Devon Energy has reported operational and financial results for the fourth-quarter and full-year 2019.

Highlights

• Fourth-quarter oil production increases 28 percent year over year, exceeding guidance
• Efficiencies drive upstream capital expenditures 6 percent below midpoint
• Operating cash flow expands year over year to $579 million
• Free cash flow generation accelerated to $171 million in the fourth quarter
• Board of directors approved a 22 percent increase to the quarterly dividend
• Lowering 2020 capital spending outlook; raising oil growth rate expectations

“Devon’s transformation to a U.S. oil business is now complete and the operating performance we achieved in 2019 showcases the world-class capabilities of our highly focused asset portfolio,” said Dave Hager, president and CEO. “A consistent theme throughout 2019 was the steady improvement in well productivity and capital efficiency that drove oil production above guidance for four consecutive quarters while keeping our total capital investment below forecast. In addition to the strong operating performance, we made substantial progress building per-share value through our industry leading share-repurchase program and we have built a strong balance sheet by reducing debt by more than 75 percent from peak levels a few years ago.

“With the positive business momentum established across our asset portfolio, we are raising per-share growth expectations in 2020,” said Hager. “Based on our success in the Delaware Basin, we now expect operational efficiencies to drive Devon’s oil growth rates higher with lower capital requirements. This improved operating outlook supports our announcement today to increase the dividend by 22 percent and our new $1 billion share repurchase program.”

Fourth-Quarter 2019 Operating Results

Total net production from Devon’s retained assets averaged 340,000 oil-equivalent barrels (Boe) per day during the fourth quarter. Oil production averaged 160,000 barrels per day, a 28 percent increase from the same period a year ago. This result exceeded the company’s midpoint guidance by 3,000 barrels per day due to strong well productivity and timing of completions in the Delaware Basin.

In addition to the strong production performance, Devon maintained discipline with its capital programs. The company’s upstream capital spending in the fourth quarter was $373 million, or 6 percent below midpoint guidance. This positive variance was attributable to efficiency gains attained across the company’s Delaware Basin and Powder River assets.

The company’s upstream revenue, excluding commodity derivatives, totaled $1.0 billion in the fourth quarter. This represents a 13 percent increase in revenue compared to the third quarter of 2019. The increase in upstream revenue resulted from growth in higher-value oil production and improved commodity price realizations for all products produced.

Devon’s lease operating expense (LOE) totaled $251 million in the fourth quarter. Including costs reclassified to discontinued operations, LOE rates declined 17 percent compared to the year-ago quarter. This improvement was attributable to low-cost production growth in the Delaware Basin and the divestiture of higher-cost Canadian assets. These improvements to the cost structure were partially offset by $11 million of expenses related to a well-control event and one-time non-operated transportation adjustments in the quarter.

The company continued its substantial progress improving its general and administrative (G&A) cost structure. Including expenses reclassified to discontinued operations, the company’s G&A costs improved 21 percent year-over-year in the fourth quarter to $119 million. With a steady cadence of cost reductions captured throughout the year, Devon exited 2019 with approximately $240 million of annualized run-rate savings compared to 2018.

Key operational highlights

Delaware Basin: Net production averaged 154,000 Boe per day, an 82 percent increase compared to the fourth-quarter 2018. The strong production growth was driven by 36 high-impact wells diversified across the Wolfcamp, Bone Spring and Leonard Shale targets. This activity averaged 30-day production rates of 2,800 Boe per day (70 percent oil), at an average completed well cost of $7.5 million. Key projects that contributed to the strong volume growth in the quarter were the company’s Cat Scratch Fever 2.0 project and three Wolfcamp projects that helped further confirm the commerciality of multiple target intervals across the basin.

Another important operational highlight in the fourth quarter was the capital efficiency gains achieved by the company’s Wolfcamp program. Due to improvements in well design and cycle times, drilled and completed feet per day metrics in the Wolfcamp improved 48 percent and 62 percent year-over-year, respectively. These improvements in the quarter drove down Wolfcamp capital costs to $880 per foot, which represents a 28 percent reduction in cost compared to the 2018 average. The company expects this positive operational trend to continue in 2020.

Powder River Basin: Net production averaged 27,000 Boe per day in the quarter, of which 74 percent was light oil. This represents a 54 percent increase in production compared to the year-ago period. Fourth-quarter volume growth was driven by 19 new wells averaging 30-day rates of 1,300 Boe per day, at an average completed well cost of $5.5 million.

The capital program was highlighted by appraisal work in the emerging Niobrara oil play, where over the past two years the company has commenced production on 11 wells across its 200,000 net acre position. During the year, Devon’s Niobrara wells achieved 30-day rates as high as 1,500 Boe per day, with oil representing more than 85 percent of the product mix. Given this success, Devon plans to double its Niobrara drilling activity in 2020 in an attempt to ready a portion of the field for development in 2021.

Eagle Ford: Fourth-quarter net production averaged 45,000 Boe per day. Production was below the company’s guidance range due to a well-control event that curtailed volumes by 9,000 Boe per day. This event was resolved during the quarter, permitting Devon to bring online 21 new wells that achieved peak 30-day rates of 2,900 Boe per day. With operational momentum re-established in the Eagle Ford, the company exited December with production reaching 53,000 Boe per day.

STACK: Net production averaged 107,000 Boe per day in the fourth quarter. To enhance returns and maintain operational continuity in the STACK, Devon recently formed a drilling partnership with Dow to develop a portion of the company’s acreage. Under the agreement, Devon will monetize half of its working interest in 133 undrilled locations in exchange for a $100 million drilling carry over the next four years. The drilling carry allows STACK projects to compete for capital allocation within Devon’s portfolio, and the partnership will begin drilling its initial development project in the second quarter of 2020.

2019 Proved Reserves

Devon’s estimated proved reserves were 757 million Boe at year-end 2019, with proved undeveloped reserves accounting for only 22 percent of the total. The company’s drilling programs successfully added 160 million Boe of reserves through extensions and discoveries in 2019. The capital costs incurred to deliver these reserve additions totaled $1.8 billion, equating to an attractive finding and development cost of $11 per Boe.

Updated 2020 Outlook

Led by the exceptionally strong well performance Devon is experiencing in the Delaware Basin, the company is now raising its full-year 2020 oil growth rate to range of 7.5 percent to 9 percent compared to 2019 (on a retained asset basis). In the first-quarter 2020, oil production is projected to average in the range of 158,000 to 163,000 barrels per day.

Importantly, Devon expects to deliver this improved oil growth outlook with less capital than previously projected. The company is now lowering the top end of its upstream capital guidance by $50 million to a range of $1.7 billion to $1.85 billion in 2020. Furthermore, the capital efficiency of this investment in 2020 is expected to be enhanced by reallocation of capital to the Delaware Basin from the STACK play. The company now projects that capital spending in the Delaware Basin will increase by approximately 15 percent year-over-year and account for approximately 60 percent of Devon’s total capital investment in 2020.

Another noteworthy guidance item for 2020 is the company’s full-year G&A outlook that is expected to decline to a range of $360 million to $400 million. Including costs reclassified as discontinued operations, this represents an improvement of more than 20 percent compared to 2019. With this outlook, Devon remains on track to meet or exceed its stated goal of reducing total G&A expense to a level of $350 million by the end of 2021.

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