德文能源 (DVN) 2016 Q2 法說會逐字稿

Welcome to the Devon Energy second quarter 2016 earnings conference call.

(Operator Instructions)

I would 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, Chrissy, and good morning, everyone. I hope you've had a chance, as always, to review our earnings release information last night and this morning. That information includes our forward-looking guidance, as well as our detailed ops report.

Also on the call today are Dave Hager, President and CEO, Tony Vaughn, Chief Operating Officer, Tom Mitchell, EVP and Chief Financial Officer, and a few other members of our senior management team.

Also, I'd like to remind you that comments and answers to questions on this call today will contain plans, forecasts, expectations and estimates that are forward-looking statements under US securities law. 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 may differ materially. For a review of risk factors relating to these statements, please see our Form 10-K and subsequent 10-Q filings. And with that, I will turn it over to Dave.

Thank you, Howard, and welcome, everyone. The last several months have been very active for Devon. We've continued to deliver strong operating results from our top tier North American resource plays and we significantly outperformed Street expectations on our asset divestitures, which dramatically improved our financial strength. Overall, it was a great quarter of execution for Devon. I will touch on three key messages today, efficiency gains, the portfolio transformation, and quality of our asset base.

First, we continue to achieve significant efficiency gains across Devon's entire portfolio. Productivity from our top two franchise assets, the STACK and Delaware Basin, was once again outstanding. We commenced production on approximately 20 wells from these prolific assets during the second quarter, with 30-day rates averaging nearly 1,500 BOE per day. Not only did those high rate wells deliver excellent returns, they also exceeded our type curve expectations by a wide margin.

Combined with positive base production performance across our entire portfolio, we were able to drive production above midpoint expectations for all products in the second quarter. Importantly, these productivity gains were attained with substantially lower costs. Drilling and completion costs at our US resource plays have now declined by as much as 40% from peak rates and we are now on pace to save nearly $1 billion of operating and G&A expenses in 2016.

The second key takeaway is that Devon's portfolio transformation is now complete. In December of last year, we announced a bold move to materially add to our position in the STACK play with the Felix acquisition, as well as the Rockies, along with our intent to monetize non-core assets across our portfolio. Since that announcement, we have successfully integrated the Felix assets into our portfolio, and the prolific new well results from this asset continue to support our view that the STACK play is the best emerging development play in North America.

We have also done a tremendous job executing on our non-core asset divestiture program. We have reached agreement to sell $3.2 billion of assets, well above the top end of our $2 billion to $3 billion guidance range, and these accretive transactions have significantly strengthened our investment grade balance sheet.

A majority of proceeds will be used for debt reduction. While there has been tremendous volatility in energy markets over the past year, I have unwavering conviction that these strategic actions were the correct long-term decisions for Devon.

Finally, I want to leave you with some thoughts about the quality and depth of Devon's go forward asset base, which we believe is unmatched in the industry. With the recent high grading of our portfolio, we sharpened our focus on Devon's top resource plays, all concentrated in North America's best basins. Led by our world class STACK and Delaware Basin assets, we have exposure to more than 1 million net acres and thousands of low risk opportunities that can deliver sustainable long-term growth for Devon.

Importantly, we are taking significant steps in 2016 to accelerate future development in the STACK and Delaware Basin. In the STACK, we are participating in more than 10 spacing pilots to optimize our 2017 development plans in the over pressured oil window. In the Delaware Basin, our total reservoir access concept, otherwise known as TRAC, has future development plans in place to efficiently develop up to nine intervals of STACK pay in a given area from super pads.

Looking beyond the massive opportunity set in STACK and Delaware Basin, we also have attractive investment opportunities in the Eagle Ford, Rockies and Barnett Shale, and more importantly, these high quality assets possess the ability to generate substantial amounts of free cash flow.

Outside of our formidable US resource plays, our top tier heavy oil asset in Canada provides tremendous optionality. These capital efficient assets can produce large amounts of cash flow and also possess significant growth potential, with greater than 1 billion barrels of undeveloped resource in the economic core of the Alberta oil sands. Overall, Devon's go forward asset base is well balanced between scalable growth assets and top tier cash flow generating assets.

Given the quality of our go forward asset portfolio, we have no shortage of attractive investment opportunities across our asset base. And with the success of our asset divestiture program, our strong financial position allows us to accelerate investment in these best-in-class resource plays.

As we previously announced in June, we are increasing our upstream capital investment by approximately $200 million to a range of $1.1 billion to $1.3 billion in 2016. This incremental capital investment will be deployed entirely in the STACK and Delaware Basin, beginning in the third quarter.

By year-end, we expect to add as many as seven operated rigs between these two areas. The annualized upstream capital spend associated with this activity at year-end is approximately $1.6 billion. While it is still a bit too early to provide any formal targets for 2017, I can tell you that this level of investment is sufficient to generate growth in oil production and stabilize Devon's top line production profile by mid-year 2017.

So in summary, I am pleased with the way Devon is positioned to navigate the current environment and prosper in the future. We have a great collection of assets, an experienced team that has a track record of delivering excellent results, and have the financial capacity to efficiently convert our resource rich opportunity set into production cash flow. With that, I'll turn the call back to Howard.

Thanks, Dave. And before we head to Q&A, I'll take just a few moments to address one of the most often asked questions the IR team has received since our release, and that's our production profile.

As we reached our sales values on divested assets in excess of our targets, there are certain assets we haven't sold, and therefore, we have rolled into the Devon go forward look. Also, the production estimates we previously issued showed a full year of the divested assets, while we have already closed several and anticipate closing the remaining assets soon. The largest component of retained assets previously in the other category are select Midland assets, which have a relatively shallow decline rate and are high margin.

And to be perfectly clear, we see both US and Canadian production stabilizing in the fourth quarter of 2016 and our projected activity levels at year-end 2016, we project top line production for our retained assets to stabilize by mid-year 2017, led by growth in the US oil. A key contributor to mitigating gas and NGL declines in the first half of 2017 will be the Hobson Row development in the STACK that we anticipate bringing on in early 2017, and we expect a return to top line growth in the second half of 2017.

Of course, these projections are predicated on an expectation that we see strengthening in commodity prices, which will allow us to add the three or four additional rigs in the fourth quarter of 2016 we disclosed in our Q2 earnings materials. So based on that level of activity at year-end, you could expect an annual spend of somewhere around $1.6 billion.

I hope this helps. And of course, if you have more detailed modeling questions, Scott, Chris, or I are happy to visit with you after the call. With that, and heading to Q&A, I'd ask you to please limit yourself to one question and an associated follow-up and you can reprompt as time permits. With that, Chrissy, we'll take our first question.

Thank you.

(Operator Instructions)

Our first question comes from the line of Pearce Hammond from Simmons Piper Jaffray.

Good morning and thanks for taking my questions.

Good morning, Pearce.

Howard, thanks for that color just now on the three rigs and then potentially on the additions and then potentially going to the seven rigs. Dave, as you look at the current forward strip to year-end and then look out to next year's pricing, do you think if those prices hold that you would add those four rigs or you'd need to see a little bit higher price to do that? No, great question, Pearce. We see that our cash flow at the current strip being approximately -- that we could add these rigs and live within cash flow. It varies, obviously, a little bit day-to-day and we're in a little bit of a downturn right now, but we're approximately at the point where it would be cash flow neutral, so we could add those rigs.

Thank you. And then my follow-up is, as you highlighted on the 2017 guidance, or preliminary 2017 guidance, and I know it's not formalized at this point, but on oil production, would you be able to hold year-end 2017 -- or excuse me, Q4 2016 -- oil production flat and then grow from there? I'm trying to get a sense of what the, if you spent that $1.6 billion, what the oil production profile would look like or would it continue to decline from the Q4 2016 levels until the middle part of next year and then start to come back up?

No, we would essentially stabilize production at the Q4 levels, Q4 2016 levels, and then later in the year it would start inclining, later in 2017.

And that would be stabilizing oil production at Q4 levels, but not total production?

That's correct. That is oil production. As Howard, said we would stabilize the BOEs around mid-year 2017. So we'd still experience some decline in where we're not investing in gas, particularly, and to a lesser degree, the NGLs. And then it would be stabilized by mid-year 2017 and then start an incline on the BOEs, as well, at the back half of 2017, and we would be exiting at a significantly higher rate than mid-year.

Excellent. Thank you so much, Dave.

Yes.

Your next question comes from the line of Arun Jayaram from JPMorgan.

My first question, Dave, is to ask you about the maintenance CapEx number. You'd previously said about a $2 billion number to keep production flat on a BOE basis, and now you're signaling $1.6 billion. I was wondering if you could maybe highlight what's driven that pretty meaningful reduction in maintenance CapEx as we think about 2017?

Yes, great question on that, Arun. We're continuing to drive efficiencies in our business, internal efficiencies. We've talked about the 40% reduction in drilling and completion costs at about 50%, 50/50 between lower service costs and internal efficiencies. I can tell you as we sit here today, we're finding even more internal efficiencies that are continuing to drive that maintenance capital lower. And so we, as well as the fact that we're exceeding the type curve that's on our wells. And so you combine the cost savings we're still finding with the fact that our wells, we're in the best parts of the best plays and they're exceeding our expectation. So that's continuing to drive the maintenance capital down.

Great. And my follow-up, Dave, is on a pro forma basis, $4.6 billion in cash, it sounded like from the ops report you'll use roughly $2 billion or so for debt reduction and $1 billion of the $3.2 billion in proceeds could be reinvested. Would you feel comfortable, for example, in 2017, if you feel good about oil in the low to mid 50s, of outspending by $1 billion or so to take some of these proceeds, just given how you have so much cash on the balance sheet?

Well, we do think that -- and we do have the other cash on the balance sheet from essentially the equity offering. We do feel that it's very important to maintain our investment grade rating. And probably longer term, we'd still look at using some of those proceeds to pay down debt. So we are, at this point, thinking that we want to live within cash flow. And so if we start, we said we'd start adding back activity if we had confidence prices are going to be somewhere around $50.00, we have added back activity, we've added back some, we plan to add back more. If we do see prices sustain over $50.00 and gas prices actually, the recovering gas has helped out significantly, as well with our cash flow, if we see gas prices sustain near the levels where they are now, we may be able to even add a little bit more activity in 2017, but it will be, that would be living within cash flow, though. So we don't see a significant cash flow outspend.

Great. Thank you very much.

Your next question comes from the line of Ed Westlake from Credit Suisse.

Two type curve questions, if I may. Obviously, let's start with the Bone Springs. You talk about some of the wells 50% ahead, [none] at 70% ahead. We just had Oxy presentation sharing that their 180-day cums, I think from memory, are double on older designs. So maybe just talk through what's the constraint on perhaps raising the overall type curve. It might just be that across the inventory you still have downspacing tests, et cetera. And then I have a question on the STACK.

Ed, this is Tony Vaughn here. And I think you just hit it right, is the activity and the number of new had completions that we have brought on of late have been fairly small, but we're extremely pleased with all the performance that we have, especially in the Leonard. Not only are all the well results that we're making public in the Leonard well above our type curve, industry around us are really experiencing the same thing. And so we'll make these type curve adjustments, both here and in STACK, just as we get a little bit more comfortable with that and get a few more reps behind us. But really the operational performance of our new activity in both the Delaware and the STACK are well above our expectations on our current type curves.

Okay. Then on the STACK, what was the average lateral length of the Q2 results? Because obviously again, exceeding type curve, but if you go to longer laterals those should be more capital efficient.

I think you're exactly right. Historically, industry has -- we've got about 200 wells in the STACK play to date, and there's about 60% of those that are the long laterals on our well count, Ed. We have about just under 50 wells that we operate and we have about just under 50% of those are long laterals. Difficult to put an arithmetic average on the full population of that, but it's probably somewhere around 6,000, 6500 feet. But I'll tell you, a lot of the early wells that were drilled were in the appraisal mind set. They were also in the lease saving mind set. And now that we're getting a lot of that information behind us, being more comfortable with the sub surface, I think Devon is really looking forward to optimizing our completions and our lateral lengths. And really, the design that we're going forward is to use as many of the long laterals as possible.

Ed, I'd just add, I think what Tony is saying here is a lot of the 10,000 footers that we drilled here were probably not as productive as we would anticipate 10,000-foot laterals to be in the future. Some of those were wells that were drilled by Felix without the benefits of 3D, and we had early completion designs that are not what we feel the optimum design. So even though there were some 10,000 footers in the mix, they were not of the quality we would anticipate from a go forward basis.

Thank you.

Our next question comes from the line of Peter Kissel from Scotia Howard Weil.

Yes. Good morning, guys, and thanks for taking my questions. Very quickly, looking at 2017, you outlined the $1.6 billion bogey, if you will, on spending, but what sort of obligations do you have for spending above that $1.6 billion? Just trying to think about how much that could go up or down as you look to stay within cash flow.

Well, we're totally flexible on that, Pete. We don't have any obligations. I think that's one of the great attributes of Devon is we have essentially all of our acreage held by production, we have a minor amount in the Felix acquisition where we need to have some activity, but we're going to have way more activity than is required to get all our acreage held by production. We don't have any, obviously, long-term projects going on in the Company. So we are totally flexible, as cash flow presents itself, as to ramping up activity. And of course, we don't like to think about it as much, but if prices do retreat, we have flexibility to decrease activity, as well. So it is strictly driven by we have the projects, we have as good of projects we think as anybody in the industry, being in the hearts of some of the best plays. It's just a matter of what cash flow is available to put against those projects.

Okay. And then one thing you guys have done a great job in the past of is stack ranking your returns of your given plays here. As the STACK has continued to look extremely good, the Delaware Basin looks extremely good, would you mind just dusting that off and reminding us where they all stand in order of preference? And maybe ultimately, where does the PRB come into the mix, looking into 2017, as you've grown to have a very big position there but very little activity?

Pete, you know, I think nothing's really changed there. If you look at the returns on a strip basis, we really haven't commented on the absolute number of that, but the returns that we see in the Partman, the Delaware, the Eagle Ford and the STACK play are all comparable to each other. If you look at the sensitivity to the number of locations that we have available, that does change. And so if you look in the Partman, we've done some of the best return work we've done there, but the inventory is not as deep and as robust as it is in the Delaware and the STACK play.

So really, all four of those plays are ones that we've got the flexibility and the ability to drive value for, which really presents an opportunity for us, I think, to prosecute and to understand the sub surface even better while still getting a lot of meaningful and competitive returns.

Of the four, Pete, the Powder River Basin is the most sensitive to oil prices, because it's about 90% light oil. And so when we were earlier in the year, after we did the acquisition, with prices down mid 30s or so, it wasn't competing for capital. But as we get back over $50.00 a barrel, the economics on that improve dramatically because of the high oil cuts there. And so that's what puts it into as very sensitive, but it puts us back up into one of the top tier plays when we get a $50.00-plus environment.

Great. Thank you, Dave, and thank you, Tony, as well.

Not as deep in inventory, but still good economics at the well level.

Great. Thank you.

Our next question comes from the line of Charles Meade from Johnson Rice.

Good morning, Dave, and to the rest of your team there. I apologize if I'm belaboring this point a bit, but I'd like to just see if I could distill some of the comments you've made on this call. The $1.6 billion number, that was really useful for what you could do. But I'd like to try to understand, or make sure I understand, what really is driving your appetite for what you actually would choose to do. So I think I heard you say you're going to spend within cash flow, regardless of where the commodity prices go. But is there a scenario where you just wouldn't have the appetite to drill more, in the case where you wouldn't have an appetite to add rigs if the commodity price went down?

Well, let me try to clarify. It's really two things that we look at when we determine our capital allocation and the levels of capital. One would be the returns at the project level. And so we compare projects across the entire Company, take into account any sort of operational considerations, any sort of limitations, and then we fund the highest return projects across the Company.

We do that to the extent that we can live within cash flow. And so that's the second step of the process, is what is our cash flow going to be. And as I said, the $1.6 billion is, and again, prices are moving around every day, so you can't, you can rerun these numbers every day and get a slightly different answer, but it is approximately the level at which we can live within cash flow in 2017 at the current strip and fund the top tier projects that we have identified with the nine rigs that we could be adding by the end of the year. And we plan to add up to that nine rig level, unless we see a significant change in commodity prices between now and then.

Right. That's helpful, Dave. And I imagine these moves in the commodity prices are even more fun for you guys than they are for us, but --

We're having a barrel of laughs.

If I could ask a question on the Delaware Basin, you guys introduced this total reservoir access concept. That's new this quarter. But one of the things that I think is going to challenge, particularly, as I understand, in your part in the Delaware Basin has been extending the standard length 5,000-foot laterals out to 10,000-foot laterals. Is that a correct perception that it's harder than other places to get to the 10,000-foot laterals and does that interact or play some part in your TRAC concept?

Charles, about 33% of our position or our footprint in the Delaware Basin will accommodate the long laterals. It's a little bit tougher to put those together as you move north in Leonetti County in our footprint. But in the southern portion of this, where this new super pad or TRAC concept would be utilized in 2017, it's a little easier to do that. And so I think what we're trying to describe here is the concept when you start thinking about having all of the stacked pays that we have, both here and in the STACK asset in Oklahoma, there's going to be a more creative and efficient way to develop our surface facilities.

And so we're walking into this with this concept. It provides us a lot of flexibility as we grow. It also allows us to have flexibility as the business environment changes. But for the most part, we're going through the permitting process to achieve or get approval for more of a field development concept, and then past that, we'll be left to get individual APDs by well as we choose to develop that. So you're right about our footprint as a little bit less contiguous on the north end of our position. But in the south end of Leonetti, it should be very well suited for this type of a concept.

The other thing that's so great about it too, Charles, and we showed it on the maps and we've put it into our investor presentations, that in particularly the southern parts of Leonetti County, we have so many prospective zones. As we said, we have up to nine prospective zones, between the Delaware Sands, the Bone Spring, Leonard and the Wolfcamp. And so we are still doing appraisal work, determining how many wells per section in an individual zone and how many of these zones, in a vertical sense also, can be developed in any one geographic location. But the numbers you start seeing start boggling the mind sometimes, I would say, with how many wells you could have on an individual section. We're hesitant to put the numbers out there until we finish more appraisal work. But there could be a tremendous amount of resource that we're developing on each section out there, and that's what's necessitated this super pad concept to figure out, it's great to have the resource, but then how are you actually going to develop that resource. And that's what's put that into place. It's a really exciting future, both in the Delaware Basin and in the STACK play, because of this.

That's helpful color, Tony and Dave. I appreciate it.

Your next question comes from the line of Doug Leggate from Bank of America Merrill Lynch.

Thank you, everybody. Good morning.

Good morning, Doug.

Dave, I want to make sure we're understanding this maintenance capital issue right. Because the number's saying, if my math is right, you're basically indicating you can hold production flat at an oil price in the mid to high 40s, (Indiscernible) through all the numbers. Is that directionally where you're headed?

I can't tell you how to get there, but --

Yes, I think that may be a little bit lower than where we're at, and I don't want to get in, Doug, I appreciate your question. I'm struggling a little bit to get into the details of that right now.

Let me walk you through very quickly, Dave, how I get there. Previously you said $40.00 was your CapEx (Indiscernible) this year. But that included the contribution from access above that $800 million. So your sensitivity is about $80 million per dollar. And previously you'd said that you would hold flat at about $60.00. So when I work through all those numbers, it kind of implies $1.6 billion is somewhere in the mid to high 40s.

Yes, I think the big thing that's changed, off the top of my head here, Doug, is that gas prices have gone up significantly. And so that has provided significant incremental cash flow to us, as well as some improvement on the NGL side, as well. So it's probably less a product of oil prices to breakeven maintenance capital on oil prices going down as it is the fact that our assumptions around what gas prices we can achieve, along with the oil, has allowed higher cash flow to allow us to keep production flat.

That makes a ton of sense. Okay. Thank you for clarifying. My follow-up is really going back to the STACK and the move to 10,000-foot wells. Obviously, you've partnered with Continental and a bunch of those wells. What do you think the costs are that you can deliver these wells at? And as a related question, what's holding you back from moving up your type curve, given what you're seeing from others in the play?

Doug, we're finding that the well costs vary quite dramatically from the shallow eastern portion of the field all the way across to the southwest portion of where Continental is, as you mentioned. We're finding that we can drill the wells for about $5.5 million per well with the two string design on the eastern half of the field. If we have to add a third string as we go past a dividing line that separates the east from the west, add that third string, it adds about $1 million. And then as we go from a 5,000-foot lateral up to a 10,000-foot lateral, that's about $1 million to $1.5 million incremental on top of that. So that might give you a range in the cost as we work across that field.

We continue to see positive results in our well performance from the early section in the northeast to the little bit of the gassier, more volatile as you move into the central portion of the field. But overall, Doug, when you put all the attributes together, we still believe that we are in the heart of the high return portion of the field. We think all those attributes really lead to what will be the most commercial development going forward for all the competitors there.

And Tony, on the type curve, is it just a matter on waiting on more well results?

It is. From an operational perspective, it's nice to see virtually every well result that we have is not in the type curve. It's above well above the type curve. So we're going to modify that with performance, but we have been pleasantly pleased. And one of the things I wanted to point out on the STACK play in general that while there's a lot of variables that go into the sub surface description of this from depth, from pressure, to changing fluid compositions, to changing thickness by zone, a lot of variables are going into that, but I've got to tell you the predictability of the results is very narrow. And we still believe the P10 to P90 range in the 90-day IP is about 2.4, which is extremely tight for a fairly young play. And so while there's a lot of variables that are changing out there, we think the predictability of the play is really unusually good in comparison to a lot of the resource plays that we've been involved in.

Appreciate the answers, guys. Thank you.

Our next question comes from the line of Scott Hanold from RBC Capital Markets.

Yes. Thank you. I was wondering if I could ask a question on the STACK. Obviously, you highlight the great performance and the well results you've had, in addition to your massive acreage position. You all are producing around 90,000 a day there. But when you step back and look at it, and I'm assuming you've generalized some of the numbers, but where do you think that ultimately could grow to? How big is the prize here on your acreage there?

Scott, I think when we did the acquisition analysis, we had a little bit of a narrative that we were trying to visualize what that would look like, as well. And we think with our position and the Woodford continues to expand, the well performance gets larger, we're seeing more resource potential in the Merrimac and the Osage, but also underneath the Merrimac, we're seeing more potential with the Woodford. We believe that we can probably push up north of 150,000 towards 200,000 BOEs per day, as all these zones continue to be derisked and Incorporated into our development plans. And of course, a lot of that, Scott, is really contingent on the commodity price environment that we're in and the pace of activity that we can prosecute that large resource base.

Okay. That's great color. And my follow-up is on the Eagle Ford, obviously getting a lot less attention right now. I'm curious on where it could fit into your long-term portfolio, especially considering your operating partner appears to be deemphasizing onshore development, at this point. How do you look at that? And if I could add a question to that, if your partner decided that, let's say, to exit the Eagle Ford, what would your reaction be? What would Devon do?

Well, I appreciate the question, Scott. I don't think it's probably appropriate for us to comment on hypothetical situations there. But the Eagle Ford, we've had some tremendous results. And again, we have a position there that is really, like we want to do in all of our plays, is in the best of one of the best plays in onshore North America. And if you look at the historical well results that we've delivered out there, we have a large proportion of the best wells that have been drilled in the play. So we certainly have liked our position. Right now, we're just in a position where, given the capital constraints that we had earlier in the year, ourselves and our partner, that we decreased drilling activity significantly, and along with that then, the completion activity. We thought we were going to resume completion activity here in Q3. It's been pushed back, it looks like, about one quarter now. So that's a very short-term challenge. But frankly, it's going to help us a little bit in 2017, as some of those volumes get pushed out of 2016 and into 2017. So I don't think it's a significant event towards the long-term strategy of the Eagle Ford.

We still see some high rate or high return type opportunities in the Eagle Ford. We are maturing our way through the best part of the inventory right now, but we are also seeing some upside from the diamond pattern that we described in the operations report, which is really staggered laterals in the lower Eagle Ford, along with upside in the upper Eagle Ford. And so we still think there's some upside that exists to the resource out there, albeit it doesn't have the, and we knew it at the time of the acquisition, it just doesn't have the running room that we see now in the Delaware and the STACK play. So we still like it very much, and we'll just have to see how things develop beyond that.

Good. I appreciate the response. Thank you.

Our next question comes from the line of Evan Calio from Morgan Stanley.

Hello. Good afternoon, guys, and thanks always for the color.

Sure.

My first question is a follow-up on the Merrimac. Given your understanding and the success of the [Alba] pad, what do you guys think is the ultimate limits here for development spacing? And what size pilot program will you need to change your development assumptions off of four, and should we expect that in those Q4 results, given your and industry pilots?

You know, Evan, we've commented that we are testing up to eight wells per section in a single interval. We're getting a lot of good data from the pilots in now. So we've seen our results on the Born Free, which gave us confidence that we have the ability to prosecute the zones on top of each other with no problem. The Alma spacing test helped us understand that five wells per section is not dense enough, even in today's commodity price environment. We're getting some information in right now on the pump house, which is a seven wells per section, and we'll be able to give you a little bit more feel for that. One of the pilots that we got some early data on was what we called the Skipper pilot, and that was an eight well per section, or almost an eight well per section; and there, we're highly encouraged that eight wells will work in the right commodity price environment and it probably will work as technology continues to improve and we can improve our frac or completion designs and maintain a more complex near well bore frac.

So the four that we initially commented on when we did the acquisition is liked, and we think that we're at least at six, if not heading north of that right now. And so that information, the pilots are coming in. We'll have about another three pilots showing us some information in Q3, some more in the first quarter of 2017, but we're starting to get comfortable with the areas that we're going to go into a full development on. And again, we'll use this TRAC concept in the STACK development, as well. And we think that we'll have the ability to prosecute up to roughly 27 wells in a section, if as all these zones continue to work. So the play's working really well and the pilot data is all positive and leading us towards our development plan.

That's all really helpful information. My second question. You guys significantly increased your Barnett refrac type curve. Should we read this as the plays progressing closer to the point where you'll be willing to monetize a portion of your acreage position, given that you can get then paid for that refrac potential?

Well, we like our position. As we've said, our transformation is complete. We like our portfolio the way it looks right now. We are always, my flippant expression in all this is, we like all our assets, but we're not in love with any of them. So we certainly, we like where we are with everything. We have no current plans to do anything with the Barnett or any of our other assets. But that's not to say we aren't always thinking at the same time that if there's some way that we can improve our results as a Company, we'll think about it. But I can tell you, there's nothing right now that says we're going to divest -- no current plans around divestiture of anything in the Barnett.

Thank you, guys. Good update today.

You know, while you're listening in, Evan, took a look at your write-up this morning and just wanted to make sure, clarify a couple of things in there. But one is the, I think you heard me make some comments there back about the predictability of our results in STACK. And so while it's not going to be uniform across the play, it is extremely predictable. And again, there's a note about the debate regarding our acreage position and whether or not it falls in the over pressured window. And I think the industry may have been led to believe that there's a North/South line, that to the east of that it's under pressured and to the west of that, it's over pressured. That's not the case, as all of us that work the sub surface data understand. And if you look in the isobar map, you can clearly see that the far northeast is normal pressure, but it quickly goes into about 0.5 PSI per foot and gradually moves into about 0.7 PSI, 0.75 PSI per foot to the southwest. So just want to clear up. And in our mind, there's no debate about whether or not we're in the over pressured window or not.

That's helpful. And I did pick up on your predictability comments earlier in the call, and I appreciate that.

Our next question comes from the line of David Tameron from Wells Fargo.

Hello. Good morning. Just along those lines, just in the opps update, you talked a little bit about the Merrimac, and you used the word variability, so that's what I jumped on. But can you -- or maybe that was my word -- but can you just talk about the Merrimac? And I know you've alluded to it a little bit, but can you just give us more color as to what you're referring to the ops update?

I'm not sure what your specific question is, David. Could you repeat it?

Yes, I just pulled up to the page. It says IP and well costs can vary significantly across the play. And we've heard others talk about the variability of the Merrimac. And so maybe the better question is, can you just talk about the Merrimac, how you see it playing out?

I think what Tony is trying to say here, I'll try my words, is that there is variability, but it's predictable variability. So you aren't going to necessarily get the same well results across the entire play, but the variability of what you would expect in a given part of the play is very low, given the phase of maturity that we're in in the play overall.

You know, David, just to elaborate what Dave mentioned is as you characterized the reservoir, there's a lot of variation in the reservoir thickness by zone. There's a lot of difference in the fluid content as you move from northeast to southwest. The bottom hole pressure changes, as I just mentioned, from east to west. So there's a lot of variation in that. The actual total depth to get the wells down varies from the east to the west dramatically. But as Dave mentioned, the results that we're seeing as an industry are pretty darn tight. And the only place that we haven't seen a predictable result has really in the far southwest, and we need a few more data points to understand the gas versus oil content there. There's a little bit of variability in that. But for the most part, everything that we're seeing in the core of the field, especially in our footprint, the predictability is extremely tight.

Okay. No, that's helpful. And then back to the Barnett. As you start thinking about $3.25 gas or $3.50 gas, or what's the magic level at which just on a returns basis, that play would start to compete with capital, as far as you think about 2017-2018?

I'll tell you, it's got commercial returns today. As we have done all of our vertical refracs, we know that those are about at cost of capital, if not just a bit above, and the horizontal refracs are getting much more predictable and we know those are at cost to capital and above. Really, it's more of a question, David, about how competitive that is in the overall portfolio. So as commodity prices increase, a lot of our other opportunities get more attractive, as well. But that's a real opportunity for the Company going forward in the future. And you know what the materiality of that is we've got about 3,000 wells out there that have the ability for us to go back into them.

Okay. Sorry to interrupt you. So just to clarify when you start talking, 2017 right now, the strips at $3.15, $3.16, so at that level, you're getting commerciality?

We are. We can get cost of capital returns.

Okay.

Well above cost of capital returns, at those kind of prices. The challenge is trying to compete on a super team here. We've got a bunch of all-stars in here and it's a pretty good player, but it's not going to see the ball as much as -- we've got the Golden State problem going here.

(Laughter) Thank you for the reframe. I appreciate it.

Our next question comes from the line of John Herrlin from Societe Generale.

Yes. Hello. Just have a question on completion designs. One, can you define your hybrid completion? And two, with the STACK and also the Woodford, you're putting in a lot more sand. Do you have any sense of what you think the economic limit is for how much proppant you can put in?

You know, I can give you a little bit of a feel. I'll remind us of the experience that we had in, I believe it was mid-2014 when we started increasing the sand loads in our Delaware completions and we really ran up to from about 600 pounds per lateral foot in early 2014 up to about 3,000 pounds per lateral foot through 2015. And at the same time, that information gave us a good matrix or a good feel for the performance change in that design, but it also helped us understand the commercial, the matrix associated with the commodity price environment. So we have backed off in the Delaware from that 3,000 pounds per lateral foot. We think we can get the most commercial returns in the current business environment done at about 1,500 to 2,000. It kind of varies across the field. So that's the way we think about it.

And then if you move over into the Anadarko Basin, we're using a slick water job in our Woodford type work, and we continue to increase our proppant loads there. So we're up to about 2,000 pounds per lateral foot. And after drilling and completing over 800 wells, this last large pad that we brought on had the best results that we've ever had in the Cana Woodford play.

As we think about the STACK play right now, we're using a hybrid type job. So we've got a little bit of a gel, the total fluid is more dominated with the slick water. So we're continuing to experiment and modify with our completion designs, but we are increasing our sand loads there up to about 2,600 to 2,750 pounds per lateral foot and enjoying increasing success there. So John, we're getting a lot of this information and we're really all about trying to make the highest return per well, not necessarily just to pump large jobs. So getting a lot of data out there, got a lot of data in our library, and we pump a lot of slick water jobs. But in a few places like the Eagle Ford and in the STACK right now, we're using a hybrid fluid.

Does the hybrid take longer to clean up?

I don't believe it does, John. Probably have to get a little bit more feel from our technical guys, but I think our hybrid fluids are breaking with temperature and I don't think there's a problem there. So just haven't heard of that complaint.

Great. Thank you.

Our next question comes from the line of Ryan Todd from Deutsche Bank.

Great. Thank you, gentlemen. Maybe a couple smaller ones. Could you talk about the infrastructure buildout and stack in the Permian, how it matches up with the potential rig count additions in the second half of 2016 and 2017, and any potential limitations or bottleneck as you look forward over the next couple of years?

You know, if you start in the Delaware, one of the things that has really changed over the last 8 to 12 months, Ryan, has been the build out of the infrastructure. And as you noticed some notes in our operating report, the majority of our work now, we have power grid system to all of our wells, we also have the majority of our fluid being transported by pipe. And so the infrastructure, and you can really see that as our LOE per BOE cost has dramatically dropped from over $16.00 a barrel down to the $8.00-type number over that period of time, so the infrastructure we built out in the Delaware Basin especially is there. There's no local takeaway issues associated with our work that we anticipate doing in the next couple of years. So really, the Delaware has now caught up to that infrastructure and the returns are good. The costs to drill and complete wells is down, and certainly the monthly recurring lease operating cost is down.

If you move over into the STACK play, the Cana Woodford part of that is very well developed out. We've got a great water system there. We're building out our concept for the Merrimac play right now. That's in the design phase. We're working very closely with our midstream partner EnLink, and they're helping us understand what the long term take away opportunities might be. But again, we don't believe that's really a question in our current thought process for our current development until probably 2019, so we're working toward that. We'll have the appropriate solution identified. We'll be able to communicate that to you.

And just a plug for the guys at EnLink. I think we highlighted essentially the flat production in the Barnett from Q1 to Q2. And with no capital, and it's pretty amazing some of the work that our team has done. That team consists of both Devon people and our EnLink team. And so there's been some great, thoughtful work on line pressure reductions, optimizing plunger lifts and the artificial lift systems out there. So really having that partnership with EnLink is really providing a lot of value across our asset base.

That's perfect. Thank you. And then maybe one logical follow-up on that. You've seen significant downward pressure in both LOE and G&A unit cost over the past 18 months. How much more room do you have to run there in terms of pushing costs lower in the Permian? You've gone from $15.00 to $8.00 a barrel over the past six quarters. Can that go to $6.00 or $4.00 or further? Any thoughts on what we should expect over the next 12-plus months?

Yes, I'll start off with this answer and then hand it over to Tony. But on the G&A side of it, the bulk of the reductions that we're seeing there were related to reductions in headcount. And we're just now starting to see all of that flow through the financials. But we have the staffing in place that we are comfortable with to execute the program now. And also, we could handle somewhat higher levels of activity, as well, up to around 15 to 20 operated rigs. So we certainly don't see a reduction in headcount anymore, as long as we maintain this path to recovery that we're on right now. And we certainly have the staffing in place in order to execute our capital program. And I'll turn it over to Tony to talk a little bit more on the LOE and where we may be able to go.

Ryan, I think there's a real passionate push in the Company right now to manage cost. And while we don't have much of a capital program in comparison to what we had in 2014, a lot of our attention here in the last 12 months has really been towards managing our base business. And we've stood up an operations excellence group here that has really done a great job facilitating this focused effort to drive costs down. All of our men and women in the field locations are doing a good job participating with us. So as we have built out our water handling capacity across all of our fields, we have more of our water going through the pipe, we own more SWD capacity than we've had in the past, as we've brought power grid system into our business, we've been able to release probably about close to 300 rental generators just in the Delaware Basin alone, really good thoughtful work there.

And we have the supply chain group that is closely linked in with our operating team, and they're doing everything from working, reducing compression costs through renegotiating some contracts, doing the same thing for chemicals. We're working on the water that we do have to transport and handle, where worked those costs down. So we've got a great focused effort going on with our supply chain, all of our field people. And again, it's something that is really passionate in the Company right now.

Where we go from there, you can start looking at some of the costs and they start flattening out, just in terms of the price per unit. But we're still working on this and we believe a lot of the wins still left to get are just through attention to detail and through designing changes and through managing our business even better than we had in the past.

Great. Thank you.

This is all the time we have left for questions. I will now turn the call back over to Mr. Howard Thill for any closing remarks.

Well, we appreciate everyone's attention. We apologize we couldn't get to everybody in the hour, but happy to follow up with you after this. If we can do anything else for you, please let us know and have a great day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for joining us today. You may now disconnect your lines.