Devon Energy Corporation (NYSE:DVN) Q1 2018 Earnings Conference Call Transcript

May 02, 2018 • 11:00 am ET


Devon Energy Corporation (NYSE:DVN) Q1 2018 Earnings Conference Call Transcript


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David A. Hager

to emphasize the only reason CapEx is trending towards the top end of guidance is because we're completing our planned 2018 program quicker than anticipated, and we'll most likely accelerate some 2019 program into 2018. This is a good news story.

The next key point is we have the marketing arrangements and supply chain in place to deliver on our growth plans. With regional takeaway constraints becoming a serious issue for the industry, our marketing plan has provided us both flow assurance and price protection across all areas of our asset portfolio. Specifically in the Delaware Basin, through firm transport on the Longhorn Pipeline, we have access to premium Gulf Coast oil pricing and have regional basis swaps near WTI pricing, covering the remaining production sold in the basin.

These physical and financial hedges are becoming increasingly valuable with Midland differentials currently trending towards $10 off WTI (ph). Given our advantaged location in Southeast New Mexico, we also have good line of sight to move our Delaware gas production as we flow our volumes directly to the West Coast, completely avoiding the WAHA hub.

In the STACK, we have direct access to Cushing for WTI pricing, and we have firm transport agreements covering the vast majority of our gas production. The firm transport of gas in the STACK and our basis swaps provide effective price protection in 2018.

The last area I will touch on is our attractive WCS hedges in Canada. In 2018, we have roughly half of our production hedged at $15 off WTI. On the supply chain front, the service market is certainly tight right now, especially in the Permian Basin. However, our supply chain team has proactively secured rigs, supplies, and pressure pumping services in our high activity basins at competitive prices to execute our capital plans in 2018 and 2019.

The multi-year development plans and commodity hedging program we've designed for the Delaware and STACK have provided Devon the opportunity to secure longer-term relationships at below market rates with top providers. So to summarize, Devon is in great shape to deliver on our growth initiatives as our marketing and supply chain are providing certainty of execution.

The third key message is that Devon will efficiently grow cash flow throughout the remainder of 2018. With current strip prices, we expect to increase our upstream cash flow by approximately 35% by year-end compared to first quarter levels. This will be driven by three factors. A key contributor to our cash flow growth is an increase in higher oil margin production in the US, where we are on pace to deliver exit rate growth of approximately 30% in 2018.

Next, we expect higher margins in Canada over the remainder of 2018 due to WCS prices recently improving by more than $10 per barrel compared to the lows experienced in Q1. The third factor contributing to higher margins over the remainder of 2018 is the aggressive steps we are taking to improve our cost structure. With the ongoing restructuring