Good morning. Arun Jayaram from JP Morgan's E&P and OFS research teams. Thanks for joining us for day one of our conference. This is one of the presentations that I really circled ahead of the conference, because it's really an opportunity to meet with Devon Energy, who recently completed the merger transaction with Coterra. Devon's been a little bit off the grid as they've gone through the approval process for the merger, but this is the first conference that CEO and President, Clay Gaspar, can really tell the story about the industrial logic of the deal. Clay, welcome to New York. Thanks for joining us.
Thank you, Arun. It's great to be here. Great to be back out meeting with investors. When you have to go quiet, you're so anxious to tell the story, so happy to be here today and part of the conference.
Well, let's go ahead and start with the Devon-Coterra merger that was announced in February. For the generals in the audience, can you elaborate on, call it, the industrial logic of why this deal made sense to you?
Certainly, I'll start there. When you look at the position that Coterra was in solo, that Devon was in solo, we were both in a really strong position. Had incredible inventory, but always looking to improve. I think that's the nature of the business. When you think about the overlap, specifically from the Coterra side, two of the three core assets overlapped with the Devon footprint. Most importantly, the Delaware Basin, where we are now the dominant force for sure in. That is the nature, the industrial logic. I'm just an engineer, simple guy by background. You start comparing maps, and when the parts start snapping together, there's a pretty good indication that it could work. You think about the importance of getting alignment on culture, getting alignment on integration.
Setting the tone of who we are and how we can create incremental value. We have a very aggressive goal, happy to talk about it, on synergies. I feel very confident today as I look down the line of being able to accomplish this. That's all value-creating opportunities to take what individually were good positions, to take them and to combine into something that's much better.
Great. Clay, it's been 47 days, if we did our math right, since the merger closed.
94 days from signing to close, 47 days from close to here. Yes, we are not sitting on our hands letting any grass grow under our feet. Thanks for the acknowledgement on that.
I can't remember a merger that closed so quickly. Kudos to Shane and the team.
Absolutely.
For getting it done so quickly. Give us a sense of how integration has gone thus far. I know you guys have been very busy. What are some of the updates from the first 47 days since the merger closed?
Yeah. As I mentioned, I think moving with haste has been kind of part of a cultural reestablishment. You think about the three goals I set out as a CEO of the combined entity, were remarkably similar to the three goals I set out as a new CEO of Devon 18 plus months ago. Those were three. Number one was getting alignment on culture, setting the tone, really taking this opportunity to inflect, get alignment, and really make sure that the combined organization are all rolling in the sa me direction, pulling for the same common goal, and doing it in a way that we can really ascribe as, this is the culture of how we work. Moving with great haste is part of that cultural establishment. Second, having a near-term goal. Everyone knowing how to quantify what winning looks like.
Tracking, identifying, holding ourselves accountable, knowing what registers on the scoreboard. How do we translate that all the way through the financials, and on a quarterly basis, bring our investors along? We had this a year and a half ago with the business optimization work that we did on the Devon side. We're using that same skill, mindset, and even kind of operational tactics to apply to the synergy target. As I sit here today, 47 days in post-close, the level of confidence I feel around accomplishing a $1 billion of incremental value associated with the synergy is exceptionally high. The third thing on the list is a long-term vision. Who are we as a company? How do we know that these shorter-term goals really contribute to the longer-term success? That's something we'll continue to roll out.
In the first 47 days, we haven't had the chance to really actively debate that as a combined team. Get that together, get that alignment, bring our board along, and then really set a course for what I believe is incredible future value creation as well.
Clay, post the merger, you're one of the more active players in U.S. shale. At the last count, I think you're running 31 rigs, 10 frack crews. Talk to us a little bit about capital allocation across your diverse plays that touch oil and gas NGLs in a number of different core U.S. lower 48 plays.
Yeah. I think that's one of the kind of hidden areas of synergy, or doing better work together. Individually, had great assets. When you combine them, they get enhanced. Sometimes it's from the capital efficiency front. We're applying drilling and completion costs to wells and seeing a very significant improvement. That's about a third of our synergy target. The second third of our synergy target is what we call operational. We're thinking about lease operating expense, gas processing contracts, enhancing those. Also improving runtime and flattening base decline, really enhancing the value that we create from all of the base wells. Then, of course, the third piece is our corporate costs, and that is just all the synergies that come bigger, better. Back to the part of reallocating capital.
There's no doubt about it, the enhancement of our portfolio allows us to lean in and let that capital flow to the best performing assets. We're lowering capital costs, we're pushing more capital towards the Delaware basin, our best productivity, and our best capital efficiency. By definition, that enhances the value creation opportunity in which you'll see as a nice continued step-up as these synergies come to reality from 2026 into 2027.
Great. Clay, on a pro forma basis, Devon is trading at a very attractive kind of free cash flow yield. The pro forma business is going to be generating a lot of cash.
A great entry price, one might call.
Great. For our traders here too. Can you talk a little bit about how you're thinking about capital allocation across core development, debt reduction, shareholder returns, and some of the strategic investment opportunities?
Yeah. This is certainly one of the areas I love getting investor feedback on. Inevitably, if you have multiple people in the room, you get multiple perspectives on this. We've approached this capital return mindset. Essentially everything's on the table, and we have opportunities to step in and improve on all fronts. We start with our base dividend. We had a 30% uplift in that base dividend from the Devon side, $0.32 a share is a nice significant step up, but also something that we truly believe throughout the cycle is very safe and secure that we never have to kind of go back on that. We can always look to not only deliver that, but also have an opportunity to step that up on an annual basis. Secondly, I think about our share repurchase program.
We had signaled a $5 billion repurchase program. We recently enhanced that, again, all in the first 47 days, to even higher, an $8 billion repurchase program. We think about that kind of on two fronts. One, a very systematic approach. We're going to be in the market every day, every quarter. Think of it scaling up from where Devon was individually to the new pro forma size company. Somewhere around $250 million to maybe even $500 million on a quarterly basis. Think about that kind of scaling over time. What that does is allows, in a cyclical business, to avoid that temptation of you got a lot of cash flow when your commodity price is up and potentially when your share price is up, and that's the exact wrong time to buy a whole bunch of differential shares.
We would love to be able to just stack a bunch of cash during that period and then go back in when the inevitable down cycle happens, and then we could go approach that. The reality of the matter is, we can't wait till sunnier days and dark skies to really optimize on that. We want to be in the market continuously to operate in a very systematic approach. Now, on top of that, there will be times of disruption that we can go above and beyond. There's an opportunity to go really opportunistic on top of that. Third, certainly not in third place, but a very good opportunity for us now is to further enhance the absolute amount of debt that we have.
In the next couple of years, we have some significant bonds coming due that we'll be able to chip away at and continue to improve. We have a target of getting to about $9 billion of debt. That takes us below one times in kind of a mid-cycle environment and something that we really believe needs to stand the test of time to make sure that we're watching through the cycle when we think about the direction of being sub one times throughout the cycle as kind of a starting mindset of where we want our debt level to be.
Yep. My last question kind of on capital allocation. I was wondering if you could talk about how the company organization is kind of harnessing AI to improve capital efficiency and lower costs. One thing I did learn being with you and the management team on the road is that your nickname is Clay AI.
Clay AI. I don't know where that originated, but I think we have moved from a place where a lot of my peers were pretty dismissive a few years ago, to where I think any CEO that can spell AI thinks they're an expert. I find it quite humorous. I can tell you, Devon, we've been on the case, really beating the drum, trying to get the excitement around the potential for this for years. We stood up our first internal firewall data map system in May of 2023 called a ChatDVN. It was the 1.0 version. Three-plus years later, we're on a Gen 3 version of that. What I would tell you is more exciting than just the technology is the embracing of that technology on all fronts.
It is really exciting seeing the wins from the back office to the guys that are on the front end of value creation every single day. Our drilling and completion teams have worked minor miracles in driving well cost down, really understanding the incredible amount of data that's flowing in every day, and turning it from random knowledge into actionable intel. Then I think about one of the things we talked on the last couple of calls about is the operational ability to optimize wells real time, 24/7, 365, fully closed loop with AI. We now have over 850 wells running autonomously, optimizing the artificial lift settings 24/7. We will extrapolate that to what I think is the potential of essentially all of the company, all of the base wells, all of the opportunity.
We're seeing very significant uplift in that regular optimization rather than what's historically been done, say, once or twice a year from a real intensive amount of calculation and optimization work. We're able to do that real-time, all the time. There's hundreds and hundreds of examples further down the value chain. I can tell you every one of those wins are meaningful to the bottom line of the organization. When I think about the opportunity set we have today with infusing that in th e blended culture, it is a real significant step up that we continue to see very material upside value creation from.
Clay, the next topic is portfolio. I know that the company is performing a comprehensive review of each asset in the portfolio. Can you give us a little bit of an update on that process? What are some of the criteria you as a management team are looking at to see which assets stay in the portfolio, which may be monetized, and how does kind of tax leakage kind of enter into the equation?
Yeah. There's these moments in time where you get to really kind of reframe the question. When I think about, individually, the two companies had optimized for their company outlook, management perspective kind of view of the opportunities in hand and further opportunities. When you come together, we have reset to a new organization. We're in a different weight class. We have different scale, different opportunities. Certainly starting with the Delaware Basin, we have the dominant position in the basin with a dominant operational ability, with a position that I think from third-party views, absolutely dominate anyone else from sub-$40 break evens to $50 to $60. From Enverus' view, even Novi Labs recently wrote an article in the last week or two extolling the virtues of our incredible inventory.
Starting that as a kind of a foundational footprint, you also have the opportunity to think, how do we further enhance that? We have the existing assets, kind of that complement that base of business. One way to look at it is, in addition to the Delaware Basin, what are the characteristics of those assets to make us an even stronger company? Without getting into the details, preventing us from boxing ourselves in on an artificial timeline or artificial expectations, what I would tell you is we think about it kind of through three lenses. The first lens is, what's the value of these individual assets?
We've done a fulsome review, both individually and collectively now as a new team, thinking about what's the inventory, what's the competitiveness for that capital, what's the upside potential in us applying technology, applying some of these synergies. T hinking about the scale of the company and how do we lean in to enhance that value further. How do we think about the long-term value applying technology, things like enhanced oil recovery, that are still yet to really get fully understood and quantified, but certainly have exciting upside from where we're at today. The second lens that we think about these assets are, how does the market view that? Right now, there's a v ery strong buyer's market for assets, and that's across the board, both oil and gas.
We think about these different positions, be it the ABS money that's really entered the space, made a big splash. We think about the private equity buyers that expresses a lot of interest in a lot of the basins that we're in. Of course, the strategic players, where we just think about what's the natural fit. Who would have that logical snapping together and enhancement opportunities that they can create value even more than how we're creating value from these assets today. A very objective view of how does the market see these assets. The third, I think very fundamentally important, is how do we think about the strategic fit of these assets? Sometimes these individual assets can further enhance even amongst themselves. You take applied learnings from one basin to another.
You think about complementary pieces of business that may be able to endure a storm, be it in a state, in a commodity swing, any of these things that can come our way without much notice. How do we build a stronger company together from a strategic point of view? What we've telegraphed is this is more of a months exercise, not a years exercise. We've talked about the incredible pace at which we're moving. This is the same objectiveness, the view at which we were approaching this. We are aggressive. We will be mindful of how do we take this moment in time to create more value for the shareholders. Last piece, you mentioned tax leakage. I would consider that maybe a second part of the consideration. Absolutely, we think about things after tax.
When you profit over time, you end up paying a fair amount of taxes. We are a true tax-paying entity, proud to report. Part of that is the tax consequences of any said transaction. I would put that a little bit more 2nd tier than the primary drivers that I artic ulated first.
Great. Maybe you could just spend a moment and talk a little bit about your feeling of where Devon's pro forma position in the Delaware Basin stacks relative to your peers. You mentioned a couple of third-party studies, but maybe you could just talk a little bit more about that.
Yeah, I would say, I love doing retrospective look back. How do we do things better? How do we get smarter? One of the things we really pride ourselves on is learning from others. Every one of our peers, every one of our service company partners. From our own experiences, how do we do things better? This merger is a perfect example of that. You had two individual companies that were essentially fighting the same fight, doing things sometimes a little bit differently. How do we think back on how is it that one company did something a little bit better? Or maybe it's a third party out there that does it better than the previous either company.
I think one of the things when I look back on Devon, the thing we could've done better is been a little bit more decisive and a little bit more pounding the table on the incredible value we have and the inventory that we have in the Delaware Basin. You enhance that with the Coterra side as well, it's just evident. I mentioned Enverus as kind of a third party, essentially the standard that many people use. I lean towards them. They don't get everything right, but directionally, they do an amazing job. What they will tell you is we have an incredibly strong portfolio that dominates anyone else in the basin. I mentioned the Novi Labs, another third-party view that looks at this. They point to 20 years of opportunity that we have in the basin.
Every day, we're getting smarter and enhancing more and more value from that. I get excited on a couple of different fronts. One, the quantum of that inventory, but also the nature in which we do that. I don't see another peer, and I say this humbly, that can stand toe-to-toe with us on what we're doing in the AI front. That is, I think, evidenced, one, by the work that we did on the Devon side around this business optimization. Much of that was underwritten by application of technology. This is very much a prove-it story. We have lots of catalysts ahead on proving this next $1 billion of value creation. I sit in front of you today exceptionally confident and looking forward to the updates that are coming your way on being able to deliver that.
Once again, applying the learnings, the operational savviness, the technology orientation on an incredibly strong inventory that we have today, I think is just an incredible investment opportunity.
Clay, post-close, the stock experienced some volatility around the recent lease sale, where Devon committed a little bit more than $2.6 billion of capital for 16.3 thousand acres in the core of the play. Can you maybe clear the air a little bit on the lease sale? Why do you think this was a good capital allocation decision? Maybe provide some inside baseball on how you prepared and attacked that lease sale.
Yeah. This is something everyone got to hear a few times when we were traveling last week. I think, again, I love looking back. What did we do well? What could we have done better? What I would tell you, the performance on this lease sale was A-plus. A-plus across the board. We did a phenomenal job. Think about this, 13 days before the lease sale, we were two individual companies that had to abide by the rules that we could not share intel on bid strategy. It was a very hard line. We are Boy Scouts. We will follow the rules. We will stay letter of the law specific on this. Very, very, very important on that.
The morning of the close, we had two teams staged in Midland that had done individual work that all of a sudden broke for the combining mutual discovery of how did we individually value these assets. I can tell you there was some things we really agreed on. I think the much more exciting things was where we disagreed. Where do you see something differently? How did you underwrite that landing zones? Where do you have knowledge on the performance, the well cost, the third-party benefits that we can apply to this? You think about that mutual discovery that we had to get aligned on, then very importantly, we had to get the management team aligned on.
Very importantly, in 13 days, we had to get a newly constructed board that hadn't even met, sometimes, in the same room, aligned on a $multi-billion aggressive target into something that was a very, very unique, kind of once in a generation lease sale. This lease sale of this scale is not happening routinely. There will be other lease sales, $50 million and hundreds of millions of dollars, but a $multi-billion opportunity in our backyard, in our backyard of our dominant position, is just not something that was going to come along on a routine basis. Let me tell you just briefly a little bit about the mechanics that I think have been missed along the way.
When I look back self-critically, how could we have done things better, I think this is the part we could have done better on articulating the real importance of the mechanics of how things were bid and how they were won, as opposed to the Gulf lease sales of the past, where you have a sealed bid, a single number that's notoriously left millions and millions of dollars on the table between the highest and the second-place bid. Every tract that transacted, it's an eBay style bid. You win by $1 per acre. $1 per acre. There is no money left on the table. This is truly understanding value discovery and market realization of these assets. Many times, there was a third- and fourth-place bidder aggressively going after these bids. Okay?
Something else that I think the general public missed, and even the sell side, besides my brother here, may have missed, is the n ature of this acreage and why it is not a good comparison to other private equity deals that may have recently transacted. The nature of private equity is an assembling of assets, most often partially developed, most often partially developed from the very best zones. Maybe it's a single well holding that landing zone. Maybe they just develop the Upper Wolfcamp, the very best of that rock, and then everything else that remains is partially impacted and maybe a little bit second-tier, relatively speaking, to what was already kind of developed. Remember, the private equity folks get paid the most on the value that's developed. That's a motivation there.
Compare and contrast that to the lease sale, where these are untouched virgin acres, have never been touched. You have a full grass to granite, as we describe it, 87.5% net revenue interest that is vastly different than the state-of-the-art, 75% is the standard on the Texas side, 75% working interest, that is anything on the state side of New Mexico, the fee side of New Mexico, is the standard. These are 87.5 untouched acres that are in our backyard that we already have infrastructure, both water, electricity, gas gathering, oil gathering, gas processing, that we will make money upon money upon money in our backyard where we make the dominant position. You're damn right we spent $2.6 billion. We would do it again if it came up tomorrow. It's not going to come up tomorrow.
This was something that we had, while it's ill-timed from an idealistic standpoint, May 20th happened on May 20th. We closed on the 7th, in 13 days, we did what I think is a phenomenal acquisition that will incredibly well stand the test of time.
Great. Thanks for that detail. Maybe a two-parter. Could you talk about just confidence on the $1 billion of synergy capture relative to the billion-dollar optimization program that you successfully completed at Devon? The second part of it is maybe talk a little bit about the ability to lower well costs in places like the Delaware.
I appreciate the way you asked the question because I think there's relative context to 18, 14, 15 months ago, when we launched the business optimization for the Devon side of the family. I was a new CEO. I knew that there was a moment in time when you can really capture not just the attention of investors, but maybe more importantly, the attention of the employee base. What's different? "Clay, you have a similar background to your predecessor, Rick. You were already the COO. Is anything really changing?" What I wanted to really grab ahold of that attention was, yeah, these three things are changing. What I talked about, the culture, the near-term value creation opportunity, and the long-term vision. Specific to this near-term opportunity, we really set out this focus around sustainable free cash flow.
In our view, it was a holistic catch. It wasn't just minimizing G&A, or even just minimizing cost. It was value creation. Thinking about the top line of how do we reduce downtime, how do we improve our recovery factors, how do we drive more value from the wells that we're drilling, maybe even more importantly, from the wells that are already existing production. Absolutely addressing every part of the value erosion that happens through G&A, through GP&T, through LOE. At the end of the day, what's left over is that value, thinking about the capital, thinking about the free cash flow as what's left over. Just not in a short-term timeframe, but sustainably, how do we think about creating more long-term value creation from a free cash flow perspective? That was the nature of that deal.
What I would tell you is the small group of us that got together, we went back and forth, we challenged back and forth, again, amongst a small group, without having the benefit of really surveying the land and saying, "Okay, where are those opportunities?" We came up short of $1 billion. We also came up with a timeframe that looked more like three years rather than two years. Thinking about how do we draw the attention of the investors into something that is big, hairy, and audacious, and really putting a line around that.
We leaned in, and I can tell you it was an uncomfortable lean, but I knew we had confidence that once we got this flywheel starting to turn, there were so many more opportunities that we couldn't just see amongst this very small group that had contemplated this very aggressive goal. You compare and contrast that to a year later, we sit there with the opportunity of an actual transaction. We know that Coterra's bringing best practices, that we're bringing best practices to this combination. There is absolutely real fundamental differences, and there are best practices we can apply. Really, when we started coming together, interestingly, the Coterra side of the family came up with $1 billion from one direction. We came up with $1 billion from a different direction.
When you add the two, there's some complementary benefits. I feel very confident in being able to deliver that. You add on top of that, the mechanism that was already in place from the Devon side, identification, tracking, holding ourselves accountable, and ultimately delivering to the shareholders in a very transparent way these values all the way through the financials. That mechanism is already a native language to us. The flywheel effect of technology and the hunger around the organization is incredibly exciting. We will deliver, I almost said we will outrun. We will deliver very confidently this $1 billion, and I feel very confident being able to do it today. You specifically asked about capital, and in one way, that third, we call it kind of the first third, is the most transparent.
There's nothing like drilling very similar wells right next door to ea ch other and comparing costs. When we do that, we see well north of a $1 million a well opportunity for us to apply starting day one, really starting to apply even before we closed. There was kind of what we call mutual discovery opportunity, where we saw low-hanging fruit that we've already aggressively started to go after. We've telegraphed with our balance of 2026 opportunity that these synergy opportunities will already start to manifest by year-end 2026. We have a very aggressive goal for the balance of 2027. Later this year, we'll start to tell you a little bit more about those tangible forecasted numbers for 2027. You'll see that the synergies bake into that.
By year-end 2027, we will have achieved these really important goals that we have.
Clay, we're almost out of time, real quickly, you provided the market with updated pro forma guidance for the back half of the year in 2026 in mid-June. What are kind of the quick takeaways from that?
Look, this is early in the process. We wanted to make sure that we had an opportunity to come together, that it's reflective of the synergies, and there is some of that baked in. We all know you start from zero, and you start to build this in. What we've telegraphed is by the end of the year, you'll start to see some of this value capture. It is better. Day one, we've already leaned in and said, "Just taking the pro forma, the Coterra numbers, plus the Devon numbers, we're already doing better than that from a capital program and from a production standpoint." There's so much more to come as we work towards our 2027 goal.
Great. Clay, we're out of time. Thank you so much.
Thanks, Arun. Appreciate it, everybody.