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Devon Energy First‐Quarter 2015 Earnings Commentary Howard Thill: Hello and welcome to Devon’s first‐quarter 2015 earnings commentary. I am Howard Thill, Senior Vice President of Corporate Communications and Investor Relations for Devon Energy. Also on the call today are John Richels, President and Chief Executive Officer; Dave Hager, Chief Operating Officer and Tom Mitchell, Executive Vice President and Chief Financial Officer. As a reminder, a transcript of this commentary and the accompanying slides are available for download on the ‘Investors’ section of our website at devonenergy.com. Also on our website you will find both our first‐quarter earnings release, which includes our forward‐looking guidance, as well as our detailed operations report. We hope you will find this information valuable in preparing for our live Q&A webcast tomorrow, Wednesday, May 6, at 11 a.m. Eastern time. Turning to slide 2, I’d like to remind you that this earnings and outlook commentary contains plans, forecasts, expectations and estimates that are forward‐looking statements under U.S. securities law. These forward‐looking statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control. These statements are not guarantees of future performance. See our 2014 Form 10‐K for a review of risk factors relating to these estimates. Please note that this presentation will reference certain Non‐GAAP performance measures and the required specific disclosures can be found within this presentation and in our earnings press release. And finally, in our discussion today all production volumes and comparisons of production volumes -1-
will be based upon our retained asset base, excluding those assets sold over the past few quarters. With that, we will now move to slide 3 and I will turn the call over to our President and CEO John Richels. John Richels: Thank you Howard and welcome everyone. The first quarter was an outstanding one for Devon as we continued to deliver superior execution across our asset portfolio. Our focused operational efforts generated production growth that exceeded our guidance for the third straight quarter, we did an exceptional job controlling costs and we further strengthened our already excellent financial position during the quarter. Let me start by covering a few highlights from our first quarter in more detail. Oil production averaged an all‐time high of 272,000 barrels per day in the first quarter. This result exceeded the high end of our guidance range by 12,000 barrels per day and represents a 55% increase compared to the first quarter of 2014. The most significant oil growth came from our U.S. operations, where light‐oil production increased 72% year over year. This dramatic increase in oil production is largely attributable to growth from our world‐class operations in the Eagle Ford Shale and Delaware Basin. This strong growth in oil drove our total companywide production 22% higher compared to the year‐
ago quarter to an average of 685,000 Boe per day. Top‐line production also exceeded the high‐end of guidance by 12,000 Boe per day. -2-
In addition to our impressive production performance, we did a very good job reducing cash operating costs across our portfolio. First‐quarter lease‐operating expense, our most significant cash cost, came in well below the low‐end of guidance and declined 7% year‐over‐year to around $9 per Boe. The final highlight I want touch on was our ability to further strengthen our financial position with a series of highly accretive EnLink transactions. These transactions included Devon’s initial asset dropdown sale to EnLink and a successful secondary offering of approximately 20% of our ownership interest in EnLink’s MLP. As a result of these efforts, we were able to generate around $870 million of value at a substantial premium to our current trading multiple. These highly‐accretive transactions are especially differentiating at a time when many companies in our sector are diluting shareholders with distressed equity offerings. Moving to slide 4, based on our outstanding operational results in the first quarter and expectation of continued operational momentum in upcoming quarters, we have raised our 2015 production growth outlook. Our oil production growth for the full year is now expected to be between 25% and 35%, a substantial increase from our previous guidance range of 20% to 25%. The majority of this incremental oil production growth is expected to come from our U.S. assets, where the best economics in our portfolio reside. This improving outlook for oil production is also driving total production higher. As a result, we have also raised our guidance for top‐line production growth to be between 5% and 10% in 2015. -3-
Moving to slide 5, in addition to higher production expectations, we are also beginning to see improving economics in our core basins from both lower industry costs and efficiency gains. In fact, service and supply costs for the industry have come down considerably from peak rates last year. Current market rates for our largest capital costs, drilling and pressure pumping, have experienced price reductions in excess of 20% from the fourth quarter of last year. While the magnitude of the decrease is not a surprise to us, the speed of realization of these better rates has exceeded our expectations and the assumption in our original 2015 capital guidance. Without any decrease in activity levels and with the acceleration of service cost savings across our portfolio, we now expect our E&P capital requirements in 2015 to be between $3.9 and $4.1 billion, a $250 million reduction in capital spending compared to our previous guidance issued in mid‐
February. We are also achieving significant cost savings from the production operations side of our business. As evidenced by our strong first‐quarter LOE result and the costs trends we see going forward, we have reduced full‐year LOE guidance by 7% to a midpoint of $9.30 per Boe. This implies a full‐year cash cost savings of around $170 million. As a result of these developments, our cash flow outlook has significantly improved over the past few months. When you combine these cost savings with the $870 million from the EnLink transactions, plus the additional cash flow from an improved production outlook, we have further strengthened our excellent financial position and liquidity. -4-
In summary, we are extremely pleased with our execution in the first quarter, and our outlook for 2015 continues to improve. As many of you know, this will be my last quarterly call as CEO, as I plan to retire at the end of July after 20 years of service with Devon. Over that time, we have achieved many notable milestones that I am very proud of. As we enter the next phase of Devon’s growth, I have never been more excited about the company’s future than I am today. We have a great collection of assets, an experienced management team and a rock solid balance sheet. These winning qualities clearly offer investors a differentiated opportunity in the E&P space and I firmly believe that Devon’s best days are still ahead. With that we will now move to slide 6 and I will turn the call over to Dave. Dave Hager: Thanks John. We appreciate your dedicated service to Devon through the years. Your efforts to reshape Devon’s portfolio have positioned us with a world‐class asset base capable of delivering excellent growth for many years to come. And you have done so in a manner that all of us have come to respect and admire. In fact, several years ago John created a set of values that epitomizes what Devon is all about. A few of those values are hiring the best people, delivering results and always doing the right thing. By formalizing these values, John has set the standard for future generations of Devon employees. And that is something that not only our employees, but also investors, can appreciate. Shifting to the business of the quarter, I want to remind everyone that our first quarter operations report is available for download on our website. This report provides a detailed review of Devon’s activity by area for the quarter and our revised outlook for 2015. Due to the substantial amount of -5-
information the operating report provides, I will limit my commentary today to just a few of Devon’s key operational highlights for the quarter. From an operations perspective, the first quarter was arguably one of the best in the company’s 40‐
plus year history. As John said, our production significantly exceeded guidance and cost savings are running well ahead of our initial budget expectations. So let’s take a brief look at some of the key highlights behind this top‐notch performance in the quarter. First, our world‐class Eagle Ford development in DeWitt County delivered yet another quarter of outstanding results. We added 79 new Lower Eagle Ford wells to production during the quarter, with initial 30‐day production rates averaging nearly 2,100 Boe per day. These high‐rate wells represent more than an 80% increase in 30‐day IP rates compared to our first month of ownership in March 2014. This new‐well activity was highlighted by several prolific wells that each had 30‐day IP rates of more than 3,000 Boe per day. The consistency with which we are able to deliver these outstanding well results is a credit to an improved completion design and a recently implemented production optimization program. With the significant improvements in well productivity we have recently reached field takeaway capacity. While we are supporting efforts to debottleneck takeaway capacity, we do expect these constraints to keep production relatively flat in Q2. In the Delaware Basin, it’s a similar story of success, with production increasing 15% from the previous quarter to 53,000 Boe per day. A key driver of this growth was a recently enhanced -6-
completion design in the basin of Southeast New Mexico targeting the Bone Spring formation. Initial 30‐day production rates from the 16 Bone Spring basin wells brought online in Q1 averaged 30‐day IP rates of nearly 1,200 Boe per day. We have now tested larger completions on more than 60 Bone Spring wells since mid‐2014. On average, these enhanced completions have increased cumulative production per well in the basin by 60% over the first 180 days compared to wells with the old design. Based on strong results, we are raising type curve expectations in the Bone Spring basin for both initial 30‐day production and EUR. IP rates in the basin are now expected to be around 900 Boe per day, approximately 60% higher than wells with the old design and per well EURs are expected to increase to around 600,000 Boe. In Canada, net oil production from our heavy oil operations averaged 104,000 barrels per day in the first quarter, a 33% increase compared to the first quarter of last year. This record‐setting total was driven by the production ramp‐up at Jackfish 3, which is currently producing around 20,000 barrels per day. Jackfish 3 is expected to reach nameplate capacity of 35,000 barrels per day by year‐end 2015. Looking ahead to the second quarter, we will bring our Jackfish 1 facility down for a scheduled 21‐day maintenance period beginning in June. The maintenance downtime and subsequent ramp‐up at Jackfish 1 is expected to curtail heavy oil production in Q2 by approximately 10,000 barrels per day. For the full year, heavy oil production remains ahead of our original budget expectations and we now expect 2015 net production to range from 100,000 to 110,000 barrels per day. -7-
Moving to the Cana‐Woodford, our industry leading position with multi‐stacked pay continues to improve. We have now drilled or participated in 12 Meramec wells with initial 30‐day rates averging around 1,500 Boe per day. With this successful appraisal activity in the Meramec, we have now derisked 60,000 net acres in the oil and liquids window of the play and identified more than 400 risked locations. Combined, the Woodford and Meramec opportunities provide us with 340,000 net risked acres and more than 4,000 locations to develop. This drilling inventory is one of the deepest and most economic in our portfolio. The last operational highlight I wish to touch on is our recent drilling success in the emerging Powder River Basin. In Q1, we brought online 11 new wells with IP rates of nearly 1,400 Boe per day. A new well design using extended‐reach laterals of 9,600 feet drove these impressive results. Due to this technical breakthrough, we are now raising our type curve in the Parkman Focus Area. Initial 30‐day production rates for these extended‐reach development wells are expected to be about 150% higher than the previous short lateral design, at a cost of only $8 million per well. In total, Devon has 225,000 net prospective acres in the emerging Powder River oil fairway with potential in the Parkman, Turner and Frontier formations. So in summary, our first‐quarter operational performance was tremendous. And while our operating teams have delivered exceptional execution with our high‐graded asset base, we are not resting on these past accomplishments. We are pressing for even better well productivity and continue to aggressively pursue further operating and capital cost savings. It is the continued execution in these areas that will ultimately help us achieve higher margins and cash flow for our shareholders. -8-
We will now move to slide 7 and I will turn the call over to Tom. Tom Mitchell: Thanks Dave. After adjusting for non‐recurring items, our core earnings totaled $89 million, or $0.22 per diluted share in the first quarter. More importantly, from a cash flow perspective, we generated $3.07 per share in the first quarter, comfortably exceeding Wall Street consensus expectations by more than 20%. While our E&P operations are definitely hitting on all cylinders, another attractive attribute is our advantaged financial position. We possess strong investment‐grade credit ratings, our production is well hedged and we have a healthy amount of liquidity. In fact, at March 31, we held nearly $2 billion of cash and had more than $2 billion of available capacity under our credit facility. In addition to our strong liquidity, we also have low financial leverage. After excluding non‐recourse EnLink obligations, we exited the quarter with net debt at well below 2 times consensus 2015 EBITDA. Looking beyond the traditional liquidity and credit metrics, another important aspect of our capital structure is our remaining ownership in EnLink, which is valued at around $6.5 billion. During the quarter, we were able to utilize this strategic investment to strengthen our financial position through a series of highly accretive transactions. The first of these midstream transactions occurred on March 23, with the announced sale of our Victoria Express Pipeline in the Eagle Ford to the EnLink MLP. This initial asset dropdown was valued at approximately $215 million, or about 10 times estimated 2015 EBITDA, a substantial premium to Devon’s current trading multiple. -9-
A few days later in March, we commenced a secondary offering and sold 22.8 million EnLink MLP units, resulting in approximately $570 million of proceeds to Devon. Subsequent to quarter end, underwriters fully exercised their option to purchase an additional 3.4 million ENLK partnership units, which amounted to an incremental $85 million of proceeds. Even after this monetization, we still maintain a 32 percent interest in the EnLink MLP as well as our 70 percent ownership in the general partner. So in summary, these midstream transactions successfully delivered roughly $870 million of value for our shareholders. Combined with the operating and capital cost savings we have achieved across our asset base, we sit in a position of enviable financial strength. While we clearly have an advantaged capital structure, we remain steadfast in our commitment in exercising capital discipline, maximizing our margins, preserving our balance sheet, and optimizing cash flow growth. That concludes our prepared remarks and we look forward to your questions during the Q&A call tomorrow. Thank you. - 10 -