First-quarter report
Devon Energy Corp. CEO Dave Hager met with The Oklahoman this week following the oil and natural gas company’s first-quarter earnings announcement.
Devon Energy Corp. CEO Dave Hager met with The Oklahoman this week following the oil and natural gas company’s first-quarter earnings announcement. An edited transcript of the chat follows.
Q: What stands out to you most from Devon’s first-quarter numbers?
A: The first and most important thing is that we are a growing company. Our production is growing. We expect significant expansion of our cash flow through the year on the order of 35 percent. Our U.S. oil production came in at the top end of our guidance. That has allowed us to raise our fullyear production guidance by 2 percent without adjusting capital spending.
Q: Devon began an effort in the first quarter to buy back $1 billion in debt this year. Why is that so important?
A: The company is on very firm financial footing. Our three-year plan, Vision 2020, is to significantly grow the production base by investing in the very high-return drilling opportunities. That will grow the cash flow of the company and will allow us to simultaneously pay down debt, even with growth at a very reasonable level.
There are still headwinds facing the industry. Not everything is perfect. Light oil prices have increased significantly, but we’ve been impacted by prices for our Canadian heavy oil, which has not increased so far. We do think it will improve as the year continues, but there has been a headwind. Natural gas prices are also quite challenged due to the large amount produced in the Permian associated with oil production.
Locally, raising the GPT (gross production tax) beyond what we think is appropriate is somewhat of a headwind as well.
Q: The Legislature recently increased the initial gross production tax rate to 5 percent from 2 percent. How do you expect that change to affect Devon?
A: It does impact the rate of return on Oklahoma projects. It’s going to cost us at least $30 million a year, perhaps more. We think we are finding ways to offset that through drilling wells more efficiently, focusing on the most prolific parts of the STACK play where we have the best acreage positions and applying the best technology. But it’s a challenge. It certainly would have been a lot easier without that increase.
We were very actively involved in the Step Up Oklahoma effort, which we thought was a comprehensive solution. We were stepping up and supporting the effort that would have raised the initial rate to 4 percent but also was coupled with regulatory reform. We’re very disappointed it went to 5 percent and the regulatory reforms appear stalled. From our perspective, it makes us consider whether we should step up again. We stepped up to be a good citizen in the state of Oklahoma. It doesn’t appear we were rewarded for doing so.
Q: What do you expect for oil and natural gas prices?
A: I’ve been in this business 40 years. My ability and our ability as an industry to predict prices is pretty bad. But it appears that the large inventories of oil that have existed are being drawn down because of strong adherence to OPEC quotas. We are seeing an increase in U.S. oil production, which is good for the country. We think that if there continues to be good adherence to OPEC quotas, prices have a good chance to remain in the $60 to $70 range. But that’s a large uncertainty. It’s also uncertain as to how much U.S. oil production can continue to grow. Can it continue to grow at the current rate for several years, or just one or two years?
We’re guardedly optimistic that we’re in a more constructive environment than a year ago. But things can change quickly. We have to plan for that.
With natural gas, I’m less optimistic. There is a large amount of natural gas being produced associated with these oil wells, causing prices in the Permian Basin to degrade significantly and prices in Oklahoma to degrade somewhat as well. The whole system gets backed up. I’m not optimistic we’re going to be anywhere above $3 an mcf (thousand cubic feet) for a significant period of time.
Q: Will increased exports to Mexico and international liquefied natural gas (LNG) exports help?
A: It’s going to help, but it’s not going to solve the problem, just because of the large amount of gas associated with oil wells and the capability of the Marcellus and Utica. Exports absolutely are going to be helpful. LNG will be helpful as the export capability continues to expand. It would be even worse without it. But it doesn’t turn it to an overall positive price story.
Q: How do you set a threeyear plan when prices are so variable?
A: Our Vision 2020 is based on $50 oil and $3 natural gas. It appears we may be doing somewhat better than that on the oil side and maybe a little worse with natural gas. The cash flow we can potentially realize if prices go to $60 oil is significant.
Q: Oil and natural gas producers generally have experienced struggling stock prices over the past few years. Devon recently announced efforts to boost the stock price through stock buybacks, debt buybacks and dividend increase. Why is the stock price so important?
A: We’re a public company. Everyone in this company works for the benefit of our shareholders. That has to be our highest priority. That is our duty as a corporation. Our most fundamental goal has to be to work to improve the stock price for the benefit of our shareholders.