and large cash returns to shareholders. To achieve these financial goals, we have carefully assembled a long duration resource base that is high-graded to the very best plays on the U.S. cost curve. This resource depth, coupled with the execution capabilities of our team, position us as a premier energy company that can deliver sustainable results through the cycle.
Since the merger announcement in 2020, we have delivered on exactly what we promised to do with this disciplined operating model, and I expect more of the same in 2023. While we will be slowed down a bit in the Q1 by an unfortunate outage, the pathway to recover is well-defined, communicated, and the trajectory of our business will only strengthen as we go through the year. Overall, 2023 is gonna be another really good year for Devon. With that, 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 today on the call. With that, operator, we'll take our first question.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypads. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. Our first question comes from Jeanine Wai from Barclays. Jeanine, please go ahead.
Hi. Good morning, everyone. Thanks for taking our questions.
Morning, Jeanine.
I guess maybe. Good morning. I guess maybe if we could start off with the 2023 plan. Just wondering if you could bridge between kind of that annualized Q4 CapEx guide, which would have implied about $3.5 billion-$3.6 billion in CapEx, and then the 2023 budget of kind of the $3.6 billion-$3.8 billion. Just wondering if, you know, the increase was primarily related to inflation activity or something else, and if the new level of CapEx is kind of the sustaining number going forward. Thank you.
Thanks, Jeanine. Good question, happy to talk about it. As we soft guided in, you know, the last couple of months extrapolating our Q4, I think we're very much in line. It is notably just a touch higher. We are continuing to see inflation, and I wanna define inflation because it's as we have conversations at the tip of the spear, I don't sense that we are seeing incremental inflation coming our way. What we have is a maturing of older stale contracts that are coming up to a little bit more kind of current rate. We experienced some of this in the Q4. We're baking in assumption that we'll see more of this throughout 2023.
Some people have wondered on our projection for the H2 of 2023, do we have any deflation or an, maybe, even a inflection to more inflation in the H2? I would say what we have is a more steady runway, run rate, including just a little bit of incremental inflation really on the order of maturing our contracts. That may be a little bit on the conservative side, but I think as far as we can see, I think that is kind of what we're experiencing today.
Okay. Great. Thank you, Clay. Appreciate all that detail. Maybe moving to you, Jeff, we heard your commentary about the buyback slow down in Q4 for good reason. We thought maybe there could have been some kind of catch up in the quarter because Q3 was probably impacted by the acquisitions. Can you provide any color on just the pace of the buyback in Q4? Is it reasonable to think that you could finish up the remaining $700 million in the authorization? Which I know would be big, but, you know, you talked about being opportunistic. Is it reasonable to think that maybe you can finish authorization by the end of Q1, or is it more likely to kind of be done by early May when it expires? Thank you.
Yeah, you bet, Jeanine. Thanks for the question. Yeah, you're exactly right on the back half of last year as we walked into the acquisitions with the cash outlays there, as well as all the noise that you're well aware of related to blackouts, you know, during that time period and certainly in the Q4 as we're leading towards year-end, that made it more difficult for us to get into the market. Frankly, we were just, in a position where we wanted to build back our cash balances to maximize our financial flexibility, as I mentioned in our opening comments. You know, going forward, to answer your question specific to 2023, we do expect to get back into the market in a bigger way.
As it relates to our authorization, as you highlight, that authorization kinda wraps up in the Q2 of this year. Of course, just as we did last year, my expectation is we'll have plenty of opportunities to go back to our board to reload that authorization to build upon it as we work it forward. Certainly our expectation here in the Q1 and moving into the Q2 is it'll look more like the pace that you saw from us in the H1 of last year as it relates to the buyback. Particularly on days like today where we're trading off relative to the group, that's a point in time where you're gonna see us be real opportunistic and aggressive getting into the market and buying our shares back.
Thank you, gentlemen.
Thank you. Our next question comes from Nitin Kumar from Mizuho. Nitin, please go ahead.
Good morning, thanks for taking my questions. Rick, I think we're gonna spend a lot of time on capital efficiency today, but I wanna start with cash returns if I may. Some of your peers have talked about maybe steering away from variable dividends and more towards buybacks just because the dividend payout is a bit variable just by this term. Can you talk about why the current mix of the fixed-plus-variable and the opportunistic buybacks is the right cash return strategy for Devon in your view?
Yeah, Nitin, great question. It's one that, you know, we've debated here internally, but we always come back to our starting point where we were back in September of 2020 when we announced the merger. We feel that this framework gives us all types of flexibility. Number one is the fixed dividend is something we've been very proud of. for now decades that Devon has delivered on. The variable certainly getting 50% of your free cash back to shareholders, and it's a very transparent method of cash return, you know, admittedly. Now, what we like about this strategy and this approach is it still gives us opportunity for share repurchases or for debt, you know, debt pay down.
You know, if you'll recall, in the first year after the merger, 2021, we actually retired $1.2 billion of debt at some great terms. Really pleased when you look back and certainly that moved. I think for us, you know, we feel that this still is the right framework for us, and so we're gonna stick with it. It gives us plenty of opportunities to do the share repurchases. As Jeff just mentioned, certainly when you see these kind of dislocations from our peer group or our longer term outlook, we're certainly contemplate that and we'll be moving on that. That's no change, Nitin. That's why we feel very committed to this framework.
I appreciate that, Rick. Just as my follow-up, some of your basin peers have been talking about new technologies that can help improve recovery factors in the Delaware Basin and the Permian. I'm just curious, you know, you mentioned the tests that you're doing or the stuff that you're doing in the Eagle Ford, but anything in the Delaware that you can speak to in terms of improving well productivity or efficiencies?
Yeah, I'm gonna start it, and then I'm gonna pivot it and let Clay wrap it up. The reality is at Devon, we have got a unbelievable technical team here, and it's not just in the Delaware. I know we've got some some of our competitor companies are talking about some things. We see that as well. I can assure you, we see longer term opportunities in the Bakken and all longer term opportunities in the Eagle Ford as well. As Clay touched on, you're gonna hear more and more of this, you know, in the future from us. We're real excited with what we see. Nitin, I'll just say this.
I can't drive home this point hard enough, and that's whether it's the incremental resource assessment we're doing to develop new inventory for the long term for the company or, what we can do from a technical perspective, operational perspective to enhance the longevity and the sustainability of our, of our assets. We're, we're all over that, and I'm gonna be real excited to, in the future, be able to talk about it. Clay, I'll pivot to you.
Yeah, I think, Rick, I think you nailed it. I'll add just a little bit of color. I mean, I think this is kind of the brave new frontier as we think about the maturing of resource plays. You know, the land capture, the kind of the easy, relatively easy stuff has been done. Now we're thinking about how do we take these overall recovery factors and where there are significant opportunities, how do we eke out that next incremental opportunity? I mentioned a couple, kind of teased ahead on a couple of things we're doing in the Eagle Ford as well as in the Williston. I can tell you all of those things are extrapolatable to other basins as well. Those happen to be two of our more mature assets, where we truly understand the geology. We understand the development.
We have the opportunity to kind of feather in some of these interesting approaches. There's quite a bit of excitement around that. I would tell you it's a little too early for prime time, but you know that our focus is clearly on that as we think further out into the portfolio.
Great. Thanks, guys. Thanks for the answers.
You bet. Thanks, Nitin.
Thank you. Our next question comes from Scott Gruber from Citigroup. Scott, please go ahead.
Good morning. I wanna come back to the comment on inflation that, you know, at the tip of the spear you're seeing a bit less inflation. At this juncture, are you starting to sense that some of the gas-directed equipment in the Haynesville is starting to get bid into the Permian? I know you mentioned your base case is for a bit more inflation over the course of the year. Sounds like, you know, mainly on contract roll. Is there a case building for deflation in rigs and frack pumps before the end of the year, just, you know, given where gas prices sit?
Thanks for the question, Scott. Yeah, I would say, you know, as I look at it, steady state today, we are at a service cost point that is higher than the current strip. What that tells me is in time, as we get into a little bit more steady state conditions.
These two things will come together. Either prices will come up or service costs come down to kinda converge. What we're seeing is in the front half of the year, we wanna make sure we're real clear on this, is we have things pretty well locked down. You'll see a lag towards something at that convergence potentially in the H2 of the year. That again, we will see, we will benefit from in a lagging way. I honestly, with all of the crosswinds in 2023, I'm not sure where commodity price is gonna go, and therefore net activity. We've seen a pretty wild swing in gas prices over the last six months. Absolutely, that will have impact. These rigs are pretty fungible, can move from basin to basin by design.
If that trend continues, we will absolutely see a coming down in service cost, certainly in the Permian. Again, I wanna be real clear. We have not baked that into our capital program. We're assuming very steady state, a kinda single-digit type inflation as we turn the page from Q4 2022 to 2023. It's really too early to bake any of that in. We're having some very interesting kinda real-time conversations. I can tell you the tone is vastly different than it was just a couple of months ago, and that's encouraging, but I think it's too early to really bake into our capital forecast.
No, I appreciate all that color. Just a quick one on Delaware operational efficiency. It looks like the drills and tills for this year may be up a handful versus last year, but pretty similar level. You guys are running a few more rigs versus early last year, and you got that fourth frack crew coming in for the H1. Could you just speak to kind of expectations around lateral length and, you know, any other factors kind of impacting overall efficiency in the basin and, you know, kind of mix impact from, you know, wells targeted in the program this year?
Yeah. Thanks for that, Scott. I would say directionally, the lateral length and the working interest when you pan out are about the same. We may be a little bit longer overall. you know, as we start thinking about net spin, you have to think about working interest as well. That varies throughout the year. it's probably within the margin of error. When I really look at the efficiency of how quickly we're getting wells down, you know, when you're looking at days, you're looking at hours of pump time on frack crews, those points of efficiency, I continue to see steady improvement. Very encouraging in that regard. I would say there is a marginal increase in operational efficiency.
Ultimately, what that'll yield, as I mentioned a couple of times in my prepared remarks, is essentially the same type well performance productivity kinda year-over-year. We're kinda claiming that as a victory, honestly. When you look at the maturation of the overall resource plays and where some of the rest of the industry is, we continue to see kind of flat productivity. Certainly, when you bake in a little bit of inflation, that capital efficiency erodes from a numerator standpoint, not from a denominator. We're baking all that in, and we're well prepared. When you really think about where we're at, still the remaining margin is pretty outstanding. Very optimistic about the net financial results as we project for 2023 to be a quite an outstanding year.
Yeah, I got it. Appreciate that color. Thank you. I'll turn it back.
Thanks, Scott.
Thank you. Our next question comes from Neil Mehta from Goldman Sachs. Neil, please go ahead.
Yeah. Good, good morning, team. Rick, first question to you is just on M&A. You talked about the two property acquisitions last year. How do you think about balancing incremental bolt-ons relative to buying back your stock? What do you think the activity set around M&A could look like in 2023?
You know, Neil, that's a great question. You know, the foundation for us is really the high bar that we've always had on transactions. We'll look at transactions if it makes sense. We'll compare and contrast that with what you're talking about, the share repurchases. I think what you saw, that's the beauty of our model. We had an earlier question about that. The beauty of our model is we can do a little of all those. We paid some great dividends. The share repurchases took place. We were able to pay cash for two very accretive acquisitions, bolt-ons. I think that's a winning combination. It really is. Now I do think that you're gonna continue to see consolidation in our space.
I think there's consolidation needs to take place, and it's healthy for our industry. I'm very much in that camp. For us, I can tell you we're gonna continue to be disciplined and thoughtful and once again think about over the long haul. It needs to be something that can compete. We've got a wonderful portfolio, and it'll always be something we look at as a, as an option.
Okay. Thanks, Rick. The follow-up for the team is just on the outlook for natural gas. You shared your comments around the oil markets. Gas is a lot more uncertain. It does feel like we might need to see a supply response in order to calibrate the market given where inventories are. Just perspective on the gas macro in 2023. How is the lower flat price for gas changing the way Devon is approaching its activity program in 2023? Do you see any changes that you need to make on the margin to respond to the margin environment?
Yeah. Neal, I'll start. I'll have Jeff follow up, clean up any of my comments. I think for us, we were on record as going out there a year ago where we felt like gas actually from the commodity prices actually got a little ahead of itself. We were a little surprised it went up quite as fast as it did. I can also say that it's come down a little faster than I thought it would as well. I think it's driven by two things. Number one certainly was Freeport with the, y ou know, you take 2 Bs a day, there is a cumulative impact of that export capability being lost. The second thing is probably in a lot of parts of the country, a little milder winter.
You know, natural gas is still, we all know this, it's still somewhat weather dependent. It's a lot different than crude oil. I think that for us, you know, we're gonna continue to stay as oily as we can for as long as we can. I can assure you, we just think that's a winning combination. Obviously, there's some strong gas guys out there. They probably are more appropriate to answer the questions. Jeff, how are you looking at it longer term?
Yeah, you bet. Neil, thanks for the question. I think, I would echo Rick's comments. We, you know, we continue to, you know, believe that longer term, there's gonna be increased demand for natural gas out of the U.S., given the LNG projects that are gonna be built out. Obviously, as we all know, that's still two years out. In the meantime, we're gonna be, you know, susceptible to some volatility depending on what weather does and other dynamics like Freeport that impact the market. you know, as Rick also mentioned, we view ourselves as an oil company and, you know, 80%, 90% of our revenues are around oil, so we're more focused there.
To your second part of your question, Neil, has it changed our game plan for this year or going forward as it relates to activity? The answer is no. Again, most of all of our activity is oil-focused, and driven by the prices that we see there and the cost structure. No big change to our game plan as a result of what we've seen in the natural gas markets.
One thing I may add is.
Thanks.
Even some of our more gassy development actually is here in the Anadarko. You have to remember that a big part of that's on a Meramec, and that's a lot different kind of project than a I'd say an Appalachia or a Haynesville type project. Many of these wells IP 1,500 barrels a day of condensate, they're high liquid content, and that's what drives returns. That's what drives our interest in it.
Thanks, everyone.
Thank you. Our next question comes from Doug Leggate from Bank of America. Doug, please go ahead.
Thanks, everybody. Well, dang, Jeff, everybody, I guess someone else stole my variable dividend question. I'll have to go with something else. Anyway, nice to be on the call. Thanks for taking my questions. Two related questions, guys, if I may. I guess, Jeff, they both might be for you. A year ago on this call, you talked about an ultra-low breakeven around $30. In your press release yesterday, presentation rather, you talked about a $40 breakeven. It seems that, you know, with the moderate inflation, I guess, expectations, those two numbers don't really seem to align. Can you walk through what's changed, the felt $40, $10 increase in breakeven is what you're trying to communicate?
Yeah. No, you bet, Doug. No question, the cost structure, as we've been talking about, has moved higher, you know, on a year-over-year basis. We had the benefit for the better part of 2022, given the supply chain work that we did and the great work the teams did to kinda lock in firm contracts with term. You're starting to see some of that unwind now, as Clay referenced earlier. That contract refresh has resulted in the higher cost structure that you're seeing in this year. That's really what's driven that breakeven higher. Now, there are some other impacts, as you're well aware. Our cash taxes, you know, we expect to be higher this year, as we've utilized the NOLs in 2022.
That's been an impact that's driving that cost higher. Far and away, I know everybody's tired of talking about it, I certainly am as well, but it's the inflationary impact that we've seen across every, frankly, every cost category. You use the word moderate, I would actually choose a different adjective. You know, when you think about most of these cost categories, we've seen, you know, anywhere between 30% and 50% kind of inflation, depending on which cost category you're talking about. That's what we're walking into in 2023. Again, I like to think we've protected ourselves well and benefited from the other side of that for the bulk of 2022.
Certainly as we refresh contracts in the Q4 of last year and walking into the Q1 and Q2 of this year, you're seeing some of that impact, and it's certainly driven that breakeven higher.
I guess I was referencing moderate versus the Q4, but yeah, you're quite correct. Thanks, Jeff, for correcting me. Well, thanks for the clarification. I guess my follow-up, it might be for you, Jeff, it might be for Rick. I'm looking at the free cash flow in the Q4 of 2022, and it's basically the same as the free cash flow in the Q4 of 2021 with higher oil and gas price. I guess my question is that with the deferred tax, it looks like that's gonna move lower to your point versus the Q4. On a normalized basis, Q4 would probably be lower than year ago then if the deferred tax moves per your guidance. I guess my question is.
I don't want to say free cash flow has peaked, but it kind of feels like outside of a commodity call, it kind of has. When you think about creating value in an inflationary environment, how do you expand free cash flow outside there, I say, of something like an acquisition? What do you do to drive value accretion, which is ultimately a function of free cash flow expansion? I'll leave it there. Thanks.
Yeah. You bet, Doug. Appreciate the question. You're spot on. I mean, that's why our focus here internally, and Clay referenced this in his comments earlier, is around the focus on that cost structure, the productivity, and the efficiency of the wells that we're drilling. That's the piece that we can control, right? Obviously, we don't have a lot of help on the revenue side. You're certainly correct to the extent that can my prices go higher, which we frankly expect that to happen given what we've seen in the market. That certainly would be incremental free cash flow to us, but we can't count on that.
What we're focused on as a company internally is around our cost structure and being more efficient, you know, every day, in the field, in the office, on the things that we can control. The good news, as Clay referenced, is we're continuing to see improvement on that front. We're continuing to squeeze white space out of the Gantt chart, you know, on a day-to-day on each of our projects. It's got to be focused around cost structure because that's what we can control, and that's how we can drive greater margins relative to the inflationary environment we're seeing today.
I appreciate the answer, Jeff. I guess I was thinking about taking out someone else's cost because you have got a strong track record of M&A, but I'll leave it there. Thanks so much.
Well, Doug, I'll just add on, and again, just to echo, you know, Rick's comments earlier. We continue to be believers that consolidation is going to happen in the space, and that certainly is going to be a driver of that. We feel like we're well-positioned to take advantage of those opportunities. As you've seen from us in the past, we've got a really high bar as it relates to what we would bring into the portfolio and to how it would compete, you know, with the assets that we've got. Again, that's hard to control as well, the timing and the nature of those transactions. We got to stay focused on what we can control, which is the work we're doing day to day.
Appreciate it. Thank you, Jeff.
Thank you. Our next question comes from Paul Cheng from Scotiabank. Paul, please go ahead.
Thank you. Good morning, guys. Two questions, please. In your press release, it seems like in the Q4, the metal length for the well tie-in is about 17% lower than the Q3. Is that a structural reason, or it just so happened that for other reason that end up to be every single basin, your metal length is lower? Also maybe, Clay, in your press release, you also said, that's a negative 55 million barrel of oil, negative reserve adjustment or revision. What is that? What area related then? What causing the negative revision there? A second question is that, do you have a net debt, medium to longer term target?
I know Jeff, just mentioning that, you're going to pay down the debt, based on the maturity. Is there a gross net or net debt target you have in mind? Say, what would be appropriate for the company longer term? Thank you.
Hey, Paul, it's Clay. I'm gonna jump in on the reserves question. I'll let Jeff handle the debt question. One, appreciate the question. I wanna stress this very importantly. We are super confident in our reserves booking process, the quality of our reserves. This is one of the hidden benefits actually from our merger. WPX had one auditor, Devon had another. We've actually brought in a third party to look at both sets of books and just take a brand-new refresh this year, which has been a great process. You know, inevitably there's gives and takes, but man, we were very, very much in line with this world-class new look, fresh auditor. The nature of reserves in general is that there's no strong incentive to overbook.
There's lots of incentives to. There's a strong disincentive to overbook. We wanna make sure that we have a conservative outlook as designed by the SEC. I think that the general phrase is much more likely to go up than down. Sometimes you have, you know, with a five-year rule, there's things that move around. Specifically to the oil question you hinted at, there was some movement in the rig dedications and the rig focus from some of the Texas assets in Delaware to a little bit more New Mexico focus. That caused some of those wells to fall off in the five-year rule. They fall off 1 category. Obviously, they can come on in other parts of the additions as well. That tends to balance.
In when you look at, the overall, quality of the reserves year after year, there's lots of really important hints to look at. Finding and development cost as a run rate. You think about PUD percentage booking, you think about PUD conversion percentage. There's a lot of things that are kind of very important to look at. When you watch all of those, Devon's in a very, very strong position. We feel very confident about our reserves. There's one other piece and a nuance of the reserves booking that's very important. When you first thing you do is you're looking at price revision. You make a change on price. The second thing you start looking at are things like cost structure and all of that.
In our case, and everyone's case, but in our case in particular, our LOE ticked up year-over-year, and that falls into a reserves, a non-price related revision. It's in that bucket. It's really as a result of higher inflation due to prices, but it doesn't quite fit into that price revision category. There's some interesting nuances. I just wanna emphasize the confidence that I have personally and the team has in our reserves process. I'll hand it to Jeff and let him talk debt.
Uh-
Yeah , I think.
Okay, before Jeff, can you also talk, comment about the lateral length in the Q4 that is about 17% lower, shorter than the Q3. Is there any structural reason or it's just one-off because of other reasons?
Hey, Paul, this is Scott. I'll jump in real quick and then pass it over to Jeff for the debt question. The key driver of the shorter lateral length is largely the incorporation of Validus. You brought online in Eagle Ford, you brought online about 30 wells in Eagle Ford, so that by nature of the drilling configuration there, they're shorter laterals. Overall, if you exclude that impact, you know, largely everything else is close to a two-mile lateral, which is in line of our previous trends. That's gonna be the big variance there. Probably all things equal, you should see that kind of weighting be very similar going forward given the capital plan that we have planned for 2023. Jeff?
Yeah. Paul, I think your last question was around our net debt to EBITDA and any targets that we have related to that. You know, what we've talked about historically, internally and externally was kind of a 1x net debt to EBITDA target. As you heard in my opening comments, we're well below that today. We're very comfortable, frankly, with our overall leverage position. You know, as we highlighted in the materials, we've got a strong investment grade credit rating. We have really positive conversations as it relates to the rating agencies. Frankly, just given the strength of our, you know, the core of our business, we feel really good about where we are.
As I mentioned in my opening comments, that allows us to be less aggressive trying to take down, you know, the absolute debt level. We feel really good with the maturities coming due, you know, here over the next, you know, call it two to three years investment-gr years. Our expectation is we'll just take those out as they mature, and wouldn't expect us to step up any incremental debt reduction in addition to that. Now, certainly, should market conditions change or, something else come to light that might change our point of view, we would adapt and be flexible given the cash balance that we have and the free cash flow we expect to generate. As.
I'll just reiterate something, you know, Rick mentioned earlier, which is that's one of the beauties of our financial model is it provides us a lot of balance to do multiple things, whether it's debt reduction, variable dividend, stock buybacks, or certainly even evaluate some cash transactions. We feel really good where we are on the leverage and we'll expect to just take those maturities as they come due over the next couple of years.
Thank you.
Thank you. Our next question comes from Neal Dingmann from Truist. Neal, please go ahead.
Morning, guys. Rick and Clay, my first question just on the reinvestment rate specifically. I'm showing that the rate maybe has increased to potentially this year a bit over 40% versus 31 last year. I'm just wondering how do you anticipate this trending? You know, is this just largely driven the higher reinvestment rate because of cost, or are there other factors we should think about, you know, when sort of determining what this reinvestment rate is gonna continue to trend towards?
Yeah. Neal, this is Jeff. Yeah, I think if you're speaking to our overall reinvestment rate, you know, at a corporate level, that's exactly right. It's just the math and the function of, you know, higher costs as a result of the inflation that we've seen and then the lower commodity prices, which we all know have been, well, certainly on natural gas have been dramatic, but more so important to us is on oil and, certainly on a year-over-year basis, the strip would suggest a lower oil price for this year as it relates to last. That math just works out to be a higher reinvestment ratio.
Okay. Okay. Thanks, Jeff. Just secondly, Clay, maybe for you just on, you touched on this a little bit. Just on the infrastructure, you mentioned, you know, in the prepared remarks on the compressor and third party, I think you mentioned that you expect this to be back to normal next quarter. Were there, I guess, proprietary changes or were there new contracts or anything you've done to, you know, help mitigate this going forward to give you more confidence in less of this happening going forward?
Neal, I'll say it's a little too early to kind of really digest all of the lessons learned. You know, the team, this is, you know, really days, maybe a couple of weeks old. We're, you know, team wanna make sure, first of all, there was no one injured, there was no one out on location, so that worked very much in our favor. We wanna understand the impact to see if there was anything immediate that we had to address on any other compressor facilities with similar designs. We didn't see anything in that regard. The teams are now doing deep investigation in parallel to the real-time fixing. What I would say is so far there's no glaring issues. There's a lot of mechanical parts, a lot of moving pieces. We will learn some things. We will apply some learnings.
I don't think there's anything that really stood out, right off the bat that we thought we could improve in the offset operations.
You do expect it back relatively normal, Clay, by Q2, you said?
Yeah. I would say middle of March, we should have production fully up and running again, about that time. Shouldn't bleed into the Q2. Feel really good about that.
Very good. Thank you.
Thanks, Neil.
Well, I see we're at the top of the hour. Appreciate everyone's interest in Devon today. If you have any further questions, please don't hesitate to reach out to the investor relations team at any time. Thank you. Have a good day.
This concludes today's call. Thank you for joining. You may now disconnect your line.