德文能源 (DVN) 2015 Q4 法說會逐字稿

Welcome to Devon Energy's fourth quarter and full-year 2015 earnings conference call.

(Operator Instructions)

This call is being recorded. I'd now like to turn the call over to Mr. Howard Thill, Senior Vice President of Communications and Investor Relations. Sir, you may begin.

Thank you, Steven, and good morning, everyone. I'd like to welcome you to the call as well. Today's call is going to consist largely of Q&A, so I hope everyone has had a chance to review our fourth quarter and full-year earnings release that also includes our forward-looking guidance as well as our detailed operations report. Also on the call today are Dave Hager, President and CEO; Tony Vaughn, Executive Vice President of E&P; Tom Mitchell, Executive Vice President and Chief Financial Officer; and a few other members of our Senior Management team.

Finally, I'll remind you that comments and answers to questions on the call will contain plans, forecasts, expectations and estimates which are forward-looking statements under US Securities Laws. These comments and answers 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 and actual results might differ materially. For a review of risk factors relating to these statements, please see our Form 10-K. With that, I will turn the call over to Dave.

Thank you, Howard, and welcome, everyone. As we all know, 2015 provided an extremely challenging business environment for our industry. We responded during the year by proactively taking steps to align our business with these conditions by reducing field level costs by $400 million, delivering efficiencies and cost savings that reduced capital requirements by $500 million, and we attained significant productivity gains that improved type curves and IP rates across all our core plays.

As we look to 2016, our top priority in this environment is to protect the balance sheet by balancing spending requirements with available cash flow. We also see no reason to accelerate production growth into these weak markets, which has led us to take aggressive measures to reduce our capital investment by 75% year-over-year.

We also have plans in place to preserve more than $1 billion of cash flow on a go-forward basis through a number of initiatives, including incremental field level cost savings, a reduction of our workforce by about 1,000 people and by adjusting the dividend rate to preserve over $300 million of cash flow. In an effort to further strengthen our balance sheet, we also have non-core divestitures under way with the intent to monetize $2 billion to $3 billion of assets during 2016.

As I've said many times, Devon is in the advantageous position of having no long cycle projects, minimal long-term contracts and nearly all of our acreage is held by production. These favorable attributes allow us to prudently adjust our 2016 capital program to balance cash flows and to protect our balance sheet. But it also gives us the ability to ramp up development activity when commodity prices rebound and to see a quick production response to that ramp when it happens.

Our capital program in 2016, is designed to maximize cash flow and operational continuity with activity directed toward the lowest risk and highest impact opportunities in each of Devon's core areas. This disciplined capital program is expected to maintain relatively flat oil production from Devon's core assets compared to 2015, and we are projecting only a 10% oil decline from Q4 2015 to Q4 2016. This production resiliency is a testament to the quality of our go forward assets.

Overall, our top line production in 2016 for core assets is expected to decline by 6% driven by lower gas volumes. The efficiency of our 2016 budget is also highlighted by our ability to fund our capital program at today's strip pricing within operational cash flow, EnLink distributions and expected access pipeline proceeds. Once again, we have the flexibility to ramp up spending or to make additional cuts to our spending plans depending upon how commodity prices trend going forward.

As I mentioned earlier, in addition to balancing near-term spending with cash inflows, we're also working to improve our financial position through the monetization of $2 billion to $3 billion of assets. We are in the latter stages of discussions for the sale of our 50% interest in Access pipeline and expect that transaction to occur in the first half of the year, potentially the first quarter.

We are also in the process of opening data room for the sale of up to 80,000 BOE per day of non-core upstream assets in the US. The properties up for sale include 15,000 net undeveloped acres in Martin County, Texas, and producing assets in the Southern Midland Wolfcamp, Carthage, Granite Wash and Mississippi lime plays We have had direct contact from potential buyers ranging from majors to well-capitalized peers to private equity firms.

We believe these assets are substantially higher quality than those being considered for divestment by others and are in the market quicker. This gives us a competitive edge. Conversations thus far have been encouraging and we have confidence in our ability to attractively sell these assets throughout 2016 and use the upstream asset sale proceeds for debt retirements.

Looking at our financial flexibility longer-term, if commodity prices remain low, Devon has significant balance sheet strength to withstand an extended downturn. Pro forma for the Felix acquisition, which closed in early January, we had $3.9 billion of liquidity at year-end, consisting of $1.5 billion of cash and $2.4 billion of capacity on our senior credit facility. Importantly, this credit facility does not mature until the end of 2019, and contains only one material financial covenant, a debt to capitalization ratio of below 65%. At year-end, this ratio was only 24%.

And in addition to our strong liquidity, we've done a good job managing our upcoming debt maturities with no significant debt coming due until December 2018. Bottom line, our advantaged capital structure provides us a significant amount of financial strength and flexibility.

So in summary, I hope you come you away with three important messages today. First, we are committed to living within cash flows in 2016. To do so, we have taken aggressive measures to preserve more than $1 billion of cash flow through operating cost and dividend reductions. Second, we have the financial strength to withstand an extended downturn and we're looking to further bolster our investment grade balance sheet with ongoing asset divestiture programs.

And lastly, the quality, depth and diversification of our go-forward asset base is unmatched. Devon has exposure to some of the best short cycle projects in the world. We're well-positioned to accelerate activity when the markets reward growth again. With that, I'll turn the call back to Howard for Q&A.

Thanks, Dave. We're going to have a calls today and a lot of questions on today's call I'm sure. So to make sure that we get as many questions on the call as possible, as usual, we'll ask you to limit yourself to one question with an associated follow-up and you can reprompt to ask additional questions if time permits. So Steven, with that, we'll take our first question.

Thank you.

(Operator Instructions)

Our first question comes from the line of Doug Leggate with Bank of America. Your line is open.

Thank you. Good morning, everybody. Dave, I appreciate the clarification on the asset sales process, but I wonder if you could give us a little bit more color on what your expected timing and perhaps the associated cash flow that goes along with that $2 billion to $3 billion of proceeds? I don't want to risk my follow-up here but just for clarification, is that excess still in that $2 billion to $3 billion or is that additive to the $2 billion to $3 billion? I do have a quick follow-up, please.

Sure, Doug. Good morning. Yes, we do include Access in the $2 billion to $3 billion, although there's obviously flexibility around that and we aren't trying to predict the market but that's -- we did make that assumption. It's in there. It could actually even be higher depending on how everything goes.

I think there's really a misperception in the market about the quality of these assets, to be quite honest with everybody. These are very high quality assets. You may remember that we did a non-core divestiture program about a 1.5 years ago after we acquired GeoSouthern and that was really what we would consider assets that were towards the bottom of our barrel I'd say as far as asset quality.

These are high quality assets and the feedback that we have received from the market thus far, is very positive regarding the quality of these assets and the ability to transact these assets at the prices that we have assumed here. We are opening data rooms starting next week and then soon after that.

We'd anticipate that we'd be receiving bids here during the first half of the year and closing on these throughout the year. I'm going to turn over to Tom Mitchell, who is going to comment a little bit about the cash flow side.

We haven't given out, Doug, a specific cash flow number. We talked about 80,000 barrels a day, about 23% of that is oil. And I just want to emphasize what Dave said. We've had a number of discussions with parties. The interest in it is extremely robust, more than you would expect. It does lean closer to the private equity side from an interest level, but that's something that we had expected when we went out with the package.

We're moving very quickly to try to get ahead of what we think may be further asset sales by other peers and we're on that timeline right now, going out here to open data rooms and move aggressively in early March. So we're well-positioned and it's a great package and that's the feedback we're getting from the potential buyers.

But on a scale basis, they're not seeing anything like this in the market and a quality basis they're not seeing anything like this in the market. And that's what gives us the confidence, both that we'll get it done and within the ranges that we've talked about.

Okay. I appreciate that, fellows. My follow-up is really on the guidance for 2016, specifically in Canada and the oil sands. Based on the differentials that you appear to be assuming and the operating cost, it looks like the real chance that some of those oil sands projects could be negative cash flow. I'm just wondering if that's the right interpretation and how you plan to manage through that in terms of maintaining production if oil prices remain depressed? And I'll leave it there. Thanks. I may expand your question just a little bit, Doug. We think we have a great benefit here at Devon, as I've been saying. We are just short-term project oriented. We do not have to continue investment into longer-term projects that no longer make economic sense such as in the deepwater, LNG projects, anything like that. So we have the ability to flex our capital down and we have the ability to flex our capital back up very quickly.

We have maintained, despite the employee reduction we're going through right now, it's very important to us to maintain the organizational capacity to flex our program back up should we see encouragement in prices. We just don't think it makes a lot of sense to accelerate production into a 30 and two price environment currently. But if we see some encouragement, we have the organizational capacity, we will have the service companies lined up where we can quickly accelerate this and then there would be a commensurate adjustment in our production guidance.

We have extremely high quality projects. There's no question about that. We're just showing financial -- the appropriate financial behavior here, given where prices are currently. Now, I'll let Tony talk to you a little bit more about the oil sands and where that stands and where we stand on opportunities in the US on the oil side too.

Okay. Thanks, Dave. And Doug, just going back to your question about Canada, on the cold flow side of the business at our Bonnyville location, we've got a lot of flexibility there. So we evaluate all those wells and we're capable of shutting in those wells when they become economic -- uneconomic on a well by well basis without any concern about the degradation in ultimate recoveries.

When you get into the SAGD portion of the inventory there, we think we have the top tier asset in the play. And we would probably be the last company to have the stress on us from a profitability or immediate cash flow projection. If you look at our capital demands for 2016, it's minor. It's minor in 2016, so we've got a lot of flexibility. There may be month-to-month that we have a neutral cash flow in the SAGD operation, but again, we probably have the best project there.

I guess when I go back and start looking at our ability to grow oil, we've got the most flexibility and more immediate impact will be in the US side of the business. There we've got the best inventory, our access to the best inventory in the Delaware Basin and STACK and Eagle Ford. So we're ready to ramp up. We've got a deep inventory. We have all the permitting and required work done, ready for that ramp up. So as soon as we generate additional cash flow in the Company, we'll be back to work and we'll be growing that oil base.

Appreciate the full answer, guys. Thank you very much.

Thanks, Doug.

Thank you. Our next question comes from the line of Charles Meade with Johnson Rice. Your line is open.

Good morning, everyone. Dave, I think you alluded to this and I apologize if I missed it but can you be a little bit more specific about what kind of oil and/or natural gas prices would incentivize you to pick up activity in the back half of 2016, assuming all these asset sales get done? And maybe offer an opinion on which plays or which areas you'd be most likely to accelerate?

Yes, Charles. We are currently looking at an anticipated cash flow neutral budget at strip pricing from our operational cash flow, the in rate distributions plus anticipated Access pipeline proceeds, which by the way, we still have a high degree of confidence we are going to execute on. That has not changed. But at strip pricing, we'd be cash flow neutral.

If we see the strip moving up and we have confidence that it's going to continue to move up, that's when we would consider increasing activity. And again, all of our projects are short-term. So it doesn't -- we can ramp back up very, very quickly. You saw it, we ramped down quickly. We can ramp back up just as quickly. There's no issue there. We just feel that we are being prudent given the current commodity price environment.

And where would we ramp up? Tony, I think answered it. There's three areas that really have strong economics for us. Those are the Eagle Ford and the Delaware Basin and the STACK play. And we'd be looking at all three of those plays to see where we'd put the rig. But they all would have fairly similar economics and strong economics.

Got it. That's helpful, Dave. That's a good segue also to the next question I was going to ask which is about those really -- the big improvement in STACK results you had that you released this quarter. I think I asked a similar question last quarter about what was driving the variance in well results across that position and maybe now I would kind of ask that question again. But also ask what's driving that improvement over time as well?

I'll let Tony take that. I'd just say we think this combined here, we said it last quarter, we're in the best part of the STACK. We're in the heart just like we are in the Eagle Ford with our position we acquired there in a volatile oil window plus we have a volatile pays. And we're moving through the appraisal process right now and we knew it was going to get better and frankly, it's getting better. It's going to keep getting better. We've got the best inventory in the industry right now. I'll let Tony go through the details on that.

Charles, you're right, if you look at our operating report, we commented on about 12 Devon wells that we brought on in the Merrimack and another eight that were -- another four that were brought on in the Felix position. All those really were above our type curve. In fact, on the majority of those wells that we continued the Felix operations, the wells were not only high rate but they're also about 60% oil. So it was above our overall modeling that we had done previously.

I think the work that we're continuing is really a follow-up to the good work that the Felix team is doing. They have really focused on the optimal landing zone in each of these Merrimack intervals. A lot of detail and concern about maintaining the largest amount of footage drilled and across the interval there. They continue to advance the completion designs. We're pumping about 2,500 to 2,700 pounds per lateral foot, so we're loading these completions up with a lot of sand. We're using majority of our fluid is a slick water based fluid with some cross-link gel in that. So we're experimenting with the fluid type there.

So I think all that combined is just leading to improved completions well to well. And I think we commented the last time we were on a call with you that really the outstanding thing that we really like about the STACK play is really the volatility of the results is very narrow for a very young play like we have at STACK. So we're very optimistic and we're ready for an increased run rate, increased activity level there when opportunity arises.

Thank you, Tony. I have the same recollection. Congratulations on your new position.

Thank you.

Thank you. Our next question comes from the line of Arun Jayaram with JPMorgan. Your line is open.

Good morning, gentlemen. Tom, I wanted to start with you. Obviously Devon has taken some aggressive action on the cost front and CapEx front. I was wondering if you could comment on any discussions you've had with the rating agencies and your confidence about maintaining Devon's historical investment grade credit rating?

Good morning, Arun. Thanks for the question. We obviously at the end of the year, you go before the agencies to give them your year-end results and talk about the reserve profile within the Company. So we've been through that exercise with all of them. You've seen the results of that. So let me start with that.

S&P has taken us to BBB, that's stable position. And we've got Fitch having concluded their rating currently at BBB+ and also stable. So we've got two solid investment grade positions there which pretty much assures us as an investment grade Company. Moody's is a different story. I think you're aware of that as well as others listening that they're debating what they're going to do. There are a lot of moving parts there. Quite frankly, it's hard for us and I think anybody at this point in time to tell exactly what they are going to do with this group.

They've already made their decision on the non-investment grade group which resulted in multiple notch down grades. They've taken a very low price deck a view of not really rating through the cycle but rating closer to the bottom of the cycle. And they're shifting how they're thinking about investment grade. So on a historic model, I feel pretty comfortable that we would be okay. It's just very difficult at this point in time to tell exactly how they're going to recalibrate what they consider to be investment grade and that decision making process is in play as we speak and probably concluding before the end of the month.

So wish I could give a more firm answer on that. I think the decisions that we've taken here, while they were really primarily targeted at the business, not the rating agencies, are also credit enhancing and should be confidence inspiring to the agencies. And that's the best we think we can do is to really focus on the business and let the rating agency portion fall where it falls given of course the fact that we want to continue to maintain our strength in investment grade and position ourselves as best as possible.

That's helpful. My follow-up is just really regarding the Q4, if you guys could comment a little bit on the Q4 2016 exit rate? Just kind of going through the math it would suggest US volumes down in the low 90s on the oil side. Just wondering if you could comment if you agree with that in terms of the exit rate given lower CapEx? And just talk about -- that would imply quite a bit of loss in operating momentum into 2017. How quickly do you think that if you got a price signal could you regain that operating momentum?

What I'm trying to emphasize to everybody here is that we are the probably uniquely positioned with the ability, with the fact that all of our projects are short cycle time projects. They're all well-oriented projects. We don't have any long-term projects within the Company. And so that gives us tremendous flexibility to decrease our capital such as we've done just now, when we're in a very low commodity price environment and the ability to ramp up capital spending and see commensurate results on the production side should we get some encouragement.

So we can make immediate decisions around ramping production back up. We have the projects ready. We have the permits ready. All we have to do, we have the wells designed. All we have to do is hire the rigs and drill the wells and then you'll see production impact anywhere from some would be completed immediately, some are pad drilling and may take up to six months or so to see the production impact from those. But you start seeing response from higher capital spend very, very quickly for us. Tony might even be able to fill you in with a little bit more details on that than what I just said, Arun.

Arun, when we do our forecasting work for the year, we're confident in the ability to forecast most of our properties. But I would comment on is the Eagle Ford has got -- the wells have such a high productivity index there's a little more range of error included in that forecast. As you know, the amount of -- or the pace of our activities is being modified as we go through the year. So that one property alone is the one that can drive an outperformance compared to how we had forecast.

I'd also like to point out that we know with the limited capital program we're completely focused on the base management of our business. And we've talked about it over the course of the last 18 months that we transformed our capabilities internally here. I think you're starting to see a lot of the results from that in public data. We had the highest 90 day queues in each of the four basins that we're driving capital towards. So we're pretty confident that we'll outperform.

I think you saw that quarter to quarter over the last six or eight quarters from us. A lot of that's going to be driven just by the management of our base. And so we've got -- personally, I've got a lot of confidence that we'll beat the curve that you're describing.

And so that just suggests real quickly, is that the guidance if I were to summarize the comments, maybe a glass half empty in terms of well product and maybe provides a little upside if you perform better than that in terms of -- you highlighted the Eagle Ford?

I think that's correct. And I think, Arun, as we continue to see results in the STACK play, we commented about the type curve there. We're already at that type curve. We'll continue to modify that as results continue to improve. I think there's going to be positives to the forecast.

Thank you.

Thanks, Arun.

Thank you. Our next question comes from the line of Subash Chandra with Guggenheim. Your line's open.

Hi. My question is I guess a road map for asset sales and use of proceeds. You talked about paying debt down. So if I think of, say, hypothetically, $2 billion to $3 billion, how do you think of how that would be deployed? Would it be 100% for debt reduction? I presume bank debt and near-term maturities. Or is there some of it that you might reconsider for the drill bit?

Hey, Sebastian. This is Tom. What we've said to you guys is that the Access proceeds would be to fill the funding gap in the capital program this year and that the proceeds from asset divestitures, the sale of our producing properties, will be targeted for debt repayment. So how we mechanically go about that debt repayment, there's -- we're still debating how exactly to go about that.

Our bonds on the long end of the curve are trading well below par. You actually get a big bang for the buck if that holds and you're able to redeploy that capital from the divestiture into those bonds. Whether we do that immediately or not is yet to be determined. It's a pretty volatile environment. But that's the target right now. You'd have Access wherever it comes out filling the funding gap and then the rest of it for debt repayment.

Okay. Thanks for that clarification. And then I guess secondly, is there a way -- you mentioned that you want to preserve your optionality and so you're organizationally capable of higher levels of activity. Is there a way to put a rig number to it, what you think the peak rig count you can do after this resizing?

Subash, I think it's going to be driven by our cash flow opportunities that we generate here in the Company. We've got the capabilities internally to ramp quickly back up to a 20 rig program if we had the business environment to do that. So we really are not inhibited by the ability to execute. We think we had the permits in place in the core of each of our four areas. So it's really going to be predicated on how we generate cash flow for the year.

That is a 20 rig operated program, not including the Eagle Ford where BHP operates that activity. And also, we do a lot of activity 50/50 with Cimarex up in the STACK play. So those rigs would be in addition to the 20 rig program that obviously we can manage.

Right. So it could be 25 to 30. Okay. Thank you very much.

Thanks, Subash.

Thank you. Our next question comes from the line of Edward Westlake with Credit Suisse. Your line is open.

Yes, good morning, and thanks for all the color in the ops report. I probably have to stick with balance sheet questions. A downside and upside case, folks are worried about recession. You've highlighted the quality of the assets that you're selling this morning. But say for example, the strip price even rolls into 2017 because of some economic weakness, what would be the game plan to manage the downside? And then I've got an upside question to follow.

Hi, Ed, first off. We've already taken a lot of steps obviously to reduce our operating and G&A cost by around $800 million. The dividend payments, we've reduced those significantly by around $320 million. Adjust our capital program, we have the asset sales going on. So we think we're in a good position even if the strip or slightly lower does come in in 2017. We would obviously be looking in 2017, at all available options that we have to us as a Company, just as we did coming into 2016.

Is there availability for further reductions in operating expense in G&A? We could review the dividend policy, equity offerings, asset sales. We have a lot of bullets in our gun, I guess you'd say, that we can fire here in order to really maintain our financial strength during these challenging economic times. And we just evaluate each of those and see which makes the most sense.

So I hear that you would be willing to sell perhaps even some of the Tier 1 acreage if you had to if, say, oil stayed low for two years?

We would certainly consider that. I'm not saying we are going to do that but we would certainly -- our focus would probably -- we'd have to make a decision whether it makes more sense to look at the oil side or we also have some very large gas assets sitting out there. So we'd have to look at that as well.

I'm not going to say we would do one or the other, but we -- there are no sacred cows around here and we would certainly evaluate all the available options and see which we think generates the greatest value for the shareholders. Obviously have to be mindful of the cash flow that's generated by these and do all the appropriate analysis when making our decision, but we'd look at all available options to see how we can best handle that should that situation occur.

And then on the upside case, say oil does recover to some mid-cycle pricing, appreciate everyone would have a different view of what that is. You seem like you're resource rich and the access to liquidity is probably constraining what you could do in terms of activity. Some other companies have been relatively successful in viewing themselves as startups and issuing equity for growth capital. Is that something on the upside case that you would consider?

Well, again, I hate to rule anything in or out. But if we get a price recovery to more like a mid-cycle case above the current strip, then we would have incremental cash flow available to reinvest back into the capital program. And I think that's the first place we'd look for funding is just for the incremental available cash flow from higher prices.

Use cash from ops as the first accelerated driver?

Yes.

Thanks.

Thanks, Ed.

Thank you. Our next question comes from the line of David Kistler with Simmons & Company. Your line is open.

Good morning, guys.

Hi, Dave.

Following up a little bit on the 2016 and some comments towards what 2017 might look like, maybe to frame that up, could you mind sharing as you talked about managing base decline where base decline was in 2015 and where you project it to be in 2016? Helps give us an indication maybe to where 2017 would shake out.

Our overall base decline has really been running roughly about 20% for the Company. On the gas side, especially in North Texas, the technical team and the operating group in North Texas have done an outstanding job to minimize the decline using plunger lifts and line pressure reductions. They've managed to arrest that decline and it's been running about 11% per year. Our oil decline because it's fairly new investments, it's much greater and it tends to be over 30%.

So on a combined basis, it's still around 20% year-over-year and I wouldn't expect that to change going into 2016. I think we still have a high degree of focus on our base business. We're continuing to improve our artificial lift operations. Our down time is continuing to be minimized and improved as we go through our work. So high optimism that we'll continue to have wins on our large base business.

Appreciate that. And then just one, thinking about activity in the Delaware right now. On the last call, you talked a little about the BLM and permitting process there can be a little bit challenging, but obviously reduced activity, I would assume puts you in a better position there. And just trying to get color on your thoughts there and does that fit part and parcel with being able to accelerate there as you're able to maybe permit more you ahead of a potential ramp-up?

I think Dave, just as you mentioned, our activity is down in comparison to where it was a year or two years ago. So the permitting requirements are not near as onerous on us as they have been. That really hadn't stopped our desire to have a great working relationship with the BLM, especially in Southeast New Mexico, that relationship is extremely high.

We just entered into the ability to work with that office there under a master agreement type concept, which we believe we'll be able to communicate more of a full development plan with them and get all the right-of-way permitting done collectively. It won't include the individual APDs for the wells that we'll propose. We'll have to come back and follow up with that but it will greatly accelerate our ability to ramp back up. So we're continuing that relationship and we're confident that we can have those wins that we've had in Southeast New Mexico and take those to Wyoming and be able to ramp back up in the Powder River Basin in that asset as well.

Okay. I appreciate that incremental color. Thanks, guys.

Thanks, Dave.

Our next question comes from the line of John Herrlin with Societe Generale. Your line is open.

Hi, guys. Have a question for you on MLPs and EnLink, Dave. Some of the more leveraged E&Ps are royaling the MLP market as folks are worried about transportation contract changes, things like that. How do you view EnLink? Has your strategy changed at all with it? Because it seems like you're getting penalized for the carnage in the MLP market.

Hi, John. Our strategy has not changed at all with regard to EnLink. We think that we have a great relationship with them. They provide outstanding service to us. We also like the fact that we are aligned with them in our new acreage in the STACK play that we acquired from Felix with them acquiring the Tall Oak assets. That gives us great confidence as we put capital against that program that we're going to have outstanding service to get those wells hooked up in a timely manner.

So our strategy really has not changed in regard to that. We certainly believe that the agreements we have with them are important and the volume commitments and the rates that we -- the tariffs we've agreed to pay are bound by contract and we plan to live up to those agreements. So there's really no change that's been in our relationship and our feeling about them from a long-term, strategic value.

Having said that, we obviously look at everything in our portfolio. So if there is a reason why that should change, again, we like it long-term. We will never rule any asset or anything as an absolute sacred cow where we don't look at the best business decision if we should go another direction. But right now, we don't see a reason to go another direction with the EnLink relationship.

Thanks, Dave. One last one from me. You mentioned tighter spacing in your ops report in the Bone Spring and the Leonard. Is that going to be the future from a development perspective there, that you'll be doing tighter horizontal well spacing?

John, I think -- this is Tony. I think you're right about that. We're actually having a lot of encouraging results right now on our down-spacing pilot, especially in the areas that have original reservoir pressure. So if you look at the -- we historically have landed the second Bone Springs in the lower section of that package and then we've staggered some what we call A-sand wells in above that and are seeing very encouraging results.

It's early on the areas that have partial depletion. We would expect a little bit less ability to down space. But the data is still coming in and we'll understand that better as we go through 2016. And of course all this is really tied to oil price. And so there will be a direct relationship to spacing for all of us and the business environment as we go forward.

Thanks.

Thanks, John.

Thank you. Our next question comes from the line of Brian Singer with Goldman Sachs. Your line is open.

Thank you. Good morning.

Good morning, Brian.

Going back to the balance sheet, what are the metrics that you regard as most important for Devon and will the asset sales and the dividend cut get you to where you want to be from a leverage perspective? Or per some of the earlier questions, are you considering more actions in your base case scenario as opposed to a downside scenario?

Hey, Brian. This is Tom. I think the asset sales go a long ways towards getting us where we want to be and if you were on historical metrics, I think that pretty much works and that's what you're seeing from S&P and Fitch. Like I said earlier in my previous comments, it's just really hard to tell where Moody's is going to shake out. So we're leaning really more on a historical view of what those metrics have been, which is not just cash flow metrics. It also involves a fairly healthy component of size and scale. But on Moody's, it's just extremely difficult at this point to answer your question.

So the underlying then goal here is investment grade credit ratings from all three rating agencies. Whatever metrics they look at would be what you would want to gear the strategy towards?

We maintain investment grade status with just two rating agencies. Regardless of what Moody's does, we stay in the investment grade indexes. While we'd like that, it doesn't damage our investment grade status if they were to drop us below.

Okay. Thanks. And then my follow-up is with regards to the -- staying within cash flow. If and when oil prices do improve, should we just expect a straight CapEx equals cash flow type strategy and how does the EnLink business apply here? If there's outspending including the impact of distribution on a consolidated basis at the EnLink level, does that weight in your decision or is it slowly Devon and Devon only?

It's essentially Devon and Devon only on that, Brian. I think that would be the first thing I would say is to look at just a straight how much incremental cash flow we would have and putting that to work back into E&P capital. That's a good first proxy.

Obviously we'd look at longer-term, what we think prices are going to do. If we have even greater confidence they're going to be moving up significantly in the future, we might be willing to ramp up even a little bit more than that. Conversely, if we think it's a temporary phenomenon, we may ramp up a little bit less. I think that's a good first proxy of how to think about it.

Great. Thank you.

Thanks, Brian.

Thank you. Our next question comes from the line of Bob Brackett with Bernstein. Your line is open.

Hi, good morning. Question on the Access pipeline sale. Your partner in the pipeline has made some noise about potentially selling their stake as well. Does that help your process? Does it hinder it? Or is it a push?

It's really independent of that, Bob. We each have our own processes going on for that. Frankly, we think we're probably a little more advanced in our stage of the process than our partner is on looking at their 50%. But it's really two independent processes at this point. And like I said, we remain very confident that we are going to be able to transact on that sometime in the first half of the year and it could potentially be as early as the first quarter but no guarantees on that.

Thanks. And a follow-up. In terms of the price you might get for that asset, can we use the capital you've put into that asset as a decent proxy or would we be far off if we did that?

Oh, you wouldn't be too far off with that, probably.

Great. Thank you very much.

Thanks, Bob.

Thank you. Our next question comes from the line of David Heikkinen with Heikkinen Energy Advisors. Your line is open.

Hey, Tom. Actually you're in a pretty unique position where you can maintain investment grade so you can talk pretty openly about some of the concerns from investors around what happens to an E&P company when you lose investment grade. Like what are the steps that goes on and thinking about your credit facility being secured, hedging facility, any firm transportation changes, just would be curious about your perspective?

Well, let me just emphasize again so people are clear, nothing would happen to us with a Moody's shift. Even if we had a bad result from another rating agency, our liquidity position is solid and doesn't change at all. So there's no -- there's nothing in our revolving capacity, our debt -- our bank debt capacity that changes in that circumstance. Those covenants remain the same. Nothing gets triggered. There's nothing in our public debt or indentures that would occur if that is the case.

I think the real impact to those that this occurs to would just be access to the capital markets and primarily at cost. You'd be dealing with higher costs as you tap the markets. Our revolver has got a lot of term left on it. You're out into 2019 before that term's up. So a lot is going to happen between now and that point in time. Those who have to renegotiate now are going to be dealing with a totally different environment.

I think the uncertainty that you're seeing out of the agencies and how they approach this is going to reach into those types of negotiations. You'll have people who have got near-term debt concerns just dealing with an uncertain bank market and an uncertain capital market. The bond holders that I've spoken to are equally confused by this and don't know necessarily how exactly it's going to shake out.

Some of them are -- we don't think in our portfolio, the debt holders, if there's a lot that would be dependent on Moody's, but there potentially could be selling of bonds for those investors who require a Moody's and an S&P rating both to hold debt. That could also be another impact. But just to re-emphasize for Devon, Devon really nothing would -- if we were taken fully non-investment grade which is not going to happen, there would be no change in our debt picture.

Nothing on the commercial paper side either?

Your commercial paper program, your access to it and people's ability to trade in that is going to be weakened if you've got somebody that goes to non-investment grade. It's not taken away for us. That really just amounts to a cost of debt, not an access issue.

I think it's more critical for companies with international assets and bigger projects. That's helpful. On the other side, just cash flow neutral, does that include EnLink distributions? I just want to make sure I'm getting that correct.

Yes, it does, David.

That was it. Thank you, guys.

Thank you, Dave.

Thank you. Our next question comes from the line of Phillips Johnston with Capital One. Your line is open.

Hey, guys, thanks. Just a quick housekeeping question on Jack Fish. The ops report shows that unit LOE was below $10 in the fourth quarter. Just wondering if you could tell us what the total operating cash cost was in the fourth quarter including the blend cost? And maybe where cash costs are running today given the recent weakness in the Canadian currency? Thanks.

It's about $7 for the blend cost, Philips.

Okay. And has the total cash cost come down since then, I guess with the weakness in the Canadian currency?

Well, come down since -- it's trading today at about where it was trading through the fourth quarter. It's around $0.72 is where the exchange rate is. It hasn't weakened further. It weakened throughout the year and gave us a significant uplift on the reduction in costs that you saw, but it hasn't continued to weaken in the first part of this year.

Okay. Got it. Thank you.

Thank you. Our next question comes from the line of David Tameron with Wells Fargo. Your line is open.

Hi, good morning. Couple questions. If I just think -- I'm just thinking about what I've seen you do in the Merrimack as far as well cost, Eagle Ford, et cetera. I guess a two-part question. One would be how much more room -- let's just assume service costs in the forward strip stays where it's at right now. How much more room do you have as far as cost reductions available in the next two to three quarters? How much more downside do you see there?

The second piece would just be, you talked about your core assets and them all being economic today. Philosophically, how do you guys think about the big picture, US and crude prices? I'm just trying to chase that marginal cost type number.

Let me start on the operating side a bit. We would estimate that the 2016 cost in comparison to 2015, might be down another 4%. It varies by category, of course. We still think there are operating efficiencies gains that we will have. As you roll back about 12 months ago, we saw early in the year, we saw a nice improvement in the service provider deescalation component.

But in the second half of the year we saw a great efficiency gains with just optimizing all of our well construction designs, optimizing our -- the execution of our wells. We had very little trouble time. All that has accelerated our time to TD. We're getting better wells completed because of the focus on that detail. So we'll continue that and historically, we've always seen somewhere between a 0% and 10% efficiency gain and I wouldn't expect anything different than that by the time we get to the end of 2016.

David, just to expand a little bit on your question. We have certainly seen third-party studies that show that our acreage in the Eagle Ford and DeWitt County is probably the most economic acreage in the Eagle Ford. And I think it competes well with any play in onshore North America. I can also tell you that we see very similar economics to DeWitt County in our -- the heart of our plays in the Delaware Basin and in the STACK play.

So we think that we have three -- certainly three of the plays in our portfolio that position us with the most economic opportunities that you might find in onshore North America. And so it's not a question of the strength of the portfolio at this point. It's a question of how much capital are we going to put against that strong portfolio? And I just want to emphasize one last time, we've taken capital down significantly and we understand that. It's because we had the flexibility to do that in this current 30 and 2 price environment.

But we have the ability to ramp that capital back up just as quickly and bring production back just as quickly should we see encouragement on the commodity price environment. So the first priority right now is balance sheet. That's what we're doing. But we have the ability to ramp it right back up and get back in the game.

David, I draw your attention back to the operating report on page 12. You can just look at -- you can look at our Cana results in the Woodford, and you'll see that we dropped our time to TD from 40 days to 20 days. So, we've actually decreased the drill time in half. And after 800 wells as we've talked about, our continuous improvement on the completion side, after 800 wells being drilled and completed, we're still seeing the highest IPs of the history of the Cana Woodford work.

All right. Thanks. I appreciate that.

Thanks, David.

Thank you. Our next question comes from the line of Ross Payne with Wells Fargo. Your line is open.

Hey, guys. I think we've kind of worn out the rating agency discussion. But I also wanted to just ask you just a simple question. Are they looking at your metrics excluding EnLink or inclusive of them? Thank you.

Hey, Ross. Tom again. It depends on which one you're dealing with it. For the most part they include it. They include it in different ways. So it's really included kind of on a -- even though this is non recourse debt to Devon, Moody's for instance, looks at it as a too big to fail type situation where you would come in and support the credit in event there were issues. That's largely how they look at it. S&B takes them down one notch from where we are and looks at it a little bit differently.

Okay. Thanks, guys.

Thank you. Our next question comes from the line of Jon Wolff with Jefferies.

(Operator Instructions)

Jon Wolff, your line is open.

Hey, guys. Looking at the $2.4 billion available of liquidity on the credit -- on the unsecured credit facility, had been $3 billion prior. I was wondering if something was drawn, maybe commercial paper termination or was it related to the facility being reduced? Question number one.

There are a lot of moving parts going to the end of the year to make payments on Felix. The only change from our $3 billion capacity is we paid down about $300 million of commercial paper. That's the only change. Net-net, your net available liquidity is pretty much close to what you saw in the ops report. Just shy of $4 billion.

Got it. So would you say you're still active in the commercial paper market, overnight market?

Yes, there's been no -- it's a little bit more costly but that's pretty much the case for anybody that's playing the CP market. Our access and our ability to deal with the CP market is unchanged at this point.

Got it. And then I was a little confused on mechanics on the rating agencies. Obviously you've got your investment grade rating was affirmed by S&P. I guess everyone's waiting on Moody's. I don't see a Fitch opinion since October. So is it two out of three or is it either Moody's or S&P that creates the mechanics of -?

These are conversations between Devon and Fitch. Fitch left our rating at that level. They're not reviewing it currently, so it stands as is and it's not up for review.

What they've indicated for the whole group is they would come out before the end of the month. Exactly when that occurs, it's hard for me to tell you. I think they had one or two more large investment grade parties that were coming before them here in an around this timeframe right now and then when they go out will be shortly after that likely.

Super helpful. Thanks.

Thank you. Our next question comes from the line of Paul Sankey with Wolfe Research. Your line is open.

Hi, everyone. It's notable that you've been confident about your asset sales program. Could you just reiterate that because it is important for this year and we've been hearing quite negative things about the asset market? Thank you.

Well, I'll reiterate it. We all feel extremely confident that these assets from all we understand are higher quality assets than anyone else has put on the market, including some of those that have recently transacted. And we also feel that there may be other companies that may be coming out with assets later in the year but we're beating them to the market.

So from all the feedback we get, is that our expectations are very realistic for the timing and for the magnitude of proceeds that we can expect to receive from these assets. We have had a significant contact with potential purchasers, even before we get the data rooms out there, as Tom said. It ranges from majors to some well-capitalized independents to a lot of interest from private equity and they're frankly, people who have become comfortable with this price environment and want to make an entry at this point.

The high quality of these assets frankly, can be a company maker type opportunity for some smaller companies. And that's what some of these people are looking at it, frankly, is they could start a whole company around one or more of these assets and have a very bright future. So you never know for sure obviously, until you transact, but all the feedback we have gives us tremendous confidence that we're well-positioned from a timing standpoint on this and with a quality standpoint to make this happen.

That is firmly stated. Thank you very much.

Thanks, Paul.

Your next question comes from the line of Jeff Healy from AIG. Your line is open.

Just want to follow up again on the more balance sheet focus. Looks like in the Devon transaction slides you guys had out that you were going to issue $1.35 billion of equity. I want to check to see if that's still the intent and if the asset sales don't emerge that you think will be able to happen in 2016, maybe look to do more equity to help shore up your balance sheet?

Well, we've already issued the equity associated with those transactions, the $1.35 billion. Tom can give you the exact numbers. They were issued I think a little over $44 for the Felix side and a little over $40, $41 I think on the -- for the Powder River Basin assets. So obviously nice looking price compared to today.

As far as additional equity beyond that, we are focused on our cost reductions. We're focused on the asset sales, the dividend reduction. I'm not going to take anything off the table as far as a possibility but we think we've taken some very significant steps to really increase the financial strength of the Company with the actions we talked about today.

Got it. Maybe sort of a follow-up then. If we said Moody's has moved the goal post and doing their own thing, would you be willing to issue equity to preserve investment grade if necessary at the other two agencies?

As Tom said, we are -- have had our ratings at S&P, we're downgraded one but placed stable. Fitch, we're not up for review right now and we're still at the previous rating there. So we are already two of the three. We already have investment grade and as Tom also alluded to, the fact that it really doesn't change our business model significantly if we were non-investment grade.

We are going to do the right decisions for the business, period. We can't just chase investment grade rating certainly when it's -- with Moody's when we're uncertain what the criteria are that they're going to use. So we're going to focus less on that and make sure that we make the right decisions for the business overall for our shareholders and for our bond holders.

Okay. Appreciate it. Thanks a lot.

There are no further questions at this time. I turn the call back over to the presenter.

Okay. We appreciate everyone's interest in Devon. We wish you a good day and please let us know if you have any further questions.

This concludes today's conference call. You may now disconnect.