Devon Energy Corporation 2026 Q2 Earnings Call

Thank you for joining us on the call today. Last night, we issued Devon's second quarter 2026 earnings release and presentation materials. Throughout the call today, we will make reference to these materials to support prepared remarks. The release and slides can be found in the Investors section of the devon website. Joining me on the call today are Clay Gaspar, our President and Chief Executive Officer, Shane Young, our Executive Vice President and Chief Financial Officer, and other members of the executive management team. As a reminder, this call will include forward-looking statement as defined under U.S. securities laws. These statements involve risks and uncertainties that may cause actual results to differ materially from our forecast. Please refer to the cautionary language and risk factors provided in our SEC filings and earnings materials.

Please note, Devon's second quarter results reflect legacy Devon operations for the full quarter, plus Coterra beginning on May 7th. I'll turn the call over to Clay.

Thank you, Dan. Good morning, everyone. This morning I'm excited to discuss our strong Q2 execution, the company's differentiated technology platform, assets and operational prowess, and the significant progress we've made in just under 100 days since the close of our merger with Coterra. First, let's turn to slide two of our investor deck we published yesterday. I want to start with who Devon is, an operations-focused, technology-forward energy powerhouse. This description is supported by three attributes that defines Devon. First, everything is anchored around the company's culture of excellence. Second, technology is a genuine competitive advantage. Third, we have key investment differentiators in inventory, cost of supply, and financial discipline. You'll hear more about these themes throughout today's call. Let's turn to slide three. The merger closed on May 7th, just 94 days after announcement.

With both legacy companies having recent integration experience, the combination has gone even better than we planned. I am happy to report to you that I am very confident in our ability to deliver the $1 billion synergy target with more than 350 synergy initiatives already identified and taking shape. Along the way, we enhanced our Permian inventory through a once-in-a-generation federal lease sale, and at the same time, we strengthened our balance sheet with debt retirement. Just as importantly, none of that activity distracted us from the day job. We outperformed our second quarter guidance across the key value drivers, and that execution translated into a $1.7 billion adjusted free cash flow. When I step back and look at what the Devon team accomplished in such a compressed timeline, I couldn't be more proud. Slide four put those first 100 days on a timeline.

I want to pause here because the pace tells you something about who we are and what you can expect from Devon. It started on day one when we closed the merger with 95% of our core IT systems and processes already decided. We raised the dividend 33%, and we put the $8 billion buyback program to work. Importantly, we immediately kicked off a comprehensive portfolio review underscored by our commitment to maximizing short, medium, and long-term shareholder value. Less than two weeks later, we captured value through our success in the Permian lease sale. By week five, we had issued combined guidance that was better than the sum of the standalone plans. By week six, we finalized the new org structure for all of the office-based employees.

From there, we closed out the quarter with a strong operational beat, and we have completed our $1.25 billion debt reduction target for 2026. Moving with speed and intention is not only a slogan, it's how Devon operates. With that foundation set, let's get to the results on slide five. Strong well performance allowed us to deliver oil production 2% above the midpoint of our guide, and the total production reached the very top end of our guidance. On the spending side, capital came in 2% below the guide as we continue to capture drilling and completion efficiencies through our advanced technology and focused execution. Put those together, our reinvestment rate improved to 43% of cash flow, well below the mid-50s over the past two years. All of that translated into $1.7 billion of adjusted free cash flow in the quarter, a powerful demonstration of what this platform can generate.

I want to emphasize that these results are not just isolated wins. It's a direct outcome of the focus and the commitment of our teams to deliver world-class operational execution. Now zooming in on the Permian, let me spend a few minutes on slide six and the New Mexico federal lease sale, because I know it generated a lot of discussion, and because the more you understand this transaction, the more you will appreciate the value we captured in this unique opportunity, adding 400 top-tier locations in the heart of the basin. Let's start with the acquisition cost. The headline was $6.5 million per location. But let's make sure we understand the uniqueness of these locations. These federal leases with a 12.5% royalty, roughly half of the typical royalty burden of state and private acreage.

That increased royalty ownership alone is worth about $2.5 million per location, which takes the effective cost to roughly $4 million per premium location. It is also important to understand the auction mechanics. The process was an ascending auction bid, think eBay, where the winning price was exactly $1 per acre higher than the second-place bid. True market price discovery. When you hear comparisons of price per location to negotiated private equity transactions, remember, those are a bit apples and oranges. The nature of private equity companies encourages them to partially develop the best opportunities first to build production. Cherry-picking the best opportunities takes them out of the inventory list, but also can have a material impact to the remaining locations. In the federal lease sale, these tracks were completely undeveloped from grass to granite, ensuring that we have the opportunity to optimally and most economically develop the resource.

I will talk about on the next slide, our industry-leading D&C performance leverages the value of this acreage. The adjacency of the existing footprint enables longer laterals. Our significant water, gas gathering, and electrical infrastructure means lower cost and higher margins on production. We are already filing permits. This acreage will play a meaningful role in our 2027 program. I would love to tell you that we'll be able to do this kind of transaction again. The fact is that this is the last Delaware Basin federal lease sale of this scale. You've seen us increasingly do over the past few years, expect us to continue to strengthen our existing acreage footprint through highly accretive ground game focused on trades and small accretive bolt-ons.

Of course, the reason that acreage is worth more in our hands than anyone else's is that we have a home field advantage. That's displayed on slide seven. Our well productivity is top-tier. Our drilling and completion costs per foot are among the lowest in the basin. In addition, our inventory is one of the deepest in the Delaware with a substantial base of low breakeven locations now including roughly 400 we just added. Productivity, cost, and depth of inventory. That combination is what underwrites differentiated capital efficiency and free cash flow. The same set of capabilities is exactly what gives us confidence in the integration, which brings me to slide eight and synergies.

We remain firmly on track to deliver at least $1 billion of annual synergy targets by year-end 2027. Our confidence is higher today than the day we announced the deal with more than 350 initiatives now underway across three roughly equal buckets. On capital optimization, we're lowering D&C costs through well design and supply chain scale while reallocating 2027 capital to its most efficient use. On the operating margins, we are consolidating field operations, leveraging combined infrastructure, and improving GP&T and revenue deducts. On the corporate costs, we're eliminating redundancies and lowering our cost of capital. What ties all three together is really technology. I believe technology is the most important competitive advantage for Devon. Let's turn to slide nine, where technology is driving real-time performance improvements today. Four quick examples. First, closed-loop AI is something that we've talked about the last few quarters, and the value to Devon is growing.

With our AI-enabled system now autonomously optimizing 1,000 wells real-time 24 hours a day, the ability to immediately respond to constantly changing well conditions keeps the production on the efficient frontier, and we have a clear path to broad deployment around the company. This is improving production trends and provides a path to lowering our corporate decline rate. Second, AI is driving our subsurface advancement with a proprietary model integrating basin-wide data to predict well performance and optimize spacing and frack design with the aim of maximizing the value of every development. This enables our ability to scenario plan and re-optimize around the what-ifs of well cost, completion design improvements, and even commodity price scenarios. Third, our surfactant tests are promising.

The completion phase surfactant chemistry is enhancing our well recovery. Our first 10 trial wells across six different landing zones delivered clear uplift versus offset controls, and we are increasing our test to more than 50 wells this year. Fourth, real-time analytics processes live D&C data to avoid costly failures and benchmark every operation against best-in-class performance. Devon is a technology-forward company that has seen significant benefits, and we remain on the cutting edge. As we blend the best practices of both organizations, technology is a key value compounder. This is the operational story, a differentiated portfolio run with discipline, getting better through technology. To take you through what all that means financially, I'll hand the call over to our CFO, Shane. Shane, welcome to your first Devon earnings call.